Snail, Inc. — Q1 2023 Form 10-Q
Business and period. The unaudited report covers the three months ended March 31, 2023, compared with Q1 2022. Snail develops and publishes games across console, PC and mobile platforms. Its business is heavily dependent on the ARK franchise, which generated 90.0% of Q1 2023 revenue.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior year-end |
|---|---|---|
| Revenue | $13.46 million | $28.05 million |
| Gross profit and margin | $3.64 million; 27.1% | $13.17 million; 46.9% |
| Operating income (loss) | $(3.52) million | $7.03 million |
| Net income (loss) | $(2.97) million; $(0.08) per share | $5.80 million; $0.17 per share |
| Operating cash flow | $(6.71) million | $5.00 million |
| Cash and cash equivalents | $4.11 million unrestricted; $6.38 million restricted cash, plus $1.01 million restricted escrow | $12.86 million unrestricted at December 31, 2022 |
| Debt | $16.03 million total; approximately $13.25 million current, including $9.0 million revolving loan and $4.17 million short-term note | $17.73 million total at December 31, 2022 |
| Working capital | Current assets $37.21 million; current liabilities $49.34 million | — |
Revenue fell 52.0% year over year. Management attributed the decline chiefly to lower ARK sales and average selling prices, and the absence of significant one-time platform contract revenue recognized in Q1 2022. Gross profit fell 72.3%, and gross margin contracted by about 19.8 percentage points. Research and development expense rose to $1.37 million from $0.18 million; general and administrative expense was nearly flat at $5.57 million.
Bookings, a company-defined non-GAAP measure, were $13.3 million, down 47.6%. Management reported EBITDA of $(3.4) million versus $7.2 million. The company sold 1.7 million units, up 31.3%, and ARK averaged 276,144 daily active users on Steam and Epic, versus 257,168 in Q1 2022.
Liquidity, outlook and risks
- Going concern: Management says the net loss, $6.7 million operating cash outflow, near-term debt maturities and uncertainty about refinancing or raising capital raise substantial doubt about the company’s ability to continue as a going concern.
- Debt and covenant risk: The $9.0 million revolving loan matures in December 2023; the $4.17 million short-term note is due in January 2024. Management plans to seek an extension for the revolver and additional financing, and expects it may not meet a quarterly debt covenant for the three months ending June 30, 2023. The company was compliant with, or had waivers for, covenants as of March 31.
- Outlook: No quantitative revenue or earnings guidance is provided. Management’s stated priorities are growing revenue through existing and new games and DLC, controlling expenses, renegotiating debt and potentially obtaining additional funds. Results are subject to game-release timing, seasonality, platform promotions and consumer demand.
- Concentration and related parties: ARK accounted for 90.0% of revenue. Three customers represented about 71% of gross receivables and generated about 60% of revenue. A related party, SDE, accounted for 58% of combined cost of revenue and operating expenses. Net receivables due from SDE were $11.3 million; accounts payable to Suzhou Snail, a related party, were $19.5 million.
- Contingencies: The company is litigating claims involving alleged copying of ARK source code; it cannot quantify potential loss. A separate commercial lease lawsuit seeks damages exceeding $3 million; Snail disputes the claims and says an affiliate agreed to assume lease liabilities and indemnify it.
- Controls and unusual matters: Disclosure controls were ineffective as of March 31 due to material weaknesses involving financial close and disclosure controls, accounting for income taxes and equity, cash-flow statement disclosures, expense classification, and identification of related-party transactions. The company reported correcting the accounting for a previously undisclosed related-party lease, which it said did not materially affect prior financial statements. Remediation is planned.
- Capital allocation: The company repurchased 152,626 shares for about $0.26 million during the quarter. As of March 31, cumulative repurchases under the $5 million program were about $3.7 million, leaving approximately $1.3 million authorized.
Investor verification priorities
- Track unrestricted cash, operating cash burn, the ability to extend or repay the revolver and short-term note, and progress on covenant compliance and financing.
- Assess whether ARK revenue and average selling prices stabilize, and whether new titles and DLC can reduce dependence on ARK and one-time platform deals.
- Verify collection of the $11.3 million related-party receivable and review the terms, timing and settlement of related-party payables, licensing costs and prepayments.
- Monitor remediation of material weaknesses and the company’s timely, reliable financial reporting.
- Follow developments in the source-code and lease litigation, including potential financial exposure and the effectiveness of the affiliate indemnity.