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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, 2023

 

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 November 13, 2023
Class A Common Stock, par value $0.0001 per share   7,901,145
Class B Common Stock, par value $0.0001 per share   28,748,580

 

 

 

 

 

 

SNAIL, INC. AND SUBSIDIARIES

Form 10-Q

For the Quarter Ended September 30, 2023

 

Table of Contents

 

    Page 
  Cautionary Statement ii
     
PART I. FINANCIAL INFORMATION F-1
     
Item 1. Condensed Consolidated Financial Statements (Unaudited) F-1
     
  Snail, Inc. and Subsidiaries Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 F-1
     
  Snail, Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2023 and 2022 F-2
     
  Snail, Inc. and Subsidiaries Condensed Consolidated Statements of Equity for the three and nine months ended September 30, 2023 and 2022 F-3
     
  Snail, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 F-4
     
  Snail, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements F-5
     
Item 2. Management’s Discussion and Analysis of the Results of Operations 29
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 43
     
Item 4. Controls and Procedures 43
     
PART II. OTHER INFORMATION 44
     
Item 1. Legal Proceedings 44
     
Item 1A. Risk Factors 44
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 51
     
Item 3. Defaults Upon Senior Securities 52
     
Item 4. Mine Safety Disclosures 52
     
Item 5. Other Information 52
     
Item 6. Exhibits 52
     
Signatures 53

 

i

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains statements that constitute forward-looking statements. Many of the forward-looking statements contained in this Quarterly Report can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “may,” “predict,” “continue,” “estimate” and “potential,” or the negative of these terms or other similar expressions.

 

Forward-looking statements appear in a number of places in this Quarterly Report and include, but are not limited to, statements regarding our intent, belief or current expectations. These forward-looking statements include information about possible or assumed future results of our business, financial condition, results of operations, liquidity, plans and objectives. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements due to various factors, including, but not limited to, those identified described in “Part II, Item 1A. – Risk Factors,” of this Quarterly Report. The statements we make regarding the following matters are forward-looking by their nature:

 

  our ability to re-establish profitable operations, raise additional capital or renegotiate our debt arrangements;
     
  our growth prospects and strategies;
     
  launching new games and additional functionality to games that are commercially successful;
     
  our expectations regarding significant drivers of our future growth;
     
  our ability to retain and increase our player base and develop new video games and enhance our existing games;
     
  competition from companies in a number of industries, including other casual game developers and publishers and both large and small, public and private multimedia companies;
     
  our ability to attract and retain a qualified management team and other team members while controlling our labor costs;
     
  our relationships with third-party platforms 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;
     
  our ability to successfully enter new markets and manage our international expansion;
     
  protecting and developing our brand and intellectual property portfolio;
     
  costs associated with defending intellectual property infringement and other claims;
     
  our future business development, results of operations and financial condition;
     
  rulings by courts or other governmental authorities;
     
  our Share Repurchase Program (as defined below), including expectations regarding the timing and manner of repurchases made under the Share Repurchase Program;
     
  our plans to pursue and successfully integrate strategic acquisitions;
     
  other risks and uncertainties described in this Quarterly Report, including those described in Item 1A of Part II, “Risk Factors”; and
     
  assumptions underlying any of the foregoing.

 

Further information on risks, uncertainties and other factors that could affect our financial results are included in our filings with the United States Securities and Exchange Commission (the “SEC”) from time to time, including in Item 1A of Part II, “Risk Factors,” of this Quarterly Report and other periodic reports on Form 10-K and 10-Q filed or to be filed with the SEC. You should not rely on these forward-looking statements, as actual outcomes and results may differ materially from those expressed or implied in the forward-looking statements as a result of such risks and uncertainties. All forward-looking statements in this Quarterly Report are based on management’s beliefs and assumptions and on information currently available to us as of the date of this filing, and we do not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made.

 

ii

 

 

PART I

 

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 

Snail, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

   September 30, 2023   December 31, 2022 
         
ASSETS          
           
Current Assets:          
Cash and cash equivalents  $4,948,832   $12,863,817 
Restricted escrow deposit   1,037,739    1,003,804 
Accounts receivable, net of allowances for credit losses of $19,929 and $31,525, respectively   4,083,369    6,758,024 
Accounts receivable - related party, net   11,599,229    11,344,184 
Loan and interest receivable - related party   103,249    101,753 
Prepaid expenses - related party   2,500,000    - 
Prepaid expenses and other current assets   11,482,303    10,565,141 
Total current assets   35,754,721    42,636,723 
           
Restricted cash and cash equivalents   1,115,084    6,374,368 
Prepaid expenses - related party   5,582,500    5,582,500 
Property, plant and equipment, net   4,768,715    5,114,799 
Intangible assets, net - license - related parties   130,435    1,384,058 
Intangible assets, net - other   271,918    272,521 
Deferred income taxes   10,902,503    7,602,536 
Other noncurrent assets   171,512    198,668 
Operating lease right-of-use assets, net   2,738,554    3,606,398 
Total assets  $61,435,942   $72,772,571 
           
LIABILITIES, NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY          
           
Current Liabilities:          
Accounts payable  $9,956,626   $9,452,391 
Accounts payable - related party   19,669,868    19,918,259 
Accrued expenses and other liabilities   2,305,132    1,474,088 
Interest payable - related parties   527,770    527,770 
Revolving loan   6,000,000    9,000,000 
Notes payable   4,358,333    5,416,666 
Convertible notes, net of discount   515,217    - 
Current portion of promissory note   2,832,231    86,524 
Current portion of deferred revenue   5,848,320    4,335,404 
Current portion of operating lease liabilities   1,470,718    1,371,227 
Total current liabilities   53,484,215    51,582,329 
           
Accrued expenses   311,276    457,024 
Promissory note, net of current portion   -    3,221,963 
Deferred revenue, net of current portion   5,680,439    5,216,042 
Operating lease liabilities, net of current portion   1,814,962    2,930,529 
Total liabilities   61,290,892    63,407,887 
           
Commitments and contingencies   -     -  
           
Stockholders’ Equity:          
Class A common stock, $0.0001 par value, 500,000,000 shares authorized; 9,251,420 shares issued, 7,901,145 and 8,053,771 shares outstanding as of September 30, 2023 and December 31, 2022, respectively   925    925 
Class B common stock, $0.0001 par value, 100,000,000 shares authorized; 28,748,580 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively   2,875    2,875 
           
Additional paid-in capital   25,945,549    23,436,942 
Accumulated other comprehensive loss   (287,685)   (307,200)
Accumulated deficit   (16,346,691)   (4,863,250)
Stockholders Equity Excluding Treasury Stock   9,314,973    18,270,292 
Treasury stock at cost (1,350,275 and 1,197,649 shares as of September 30, 2023 and December 31, 2022, respectively)   (3,671,806)   (3,414,713)
Total Snail, Inc. equity   5,643,167    14,855,579 
Noncontrolling interests   (5,498,117)   (5,490,895)
Total stockholders’ equity   145,050    9,364,684 
Total liabilities, noncontrolling interests and stockholders’ equity  $61,435,942   $72,772,571 

 

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

 

F-1

 

 

Snail, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

 

   2023   2022   2023   2022 
   Three months ended September 30,   Nine months ended September 30, 
   2023   2022   2023   2022 
                 
Revenues, net  $8,981,135   $15,614,171   $32,331,876   $59,132,284 
Cost of revenues   9,463,086    12,424,067    29,659,788    40,397,396 
                     
Gross profit, (loss)   (481,951)   3,190,104    2,672,088    18,734,888 
                     
Operating expenses:                    
General and administrative   3,452,141    4,478,907    11,915,126    13,525,001 
Research and development   1,317,400    116,624    3,892,039    479,630 
Advertising and marketing   215,477    198,417    488,318    569,127 
Depreciation and amortization   112,914    128,536    346,084    435,644 
Total operating expenses   5,097,932    4,922,484    16,641,567    15,009,402 
                     
(Loss) income from operations   (5,579,883)   (1,732,380)   (13,969,479)   3,725,486 
                     
Other income (expense):                    
Interest income   47,147    12,712    98,411    45,789 
Interest income - related parties   504    505    1,496    582,128 
Interest expense   (370,376)   (261,070)   (961,196)   (613,338)
Interest expense - related parties   -    -    -    (3,222)
Other income   313,156    19,500    321,331    319,153 
Foreign currency transaction (loss) gain   (1,394)   16,169    (25,606)   21,679 
Total other income (expense), net   (10,963)   (212,184)   (565,564)   352,189 
                     
(Loss) income before (benefit from) provision for income taxes   (5,590,846)   (1,944,564)   (14,535,043)   4,077,675 
                     
(Benefit from) provision for income taxes   (1,156,675)   (398,998)   (3,044,380)   803,305 
                     
Net (loss) income   (4,434,171)   (1,545,566)   (11,490,663)   3,274,370 
                     
Net (loss) income attributable to non-controlling interests   (1,539)   (6,828)   (7,222)   56,348 
                     
Net (loss) income attributable to Snail, Inc. and Snail Games USA Inc.   (4,432,632)   (1,538,738)   (11,483,441)   3,218,022 
                     
Comprehensive income statement:                    
                     
Other comprehensive income (loss) related to foreign currency translation adjustments, net of tax   (1,512)   5,682    19,515    (76,720)
                     
Total comprehensive (loss) income  $(4,434,144)  $(1,533,056)  $(11,463,926)  $3,141,302 
                     
Net (loss) income attributable to Class A common stockholders:                    
Basic  $(955,763)  $(1,538,738)  $(2,477,768)  $3,218,022 
Diluted  $(955,763)  $(1,538,738)  $(2,477,768)  $3,218,022 
                     
Net loss attributable to Class B common stockholders:                    
Basic  $(3,476,869)  $-   $(9,005,673)  $- 
Diluted  $(3,476,869)  $-   $(9,005,673)  $- 
                     
(Loss) income per share attributable to Class A and B common stockholders:                    
Basic  $(0.12)  $(0.04)  $(0.31)  $0.09 
Diluted  $(0.12)  $(0.04)  $(0.31)  $0.09 
                     
Weighted-average shares used to compute income per share attributable to Class A common stockholders(1):                    
Basic   7,901,145    35,000,000    7,909,715    35,000,000 
Diluted   7,901,145    35,000,000    7,909,715    35,000,000 
                     
Weighted-average shares used to compute income per share attributable to Class B common stockholders:                    
Basic   28,748,580    -    28,748,580    - 
Diluted   28,748,580    -    28,748,580    - 

 

(1) The shares used for the denominator in the calculation of EPS are the number of shares transferred in the reorganization transaction for comparative purposes. Snail Games USA Inc. did not have Class A common stock as of September 30, 2022.

 

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

 

F-2

 

 

Snail, Inc. and Subsidiaries

Condensed Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2023 and 2022

 

   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Receivable   Loss   Earnings   Shares   Amount   Equity   interests   Equity 
   Common Stock - Snail Games USA Inc.   Class A Common Stock   Class B Common Stock   Additional Paid-In-   Due from Shareholder Loan and Interest  

Accumulated

Other Comprehensive

   Retained   Treasury Stock   Snail Games USA Inc.  

Non

controlling

   Total 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Receivable   Loss   Earnings   Shares   Amount   Equity   interests   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 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 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 

 

   Shares   Amount   Shares   Amount   Capital   Loss   Deficit   Shares   Amount   Equity   interests   Equity 
   Class A Common Stock   Class B Common Stock   Additional Paid-In-       Accumulated
Other
Comprehensive
   Accumulated   Treasury Stock   Snail, Inc.   Non
controlling
   Total 
   Shares   Amount   Shares   Amount   Capital   Loss   Deficit   Shares   Amount   Equity   interests   Equity 
                                                 
 Balance at December 31, 2022   9,251,420   $925    28,748,580   $2,875   $23,436,942   $(307,200)  $(4,863,250)   (1,197,649)  $(3,414,713)  $14,855,579   $(5,490,895)  $9,364,684 
                                                             
Stock based compensation related to restricted stock units   -    -    -    -    152,595    -    -    -    -    152,595    -    152,595 
                                                             
Repurchase of common stock   -    -    -    -    -    -    -    (152,626)   (257,093)   (257,093)   -    (257,093)
                                                             
Foreign currency translation   -    -    -    -    -    2,320    -