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PRESENTATION AND NATURE OF OPERATIONS | 9 Months Ended
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Sep. 30, 2023
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
PRESENTATION AND NATURE OF OPERATIONS | NOTE 1 – PRESENTATION AND NATURE OF OPERATIONS Snail, Inc. was incorporated under the laws of Delaware in January 2022. The terms “Snail, Inc,” “Snail Games,” “our” and the “Company” are used to refer collectively to Snail, Inc. and its subsidiaries. The Company’s fiscal year end is December 31. The Registrant was formed for the purpose of completing an initial public offering (“IPO”) and related transactions to carry on the business of Snail Games USA Inc. and its subsidiaries. Snail Games USA Inc. was founded in 2009 as a wholly owned subsidiary of Suzhou Snail Digital Technology Co., Ltd. (“Suzhou Snail”) located in Suzhou, China and is the operating entity that continues post IPO. Snail Games USA Inc. is devoted to researching, developing, marketing, publishing, and distributing games, content and support that can be played on a variety of platforms including game consoles, PCs, mobile phones and tablets. The Company is a global developer and publisher of interactive entertainment content and support on video game consoles, personal computers, mobile devices, and other platforms. On July 13, 2022, Suzhou Snail transferred all of its right, title, and interest to all of the 500,000 shares of common stock of the Company (“Shares”) to Snail Technology (HK) Limited (“Snail Technology”), an entity organized under the laws of Hong Kong, pursuant to the certain Share Transfer Agreement dated July 13, 2022 between Suzhou Snail and Snail Technology. Subsequently, Snail Technology transferred all of its right, title, and interest in the shares to certain individuals per the Share Transfer Agreement. In connection with the reorganization transaction described below the individuals contributed their interest in the Company to Snail, Inc. in return for common stock of Snail, Inc. in connection with Snail, Inc.’s IPO. Because the Company and Suzhou Snail are owned by the same shareholders, Suzhou Snail is considered a related party to the Company. Reorganization Transaction and IPO On September 16, 2022, Snail, Inc., filed a Registration Statement on Form S-1 with the United States Securities and Exchange Commission in connection with its IPO. On November 9, 2022, effective as of the IPO pricing, Snail Games USA Inc.’s existing shareholders transferred their 500,000 shares of common stock of Snail Games USA Inc. to Snail, Inc. in exchange for 6,251,420 shares of Class A common stock and 28,748,580 shares of Class B common stock of Snail, Inc., and Snail, Inc. became the parent of Snail Games USA Inc. Because the reorganization transaction was considered a transaction between entities under common control, the financial statements for periods prior to the reorganization transaction and the IPO have been adjusted to combine the previously separate entities for presentation purposes. On November 9, 2022, Snail, Inc. priced its IPO, and on November 10, 2022, Snail, Inc.’s Class A common stock began trading on The Nasdaq Capital Market under the ticker symbol SNAL. In the IPO, Snail, Inc. issued 3,000,000 shares of Class A common stock at $5.00 per share and net proceeds from the IPO were distributed to Snail Games USA Inc. in November 2022 in the amount of approximately $12.0 million, net of the underwriting discount and offering costs of $3.0 million. In connection with the IPO, $1.0 million of the IPO proceeds were remitted to an escrow account which is held to provide a source of funding for certain indemnification obligations of Snail, Inc. to the underwriters. The amount in escrow is reported as a restricted escrow deposit in the consolidated balance sheets for 12 months from the date of the offering, at which time the restrictions will be removed and the balance will be reverted to unrestricted cash. Basis of Presentation and Consolidation The accompanying condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC and generally accepted accounting principles as promulgated in the United States of America (“U.S. GAAP”) for interim reporting. Accordingly, certain notes or other information that are normally required by U.S. GAAP have been condensed or omitted if they substantially duplicate the disclosures contained in our annual audited consolidated financial statements. Additionally, the year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements but does not include all disclosures required by U.S. GAAP. Accordingly, the unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed on March 29, 2023. The condensed consolidated results of operations for any interim period are not necessarily indicative of the results to be expected for the full year or for any other future annual or interim period. In the opinion of management, all adjustments considered necessary for the fair presentation of the Company’s financial position and its results of operations in accordance with U.S. GAAP (consisting of normal recurring adjustments) have been included in the accompanying unaudited condensed consolidated financial statements. Snail Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements Certain comparative amounts have been reclassified to conform with the current period presentation. The common stock of Snail Games USA Inc., as of September 30, 2022, has been reclassified as Class A common stock as the stockholders of the Snail Games USA Inc. common stock had their shares converted to Class A shares of Snail Inc. during the reorganization transaction that occurred amongst a common controlled group. For more information regarding the reorganization transaction see Note 20 - Equity. During the nine months ended September 30, 2023, certain comparative amounts have been reclassified due to immaterial errors identified by the Company in its presentation of certain server hosting costs. During the three months ended June 30, 2023, the Company began reporting all of its server hosting costs as costs of revenue whereas they were previously reported within both cost of sales and general and administrative expenses. The Company has assessed the materiality of these errors on its prior annual and interim financial statements, assessing materiality both quantitatively and qualitatively, in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 99 and SAB No. 108 and concluded that the errors were not material to those consolidated financial statements. However, to correctly present cost of revenues, gross profit and general and administrative expenses, the reclassifications have been made throughout this report and accompanying note disclosures. The effects on the related captions in the condensed consolidated statements of operations and comprehensive income (loss) for all previously reported periods were as follows: SCHEDULE OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|  | For the three months ended September 30, 2022 |
|  | As reported |  |  | Adjustment |  |  | As adjusted |
Cost of revenues |  | $ | 11,468,961 |  |  | $ | 955,106 |  |  | $ | 12,424,067 |
Gross profit |  |  | 4,145,210 |  |  |  | (955,106 | ) |  |  | 3,190,104 |
General and administrative |  |  | 5,434,013 |  |  |  | (955,106 | ) |  |  | 4,478,907 |
|  | For the nine months ended September 30, 2022 |
|  | As reported |  |  | Adjustment |  |  | As adjusted |
Cost of revenues |  | $ | 37,744,863 |  |  | $ | 2,652,533 |  |  | $ | 40,397,396 |
Gross profit |  |  | 21,387,421 |  |  |  | (2,652,533 | ) |  |  | 18,734,888 |
General and administrative |  |  | 16,177,534 |  |  |  | (2,652,533 | ) |  |  | 13,525,001 |
|  | For the twelve months ended December 31, 2022 |
|  | As reported |  |  | Adjustment |  |  | As adjusted |
Cost of revenues |  | $ | 49,507,888 |  |  | $ | 3,613,788 |  |  | $ | 53,121,676 |
Gross profit |  |  | 24,936,253 |  |  |  | (3,613,788 | ) |  |  | 21,322,465 |
General and administrative |  |  | 22,327,746 |  |  |  | (3,613,788 | ) |  |  | 18,713,958 |
|  | For the three months ended March 31, 2023 |
|  | As reported |  |  | Adjustment |  |  | As adjusted |
Cost of revenues |  | $ | 9,816,397 |  |  | $ | 1,044,540 |  |  | $ | 10,860,937 |
Gross profit |  |  | 3,642,091 |  |  |  | (1,044,540 | ) |  |  | 2,597,551 |
General and administrative |  |  | 5,570,291 |  |  |  | (1,044,540 | ) |  |  | 4,525,751 |
Snail Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements The condensed consolidated financial statements include the accounts of Snail, Inc. and the following subsidiaries: SCHEDULE OF SUBSIDIARIES INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS
|  | Equity % |
Subsidiary Name |  | Owned |
Snail Games USA Inc. |  |  | 100 | %
Snail Innovation Institute |  |  | 70 | %
Frostkeep Studios, Inc. |  |  | 100 | %
Eminence Corp |  |  | 100 | %
Wandering Wizard, LLC |  |  | 100 | %
Donkey Crew, LLC |  |  | 99 | %
Interactive Films, LLC |  |  | 100 | %
Project AWK Productions, LLC |  |  | 100 | %
BTBX.IO, LLC |  |  | 70 | %
All intercompany accounts, transactions, and profits have been eliminated upon consolidation. Use of Estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and the accompanying notes. Such estimates include revenue recognition, provisions for credit losses, deferred income tax assets and associated valuation allowances, deferred revenue, income taxes, valuation of intangibles, including those with related parties, impairment of intangible assets, stock-based compensation and fair value of warrants. These estimates generally involve complex issues and require management to make judgments, involve analysis of historical and future trends that can require extended periods of time to resolve, and are subject to change from period to period. In all cases, actual results could differ materially from estimates. Segment Reporting The Company has one operating and reportable segment. Our operations involve similar products and customers worldwide. Revenue earned is primarily derived from the sale of software titles, which are developed internally or licensed from related parties. Financial information about our segment and geographic regions is included in Note 3 – Revenue from Contracts with Customers. Liquidity and Going Concern The Company incurred a net loss of $11.5 million and negative cash flows of $13.2 million for the nine months ended September 30, 2023. As of September 30, 2023, the Company had cash and cash equivalents of $4.9 million, restricted cash and cash equivalents of $1.1 million and current debt of $13.7 million. As of September 30, 2023, the Company’s 2021 Revolving Loan (as defined below) and 2022 Short Term Note (as defined below) of $6.0 million and $2.1 million are due in December 2023 and January 2024, respectively. Management intends to renegotiate with the lender to extend the maturity date of the 2021 Revolving Loan. However, there is no guarantee that management will be able to renegotiate the terms of the 2021 Revolving Loan with its lender on terms acceptable to the Company or at all. Additionally, management plans to repay the outstanding amounts under the 2022 Short Term Note pursuant to the terms of the 2022 Short Term Note agreement and to secure an additional debt arrangement. Currently, management expects that the Company will not be in compliance with its quarterly debt covenant for the three months ending December 31, 2023. Management is working with the lender to resolve the expected non-compliance with the debt covenant. Snail Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements The Company may need to raise additional capital. The need for additional capital depends on many factors, including, among other things, whether the Company can successfully renegotiate the terms of its debt arrangements, the rate at which the Company’s business grows, demands for working capital, revenue generated from existing DLCs and game titles and launches of new DLCs and new game titles, and any acquisitions that the Company may pursue. From time to time, the Company could be required, or may otherwise attempt, to seek additional sources of capital, including, but not limited to, equity and/or debt financings. The Company cannot provide assurance that it will be able to successfully access any such equity or debt financings or that the required equity or debt financings would be available on terms acceptable to the Company, if at all, or that any such financings would not be dilutive to its stockholders. The Company’s recent net loss, level of cash used in operations, debt obligations coming due in less than 12 months, potential need for additional capital, and the uncertainties surrounding its ability to raise additional capital and renegotiate its debt arrangements raise substantial doubt about its ability to continue as a going concern. The unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. In order for the Company to continue operations beyond the next 12 months and be able to discharge its liabilities and commitments in the normal course of business, the Company must re-establish profitable operations in order to generate cash from operations by increasing revenue or controlling or potentially reducing expenses, renegotiate the terms of its debt arrangements, or obtain additional funds when needed.

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