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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                    

Commission File Number 001-41556

SNAIL, INC.

(Exact name of registrant as specified in its charter)

Delaware

    

88-4146991

(State or other jurisdiction of
incorporation or organization)

(IRS Employer
Identification No.)

12049 Jefferson Blvd

Culver City, CA 90230

(Address of principal executive offices) (zip code)

+1 (310) 988-0643

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading symbol

    

Name of each exchange on which registered

Class A Common Stock, par value $0.0001 per share

SNAL

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES      NO  

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES      NO  

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class of Common Stock

    

Outstanding Shares as of December 14, 2022

Class A Common Stock, par value $0.0001 per share

8,157,443

Class B Common Stock, par value $0.0001 per share

28,748,580

Table of Contents

SNAIL, INC. AND SUBSIDIARIES

Form 10-Q

For the Quarter Ended September 30, 2022

Table of Contents

    

Page

PART I. FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements (Unaudited)

2

Financial Statements Introductory Note and Snail, Inc. Balance Sheet as of September 30, 2022 (Unaudited)

2

Snail, Inc. Notes to Condensed Consolidated Statements (Unaudited)

3

Snail Games USA Inc. and Subsidiaries Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021

4

Snail Games USA Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine month periods ended September 30, 2022 and 2021 (Unaudited)

5

Snail Games USA Inc. and Subsidiaries Condensed Consolidated Statements of Equity for the three and nine month periods ended September 30, 2022 and 2021 (Unaudited)

6

Snail Games USA Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2022 and 2021 (Unaudited)

7

Snail Games USA Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)

8

Item 2.

Management’s Discussion and Analysis of the Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

36

Item 4.

Controls and Procedures

36

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3.

Defaults Upon Senior Securities

39

Item 4.

Mine Safety Disclosures

39

Item 5.

Other Information

39

Item 6.

Exhibits

40

Signatures

41

Table of Contents

Item 1. Consolidated Financial Statements (Unaudited).

Financial Statements Introductory Note

Snail, Inc. is an entity incorporated under the laws of Delaware in January 2022 and trades on the Nasdaq Capital Market under the symbol “SNAL.” Snail, Inc. is a holding company with its principal asset consisting of all the shares of common stock of Snail Games USA Inc. (“Snail Games USA”) and, in turn, controls the business and affairs of Snail Games USA and its subsidiaries. Snail, Inc. closed its initial public offering (“IPO”) on November 14, 2022. Concurrently with the IPO, the stockholders of Snail Games USA collectively exchanged 500,000 shares of Snail Games USA common stock for 6,251,420 shares of Class A common stock and 28,748,580 shares of Class B common stock of Snail, Inc. Unless otherwise indicated or the context otherwise requires, all references to “Snail, Inc.,” (the “Parent”) refer to Snail, Inc., and “Company,” “we,” “our,” “ours,” “us” or similar terms refer to Snail Games USA, together with its consolidated subsidiaries. As Snail, Inc. had no substantial assets or activities as of September 30, 2022, and for the three and nine month periods then ended and the reorganization had not been completed as of such date, we have presented the consolidated financial statements and related disclosures of Snail Games USA and its consolidated subsidiaries separate from Snail, Inc. Presented for Snail, Inc. is the balance sheet as of September 30, 2022. There were no operating activities for Snail, Inc. for the three and nine month periods ended September 30, 2022.

Snail, Inc. Unaudited Balance Sheet

    

September 30, 2022

ASSETS

 

  

Current Assets:

 

  

Cash

$

100

Total current assets

 

100

Total assets

$

100

STOCKHOLDER’S EQUITY

 

  

Common stock, $0.001 par value, 1,000 shares authorized, 100 shares issued and outstanding

$

Additional paid-in capital

 

100

Total stockholder’s equity

$

100

See accompanying notes to condensed consolidated financial statements (unaudited).

2

Table of Contents

Snail, Inc. Notes to Condensed Consolidated Statements (Unaudited)

NOTE 1ORGANIZATION

Snail, Inc. was incorporated under the laws of Delaware in January 2022. The Registrant’s fiscal year end is December 31. The Registrant was formed for the purpose of completing an initial public offering (“IPO”) and related transactions to carry on the business of Snail Games USA and its subsidiaries. On November 14, 2022, in connection with the IPO, Snail, Inc. became the holding company of Snail Games USA and its subsidiaries through the exchange of common stock of Snail Games USA for common stock of Snail, Inc, and will control the business and affairs of Snail Games USA and its subsidiaries.

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The balance sheet has been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Separate Statements of Income, Stockholder’s Equity and Cash Flows have not been presented as there have been no operating activities by this entity during the period ended September 30, 2022.

NOTE 3STOCKHOLDER’S EQUITY

Mr. Hai Shi is the Founder and Chairman of the Registrant and was the sole shareholder as of September 30, 2022. He contributed the $100 to the Registrant on January 14, 2022 to purchase 100 shares of the Registrants common stock.

NOTE 4SUBSEQUENT EVENTS

Refer to Note 19 – Subsequent Events, in the Snail Games USA and Subsidiaries condensed consolidated financial statements for information regarding the IPO, reorganization transaction, and other subsequent events.

3

Table of Contents

Snail Games USA Inc. and Subsidiaries Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021

    

September 30, 

    

December 31, 

2022

2021

ASSETS

 

  

 

  

Current Assets:

 

  

 

  

Cash

$

9,044,666

$

10,164,338

Accounts receivable, net of allowances for doubtful accounts of $19,929 and $31,525, respectively

 

4,596,313

 

12,244,785

Accounts receivable - related party, net

 

12,239,430

 

8,435,823

Loan and interest receivable - related party

 

101,249

 

203,408

Prepaid expenses - related party, net of long-term portion

 

1,500,000

 

3,145,000

Prepaid expenses and other current assets

 

11,704,897

 

11,017,007

Total current assets

 

39,186,555

 

45,210,361

Restricted cash and cash equivalents

 

6,368,016

 

6,389,777

Prepaid expenses - related party

 

6,520,000

 

Property, plant and equipment, net

 

5,245,271

 

5,678,701

Intangible assets, net - license - related parties

 

3,235,038

 

8,787,976

Intangible assets, net - license

 

 

250,000

Intangible assets, net - other

 

275,600

 

277,148

Deferred income taxes

 

8,191,051

 

8,191,051

Other noncurrent assets

 

194,032

 

199,919

Operating lease right-of-use assets, net

 

3,887,326

 

5,100,912

Total assets

$

73,102,889

$

80,085,845

LIABILITIES, NONCONTROLLING INTERESTS AND EQUITY

 

 

  

Current Liabilities:

 

 

  

Accounts payable

$

6,765,934

$

3,871,510

Accounts payable - related party

 

22,330,781

 

23,733,572

Accrued expenses and other liabilities

 

2,375,610

 

2,975,475

Loan payable - related parties

 

 

400,000

Interest payable - related parties

 

527,770

 

528,439

Revolving loan

 

9,000,000

 

9,000,000

Short term note

 

6,666,667

 

Notes payable

 

 

216,329

Current portion of long-term debt

 

79,425

 

77,348

Current portion of deferred revenue

 

3,934,693

 

11,005,517

Current portion of operating lease liabilities

 

1,339,172

 

1,688,965

Total current liabilities

 

53,020,052

 

53,497,155

Accrued expenses

454,438

Long-term debt, net of current portion

 

2,825,390

 

2,885,434

Deferred revenue, net of current portion

 

9,048,505

 

9,275,417

Operating lease liabilities, net of current portion

 

3,285,679

 

4,375,786

Total liabilities

 

68,634,064

 

70,033,792

Commitments and contingencies

 

 

  

Equity:

 

 

  

Common stock, $0.01 par value, 1,000,000 shares authorized, 500,000 shares issued and outstanding

 

5,000

 

5,000

Additional paid-in capital

 

12,881,055

 

94,159,167

Due from shareholder - loan receivable

 

 

(91,388,176)

Due from shareholder - interest receivable

 

 

(2,965,346)

Accumulated other comprehensive loss

 

(343,277)

 

(266,557)

Retained earnings (accumulated deficit)

 

(2,593,035)

 

16,045,231

Total Snail Games USA Inc. equity

 

9,949,743

 

15,589,319

Noncontrolling interests

 

(5,480,918)

 

(5,537,266)

Total equity

 

4,468,825

 

10,052,053

Total liabilities, noncontrolling interests and equity

$

73,102,889

$

80,085,845

See accompanying notes to condensed consolidated financial statements (unaudited).

4

Table of Contents

Snail Games USA Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine month periods ended September 30, 2022 and 2021 (Unaudited)

    

For the

    

For the

three months ended September 30, 

nine months ended September 30, 

    

2022

    

2021

    

2022

    

2021

Revenues, net

$

15,614,171

$

24,361,019

$

59,132,284

$

83,200,198

Cost of revenues

 

11,468,961

 

15,478,327

 

37,744,863

 

48,381,061

Gross profit

 

4,145,210

 

8,882,692

 

21,387,421

 

34,819,137

Operating expenses:

 

 

 

 

General and administrative

 

5,434,013

 

3,997,917

 

16,177,534

 

13,053,478

Research and development

 

116,624

 

216,798

 

479,630

 

588,207

Advertising and marketing

 

198,417

 

148,752

 

569,127

 

265,812

Depreciation and amortization

 

128,536

 

208,896

 

435,644

 

638,659

Total operating expenses

 

5,877,590

 

4,572,363

 

17,661,935

 

14,546,156

Income (loss) from operations

 

(1,732,380)

 

4,310,329

 

3,725,486

 

20,272,981

Other income (expense):

 

 

 

 

Interest income

 

12,712

 

21,230

 

45,789

 

71,857

Interest income - related parties

 

505

 

420,164

 

582,128

 

1,128,397

Interest expense

 

(261,070)

 

(114,447)

 

(613,338)

 

(304,918)

Interest expense - related parties

 

 

(2,016)

 

(3,222)

 

(5,983)

Other income

 

19,500

 

31,247

 

319,153

 

482,790

Foreign currency transaction gain (loss)

 

16,169

 

(15,987)

 

21,679

 

(80,755)

Equity in loss of unconsolidated entity

 

 

 

 

(314,515)

Total other income (expense), net

 

(212,184)

 

340,191

 

352,189

 

976,873

Income (loss) before provision for income taxes

 

(1,944,564)

 

4,650,520

 

4,077,675

 

21,249,854

Income tax provision (benefit)

 

(398,998)

 

891,538

 

803,305

 

4,214,245

Net income (loss)

 

(1,545,566)

 

3,758,982

 

3,274,370

 

17,035,609

Net gain (loss) attributable to non-controlling interests

 

(6,828)

 

(125,881)

 

56,348

 

(489,499)

Net income (loss) attributable to Snail Games USA Inc.

 

(1,538,738)

 

3,884,863

 

3,218,022

 

17,525,108

Comprehensive income statement:

 

 

 

 

Other comprehensive income (loss)

 

5,682

 

382,088

 

(76,720)

 

421,048

Total other comprehensive income (loss)

$

(1,533,056)

$

4,266,951

$

3,141,302

$

17,946,156

See accompanying notes to condensed consolidated financial statements (unaudited).

5

Table of Contents

Snail Games USA Inc. and Subsidiaries Condensed Consolidated Statements of Equity for the three and nine month periods ended September 30, 2022 and 2021 (Unaudited)

Due from

Shareholder

Accumulated

Retained

Additional

Loan and

Other

Earnings

Snail Games

Non

Common Stock

Paid-In-

Interest

Comprehensive

(Accumulated

USA Inc.

controlling

    

Shares

    

Amount

    

Capital

    

Receivable

    

Income (Loss)

    

Deficit)

    

Equity

    

Interests

    

Total Equity

Balance at December 31, 2021

 

500,000

$

5,000

$

94,159,167

$

(94,353,522)

$

(266,557)

$

16,045,231

$

15,589,319

$

(5,537,266)

$

10,052,053

Loan to shareholder

 

 

 

 

(450,681)

 

 

 

(450,681)

 

 

(450,681)

Foreign currency translation

 

 

 

 

 

(51,203)

 

 

(51,203)

 

 

(51,203)

Net income

5,811,057

5,811,057

(7,290)

5,803,767

Balance at March 31, 2022

500,000

5,000

94,159,167

(94,804,203)

(317,760)

21,856,288

20,898,492

(5,544,556)

15,353,936

Loan to shareholder

(130,197)

(130,197)

(130,197)

Dividend distribution

(81,278,112)

94,934,400

(21,856,288)

(8,200,000)

(8,200,000)

Foreign currency translation

(31,199)

(31,199)

(31,199)

Net income (loss)

 

 

 

 

 

 

(1,054,297)

 

(1,054,297)

 

70,466

 

(983,831)

Balance at June 30, 2022

 

500,000

5,000

12,881,055

(348,959)

(1,054,297)

11,482,799

(5,474,090)

6,008,709

Foreign currency translation

 

 

 

 

 

5,682

 

 

5,682

 

 

5,682

Net income (loss)

 

 

 

 

 

 

(1,538,738)

 

(1,538,738)

 

(6,828)

 

(1,545,566)

Balance at September 30, 2022

 

500,000

$

5,000

$

12,881,055

$

$

(343,277)

$

(2,593,035)

$

9,949,743

$

(5,480,918)

$

4,468,825

Due from

Shareholder

Accumulated

Additional

Loan and

Other

Snail Games

Non

Common Stock

Paid-In-

Interest

Comprehensive

Retained

USA Inc.

controlling

    

Shares

    

Amount

    

Capital

    

Receivable

    

Income (Loss)

    

Earnings

    

Equity

    

Interests

    

Total Equity

Balance at December 31, 2020

 

500,000

$

5,000

$

94,159,167

$

(62,186,331)

$

(197,174)

$

7,576,835

$

39,357,497

$

(5,017,741)

$

34,339,756

Loan to shareholder

 

 

 

 

(9,169,393)

 

 

 

(9,169,393)

 

 

(9,169,393)

Foreign currency translation

 

 

 

 

 

33,332

 

 

33,332

 

 

33,332

Net income (loss)

 

 

 

 

 

 

6,178,607

 

6,178,607

 

(168,008)

 

6,010,599

Balance at March 31, 2021

 

500,000

 

5,000

 

94,159,167

 

(71,355,724)

 

(163,842)

 

13,755,442

 

36,400,043

 

(5,185,749)

 

31,214,294

Loan to shareholder

(7,058,648)

(7,058,648)

(7,058,648)

Foreign currency translation

 

 

 

 

 

5,628

 

 

5,628

 

 

5,628

Dissolution of subsidiary

 

 

 

 

 

 

 

 

39,340

 

39,340

Net income (loss)

 

 

 

 

 

 

7,461,638

 

7,461,638

 

(195,610)

 

7,266,028

Balance at June 30, 2021

 

500,000

 

5,000

 

94,159,167

 

(78,414,372)

 

(158,214)

 

21,217,080

 

36,808,661

 

(5,342,019)

 

31,466,642

Loan to shareholder

(9,353,161)

(9,353,161)

(9,353,161)

Foreign currency translation

 

 

 

 

 

382,088

 

 

382,088

 

 

382,088

Net income (loss)

 

 

 

 

 

 

3,884,863

 

3,884,863

 

(125,881)

 

3,758,982

Balance at September 30, 2021

 

500,000

$

5,000

$

94,159,167

$

(87,767,533)

$

223,874

$

25,101,943

$

31,722,451

$

(5,467,900)

$

26,254,551

See accompanying notes to condensed consolidated financial statements (unaudited).

6

Table of Contents

Snail Games USA Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2022 and 2021 (Unaudited)

Nine months ended September 30,

    

2022

    

2021

Cash flows from operating activities:

 

  

 

  

Net income

$

3,274,370

$

17,035,609

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

  

 

  

Amortization - intangible assets - license

 

250,000

 

450,000

Amortization - intangible assets - license, related parties

 

5,552,938

 

10,675,193

Amortization - intangible assets - other

 

672

 

6,149

Amortization - loan origination fees

 

19,149

 

22,388

Depreciation and amortization - property and equipment

 

435,644

 

638,659

Gain on lease termination

 

(122,533)

 

Gain on paycheck protection program and economic injury disaster loan forgiveness

 

(174,436)

 

(392,200)

Gain on disposal of fixed assets

 

(17,067)

 

Interest income from shareholder loan

 

(580,878)

 

(1,074,881)

Deferred taxes

 

 

2,682

Decrease in non-controlling interest - dissolution of subsidiary

 

 

39,340

Changes in assets and liabilities:

 

  

 

  

Accounts receivable

 

7,648,432

 

5,049,456

Accounts receivable - related party

 

(3,803,606)

 

2,542,956

Prepaid expenses - related party

 

(4,875,000)

 

Prepaid expenses and other current assets

 

(2,232,406)

 

(5,689,750)

Other noncurrent assets

 

(15,228)

 

241,422

Accounts payable

 

2,905,024

 

(390,331)

Accounts payable - related party

 

(1,402,791)

 

311,024

Accrued expenses

 

(127,993)

 

700,163

Interest payable - related parties

 

1,490

 

5,983

Lease liabilities

 

(103,782)

 

(130,090)

Deferred revenue

 

(7,297,736)

 

(11,389,985)

Net cash (used in) provided by operating activities

 

(665,737)

 

18,653,787

Cash flows from investing activities:

 

  

 

  

Loan provided to related party

 

 

(24,506,321)

Repayment on loan provided by related party

(300,000)

Acquisition of license rights - related party

 

 

(5,000,000)

Purchases of property and equipment

 

(5,256)

 

(3,403)

Proceeds from sale of property and equipment

19,500

Repayment on Pound Sand note

 

1,496,063

 

Investment at cost

 

 

(895)

Net cash provided by (used in) investing activities

 

1,210,307

 

(29,510,619)

Cash flows from financing activities:

 

  

 

  

Repayments on long-term debt

 

(57,967)

 

(6,731,666)

Repayments on short-term note

 

(3,333,333)

 

Borrowings on long-term debt

 

 

2,904,815

Borrowings on short-term note

 

10,000,000

 

Payments on paycheck protection program and economic injury disaster loan

 

(90,198)

 

Refund of payments on paycheck protection program and economic injury disaster loan

 

48,305

 

Borrowings on revolving loan

 

 

6,500,000

Cash dividend declared and paid

 

(8,200,000)

 

Net cash (used in) provided by financing activities

 

(1,633,193)

 

2,673,149

Effect of currency translation on cash and cash equivalents

 

(52,810)

 

380,403

Net decrease in cash, and restricted cash and cash equivalents

 

(1,141,433)

 

(7,803,280)

Cash, and restricted cash and cash equivalents - beginning of period

 

16,554,115

 

33,902,707

Cash, and restricted cash and cash equivalents - end of period

$

15,412,682

$

26,099,427

Supplemental disclosures of cash flow information

 

  

 

  

Cash paid during the period for:

 

  

 

  

Interest

$

594,189

$

105,577

Income taxes

$

831,400

$

3,300,000

Noncash transactions during the period for:

 

  

 

  

Loan and interest payable - related parties

$

103,890

$

Loan and interest receivable - related parties

$

(103,890)

$

Loan and interest from shareholder

$

94,934,400

$

Dividend distribution

$

(94,934,400)

$

Noncash financing activity during the period:

 

  

 

  

Gain on paycheck protection program and economic injury disaster loan forgiveness

$

(174,436)

$

(392,200)

See accompanying notes to condensed consolidated financial statements (unaudited).

7

Table of Contents

Snail Games USA Inc. and Subsidiaries Notes to Condensed Consolidated Statements (Unaudited)

NOTE 1 – PRESENTATION AND NATURE OF OPERATIONS

Snail Games USA Inc. is devoted to researching, developing, marketing, publishing, and distributing games, content and support that can be played on a variety of platforms including game consoles, PCs, mobile phones and tablets. The terms “Snail Games USA,” “we,” “our” and the “Company” are used to refer collectively to Snail Games USA Inc. and its subsidiaries. The Company is a global developer and publisher of interactive entertainment content and support on video game consoles, personal computers, mobile devices, and other platforms.

The Company was founded in 2009 as a wholly owned subsidiary of Suzhou Snail Digital Technology Co., Ltd. (“Suzhou Snail”) located in Suzhou, China. On July 13, 2022, Suzhou Snail transferred all of its right, title, and interest to all of the 500,000 shares of common stock of the Company (“Shares”) to Snail Technology (HK) Limited (“Snail Technology”), an entity organized under the laws of Hong Kong, pursuant to the certain Share Transfer Agreement dated July 13, 2022 between Suzhou Snail and Snail Technology. Subsequently, Snail Technology transferred all of its right, title, and interest in the shares to certain individuals per the Share Transfer Agreement. In connection with the transaction described in Note 19 - Subsequent Events, the individuals contributed their interest in the Company to Snail, Inc. (the “Parent”) in return for common stock of the Parent in connection with Snail, Inc.’s initial public offering (“IPO”). Because the Company and Suzhou Snail are owned by the same shareholders, Suzhou Snail is considered a related party to the Company.

Basis of Presentation and Consolidation

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles as promulgated in the United States of America (“U.S.GAAP”) for interim reporting. Accordingly, certain notes or other information that are normally required by U.S. GAAP have been condensed or omitted if they substantially duplicate the disclosures contained in our annual audited condensed consolidated financial statements. Additionally, the year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements but does not include all disclosures required by U.S. GAAP. Accordingly, the unaudited condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and notes thereto for the year ended December 31, 2021.

In the opinion of management, all adjustments considered necessary for the fair presentation of the Company’s financial position and its results of operations in accordance with U.S. GAAP (consisting of normal recurring adjustments) have been included in the accompanying unaudited condensed consolidated financial statements.

Certain comparative amounts have been reclassified to conform with the current period presentation.

The condensed consolidated financial statements include the accounts of Snail Games USA Inc. and the following subsidiaries:

    

Equity %

 

Subsidiary Name

Owned

 

Snail Innovation Institute

 

70

%

Frostkeep Studios, Inc.

 

100

%

Eminence Corp

 

100

%

Wandering Wizard, LLC

 

100

%

Donkey Crew Limited Liability Company

 

99

%

Interactive Films, LLC

 

100

%

Project AWK Productions, LLC

 

100

%

BTBX.IO, LLC

 

70

%

Elephant Snail, LLC (through April 15, 2021)

 

51

%

All intercompany accounts, transactions, and profits have been eliminated upon consolidation.

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Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and the accompanying notes. Such estimates include revenue recognition, provisions for doubtful accounts, deferred income tax assets and associated valuation allowances, deferred revenue, income taxes, valuation of intangibles, including those with related parties and impairment of intangible assets. These estimates generally involve complex issues and require management to make judgments, involve analysis of historical and future trends that can require extended periods of time to resolve, and are subject to change from period to period. In all cases, actual results could differ materially from estimates.

Segment Reporting

The Company has one operating and reportable segment. Our operations involve similar products and customers worldwide. Revenue earned is primarily derived from the sale of software titles, which are developed internally or licensed from related parties. Financial information about our segment and geographic regions is included in Note 3 – Revenue from Contracts with Customers.

COVID-19

Since the start of the coronavirus pandemic early in 2020, the Company has made sustained efforts to ensure the health and safety of the workforce while ensuring continuity of the business. In the workplace, the Company has designed and implemented protocols for social distancing, made provisions for the workforce to work remotely where possible, and established quarantine policies for those who present COVID-like symptoms or may have been in contact with those who have. Further, the Company keeps current with local, state, federal and international laws and restrictions that could affect the business and provide real-time information to the workforce. The Company has its own policies relating to health and is committed to compliance with COVID-19 policies.

As has been the case with many other employers, since the start of 2021, the Company has encouraged its workforce to receive vaccinations against COVID-19 through various means, including incentive programs. However, new variants, particularly the Delta and Omicron variants, have engendered a resurgence of the virus in many regions particularly among the unvaccinated. In-the-midst of changing conditions, the Company has nevertheless been able to manage its business with minimal impact during the three and nine month periods ended September 30, 2022 and 2021.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

The Company’s revenue includes the publishing of software games delivered digitally and through physical discs (e.g., packaged goods). The Company’s digital games may include additional downloadable content that are new feature releases to digital full-game downloads. Revenue also includes sales of mobile in-app purchases that require the Company’s hosting support in order to utilize the game or related content. Such games include virtual goods that can be purchased by the end users, as desired. When control of the promised products and services is transferred to the customers, the Company recognizes revenue in the amount that reflects the consideration it expects to receive in exchange for these products and services. Revenue from delivery of products is recognized at a point in time when the end consumers download the games and the control of the license is transferred to them.

The Company recognizes revenue using the following five steps as provided by ASC Topic 606 Revenue from Contracts with Customers: 1) identify the contract(s) with the customer; 2) identify the performance obligations in each contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize revenue when, or as, the entity satisfies a performance obligation. The Company’s terms and conditions vary by customers and typically provide net 30 to 75 days terms or 45 days after each quarter ends.

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Principal vs Agent Consideration

The Company offers certain software products via third-party digital storefronts, such as Microsoft’s Xbox Live, Sony’s PlayStation Network, Valve’s Steam, Epic Games Store, Apple’s App Store, the Google Play Store, and retail distributor. For sales of our software products via third-party digital storefronts and retail distributor, we determine whether or not we are acting as the principal in the sale to the end user, which we consider in determining if revenue should be reported based on the gross transaction price to the end user or based on the transaction price net of fees retained by the third-party digital storefront. An entity is the principal if it controls a good or service before it is transferred to the customer. Key indicators that we use in evaluating these sales transactions include, but are not limited to, the following:

The underlying contract terms and conditions between the various parties to the transaction;
Which party is primarily responsible for fulfilling the promise to provide the specified good or service; and
Which party has discretion in establishing the price for the specified good or service.

Based on our evaluation of the above indicators, for sales arrangements via Microsoft’s Xbox Live, Sony’s PlayStation Network, Valve’s Steam, Epic Games Store, and retail distributor, the digital platforms and distributors have discretion in establishing the price for the specified good or service and we have determined we are the agent in the sales transaction to the end user and therefore we report revenue on a net basis based on the consideration received from the digital storefront. For sales arrangements via Apple’s App Store and the Google Play Store, we have discretion in establishing the price for the specified good or service and we have determined that we are the principal to the end user and thus report revenue on a gross basis and mobile platform fees charged by these digital storefronts are expensed as incurred and reported within cost of revenues.

Contract Balance

The Company records deferred revenue when cash payments are received or due in advance of its performance, even if amounts are refundable.

Deferred revenue is comprised of the transaction price allocable to the Company’s performance obligation on technical support and the sale of virtual goods available for in-app purchases, and payments received from customers prior to launching the games on the platforms. The Company categorizes the virtual goods as either “consumable” or “durable.” Consumable virtual goods represent goods that can be consumed by a specific player action; accordingly, the Company recognizes revenues from the sale of consumable virtual goods as the goods are consumed and the performance obligation is satisfied. Durable virtual goods represent goods that are accessible to the players over an extended period of time; accordingly, the Company recognize revenues from the sale of durable virtual goods ratably over the period of time the goods are available to the player and the performance obligation is satisfied, which is generally the estimated service period.

The Company also has a long-term title license agreement with a platform for a period of three years. The Company recognizes deferred revenue and amortizes this revenue according to the terms of the relevant agreement. The agreement was initially made between the parties in November 2018 and valid through December 31, 2021. The agreement was subsequently amended in June 2020 to extend the ARK 1 availability on the platform perpetually, effective January 1, 2022 and to put ARK 2 on the platform for three years upon release. The Company recognized $2.5 million in revenue related to ARK 1 perpetual license for the nine months ended September 30, 2022 and deferred $2.3 million related to ARK 2 that is included in the long-term portion of deferred revenue.

In November 2021, the Company entered an agreement with a platform to make ARK 1 available on the platform for a period of 5 weeks in exchange for $3.5 million. The platform launched the 5-week program on March 1, 2022 and the Company recognized the full amount of revenue from this contract for the nine months ended September 30, 2022, as the significant performance obligation of making the game available on the platform was met on the first day of the contract.

The Company entered into a non-exclusive license agreement with a platform in February 2020 to make ARK 1 available on the platform, exclusive of all available DLC, for a period of 2 weeks in exchange for $8.0 million. During the 2 weeks the platform offered digital rights to ARK 1 to its end users for free. The platform launched the first free week in June of 2020 and the Company recognized $4.0 million of the advanced payment as revenue during the year ended December 31, 2020. In September 2022, the platform launched the second free week and the Company recognized the remaining $4.0 million of revenue during the nine months ended September 30, 2022.

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Estimated Service Period

For certain performance obligations satisfied over time, we have determined that the estimated service period is the time period in which an average user plays our software products (“user life”) which most faithfully depicts the timing of satisfying our performance obligation. We consider a variety of data points when determining and subsequently reassessing the estimated service period for players of our software products. Primarily, we review the weighted average number of days between players’ first and last days played online. When a new game is launched and no history of online player data is available, we consider other factors to determine the user life, such as the estimated service period of other games actively being sold with similar characteristics. We also consider known online trends, the service periods of our previously released software products, and, to the extent publicly available, the service periods of our competitors’ software products that are similar in nature to ours.

We believe this provides a reasonable depiction of the use of games by our customers, as it is the best representation of the period during which our customers play our software products. Determining the estimated service period is subjective and requires significant management judgment and estimates. Future usage patterns may differ from historical usage patterns, and therefore the estimated service period may change in the future. The estimated service periods for virtual goods are generally approximately 30 to 100 days.

Shipping and Handling

The distributor, as the principal, is responsible for the shipping of the game discs to the retail stores and incurring the shipping costs. The Company is paid the net sales amount after deducting shipping costs and other related expenses by the distributor.

Cost of Revenues

Cost of revenues include software license royalty fees, merchant fees, server and database center costs, game localization costs, game licenses and amortization costs. Cost of revenues for the three and nine month periods ended September 30, 2022 and 2021 were comprised of the following:

Three months ended

Nine months ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Software license royalties - related parties

$

3,428,231

$

4,954,040

$

13,314,258

$

17,046,875

Software license royalties

47,020

47,020

License and amortization - related parties

 

6,350,979

 

8,483,182

 

19,052,938

 

24,169,714

License and amortization