Snail Inc

Previous wording

Our mission is to provide high-quality entertainment experiences to audiences around the world. We are a leading, global independent developer and publisher of interactive digital entertainment for consumers around the world. We have built a premier portfolio of premium games designed for use on a variety of platforms, including consoles, PCs, and mobile devices.ARK: Survival Evolved has been a top-25 selling game on the Steam platform by gross revenue in each year we released anARK DLC. Our expertise in technology, in-game ecosystems and monetization of online multiplayer games has enabled us to assemble a broad portfolio of intellectual property across multiple media formats and technology platforms. Our flagship franchise from which we generate the substantial majority of our revenues,ARK, is a leader within the sandbox survival genre with 91.7 million console and PC installs through March 31, 2024 and repeated releases within the top-25 selling games on the Steam platform. See below for discussion of key performance metrics and non-GAAP measures. In the three months ended March 31, 2024,ARK: Survival Evolved andARK: Survival Ascendedcombined for an average total of 209,140 daily active users (“DAUs”) on the Steam and Epic platforms, as compared to 276,144 in the three months ended March 31, 2023. We define “daily active users” as the number of unique users who play any given game on any given day. For the three months ended March 31, 2024 and 2023, we generated 78.6% and 90.0%, respectively, of our revenues from theARKfranchise.

Current wording

Our mission is to provide high-quality entertainment experiences to audiences around the world. We are a leading, global independent developer and publisher of interactive digital entertainment for consumers around the world. We have built a premier portfolio of premium games designed for use on a variety of platforms, including consoles, PCs, and mobile devices.ARK: Survival Evolved has been a top-25 selling game on the Steam platform by gross revenue in each year we released anARK DLC. Our expertise in technology, in-game ecosystems and monetization of online multiplayer games has enabled us to assemble a broad portfolio of intellectual property across multiple media formats and technology platforms. Our flagship franchise from which we generate the substantial majority of our revenues,ARK, is a leader within the sandbox survival genre with 92.7 million console and PC installs through June 30, 2024 and repeated releases within the top-25 selling games on the Steam platform. See below for discussion of key performance metrics and non-GAAP measures. In the three and six months ended June 30, 2024,ARK: Survival Evolved andARK: Survival Ascendedcombined for an average total of 218,241 and 213,691 daily active users (“DAUs”) on the Steam and Epic platforms, respectively, as compared to 240,522 and 258,245 in the three and six months ended June 30, 2023, respectively. We define “daily active users” as the number of unique users who play any given game on any given day. For the three months ended June 30, 2024 and 2023, we generated 77.2% and 83.0%, respectively, of our revenues from theARKfranchise. For the six months ended June 30, 2024 and 2023, we generated 77.7% and 87.1%, respectively, of our revenues from theARKfranchise.

Previous wording

Our dedication to providing audiences with high-quality entertainment experiences utilizing the latest gaming technology has produced strong user engagement, continued revenue growth, and increased cash flows. Through March 31, 2024, ourARK franchise game has been played for 3.5 billion hours with an average playing time per user of 163.7 hours and with the top 21.0% of all players spending over 100 hours in the game, according to data from the Steam platform. For the three months ended March 31, 2024 and 2023, our net revenue was $14.1 million and $13.5 million, respectively. During the three months ended March 31, 2024, approximately 42.5% of our revenue came from consoles, 36.2% from PC and 6.8% from mobile platforms as compared to 42.9% from consoles, 37.2% from PC and 12.8% from mobile platforms during three months ended March 31, 2023. We had a net loss of $1.8 million and $3.0 million, for the three months ended March 31, 2024 and 2023, respectively.

Current wording

Our dedication to providing audiences with high-quality entertainment experiences utilizing the latest gaming technology has produced strong user engagement, continued revenue growth, and increased cash flows. Through June 30, 2024, ourARK franchise game has been played for 3.7 billion hours with an average playing time per user of 161 hours and with the top 21.1% of all players spending over 100 hours in the game, according to data from the Steam platform. For the three months ended June 30, 2024 and 2023, our net revenue was $21.6 million and $9.9 million, respectively. For the six months ended June 30, 2024 and 2023, our net revenue was $35.7 million and $23.4 million, respectively. During the three months ended June 30, 2024, approximately 38.6% of our revenue came from consoles, 54.7% from PC and 5.2% from mobile platforms as compared to 36.7% from consoles, 34.0% from PC and 15.2% from mobile platforms during the three months ended June 30, 2023. During the six months ended June 30, 2024, approximately 40.1% of our revenue came from consoles, 47.4% from PC and 5.9% from mobile platforms as compared to 40.3% from consoles, 35.9% from PC and 13.8% from mobile platforms during the six months ended June 30, 2023. We had a net income of $2.3 and a net loss of $4.1 million, for the three months ended June 30, 2024 and 2023, respectively. For the six months ended June 30, 2024 we had a net income of $0.5 million, as compared to net loss of $7.1 million for the six months ended June 30, 2023.

Previous wording

We continuously evaluate and invest in content strategy to improve and innovate our games and features and to develop current technological platforms. We are currently actively investing in expanding our gaming pipeline as well as developing media and eSports content related to our gaming intellectual property. We also continue to invest to grow our micro-influencer platform,NOIZ, by attracting new influencers and brand customers.

Current wording

We continuously evaluate and invest in content strategy to improve and innovate our games and features and to develop current technological platforms. We are currently actively investing in expanding our gaming pipeline as well as developing media and eSports content related to our gaming intellectual property. We also continue to invest to grow our micro-influencer platform,NOIZ, by attracting new influencers and brand customers. We have established a new division internally under the Interactive Films brand. This division will focus on creating content in the Vertical Short segment of the digital entertainment market.

Previous wording

We have experienced significant growth in our number of downloads over the last several years. We have sold 46.3 million units between January 1, 2016 and March 31, 2024. During the three months ended March 31, 2024, we sold 1.1 million units compared to 1.7 million in the three months ended March 31, 2023. Our video games provide highly engaging, differentiated entertainment experiences where the combination of challenge and progress drives player engagement, high average player times, and long-term franchise value. The success of our franchise hinges on our ability to keep our current players engaged while also growing our user base by innovating our platform and monetizing new offerings. The degree to which gamers are willing to engage with our platform is driven by our ability to create interactive and unique content that will enhance the game-play experience. We sell DLCs which are supplementary to our master games and expand the gaming universe to continuously evolve the game and retain players. Our master games are the base versions of a specific title, for example,ARK: Survival Evolved is our master game andARK: Genesis is a DLC.

Current wording

We have experienced significant growth in our number of downloads over the last several years. We have sold 47.6 million units between January 1, 2016 and June 30, 2024. During the three months ended June 30, 2024, we sold 1.3 million units compared to 1.0 million in the three months ended June 30, 2023. During the six months ended June 30, 2024, we sold 2.4 million units compared to 2.7 million in the six months ended June 30, 2023. Our video games provide highly engaging, differentiated entertainment experiences where the combination of challenge and progress drives player engagement, high average player times, and long-term franchise value. The success of our franchise hinges on our ability to keep our current players engaged while also growing our user base by innovating our platform and monetizing new offerings. The degree to which gamers are willing to engage with our platform is driven by our ability to create interactive and unique content that will enhance the game-play experience. We sell DLCs which are supplementary to our master games and expand the gaming universe to continuously evolve the game and retain players. Our master games are the base versions of a specific title, for example,ARK: Survival Evolved is our master game andARK: Genesis is a DLC.

Previous wording

We are focused on innovation and technology leadership in order to maintain our competitive advantage. We spend a portion of our capital on our research and development platform to continuously improve our technological offerings and gaming platform. Our proprietary video game technology includes a versatile game engine, development pipeline tools, advanced rendering technology and advanced server and network operations. Continued investment in improving the technology behind our existing gaming platforms as well as developing new software tools for new product offerings is important to maintaining our strategic goals, developer and creator talent, and financial objectives. For us to continue providing cutting-edge technology to our users and bringing digital interactive entertainment to market, we must also continue to invest in developmental and creative resources. For our users, we regularly invest in user-friendly features and enhance user experience in our games and platforms. As our industry moves towards increased use of cloud gaming and gaming as a service technology, our ability to bring interactive technologies to market will be an increasingly important part of our business.

Current wording

We are focused on innovation and technology leadership in order to maintain our competitive advantage. We spend a portion of our capital on our research and development platform to continuously improve our technological offerings and gaming platform. Our proprietary video game technology includes a versatile game engine, development pipeline tools, advanced rendering technology and advanced server and network operations. Continued investment in improving the technology behind our existing gaming platforms as well as developing new software tools for new product offerings is important to maintaining our strategic goals, developer and creator talent, and financial objectives. For us to continue providing cutting-edge technology to our users and bringing digital interactive entertainment to market, we must also continue to invest in developmental and creative resources. For our users, we regularly invest in user-friendly features and enhance user experience in our games and platforms. As our industry moves towards increased use of cloud gaming and gaming as a service technology, our ability to bring interactive technologies to market will be an increasingly important part of our business. To accompany our entry into the Vertical Shorts market, we are currently developing a distribution platform. Once launched, users will be able to access the content on demand.

Previous wording

For the three months ended March 31, 2024, bookings increased by $6.3 million, or 47.1%, compared to the three months ended March 31, 2023, because of the release ofARK: Survival Ascendedin the fourth quarter of 2023. In addition to increased sales ofARK: Survival Ascended,the Company deferred approximately $5.5 million in revenues during the three months ended March 31, 2024 for theARK: Survival AscendedDLC’s which have not yet released.

Current wording

For the three months ended June 30, 2024, bookings increased by $13.6 million, or 146.7%, compared to the three months ended June 30, 2023, because of the release ofARK: Survival Ascendedin the fourth quarter of 2023, and the release ofBobs Tall TalesandBellwrightalong with theARK: Survival AscendedDLC,Scorched Earth in April 2024. In addition to increased sales of the aforementioned titles*,the Company deferred approximately $7.1 million in revenues during the three months ended June 30, 2024 for theARK: Survival AscendedDLC’s and parts ofBobs Tall Tales* which have not yet released; partially offset by the recognition of $5.6 million for the release ofScorched Earth.

Previous wording

For the three months ended March 31, 2024, EBITDA increased by $1.5 million, or 44.7%, compared to the three months ended March 31, 2023, primarily as a result of a decrease in net loss of $1.2 million and a decrease in the benefit from income taxes of $0.3 million.

Current wording

For the three months ended June 30, 2024, EBITDA increased by $7.9 million, or 162.8%, compared to the three months ended June 30, 2023, primarily because of an increase in net income of $6.4 million and a decrease in the benefit from income taxes of $1.7 million.

Previous wording

Our net revenues through our current period top four platform providers as a proportion of our total net revenue for the three months ended March 31, 2024 and 2023 were as follows:

Current wording

Our net revenues through our current period top four platform providers as a proportion of our total net revenue for the three and six months ended June 30, 2024 and 2023 were as follows:

Previous wording

We expect changes in revenue to correlate with trends in the use and purchase of our games. The increase in net revenues of Platforms 1 and 3 during the three months ended March 31, 2024 from 2023 due to increased sales from the release ofARK: Survival AscendedandMyth of Empires. The decrease in Platform 2 was due to the increase in deferred revenues related to theARK: Survival AscendedDLC’s that have not yet been released. The bookings for these platforms increased during the 2024 period due to the release ofARK: Survival Ascended. The decrease in net revenues of Platform 4 was due toARK: Survival Ascended not yet being launched on Platform 4 as of March 31, 2024.

Current wording

We expect changes in revenue to correlate with trends in the use and purchase of our games. The increase in net revenues of Platforms 1, 2 and 3 during the three and six months ended June 30, 2024 from 2023 was due to increased sales from the release ofARK: Survival Ascended,Scorched Earth, BellwrightandMyth of Empires. The decrease in net revenues of Platform 4 was due toARK: Survival Ascendednot yet being launched on Platform 4 as of June 30, 2024.

Previous wording

The benefit from income taxes consists of current income taxes in the various jurisdictions where we are subject to taxation, primarily the United States, as well as deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities in each of these jurisdictions for financial reporting purposes and the amounts used for income tax purposes. Under current U.S. tax law, the federal statutory tax rate applicable to corporations is 21%. Our effective tax rate of 21% did not differ from the federal statutory rate of 21%.

Current wording

The benefit from income taxes consists of current income taxes in the various jurisdictions where we are subject to taxation, primarily the United States, as well as deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities in each of these jurisdictions for financial reporting purposes and the amounts used for income tax purposes. Under current U.S. tax law, the federal statutory tax rate applicable to corporations is 21%. Our effective tax rate of 19% differed from the federal statutory rate of 21% due to permanent differences and state taxes.

Previous wording

The increase in cost of revenues for the three months ended March 31, 2024 was due to an increase of $0.8 million in license and amortization – related parties, a result of increased monthly license costs to SDE Inc. partially offset by a lower depreciable of intangible assets in 2024, an increase in software license royalties – related parties of $0.4 million; increased engine fees of $0.6 million resulting from an increase in totalArksales partially offset by decreased merchant fees of $0.3 million resulting from decreased sales ofArk Mobile.

Current wording

The increase in cost of revenues for the three months ended June 30, 2024 was due to an increase of $2.8 million in software license royalties – related parties, a result of increasedARKsales, an increase of $1.1 million in license and amortization – related parties due to the increased license fee paid to SDE partially offset by a lower depreciable base of intangible assets in 2024, an increase in engine fees of $1.0 million, partially offset by decreased internet, server and data center fees of $0.4 million and a decrease in software license royalties of $0.2 million.

Previous wording

Research and development expenses for the three months ended March 31, 2024 increased by $0.4 million, or 29.3%, compared to the three months ended March 31, 2023. The increase in research and development expenses was due to the outsourced development ofHermespaid through Suzhou Snail*.*

Current wording

Research and development expenses for the three months ended June 30, 2024 increased by $0.7 million, or 55.0%, compared to the three months ended June 30, 2023. The increase in research and development expenses was due to the outsourced development ofHermespaid through Suzhou Snail*.*

Previous wording

Other Factors Affecting Net Loss

Current wording

Other Factors Affecting Net Income (Loss)

Previous wording

Interest income was $0.1 million and $0.0 million for the three months ended March 31, 2024 and 2023, respectively. The increase was due to the balance of the of our cash deposits being higher on average during the three months ended March 31, 2024.

Current wording

Interest income was $0.1 million and $0.0 million for the three months ended June 30, 2024 and 2023, respectively. The increase was due to the balance of our cash deposits being higher on average during the three months ended June 30, 2024.

Previous wording

Interest expense primarily related to our outstanding indebtedness with third-party lenders. Interest expense increased by $0.1 million for the three months ended March 31, 2024 as a result of rising interest charges on the Company’s floating rate debt and amortization of debt discounts which did not occur in the three months ended March 31, 2023.

Current wording

Interest expense primarily related to our outstanding indebtedness with third-party lenders. Interest expense decreased by $0.2 million for the three months ended June 30, 2024 because of lower average debt during the three months ended June 30, 2024.

Previous wording

The Company had an income tax benefit of $0.5 million for the three months ended March 31, 2024 and a benefit of $0.8 million for the three months ended March 31, 2023. Our effective income tax rate was 21% during both periods.

Current wording

The Company had an income tax provision of $0.6 million for the three months ended June 30, 2024 and a benefit of $1.1 million for the three months ended June 30, 2023. Our effective income tax rate was 21% during both periods.

Previous wording

Net revenues for the three months ended March 31, 2024 increased by $0.6 million, or 4.9%, compared to the three months ended March 31, 2023. The increase in net revenues was due to an increase in total Ark sales of $5.1 million, an increase due to the recognition of $1.2 million payment related to the Angela Games settlement and recognized upon satisfaction of performance obligations included in the contract, an increase in sales of the Company’s other games of $0.7 million, partially offset by a decrease in Ark Mobile sales of $0.6 million and an increase in deferred revenues of $5.5 million related to the Ark franchise.

Current wording

Net revenues for the six months ended June 30, 2024 increased by $12.3 million, or 53%, compared to the six months ended June 30, 2023. The increase in net revenues was due to an increase in total Ark sales of $15.1 million, an increase due to the recognition of $1.2 million payment related to the Angela Games settlement and recognized upon satisfaction of performance obligations included in the contract, an increase in sales of the Company’s other games of $4.5 million, partially offset by a decrease in Ark Mobile sales of $0.9 million and an increase in deferred revenues of $7.5 million related to the Ark franchise.

Previous wording

General and administrative expenses for the three months ended March 31, 2024 decreased by $2.2 million, or 49.6%, compared to the three months ended March 31, 2023. The decrease in general and administrative expenses was due to a decrease in legal and professional expenses of $1.0 million, a decrease in administrative internet and server costs of $0.2 million, a decrease in salaries and wages of $0.9 million due to the reversal of previously expensed stock based compensation, and a decrease in expenses of $0.2 million for SEC filing fees, investor relations, NASDAQ listing fees and compliance expenses.

Current wording

General and administrative expenses for the six months ended June 30, 2024 decreased by $3.4 million, or 40.0%, compared to the six months ended June 30, 2023. The decrease in general and administrative expenses was due to a decrease in legal and professional expenses of $1.3 million, a decrease in administrative internet and server costs of $0.3 million, a decrease in salaries and wages of $1.3 million due to the reversal of previously expensed stock based compensation, and a decrease in expenses of $0.4 million for SEC filing fees, investor relations, NASDAQ listing fees and compliance expenses.

Previous wording

Other income increased by $0.2 million for the three months ended March 31, 2024, in comparison to the three months ended March 31, 2023. The increase is due to the recognition of $0.2 million of litigation revenues due to a revenue share agreement that was the result of the litigation settlement.

Current wording

Other income increased by $0.5 million for the six months ended June 30, 2024, in comparison to the six months ended June 30, 2023. The increase is due to the recognition of litigation revenues due to a revenue share agreement that was the result of the litigation settlement and revaluation of the Company’s outstanding warrant liabilities.

Previous wording

Our primary sources of liquidity are the cash flows generated from our operations, that are currently available as unrestricted cash. Our unrestricted cash was $16.1 million and $15.2 million as of March 31, 2024 and December 31, 2023, respectively.

Current wording

Our primary sources of liquidity are the cash flows generated from our operations, that are currently available as unrestricted cash. Our unrestricted cash was $15.5 million and $15.2 million as of June 30, 2024 and December 31, 2023, respectively.

Previous wording

As of March 31, 2024, our 2021 Revolving Loan and Convertible Notes of $3.0 million and $0.7 million are due in December 2024 and May 2024, respectively. On August 24, 2023, the Company issued convertible notes at a 7.4% discount and a principal balance of $1,080,000. In addition to the stated discount, the fair value of the Convertible Notes was allocated to warrants issued in connection with the debt giving rise to an additional discount in the amount of $445,754. The notes have an interest rate of 7.5%, will be paid in consecutive monthly installments beginning February 24, 2024 and if the note is not converted, it will mature on May 24, 2024. In February 2024, the Company made the first payments of principal and accrued interest in the amount of $312,075, and the convertible note holders converted 71,460 shares for an aggregate value of $60,000. The Company paid an additional $548,438 of accrued interest and principal on its convertible notes balance in April 2024. In concurrence with the registration of the convertible notes shares the Company registered shares for distribution in an equity line of credit. The Company has the right, but not the obligation, to sell up to $5.0 million in Class A common stock to the investor. We intend to renegotiate with the lender to extend the maturity date of the 2021 Revolving Loan and to negotiate a new Short Term Note. However, there is no guarantee that we will be able to renegotiate the terms of the 2021 Revolving Loan or obtain a new short term note with the lender at terms acceptable to us or at all. Currently, we expect that we will not be in compliance with our quarterly debt covenant for the three months ending June 30, 2024. We are working with the lender to resolve the expected non-compliance with the debt covenant.

Current wording

As of June 30, 2024, our 2021 Revolving Loan has a balance of $3.0 million and is due in December 2024. The Company has repaid its Convertible Notes balance of $1.1 million, its $1.5 million financing arrangement, and the remaining $0.8 million of its short term notes balance during the six months ended June 30, 2024. In concurrence with the registration of the convertible notes shares the Company registered shares for distribution in an equity line of credit. The Company has the right, but not the obligation, to sell up to $5.0 million in Class A common stock to the investor. We intend to renegotiate with the lender to extend the maturity date of the 2021 Revolving Loan and to negotiate a new Short Term Note. However, there is no guarantee that we will be able to renegotiate the terms of the 2021 Revolving Loan or obtain a new short term note with the lender at terms acceptable to us or at all. Currently, we expect that we will not be in compliance with our quarterly debt covenant for the three months ending September 30, 2024. We are working with the lender to resolve the expected non-compliance with the debt covenant.

Previous wording

The Company raised additional capital during the year ended December 31, 2023 in the form of the convertible notes, short term financing arrangement with the Company’s internet and data center (“IDC”) vendor, and the distribution agreement entered into with our retail partner which provided advanced royalties. We may need to raise additional capital and issue registered shares to draw on an equity line of credit if needed. The need for additional capital depends on many factors, including, among other things, whether we can successfully renegotiate the terms of our debt arrangements, the rate at which our 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 we may pursue. From time to time, we could be required, or may otherwise attempt, to seek additional sources of capital, including, but not limited to, equity and/or debt financings. We cannot provide assurance that we will be able to successfully access any such equity or debt financings, that the required equity or debt financings would be available on terms acceptable to us, if at all, or that any such financings would not be dilutive to our stockholders.

Current wording

The Company has raised capital through the issuance of the convertible notes, equity line of credit, a short term financing arrangement with the Company’s internet and data center (“IDC”) vendor, and the distribution agreement entered into with our retail partner which provided advanced royalties. We may need to raise additional capital and issue registered shares to draw on an equity line of credit if needed. The need for additional capital depends on many factors, including, among other things, whether we can successfully renegotiate the terms of our debt arrangements, the rate at which our 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 we may pursue. From time to time, we could be required, or may otherwise attempt, to seek additional sources of capital, including, but not limited to, equity and/or debt financings. We cannot provide assurance that we will be able to successfully access any such equity or debt financings, that the required equity or debt financings would be available on terms acceptable to us, if at all, or that any such financings would not be dilutive to our stockholders.

Previous wording

Our current unrestricted cash position of approximately $16.1 million, and our expected revenue receipts will allow the Company to continue operations beyond the next 12 months and service its current debts.

Current wording

Our current unrestricted cash position of approximately $15.5 million, and our expected revenue receipts will allow the Company to continue operations beyond the next 12 months and service its current debts.

Previous wording

The following tables present a summary of our cash flows for the periods indicated (in millions):

Current wording

The following tables present a summary of our cash flows for the periods indicated:

Previous wording

Net cash flows provided by (used in) operating activities for the three months ended March 31, 2024 increased $13.5 million as compared to the three months ended March 31, 2023, which resulted primarily from an increase in deferred revenues of $4.9 million, a decrease in accounts receivable and accounts receivable - related party of $16.9 million, a decrease in net loss of $1.2 million, partially offset by a decrease in accounts payable and accounts payable – related parties of $6.5 million, a decrease in accrued expenses of $0.9 million, and a decrease in noncash reconciling items of $2.1 million.

Current wording

Net cash flows provided by (used in) operating activities for the six months ended June 30, 2024 increased $15.9 million as compared to the six months ended June 30, 2023, which resulted primarily from an increase in deferred revenues of $6.8 million, a decrease in accounts receivable and accounts receivable - related party of $15.8 million, an increase in net income of $7.6 million, partially offset by a decrease in accounts payable and accounts payable – related parties of $12.2 million, a decrease in accrued expenses of $1.9 million, and a decrease in noncash reconciling items of $0.2 million.

Previous wording

The Company had a net loss of $1.8 million and $3.0 million for the three months ended March 31, 2024 and 2023, respectively, representing an decrease of $1.2 million. The decrease was primarily due to an increase in net revenue of $0.6 million, decreased general and administrative expenses of $2.2 million, an increase in other income of $0.2 million, an increase in interest income of $0.1 million, partially offset by increased research and development costs of $0.4 million, increased costs of revenues of $1.2 million, increased interest expenses of $0.1 million, and a decrease in income tax provision of $0.3 million.

Current wording

The Company had a net income of $0.5 million, and a net loss of $7.1 million, for the six months ended June 30, 2024 and 2023, respectively, representing an increase of $7.6 million. The increase was primarily due to an increase in net revenue of $12.4 million, decreased general and administrative expenses of $3.4 million, an increase in other income of $0.5 million, an increase in interest income of $0.1 million, partially offset by increased research and development costs of $1.1 million, increased costs of revenues of $5.1 million, increased interest expenses of $0.1 million, and a decrease in income tax benefit of $2.0 million.

Previous wording

Non-cash reconciling items were ($1.2) million and $1.0 million for the three months ended March 31, 2024 and 2023, respectively, representing a decrease of $2.2 million. The decrease in the non-cash reconciling items was due to a decrease in amortization of intangible assets of $0.7 million, a decrease in stock based compensation expense of $1.1 million, and a decrease in deferred taxes of $0.6 million, partially offset by an increase in accretion expense of $0.2 million.

Current wording

Non-cash reconciling items were ($0.4) million and ($0.2) million for the six months ended June 30, 2024 and 2023, respectively, representing a decrease of $0.2 million. The decrease in the non-cash reconciling items was due to a decrease in amortization of intangible assets of $1.1 million, a decrease in stock based compensation expense of $1.3 million, partially offset by an increase in deferred taxes of $1.9 million, and an increase in accretion expense of $0.2 million.

Previous wording

Our accounts receivable - related party represent revenues attributable to certain mobile games that, for administrative reasons, were collected on our behalf by SDE Inc. (“SDE”), an affiliated entity, from fiscal year 2018 through 2021. SDE no longer collects such payments on our behalf; all such payments are received directly from the platforms through which we offer the relevant games. As of March 31, 2024 and December 31, 2023, the net outstanding balances of receivables due from SDE were $12.0 million and $13.5 million, respectively. We expect accounts receivables owed to us by SDE will be repaid within the next two fiscal years and intend to exercise all legally available means of collection. The Company and SDE have entered into an agreement to offset uncollected amounts against monthly payments due to SDE for operating expenses and costs of revenue. See Note 5-Accounts Receivable - Related Party to our unaudited condensed consolidated financial statements included in this Quarterly Report.

Current wording

Our accounts receivable - related party represent revenues attributable to certain mobile games that, for administrative reasons, were collected on our behalf by SDE Inc. (“SDE”), an affiliated entity, from fiscal year 2018 through 2021. SDE no longer collects such payments on our behalf; all such payments are received directly from the platforms through which we offer the relevant games. As of June 30, 2024 and December 31, 2023, the net outstanding balances of receivables due from SDE were $10.5 million and $13.5 million, respectively. We expect accounts receivables owed to us by SDE will be repaid within the next two fiscal years and intend to exercise all legally available means of collection. The Company and SDE have entered into an agreement to offset uncollected amounts against monthly payments due to SDE for operating expenses and costs of revenue. See Note 5-Accounts Receivable - Related Party to our unaudited condensed consolidated financial statements included in this Quarterly Report.

Previous wording

Net cash flows used in financing activities for the three months ended March 31, 2024 were $5.9 million compared to $2.0 million for the three months ended March 31, 2023. Financing activities for the three months ended March 31, 2024 included $5.6 million in debt payments and $0.3 million in payments of capitalized offering costs in accounts payable. Financing activities for the three months ended March 31, 2023 included repayments of $1.7 million on a short term note, purchases of treasury stock in the amount of $0.3 million, and $0.1 million in payments of capitalized offering costs.

Current wording

Net cash flows used in financing activities for the six months ended June 30, 2024 were $6.7 million compared to $6.3 million for the six months ended June 30, 2023. Financing activities for the six months ended June 30, 2024 included $6.4 million in debt payments and $0.3 million in payments of capitalized offering costs in accounts payable. Financing activities for the six months ended June 30, 2023 included debt repayments of $6.0 million, the purchases of treasury stock in the amount of $0.3 million, and $0.1 million in payments of capitalized offering costs.

Previous wording

In January 2022, we amended and restated our 2021 Revolving Loan and we executed a promissory note to obtain an additional long-term loan with a principal balance of $10.0 million which was set to mature on January 26, 2023 (the “2022 Short Term Note”). In November 2022, the maturity date was extended to January 26, 2024. Interest was equal to the higher of 3.75% and the Wall Street Journal prime rate plus 0.50%. The 2022 Short Term Note is secured and collateralized by our existing assets. The Company completed the last payment obligation on the 2022 Short Term Note during the three months ended March 31, 2024.

Current wording

In January 2022, we amended and restated our 2021 Revolving Loan and we executed a promissory note to obtain an additional long-term loan with a principal balance of $10.0 million which was set to mature on January 26, 2023 (the “2022 Short Term Note”). In November 2022, the maturity date was extended to January 26, 2024. Interest was equal to the higher of 3.75% and the Wall Street Journal prime rate plus 0.50%. The 2022 Short Term Note is secured and collateralized by our existing assets. The Company completed the last payment obligation on the 2022 Short Term Note during the six months ended June 30, 2024.

Previous wording

On August 24, 2023, the Company issued convertible notes at a 7.4% discount and a principal balance of $1,080,000. The notes have an interest rate of 7.5%, will be paid in consecutive monthly installments beginning February 24, 2024 and will mature on May 24, 2024. In the event of a default the interest rate will be increased to the lower of 16% per annum or the highest amount permitted by applicable law. The Company has the option to prepay the notes at any time and the note holders have the option to convert the notes, in whole or in part, any time after November 24, 2023. In connection with the Convertible Notes the Company issued to the investors warrants to purchase an aggregate of 714,285 shares that were accounted for under the fair value method and allocated a value of $445,754. The difference of $525,754 between the proceeds allocated to the Convertible Notes and the aggregate principal amount will be accreted over the life of the notes and accounts for the fair value of the warrants and the stated discount. Additionally, $152,500 of transaction costs incurred by the Company were recorded as a debt discount. The discount is amortized using the effective interest rate of 103.4%. The effective interest rate is based on the principal balance discounted by stated interest, debt issuance costs and fair value allocated to the related warrants. As of March 31, 2024, we had borrowings of $750,450, net of a $48,166 discount under the Convertible Notes. The Company has registered shares for potential issuance on exercise of the warrants, or conversion of the note, on Form S-1 that was declared effective on October 30, 2023. As of March 31, 2024, the note holders have not exercised the warrants. During the three months ended March 31, 2024 the noteholders exercised the option to convert $60,000 in principal of the notes to 71,460 shares of the Company’s Class A common stock.

Current wording

On August 24, 2023, the Company issued convertible notes at a 7.4% discount and a principal balance of $1,080,000. The notes had an interest rate of 7.5%, were paid in consecutive monthly installments beginning February 24, 2024 and matured on May 24, 2024. In connection with the Convertible Notes the Company issued to the investors warrants to purchase an aggregate of 714,285 shares that were accounted for under the fair value method and allocated a value of $445,754. The difference of $525,754 between the proceeds allocated to the Convertible Notes and the aggregate principal amount were accreted over the life of the notes and accounted for the fair value of the warrants and the stated discount. Additionally, $152,500 of transaction costs incurred by the Company were recorded as a debt discount. The discount was amortized using the effective interest rate of 103.4%. The effective interest rate is based on the principal balance discounted by stated interest, debt issuance costs and fair value allocated to the related warrants. As of June 30, 2024, the Convertible Notes have been repaid. The Company has registered shares for potential issuance on exercise of the warrants, or conversion of the note, on Form S-1 that was declared effective on October 30, 2023. As of June 30, 2024, the note holders have not exercised the warrants. During the six months ended June 30, 2024, prior to repayment, the noteholders exercised the option to convert $60,000 in principal of the notes to 71,460 shares of the Company’s Class A common stock.

Previous wording

In July 2023, the Company entered into a cooperation agreement with its IDC vendor. The Company agreed to make the vendor the official server host ofArk: Survival Evolved and future iterations and sequels of the game for a period of 7 years. In return, the vendor has agreed to provide the Company with funds in cash of up to $3.0 million without discount and free of charges and costs to the Company. The funds are to be repaid in monthly installments starting in November 2023 and were based on 20% of the gross monthlyARK: Survival Ascended revenues. The Company has imputed interest at 8.0% on draws made. As of March 31, 2024, we had repaid the remaining $1.5 million outstanding under the Note Payable.

Current wording

In July 2023, the Company entered into a cooperation agreement with its IDC vendor. The Company agreed to make the vendor the official server host ofArk: Survival Evolved and future iterations and sequels of the game for a period of 7 years. In return, the vendor has agreed to provide the Company with funds in cash of up to $3.0 million without discount and free of charges and costs to the Company. The funds were repaid in monthly installments starting in November 2023 and were based on 20% of the gross monthlyARK: Survival Ascendedrevenues. The Company has imputed interest at 8.0% on draws made. As of June 30, 2024, we had repaid the remaining $1.5 million outstanding under the Note Payable.

Previous wording

The 2021 Revolving Loan, Term Loan and the 2022 Short Term Note require us to maintain a minimum debt service coverage ratio of 1.5 to 1.0. Additionally, the 2021 Revolving Loan requires us to maintain an outstanding principal balance of no more than $3.0 million for 30 consecutive days during any twelve-month period. For the three months ended March 31, 2024, our debt service coverage ratio was 0.0, and we received waivers for all covenants under our debt facilities as of March 31, 2024. The waiver is applicable to all debt facilities with the lender and will waive the covenants for the trailing twelve months ended March 31, 2024. The Company repaid the $0.8 million term note that was one of three debt facilities with the lender, in January 2024. The Company’s ability to comply with the covenants, or receive waivers for the covenants, can lead to the acceleration of payments due under the debt facilities with the lender, cause the lender to cease making advances under the revolving agreement, or allow the lender to take possession of collateral. Due to the failure of complying with the debt covenant the Company classifies its long term debt as current.

Current wording

The 2021 Revolving Loan, Term Loan and the 2022 Short Term Note require us to maintain a minimum debt service coverage ratio of 1.5 to 1.0. Additionally, the 2021 Revolving Loan requires us to maintain an outstanding principal balance of no more than $3.0 million for 30 consecutive days during any twelve-month period. For the trailing twelve months ended June 30, 2024, our debt service coverage ratio was 0.0, and we received waivers for all covenants under our debt facilities as of June 30, 2024. The waiver is applicable to all debt facilities with the lender and will waive the covenants for the trailing twelve months ended June 30, 2024. The Company repaid the $0.8 million term note that was one of three debt facilities with the lender, in January 2024. The Company’s ability to comply with the covenants, or receive waivers for the covenants, can lead to the acceleration of payments due under the debt facilities with the lender, cause the lender to cease making advances under the revolving agreement, or allow the lender to take possession of collateral. Due to the failure of complying with the debt covenant the Company classifies its long term debt as current.