Snail, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The unaudited operating results and balance sheet are those of Snail Games USA, Inc. and subsidiaries, the business acquired by Snail, Inc. in a reorganization completed in November 2022. Snail, Inc. itself had $100 of assets and no operating activity at September 30, 2022.
Business context
Snail develops and publishes games across console, PC, and mobile platforms. Its flagship franchise, ARK: Survival Evolved, generated 89.6% of revenue in Q3 and 91.7% in the first nine months of 2022. The company reported 83.2 million cumulative console and PC installs through September 30, 2022. Results are unaudited.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $15.6 million | $24.4 million | $59.1 million | $83.2 million |
| Gross profit | $4.1 million | $8.9 million | $21.4 million | $34.8 million |
| Gross margin | 26.5% | 36.5% | 36.2% | 41.8% |
| Operating income (loss) | $(1.7) million | $4.3 million | $3.7 million | $20.3 million |
| Net income (loss) | $(1.5) million | $3.8 million | $3.3 million | $17.0 million |
| Operating cash flow | Not separately stated | Not separately stated | $(0.7) million | $18.7 million |
- Q3 revenue fell 36.1%; nine-month revenue fell 29.0%. Management attributed the declines mainly to lower ARK sales, fewer deferred-revenue releases and, in Q3, the absence of a prior-year platform milestone and the 2021 Genesis II launch uplift.
- Nine-month gross profit declined 38.5%, while general and administrative expense rose 24.6% to $16.2 million, driven primarily by litigation and professional costs, higher payroll, and other costs. The company reported Q3 operating and net losses.
- Bookings, a company-defined non-GAAP measure, were $11.3 million in Q3, down 37.9%, and $51.8 million for nine months, down 27.9%. Reported EBITDA, also non-GAAP, was $(1.5) million in Q3 and $4.4 million for nine months, versus $4.6 million and $21.0 million, respectively, in 2021.
- Cash and restricted cash totaled $15.4 million at September 30 ($9.0 million unrestricted and $6.4 million restricted), compared with $26.1 million a year earlier. Total assets were $73.1 million and total liabilities $68.6 million. Current assets of $39.2 million were below current liabilities of $53.0 million.
- Debt totaled $18.6 million, including a $9.0 million revolving loan and $6.7 million current portion of a 2022 note. The company said it was in compliance with debt covenants at quarter-end. Deferred revenue was $13.0 million, down from $20.3 million at December 31, 2021.
- Net related-party receivables were $12.2 million and related-party accounts payable were $22.3 million at quarter-end. The receivable relates to mobile-game revenue collected by a related party; the company said it expected repayment within a commercially reasonable period.
Material changes and unusual items
- Units sold declined 7.7% in Q3 and 22.2% in the first nine months year over year. Reported installs rose to 34.7 million in the first nine months from 5.1 million, largely due to free-week promotions and a subscription program; installs are not the same as paid unit sales.
- In April, the company distributed a $94.9 million shareholder loan receivable to former parent Suzhou Snail as an in-kind dividend and paid an $8.2 million cash dividend related to withholding taxes. The shareholder loan had been presented as contra-equity; the distribution is not operating cash flow.
- Amortization expense was lower following a $16.3 million impairment of the Atlas license in 2021. The filing reports no Atlas impairment charge in the 2022 periods presented.
- After quarter-end, Snail, Inc. completed its IPO on November 14, 2022, selling 3.0 million Class A shares at $5.00 each. The filing reports approximately $10.3 million of net proceeds to Snail, Inc. and also says approximately $12.0 million was distributed to Snail Games USA; $1.0 million was placed in escrow. The underwriters’ 450,000-share option had not been exercised as of the filing.
- After quarter-end, the company extended the $10 million note’s maturity to January 2026? The filing specifies January 26, 2024, and amended its interest rate. In December it also amended the ARK 1 license fee structure. These subsequent changes are not part of September 30 balances.
Outlook, commentary and risks
No specific revenue or earnings guidance is provided. Management expects public-company administrative costs and, as the business expands, investment in content, research and development, and marketing to rise. Results may fluctuate with game and DLC releases, platform promotions, seasonality, player engagement, and reliance on third-party distribution platforms. The filing notes that ARK remains the substantial majority of revenue and that quarterly performance depends on sustaining and growing its player base.
- Litigation: The company and Studio Wildcard allege that Myth of Empires misappropriated ARK source code; the opposing parties dispute the claims. The Ninth Circuit affirmed denial of a preliminary injunction in October 2022. The company said potential loss could not be quantified and recorded no accrual; legal costs are borne by Studio Wildcard.
- Related-party and concentration risks: Related-party receivables and payables are significant. Two customers represented approximately 58% of gross receivables at September 30; the filing also reports material revenue concentration among major customers.
- Liquidity and debt: Current liabilities exceeded current assets, operating cash flow was negative for the first nine months, and debt includes a fully drawn revolver. Debt facilities have financial covenants and collateral requirements.
- Other items: The company received a $2.5 million California tax refund in November 2022. It also authorized a share repurchase program of up to $5 million; by December 13, it had repurchased 1,090,877 shares for about $3.2 million, at an average $2.98 per share.
Important facts for investors to verify
- Reconcile the IPO proceeds disclosures: approximately $10.3 million net proceeds to Snail, Inc. versus approximately $12.0 million said to have been distributed to Snail Games USA.
- Track collections of the $12.2 million related-party receivable and changes in the $22.3 million related-party payable balance.
- Assess the ability to generate operating cash flow and meet near-term debt payments and covenant requirements following the note extension.
- Monitor ARK revenue, paid-unit sales, deferred revenue, and whether new releases can reduce dependence on the flagship franchise.
- Follow developments in the Myth of Empires litigation and any change in the company’s assessment of potential exposure.
- Review the impact of the December ARK 1 license amendment, post-IPO share repurchases, and employee and director equity awards on margins, liquidity, and share count.