Snail, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are with FY2021. This is an annual filing, not a standalone Q4 report. Snail is a video-game developer and publisher whose revenue is heavily concentrated in the ARK franchise.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net revenue | $74.4 million | $106.7 million |
| Gross profit / gross margin | $24.9 million / 33.5% | $43.0 million / 40.3% |
| Operating income (loss) | ($1.6 million) | $8.3 million |
| Net income | $1.0 million | $7.9 million |
| Net income attributable to Snail, Inc. and Snail Games USA Inc. | $0.9 million | $8.5 million |
| Operating cash flow | ($3.4 million) | $15.8 million |
| Bookings (non-GAAP) | $63.7 million | $92.5 million |
| EBITDA (non-GAAP) | ($0.7 million) | $9.2 million |
Revenue fell 30.3%; management attributed the decline mainly to lower ARK sales as the game aged, more free-week promotions in 2022, and the absence of a 2022 DLC release (FY2021 included Genesis II). Units sold decreased 17.1% to 5.8 million. Free promotions and a platform subscription program contributed to reported installs of 36.7 million in 2022, versus 7.0 million in 2021; installs are not the same as paid units sold.
Cost of revenue declined 22.3%, less than revenue, and gross margin contracted. Operating expenses included $4.9 million of increased legal costs related to Angela Games litigation, higher public-company and personnel costs, and increased research and development. FY2021 included a $16.3 million impairment of the Atlas license; there was no comparable impairment in 2022. A $2.4 million income-tax benefit helped produce positive net income despite an operating loss; the reported effective tax rate was 168.5%, affected by a state tax refund, valuation allowance changes, and a subsidiary tax-status change.
Liquidity, debt and balance sheet
- At December 31, 2022, unrestricted cash was $12.9 million; restricted cash and cash equivalents were $6.4 million, including amounts securing debt and landlord letters of credit. A further $1.0 million IPO escrow deposit was restricted.
- Current assets were $42.6 million and current liabilities were $51.6 million, implying negative working capital of about $8.9 million.
- Total debt carrying amounts were $17.7 million: $9.0 million drawn on a revolving loan, $5.8 million on a secured note, and approximately $2.9 million on a term loan. The filing classifies $14.5 million as current. The revolving loan matures December 31, 2023; the $10 million note’s maturity was extended to January 26, 2024. Management intended to extend the revolver, but gave no assurance it could do so on acceptable terms.
- Net cash used in operations was $3.4 million. Cash increased by $2.7 million, including financing from the IPO, borrowing, and share repurchases. The company reported $19.2 million of cash and restricted cash combined at year-end.
Business changes, outlook and risks
- ARK generated 90.8% of FY2022 revenue, versus 90.7% in FY2021. Approximately 96.3% of revenue was generated through third-party gaming platforms. Console, PC, and mobile represented about 43.5%, 42.4%, and 12.8% of revenue, respectively.
- ARK licensing is a major related-party dependency: the licensor, SDE, is controlled by the spouse of founder and chairman Hai Shi. In December 2022, the ARK 1 license economics were amended to shift, after public release of ARK 2, from a monthly fee plus 25% royalty to a 45% revenue royalty. Snail also paid $5.0 million for ARK 2 license rights in 2022. The filing describes further license changes and a $1.0 million DLC prepayment in March 2023.
- Net accounts receivable from related party SDE was $11.3 million at year-end; accounts payable to related parties was $19.9 million. These balances and the related-party licensing arrangements merit attention.
- Management described 2023 plans for additional ARK content and platform releases, a significant ARK upgrade for console and PC, a mobile relaunch, and a relaunch of Survival of the Fittest. Five console and PC games were under development with expected releases over the following five years. The filing provides no numerical revenue, earnings, or cash-flow guidance.
- The company is highly exposed to ARK’s continued popularity, successful content launches, licensors, platform providers, and a small number of customers. Other disclosed risks include competition, product delays or defects, cybersecurity and privacy regulation, and economic conditions.
- The company and Studio Wildcard are litigating with Angela Games and Imperium over alleged copying of ARK source code. The court denied the plaintiffs’ preliminary-injunction request; as of the filing, discovery was ongoing and trial was set for January 2024. The company said it could not quantify potential loss if the plaintiffs’ claims succeeded.
- Management identified a material weakness in internal controls over financial reporting, involving income-tax and equity accounting, cash-flow disclosures, and expense and deferred-tax classifications. Management concluded controls were ineffective at year-end and said it planned to strengthen close controls and add experienced finance personnel. The auditor gave an unqualified opinion on the financial statements but did not audit or opine on internal-control effectiveness.
- Snail completed its IPO in November 2022, selling 3.0 million Class A shares at $5.00 per share and distributing approximately $12.0 million of net proceeds to Snail Games USA. It repurchased approximately 1.2 million shares for $3.4 million during 2022. Class B shares carry ten votes per share, and founder Hai Shi controls a majority of voting power. The company does not anticipate cash dividends in the foreseeable future.
Most important facts for investors to verify
- Whether the planned ARK releases and other pipeline titles launch on schedule and generate enough sales to reduce franchise concentration.
- Whether the revolver is extended or repaid at maturity, and how the company manages its negative working capital and operating cash outflow.
- Collection timing and recoverability of the $11.3 million net receivable from SDE, alongside related-party payables and ARK license terms.
- Progress in remediating the material weakness and whether future filings report effective controls without further adjustments.
- Developments, costs, and potential exposure in the Angela Games litigation, for which the filing does not provide a clear quantified loss estimate.