Snail, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. Snail develops and publishes games across console, PC and mobile; the ARK franchise generated about 86.4% of third-quarter revenue and 86.9% of nine-month revenue.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $9.0 million | $15.6 million | $32.3 million | $59.1 million |
| Gross profit (loss) | ($0.5) million | $3.2 million | $2.7 million | $18.7 million |
| Operating income (loss) | ($5.6) million | ($1.7) million | ($14.0) million | $3.7 million |
| Net income (loss) | ($4.4) million | ($1.5) million | ($11.5) million | $3.3 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | ($10.8) million | ($0.7) million |
- Third-quarter gross margin was approximately -5.4%, versus 20.4% a year earlier; nine-month gross margin was approximately 8.3%, versus 31.7%.
- Third-quarter revenue fell 42.5%; nine-month revenue fell 45.3%. Nine-month adjusted EBITDA, a non-GAAP measure, was a loss of $13.3 million, compared with income of $4.5 million.
- At September 30, cash and cash equivalents were $4.9 million, with restricted cash of $1.1 million. Current assets were $35.8 million and current liabilities $53.5 million, a current-liability excess of approximately $17.7 million. Total equity was only $0.1 million.
- Total debt, net of discount, was $13.7 million, all classified as current. The balance sheet also included $11.5 million of net related-party receivables and $19.7 million payable to a related party.
- Cash and restricted cash decreased $13.2 million in the first nine months, ending at $6.1 million combined. Financing cash use was $2.4 million.
Changes versus the prior comparable period
- Management attributed lower revenue chiefly to reduced ARK selling prices and in-game purchases, and to prior-year one-time platform payments and deferred revenue recognition. Nine-month unit sales declined 6.9% to 3.9 million; Q3 unit sales were approximately flat at 1.2 million.
- Cost of revenue declined less quickly than revenue, producing a Q3 gross loss. Lower royalties and license amortization partly offset increased server and data-center costs.
- Research and development expense rose to $1.3 million in Q3 from $0.1 million and to $3.9 million for nine months from $0.5 million, reflecting investment in ARK and other titles. Nine-month general and administrative expense decreased 11.9%.
- ARK: Survival Evolved average daily active users on Steam and Epic declined to 231,337 in Q3 from 339,884; nine-month average DAUs were 249,170 versus 319,013.
Liquidity, outlook, risks and unusual items
- Going concern: Management stated that losses, operating cash use, debt coming due within 12 months and uncertainty over refinancing or new capital raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements contain no adjustments for a possible inability to continue operations.
- The $6.0 million revolver matures December 31, 2023, and the $2.1 million remaining short-term note is due by January 2024. Management planned to renegotiate or renew debt arrangements and expected possible noncompliance with a quarterly debt covenant for the period ending December 31, 2023. Lenders had waived covenant noncompliance reported through September 30.
- Additional financing includes $1.08 million principal of convertible notes issued for $1.0 million gross proceeds, with a 7.5% stated rate, potential conversion and warrant-related dilution; and an equity line allowing up to $5.0 million of stock purchases, subject to conditions and limits. Draws under the equity line may dilute existing holders. A server-host vendor also advanced $2.3 million under an arrangement repayable from 20% of monthly ARK revenue.
- Management’s stated priorities were to increase revenue through existing and new games and DLC, control expenses, renegotiate debt and obtain funds if needed. The filing gives no specific revenue or earnings guidance.
- A July distribution agreement provided prepaid royalties of $0.5 million for ARK: Survival Ascended and $1.3 million for ARK II, recorded as deferred revenue until release. Deferred revenue totaled $11.5 million at September 30.
- The Company settled litigation with Angela Game in September; part of the upfront payment was recorded as other income and the remainder deferred pending performance obligations and revenue sharing. Separately, a landlord lawsuit seeks more than $3 million. An affiliate that had agreed to indemnify the Company filed for bankruptcy in October; the Company does not expect recovery and recorded no loss accrual because the potential loss could not be quantified.
- Management reported ineffective disclosure controls and material weaknesses involving financial close and disclosures, income-tax and equity accounting, cash-flow disclosures, expense classification, related-party identification and accounting for a significant settlement. Remediation efforts were underway. Prior-period server-cost classifications were reclassified; the Company deemed the errors immaterial.
- Revenue and operations are concentrated: two customers represented about 60% of Q3 revenue, and one related-party vendor represented 49% of nine-month cost of revenue and operating expenses. The ARK franchise and third-party distribution platforms are also significant dependencies.
Important facts for investors to verify
- Whether the revolver and short-term note were extended, repaid or refinanced, and whether covenant compliance was resolved after September 30.
- Subsequent cash balances, operating cash use and access to the equity line or other financing, including potential share dilution and conversion terms.
- ARK: Survival Ascended and ARK II release timing, commercial performance, and the effect of lower ARK pricing, sales and player activity.
- Collection of the $11.5 million related-party receivable, related-party balances and dependence on key customers, vendors and licensors.
- Developments in the landlord litigation and the effect of the affiliate’s bankruptcy on potential indemnification or loss exposure.
- Progress in remediating material weaknesses and any later financial statement corrections or changes in estimates.