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EQUITY
 9 Months Ended
Sep. 30, 2023
Equity [Abstract]  
EQUITY

NOTE 20 – EQUITY

 

The Company has authorized two classes of common stock, Class A and Class B. The rights of the holders of both Class A and Class B common stock will be identical, except with respect to voting, conversion and transfer restrictions applicable to the Class B common stock. Each share of Class A common stock will be entitled to one vote. Each share of Class B common stock will be entitled to ten votes and will be convertible into one share of Class A common stock automatically upon transfer, subject to certain exceptions. Holders of Class A common stock and Class B common stock will vote together as a single class on all matters unless otherwise required by law.

 

On November 9, 2022, in connection with the IPO, the Company entered into an underwriting agreement (the “Underwriting Agreement” with the underwriters (the “Underwriters”), pursuant to which the Company agreed to issue and sell 3,000,000 shares of Class A common stock (the “Firm Shares”) at a purchase price of $4.675 per share to the Underwriters and granted the Underwriters an option (the “Over-Allotment Option”) to purchase up to 450,000 additional shares of Class A common stock (the “Option Shares”) at a purchase price of $4.675 per share. The Underwriters had the right to exercise the Over-Allotment Option at any time in whole, or from time to time in part, on or before the forty-fifth day following the effectiveness of the IPO. The Over-Allotment Option was not exercised by the Underwriters prior to its expiration.

 

In connection with the Underwriting Agreement, on November 9, 2022, the Company also issued to the Underwriters warrants to purchase such number of shares of the Company’s Class A common stock in an amount equal to four percent of the total number of shares of Class A common stock sold in the IPO, or 120,000 shares of Class A common stock (the “Underwriters Warrants”). The Underwriters Warrants may be exercised at a price per share equal to 125% of the IPO price, or $6.25 per share. The Underwriters Warrants are exercisable, in whole or in part, commencing on November 9, 2022, and expiring on the three-year anniversary thereof. The Underwriters Warrants have not been exercised as of the filing of this Quarterly Report.

 

 

Snail Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

 

The Underwriters Warrants and Over-Allotment Option are legally detachable and separately exercisable from each other and from the Firm Shares; therefore, they meet the definition of freestanding and are not considered embedded in the Firm Shares.

 

The Underwriters Warrants are considered indexed to the Company’s own stock. Additionally, the Company concludes that the Underwriters Warrants meet all requirements for equity classification. Because the Underwriters Warrants are issued to the Underwriters for their services and can be exercised immediately (subject to certain transfer conditions) they will be measured at their fair value on their date of issuance and recorded within stockholders’ equity. As long as the Underwriters Warrants remain classified as equity, they shall not be revalued. The fair value of the Underwriters Warrants was determined using the Black-Scholes model. The key assumptions used in the valuation were an average expected volatility of 53%, discount rate of 4.49% and remaining term of 3 years.

 

The Company allocates all the issuance costs to the firm shares as a reduction of proceeds.

 

Convertible Debt

 

In August 2023, pursuant to a securities purchase agreement (the “SPA”), the Company issued to two accredited investors (the convertible debt “Investors”) convertible notes with an aggregate principal amount of $1,080,000 (the “Convertible Notes”) and warrants to purchase up to an aggregate of 714,285 shares of the Company’s Class A common stock for gross proceeds of $1,000,000 (the “Convertible Notes Financing”).

 

In connection with the Convertible Notes Financing, the Company also entered into a registration rights agreement with the Investors. So long as the Company complies with certain conditions set forth in the SPA and the registration rights agreement, the Company will sell and the Investors will purchase, an additional $1,080,000 of aggregate principal amount of notes and warrants in the second tranche of the Convertible Note Financing. The second tranche closing has not yet taken place.

 

The Convertible Notes carry an original issue discount of approximately 7.4%, bear interest at a rate of 7.5% per annum (16% per annum in case of an event of default), are repayable in equal consecutive monthly installments beginning February 24, 2024 and mature on May 24, 2024 (the “Maturity Date”).

 

The Convertible Notes may be prepaid by the Company upon giving the Investors a fifteen-trading day notice by paying an amount equal to the then outstanding balance. If the Company enters into a qualifying financing it may be required by the Investors to repay part or all of the Convertible Notes at a 112.5% premium (limited to 10% of the proceeds of the qualified financing, if such financing results in gross proceeds to the Company at least $5,000,000). In event of default or change of control, the Investors may require the Company to prepay the Convertible Notes at a 120% premium.

 

Subject to certain ownership limitations, starting three months after their issuance, the Convertible Notes can be converted at the option of the holder at any time into shares of the Company’s Class A common, at a conversion price equal 90% (85% in case of an event of default) of the average of the three the lowest daily volume weighted average price (“VWAP”) of the Class A common stock during the ten (10) trading days period prior the receipt of the notice of conversion. The conversion price may be adjusted if the Company issues a qualifying security at a lower price than the then conversion price.

 

If, upon receipt of conversion notice, the Company cannot issue shares of Class A common stock for any reason, then it is required to issue as many shares of Class A common stock as it is able to issue and, with respect to the unconverted portion, the Noteholder may elect for the Company to pay for each shares of Class A common stock that could not be issued at a price equal to the higher of the then conversion price or the VWAP as of the date of the conversion notice.

 

The Company determined that the Convertible Notes included features that required bifurcation from the debt host and met the criteria to be accounted for as a derivative liability that is accounted for at fair value. On the date of issuance, the compound derivative had an estimated fair value that was not significant due to the remoteness of the events that would trigger the redemption features. The derivative liability uses level 3 inputs, is to be measured at fair value each reporting date with change in fair value being reported in other income. The change in fair value during the three and nine months ended September 30, 2023, was not significant and as such, not recorded.

 

On the date of issuance, the Company allocated the proceeds between the instruments issued using fair value for the derivative liability with the residual amounts allocated to the convertible notes and warrants using relative fair value as follows:

 

 SCHEDULE OF PROCEEDS BETWEEN THE INSTRUMENTS

      
Convertible notes  $554,246 
Derivative liability   - 
Warrants   445,754 
Total proceeds  $1,000,000 

 

 

Snail Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

 

The difference of $525,754 between the allocated proceeds to the Convertible Notes and the aggregate principal amount will be accreted during the life of the notes. Additionally, $152,500 of transaction costs incurred by the Company were recorded as debt discount.

 

The following is a summary of the Convertible Notes as of September 30, 2023:

  SCHEDULE OF CONVERTIBLE NOTES

               Fair value
   Principal Amount   Unamortized debt discount and issuance costs   Net carrying amount   Amount   Levelling
Convertible Notes  $642,204   $(126,987)  $515,217   $557,000   Level 3

 

The debt discount is being amortized to interest expense over the maturity period using the effective interest method. For the three and nine months ended September 30, 2023, the Company recognized $121,796 of interest expense related to the Convertible Notes, comprising of $8,325 of contractual interest expense, $87,958 in accretion and $25,513 of amortization of debt discount and issuance costs.

 

Warrants

 

The convertible note warrants allow the Investors to purchase an aggregate of 714,285 shares of the Company’s Class A common stock at an exercise price of $1.89. The warrants can be exercised, subject to certain ownership limitations, in whole or in part during the exercise period commencing on November 24, 2023 and ending on the date that is five years thereafter.

 

The exercise price and the number of shares of the warrants are subject to adjustment for standard anti-dilution provisions and also for subsequent issuance at a price lower than the then exercise price and adjustments to the strike price of other equity-linked instruments to a lower price than the then exercise price.

 

Due to their adjustment provisions, the warrants are classified as a liability on the condensed consolidated balance sheet. The fair value of the warrants at issuance has been estimated using a Monte-Carlo model and the following significant inputs:

  SCHEDULE OF STOCK BASED WARRANTS

  

Issuance

date

   

September 30,

2023

  
Stock price  $1.35    $ 1.14  
Exercise price  $1.89    $ 1.89  
Contractual term (years)   5.0      4.9  
Volatility   60.0%     45.0 %
Risk-free rate   4.39%     5.51 %

 

The warrant liability, which uses level 3 inputs, is to be measured at fair value each reporting period with the change in fair value being recognized in other income (expense). At September 30, 2023, the fair value of the warrant liability was $452,351 and the changes in fair value during the three months ended September 30, 2023, amounted to a charge of $6,597 included in other income in our condensed consolidated statements of operations and comprehensive income (loss).

 

 

Snail Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

 

Equity Line Purchase Agreement

 

On August 24, 2023, the Company entered into a common stock purchase agreement (the “Equity Line Purchase Agreement”) and a registration rights agreement (the “Registration Rights Agreement”) with an investor, pursuant to which the investor has committed to purchase up to $5,000,000 in shares of the Company’s Class A common stock, subject to certain limitations and conditions set forth in the Equity Line Purchase Agreement. The Company shall not issue or sell any shares of common stock under the Equity Line Purchase Agreement which, when aggregated with all other shares of common stock beneficially owned by the investor, would result in beneficial ownership of more than 9.99% of the Company’s outstanding shares of common stock.

 

Under the terms of the Equity Line Purchase Agreement, the Company has the right, but not the obligation, to sell to the investor, shares of Class A common stock over the period commencing on the execution date of the Equity Line Purchase Agreement and ending on the earlier of (i) December 31, 2025, or (ii) the date on which the investor shall have purchased Securities pursuant to the Equity Line Purchase Agreement for an aggregate purchase price of the $5,000,000, provided that a registration statement covering the resale of shares of Class A common stock that have been and may be issued under the Equity Line Purchase Agreement is declared effective by the SEC.

 

The registration statement covering the offer and sale of up to 8,913,312 shares of Class A common stock was declared effective on October 30, 2023, and an amendment increasing the registered shares to 15,093,768 was filed on October 10, 2023. The purchase price will be calculated as 92% of the volume weighted average prices of the Company’s common stock during normal trading hours for five business days prior to the closing date with respect of a purchase notice.

 

Concurrently with the signing of the Equity Line Purchase Agreement, the Company issued the equity line warrant to purchase 367,647 shares of its Class A common stock to the investor as a commitment fee. The total fair value, at the date of issuance, of the equity line warrant of approximately $105,411 was recorded as a liability and deferred offering cost and is included in other assets on our condensed consolidated balance sheet.

 

Warrants

 

In connection with the equity line of credit the Company issued to the Investors warrants to purchase an aggregate 367,647 shares of the Company’s Class A common stock for an exercise price of $1.50. The warrants can be exercised, subject to certain ownership limitations, in whole or in part during the exercise period commencing on August 24, 2023 and ending on the date that is five years thereafter.

 

The exercise price and the number of shares of the warrants are subject to adjustment for standard anti-dilution provisions, for subsequent common share issuance at a price lower than the then exercise price of the warrants and adjustments to the strike price of other equity-linked instruments to a lower price than the then exercise price of the warrants.

 

Due to their adjustment provision, the warrants are classified as a liability on the consolidated balance sheet. The fair value of the warrants at issuance has been estimated using a Monte-Carlo model and the following significant inputs:

  SCHEDULE OF STOCK BASED WARRANTS

  

.Issuance

date

  

September 30,

2023

 
Stock price  $1.35   $1.14 
Exercise price  $1.89   $1.89 
Contractual term (years)   5.0    4.90 
Volatility   40.0%   40.0%
Risk-free rate   5.49%   4.61%

 

The warrant liability, which uses level 3 inputs, is to be measured at fair value at each reporting period and with the change in fair value being recognized in earnings. At September 30, 2023, the fair value of the warrant liability was $76,346 and the changes in fair value during the three and nine months ended September 30, 2023 amounted to an income of $29,065.

 

Restricted Stock Units (“RSUs”)

 

RSUs granted to directors vest based on the directors’ continued employment with us through each applicable vest date, which is generally over one year. If the vesting conditions are not met, unvested RSUs will be forfeited. The following table summarizes our RSU units activity with directors for the nine months ended September 30, 2023. There were no activities during the nine months ended September 30, 2022.

 SCHEDULE OF RESTRICTED STOCK UNITS ACTIVITY

  

Restricted

Stock Units

  

Weighted-Average

Grant-Date Fair Values

 
Outstanding as of January 1, 2023   24,000   $5.00 
Granted   —    — 
Vested   —    — 
Forfeited or cancelled   —    — 
Outstanding as of September 30, 2023   24,000   $5.00 

 

The grant date fair value of RSUs granted to directors is based on the quoted market price of our common stock on the date of grant.

 

 

Snail Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

 

Our RSUs granted to employees vest upon the achievement of pre-determined performance-based milestones as well as service conditions (“PSUs”). The pre-determined performance-based milestones are based on specified percentages of the PSUs that would vest at each of the first five anniversaries of the IPO date if the Company’s average annual growth rate (“AAGR”) is calculated to be at a target percentage or above during the period between the Company’s IPO Date and the annual revenue for each of the anniversary year. If these performance-based milestones are not met but service conditions are met, the PSUs will not vest, in which case any compensation expense the Company has recognized to date will be reversed. Generally, the total aggregate measurement period of our PSUs is 5 years, with awards cliff-vesting after each annual measurement period during the total aggregate measurement period.

 

Each quarter, the Company updates our assessment of the probability that the performance milestones will be achieved. The Company amortizes the fair values of PSUs over the requisite service period. Each performance-based milestone is weighted evenly and the number of shares that vest based on each performance-based milestone is independent from the other.

 

The following table summarizes our PSU activity with employees, presented with the maximum number of shares that could potentially vest, for the nine months ended September 30, 2023. There were no activities during the nine months ended September 30, 2022.

 

  

Restricted Stock

Units

  

Weighted-Average

Grant-Date Fair Values

 
Outstanding as of January 1, 2023   1,197,552   $5.00 
Granted   —    — 
Vested   —    — 
Forfeited or cancelled   (26,789)   5.00 
Outstanding as of September 30, 2023   1,170,763   $5.00 

 

The grant date fair value of PSUs granted to employees is based on the quoted market price of our common stock on the date of grant.

 

Repurchase Activity

 

All share repurchases settled in the nine months ended September 30, 2023 were open market transactions. As of September 30, 2023, 1,350,275 shares of Class A common stock were repurchased pursuant to the Share Repurchase Program for an aggregate purchase price of approximately $3.7 million. The average price paid per share was $2.72 and approximately $1.3 million aggregate amount of shares of Class A common stock remain available for repurchase under the Share Repurchase Program.

 

Stock-Based Compensation Expense

 

Stock-based compensation expense resulting from RSUs and PSUs of $220,231 and $589,532 are recorded under general and administrative expenses included in our condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2023, respectively. Stock-based compensation expense resulting from PSUs of $16,411 and $32,475 are recorded under research and development expenses included in our condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2023, respectively. There were no stock-based compensation expenses incurred during the three and nine months ended September 30, 2022.

 

During the three months ended September 30, 2023 and 2022, the Company recognized approximately $48,308 and $0 respectively, of deferred income tax benefit related to our stock-based compensation expense. During the nine months ended September 30, 2023 and 2022, the Company recognized approximately $131,185 and $0 respectively, of deferred income tax benefit related to our stock-based compensation expense.

 

As of September 30, 2023, our total unrecognized compensation cost related to RSUs and PSUs was approximately $1.3 million and is expected to be recognized over a weighted-average service period of 2.6 years.