Snail, Inc.

Ladies and gentlemen, greetings and welcome to the Snail Inc. First Quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jake Tisano, Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to Snail Inc.'s First Quarter 2024 earnings conference call and webcast. On today's call are Tony Tan, Snail's Co-Chief Executive Officer, Peter Kang, Chief Operating Officer, and Heidi Chow, Chief Financial Officer. By now, everyone should have access to the company's First Quarter 2024 earnings press release filed today with the SEC after market closed. This earnings press release is available on the Investor Relations section of Snail Inc.'s website at .snail.com or the SEC's website at .scc.gov slash edgier. During this call, management may make forward-looking statements regarding future events and the future financial performance of the company. Actual events and results may differ materially, but our expectations and forward-looking statements are subject to the risks and uncertainties. Please refer to the company's most recent Form 10Q that was filed today with the SEC, the most recent Form 10K that was filed with the SEC on April 1st, 2024, and other SEC filings. The company makes these forward-looking statements as of today and disclaims any duty or obligation to update them or to release publicly any updates or revisions to any forward-looking statements to reflect any change in its expectations or any change in events, conditions, or circumstances on which any such statement is based. On today's call, we will refer to bookings and EBITDA, which are non-GAAP financial measures that provide us with useful information for the company's investors. You will find the historical reconciliation of bookings and EBITDA to the corresponding GAAP measures in the earnings press release and the company's SEC filings. With that, I'll turn the call over to Tony. Tony? Tony

Lee Good afternoon, everyone, and thank you for joining us today. It's an honor to be speaking with you for the first time as the new co-CEO of Snail. I first want to express my gratitude to Jim Tsai for his leadership over the past several years in building Snail into the successful gaming company it is today. Jim laid a strong foundation, and I am excited to build upon it as we enter this next chapter. I'm thrilled to have the opportunity to lead Snail forward. This company has an incredibly passionate and talented team with cutting-edge technology and leading franchises like Arc that have cultivated incredibly engaged and dedicated communities of gamers. As a long-time player of Arc myself, I have a deep appreciation for the creativity and innovation this company embodies. Looking ahead, I'm mostly excited about our plans to further leverage artificial intelligence across our development pipelines. The AI technologies that have seen mission in the past, such as Meshine, Luma AI, F-DEV, and the Society of Brain have immense potential to accelerate our creativity while maintaining premium quality. Our goal is to make Snail an AI trailblazer that enhances our talented human teams rather than replacing them. I'm also eager to capitalize on the widespread attention of the Arc animated. The gaming world's eyes will be on this franchise providing an ideal opportunity to engage new players and further energize our existing community. With that, let's quickly review the quarter and then I will hand it over to Peter Kang or COO to dive a little bit further into recent updates to our product roadmap. Our Arc franchise continues to be an incredible, successful story. Through March 31, 2024, Arc has been played for an astonishing 3.5 billion hours with an average playing time per user of 163.7 hours. Impressively, the top 21% of all players have spent over 100 hours immersed in the game according to data from the platform. For the first quarter of 2024, Snail generated net revenue of $14.1 million, up from $13.5 million in Q1 2023. Net loss for Q1 2024 was $1.8 million versus a $3.0 million net loss in Q1 2023. With that, let me hand it over to Peter to review our

product roadmap. Thank you.

Thank you, Tony. And hello, everyone. In Q1, our indie publishing label, Wandering Wizard, released Zombie Within, a second entry into the social deduction genre by NUGEN, the developers of our hit title, West Hunt. The title has entered into early access on Steam and we are eagerly awaiting player feedback to improve the title. We're looking forward to a 1.0 release in Q4 of 2024. West Hunt has also released onto Nintendo Switch, which will bring the social deduction mayhem to Nintendo's handheld devices, providing cross-play access to the title. We've also updated the public roadmap for Arc Ascendant's DLC release schedule, which indicates a new map every two months throughout the 2024 calendar year. After the release of Scorched Earth in April of 2024, the next DLC map to come will be the center. We're excited about continuing to provide content for Arc Ascended at a much steadier pace. Between DLCs, we will also be adding a few dinosaurs to the world to add more flavor to the Arc universe. The animated series for Arc was released on Paramount Plus great acclaim. Using the backdrop of the Arc universe, players of the game will be able to see an adaptation of the Arc universe while enjoying the very elements that attracted them to the game, dinosaurs. So far, reception has been great with IGN giving the title an 8 out of 10. We also see a draw of new players learning about the Arc franchise, which we are complementing with cosmetic skins from the animated series across all available platforms. Our development pipeline continues to investigate and research advances in AI, primarily focused on Arc pipeline currently. AI has allowed us to rapidly prototype and ideate on our vision for products and development. Currently, we have three projects which are yet to be announced in development. And we have been using AI to concept the game world, allowing for the development team to envision the virtual worlds before assembling the pieces. On the topic of Arc 2, we're still holding off on new announcements in Q1. The game is still in the development stage and we're taking learnings from Arc Ascended into consideration as we continue to work with the Unreal 5 engine. New advances in technology bring great promise and we hope to integrate the latest features in time for the release. More news about this title will come later this year. And now let me hand it off to Heidi Chao for Q1 financials.

Heidi Chao Thank you, Peter. Hello everyone and thank you for joining our first quarter 2024 call. Net revenues for the three months ended March 31, 2024 was $14.1 million as compared to $13.5 in the three months ended March 31, 2023. The increase in net revenues was primarily due to the release of Arc Survival Ascended. To properly account for revenues from sales, snail must recognize revenue over time rather than all at once. This involves estimating when we will deliver the full game experience to customers through the transfer of the game license, downloadable content, technical support obligations, and how long we estimate that players will be engaged with our games. This involves estimating when we will deliver the full game experience to customers through the transfer of the game license, downloadable content, technical support obligations, and how long we estimate that players will be engaged with our games. The timing of future game updates and content release is based on the projection of when our developer will hit certain milestones. However, those estimates can change if developers meet unexpected delays or if the game platform requirements shift unexpectedly. Essentially, properly accounting for our game revenue over time involves making projections that are subject to change based on the development milestones. The estimated service period of our virtual goods and market conditions. This can affect the timing of our revenue recognition each period and can cause the deferral of significant revenue into future quarters. Net loss for the three months ended March 31, 2024 was $1.8 million compared to the net loss of $3.0 million for the three months ended March 31, 2023. Bookings for the three months ended March 31, 2024 were $19.6 million as compared to $13.3 million for the three months ended March 31, 2023. The recent release of Arc Survival Accender on the Steam, PlayStation, and Xbox platforms was a primary factor in generating net revenues of $14.1 million. And the company deferred an additional $5.5 million in revenue for Arc Survival Accender DLCs which have not yet launched. Earnings before interest taxes, appreciation, and amortization was a loss of $1.9 million versus a loss of $3.4 million in the prior year period. The decrease was due to a decrease in net loss of $1.2 million and a decrease benefit from income taxes of $300,000. As of March 31, 2024, earnably traded cash and cash equivalent was $16.1 million. To review our detailed financial statements, please refer to the earnings release and also our most recently filed form 10Q which was filed today with the SEC. Thank you for joining us today and let's open the line up for questions. Operator.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question is from the line of Pat McCann with Noble Capital Markets. Please go ahead.

Hey, good afternoon and thanks for taking my questions. My first question is, I guess with the modding program, I was wondering so far, could you provide any updates on the reception of the modding, of the premium mods? Are users showing a propensity to pay for those? What are the early returns so far and how do you feel about that going forward?

Hi, this is Peter Kang and I will speak a little bit about this modding program. What we have noticed is there is a growing tendency inside this sector of the industry to start getting into allowing what is called user generated content on your gaming platform. It is a feature that has to grow and snowball in order to gain success. Our biggest hurdles, I would say, are to allow for content creators in the sector to understand the differences between our modding programs and others out there. Such as pay rates, such as adaptation and actual professional level tools to do so. What makes our program stand out is that our program uses Unreal 5, which is a professional level engine. Our program also allows for content creators to create content at a very polished level and eventually distribute the product across all console platforms. Right now we see a growing adaptation rate. I believe there is around three mods that are fairly popular with sizable revenue. We are watching and keeping a close eye on the amount of growth that is coming out of this program. Coming out in Q2, we will see more of this type of product. There are several exciting mods that are in the pipeline and we are looking forward to releasing them.

Thank you. Then my

next question was regarding the DLC roadmap. You mentioned that you would be releasing a DLC about every two months that were included in ASA. What about other potential DLCs that are more standalone offerings that were not included in that? What is the prospect for releases like that and when would those fit in?

So, you know, inside this roadmap that is public across our announcement channels for Arc, we have several unmentioned surprise types of content drops to the players. Within those time slots, they will be DLCs that were not inherently part of the previous Arc universe and are just being upgraded. Those will be new DLCs with new features. We are just currently not ready to fully unveil what they are yet, but they are being worked on and they are part of the slotted schedule of a new map every two months.

Great. Thanks so much. If I could squeeze in one

more, I was wondering with, I believe this quarter that the Arc Survival Ascended had a higher number of daily active users than Arc Survival Ascended. Is that a surprise at all or what would be your expectations with, you know, I guess ASC has been around for quite a while and has a loyal fan base or user base? Is that something that you expect for it to still have a higher daily active user than ASA or is that a surprise?

So, it's not too much of a surprise. As it stands, Arc Survival Ascended uses the latest Unreal 5 engine and we really have tuned the product to use the most of the engine's new features. And what this results in is a product that is cutting edge that requires a very high PC spec system to fully optimize the game. And, you know, when you're on PC, what you're looking at is a growth curve of players who are on Arc Survival Evolved now using lower end PCs. And as they start to adapt into the better technology, they will find themselves more eager to convert to Arc Survival Ascended and be able to enjoy the full effects of the Unreal 5 engine. So, I would say this is the nuance of creating a product that's using the latest technology. As the mass population adapts to higher end PCs, which will, you know, become more accessible across economic gaps, we will see Arc Survival Ascended continue to grow over time. And that's why, you know, we're okay with this new life cycle of releasing the DLC maps because we know over time more and more players who have been exposed to the IP will adapt to higher end PC and be able to convert to Arc Ascended.

Thanks, that's really helpful. That's all I have. Thank you.

Thank you. Our next question is from the line of Bo Pei with US Tiger Securities. Please go ahead.

Hi, management. Good afternoon. Thanks for taking my questions. So, my first question is, given the success of the Arc franchise, what plans do you have to further expand this universe beyond games and the animated

series? Hi, this is Peter King.

So, I'll be giving you a little bit more detail about this question. You know, as always, we've looked past video games and most of our endeavors to assist in expanding the Arc universe. Previously, we have operated with IP licensing models where we've created products that are still in gaming to expand the universe, to expand the reach to different audiences and age groups. Products such as the Pixar, a Voxelated game, products such as Arc Park, a VR game. And then with the latest onset of Arc animated series, we've started to explore outside the confines of video games. Moving forward, we will continue to look for opportunities to license IP and merchandising and other facets of entertainment and potentially even more diverse genres of gaming. So, we will continue to grow the reach of the IP and the exposure of the IP to centralize around the various platforms that we have published products in.

That's helpful. And then, can you provide more details on the three unannounced projects currently in development and how AI is being flourishing in the conceptualization process?

Absolutely. So, you know, mostly when we go to create a video game, we start with concept art, which is 2D. From there, we go into what's called 3D modeling. And after the 3D modeling, we put texturization onto the model. And this process takes quite a bit of time to see a final product inside the video game. Right now, we're using AI to quickly iterate on conception phase of the pipeline where we're able to rapidly prototype different looks and visual effects inside the world using AI to generate the look and feel of a character model. As AI continues to improve, soon we will be able to use AI to turn our 2D concepts into 3D models. And the growth of AI is astounding at this point. We foresee in the future, within a year and a half to two years, that we will be able to fully create the process of 2D art to 3D models and texture all with the help of AI. And what this does is it provides us with the ability to reduce costs across the board to ideate at a much faster pace than previously. And we're able to really flesh out what the world's going to look like before we even start creating the product. And what this means is it's going to be a quicker development cycle to the end user. It's going to be a higher quality product while maintaining a lower cost to the end consumer.

Yeah, that sounds exciting. And then my last question is, what is the expected contribution from the Nintendo Switch release of West Hunt? And are there any plans to bring other titles to the Switch platform?

Absolutely. So, you know, the release of West Hunt on the Switch is for us to reach a greater audience. The game itself, being a social deduction game, very fitting for the Switch console. As we can see, players start to adapt to play the game while they're on the move. You know, whether they're in a car, a train, or airplane, they're able to enjoy the game because it is a short session game. It is something that they can quickly play, enter and exit at a rapid pace. And we do plan to continue to bring some more of our products to the Nintendo Switch platform. But we're slowly working on selecting which ones are the best fit. We do feel that it's important for the product to fit the platform. And so we'll continue to evaluate our library and catalog to see which ones are the best fit.

That's very helpful. Thank you so much. That's all my questions.

Thank you. Ladies and gentlemen, this concludes our question and answer session. The conference of Snail Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.