Snail, Inc.

Snail Inc. and Subsidiaries

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 Company 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.

Basis of Presentation and Consolidation

The accompanying 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”).

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 consolidated financial statements.

The Consolidated Financial Statements include the accounts of Snail, Inc. and the following subsidiaries:

The Company incorporated new wholly owned subsidiaries to facilitate future business operations and strategic initiatives. Rustic Roost, LLC was incorporated on December 13 th, 2024; Snail Coins, LLC was incorporated on August 7 th, 2025; Snail Coins (BVI), Ltd was incorporated on September 8 th, 2025; and Egofold, LLC was incorporated on August 8 th, 2025. All intercompany accounts, transactions, and profits have been eliminated upon consolidation.

Use of Estimates

The preparation of Consolidated Financial Statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and the accompanying notes. Such estimates include revenue recognition, see Note 2 –Revenue Recognition, provisions for credit losses, deferred income tax assets and associated valuation allowances, deferred revenue, stock-based compensation and fair value of warrants and convertible notes. 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 hasone operating and reportable segment, as the Company’s chief operating decision maker, who is the Company’s Chief Executive Officer, reviews financial information on a consolidated basis for purposes of allocating resources and evaluating performance. 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 and third parties. Financial information about our geographic regions is included in Note 3 –Revenue from Contracts with Customersand information about our reportable operating segment is included inNote 18 – Operating Segments.

NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

The Company’s revenue is generated from the publishing of software games sold digitally and through physical discs (e.g., packaged goods), the publishing of separate downloadable content that are new feature releases to existing digital full-game downloads that are sold digitally, and in-app purchases of virtual goods used by players of its free-to-play mobile games. When control of the promised products and services is transferred to the end users, the Company recognizes revenue in the amount that reflects the consideration it expects to receive in exchange for these products and services. Revenue from delivery of products is recognized at a point in time when the intellectual property is made available to the third-party platform.

The Company determines the standalone selling price for its technical support performance obligation using the cost-plus-margin approach in accordance with ASC 606,Revenue from Contracts with Customers. The Company determines the proportion of total technical support activity attributable to its games based on historical data. The Company then uses the per-unit cost determination to allocate technical support costs over an estimated service period of five years, the expected life of the user. The resulting per-unit cost is increased by a reasonable margin percentage to arrive at the per unit price of the Company’s technical support obligations.

The Company is a publisher of games and sells to its customers including Microsoft’s Xbox Live, Sony’s PlayStation Network, Valve’s Steam, Epic Games Store, My Nintendo Store and retail distributors. The Company assesses whether it acts as principal or agent in each transaction, considering factors such as contractual terms, primary responsibility for fulfilling the promise to deliver the product, and discretion in pricing. The Company serves as the principal for the publisher of games in its arrangement with a related party, SDE Inc. (“SDE”), recognizing revenue on a gross basis. Under this arrangement, the Company licenses intellectual property rights from SDE. For mobile sales arrangements via Apple’s App Store and the Google Play Store, the Company has discretion in establishing the price for the specified good or service and it has determined that the Company is the principal to the end user and thus reports revenue on a gross basis. The Company serves as the principal of games in its arrangement with a related party, Suzhou Snail.

The virtual goods that the Company sells to players of its free-to-play mobile-games, include virtual currency or in-game purchases of additional game play functionality. For virtual goods, the satisfaction of the Company’s performance obligation is dependent on the nature of the virtual good purchased and as a result, the Company categorizes its virtual goods as follows:

For games that were sold in a bundle with downloadable content (“DLC”) that have not yet been launched and been reported in deferred revenue in the consolidated balance sheets, the Company has used the adjusted market assessment approach per Accounting Standards Codification (“ASC”) 606-10-32-34 to assign a value for the Company’s remaining performance obligations. The Company uses the following reasonably available information in developing the standalone selling prices of the performance obligations:

The Company recognizes revenue using the following five steps as provided by ASC Topic 606Revenue from Contracts with Customers: 1) identify the contract(s) with the customer; 2) identify the performance obligations in each contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize revenue when, or as, the entity satisfies a performance obligation. The Company’s terms and conditions vary by customers and typically provide payment terms of net 30 to 75 days.

Contract Balance

The Company records deferred revenue when cash payments are received or due in advance of its performance, even if amounts are refundable.

Deferred revenue is comprised of the transaction price allocable to the Company’s performance obligation on technical support and the sale of virtual goods available for in-app purchase, and payments received from customers prior to launching the games on the platforms. The Company recognizes revenues from the sale of virtual goods ratably over their estimated service period. The Company’s estimated service period for players of the Company’s mobile games is generally 90 days from the date of purchase.

The Company has a long-term title license agreement with a platform which makesARK 1 available on the platform in perpetuity, and putsARK II on the platform for three years upon release. The Company deferred $2.3 million related toARK II that is included in the long-term portion of deferred revenue and will be recognized upon the release ofARK IIon the platform.

In July 2023, the Company entered into a distribution agreement with its retail distribution partner for the distribution ofARK: Survival AscendedandARK II.The initial term was two years and renew each subsequent year unless it is cancelled. As of December 31, 2025, the Company has deferred $1.1 million related toARK IIas long-term deferred revenue until the disc releases occur.

Estimated Service Period

For certain performance obligations satisfied over time, the Company has determined that the estimated service period is the time period in which an average user plays the Company’s software games (“user life”) which most faithfully depicts the timing of satisfying its performance obligation. The Company considers a variety of data points when determining and subsequently reassessing the estimated service period for players of our software games. The Company also considers publicly available online trends. The estimated service period forARK: Ultimate Mobile Edition is approximately three months. This estimate is based on observed gamer behavior, including low 90-day retention rates and Keys purchase and consumption trends analyzed using a stratified sampling methodology, which indicates that most gamer activity occurs within two to three months of initial engagement.

The Company believes this provides a reasonable depiction of the transfer of its game related services to its players, as it is the best representation of the period during which its players play the Company’s software games. Future usage patterns may differ from historical usage patterns, and therefore the estimated service period may change in the future. The estimated service periods for players of the Company’s current software games are generally 90 days depending on the software games.

Shipping, Handling and Value Added Taxes (“VAT”)

The distributor is responsible for the shipping of the game discs to retail stores and incurring the shipping and VAT costs. The Company is paid the net sales amount after deducting shipping costs, VAT and other related expenses by the distributor.

Cost of Revenues

Cost of revenues include software license royalty fees, merchant fees, internet, server and database center costs, game licenses, engine fees and amortization costs. Cost of revenues for the years ended December 31, 2025 and 2024 were comprised of the following:

General and Administrative Costs

General and administrative costs include rent, salaries, stock-based compensation, legal and professional expenses, administrative internet and server, contractor costs, insurance expense, licenses and permits, other taxes and travel expenses. These costs are expensed as they are incurred. Stock-based compensation expense (income), included in general and administrative costs, of $342,925 and $(828,495) was incurred during the years ended December 31, 2025 and 2024, respectively.

Research and Development

Research and development costs are expensed as incurred. Research and development costs include travel, payroll, third-party costs, and other general expenses specific to research and development activities. Stock-based compensation expense (income), included in research and development costs, of $28,571 and $(61,713) was incurred during the years ended December 31, 2025 and 2024, respectively.

We account for software products intended to be sold, leased or otherwise marketed in accordance with ASC 985. Accordingly, we capitalize certain development costs incurred after technological feasibility is established but before the general release of the game. In some cases, there may be capitalized costs for the development of significant additions or improvements to a game or for porting to a different console. These capitalized costs may include labor, materials, and an allocation of overhead directly related to development activities or outsourced development services. As of December 31, 2025, the Company had capitalized $3,652,165 of software development costs under ASC 985 upon the establishment of technological feasibility for the related titles.

Advertising and Marketing Costs

The Company expenses advertising and marketing costs as incurred. Advertising and marketing costs of $5,236,951 and $1,523,398 were incurred during the years ended December 31, 2025 and 2024, respectively.

Impairment Expenses

The Company evaluates its intangible assets, including game licenses, software, and film assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such indicators are present, the Company performs a recoverability test by comparing the carrying value of the asset to the estimated future cash flows expected to result from the use and eventual disposition of the asset. If the carrying amount exceeds the estimated future cash flows, an impairment loss is recognized for the amount by which the carrying value exceeds the asset’s fair value. Impairment expenses for the years ended December 31, 2025 and 2024 were $1,536,182 and $0, respectively.

Non-controlling Interests

Non-controlling interests on the consolidated balance sheets and consolidated statements of operations and comprehensive income (loss) include the equity allocated to non-controlling interest holders. As of December 31, 2025 and 2024, there were non-controlling interests with the following subsidiaries:

Cash and Cash Equivalents and Restricted Cash and Cash Equivalents

Cash is available for use in current operations or other activities such as capital expenditures and business combinations. Restricted cash and cash equivalents are time deposits, that are currently provided as a standby letter of credit to landlords and collateral held in reserve related to the Company’s revolving line of credit. The Company’s policy for determining whether an item is treated as cash, or a cash equivalent, is based on its original maturity, liquidity, and risk profile. The Company classifies restricted cash and cash equivalents based on the expected timing of when the restrictions will lapse. Amounts expected to be released within one year of the balance sheet date are presented as short-term restricted cash and cash equivalents, while amounts expected to remain restricted for more than one year are presented as long-term restricted cash and cash equivalents on the consolidated balance sheets. Investments with maturities of three months or less, are highly liquid and have insignificant risk are considered to be cash equivalents

Accounts Receivable

The Company generally records a receivable related to revenue when it has an unconditional right to invoice and receive payment. Accounts receivable are carried at original invoice amount less an allowance made for credit losses. The Company uses a combination of quantitative and qualitative risk factors to estimate the allowance, including an analysis of the customers’ creditworthiness, historical experience, age of current accounts receivable balances, changes in financial condition or payment terms of the Company’s customers. In estimating expected credit losses, the Company has elected the practical expedient under ASU 2025-05 to assume that current economic conditions, as of the balance sheet date, will not change for the remaining life of the current accounts receivable. The Company evaluates the allowance for credit losses on a periodic basis and adjusts it as necessary based on the risk factors mentioned above. Any increase in the provision for credit losses is recorded as a charge to general and administrative expense in the current period. Any amounts deemed uncollectible are written off against the allowance for credit losses. Management judgment is required to estimate the Company’s allowance for credit losses in any accounting period. The amount and timing of credit losses and cash collection could change significantly because of a change in any of the risk factors mentioned above. There were no credit losses recognized during the years ended December 31, 2025 and 2024.

Property and Equipment, Net

Property and equipment, net, are stated at cost. Depreciation is calculated using the straight-line method over the following useful lives:

When assets are retired or disposed of, the cost and accumulated depreciation thereon are removed, and any resulting gains or losses are included in the consolidated statements of operations and comprehensive income (loss). Leasehold improvements are amortized using the straight-line method over the estimated life of the asset, not to exceed the length of the lease. Repairs and maintenance costs are expensed as incurred.

Foreign Currency

The functional currency for the Company’s foreign operations is primarily the applicable local currency. Accounts of foreign operations are translated into U.S. dollars using exchange rates for assets and liabilities at the balance sheet date and average prevailing exchange rates for the period for revenue and expense accounts. Adjustments resulting from the translation are included in accumulated other comprehensive loss. Realized and unrealized transaction gains and losses arising from transactions denominated in foreign currencies different than the relevant functional currency are included in the Company’s consolidated statements of operations and comprehensive income (loss) in the period in which they occur. Foreign currency transaction (losses) and gains were $(90,500) and $11,686 during the years ended December 31, 2025 and 2024, respectively.

Intangible Assets – License Usage Rights

The Company enters into license agreements with third-party developers and related party developers that require the Company to make payments for license usage rights and game development and production services. These license agreements grant the Company the exclusive publishing and distribution rights to game titles as well as, in some cases, the underlying intellectual property rights. These license agreements also specify the payment schedules, royalty rates and the relevant licensing period. The Company capitalizes the cost of license usage rights as intangible assets and amortizes them over the terms of the respective licensing rights. As of December 31, 2025 and 2024, the Company capitalized $420,000 in license usage rights which are included within intangible assets, net, within the consolidated balance sheets. Additionally, the Company has capitalized $5,000,000 related to a game license, which is included in intangible assets, net – related party as of December 31, 2025.

Film Costs, net

The Company capitalizes costs to produce short videos in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 926, including direct production costs, production overhead, interest, acquisition costs and development costs. The Company will account for each episodic series as a unit for which capitalized film costs will be amortized by the Company using the individual-film forecast-computation method. Each reporting period the Company will reassess its estimate of ultimate revenues used to determine the amortization rate for each episodic series. If the estimate is revised, the Company will account for the change prospectively. The Company will then remeasure the amortization based on the portion of ultimate revenues that have been recognized and that are yet to be recognized. Unamortized film costs shall be tested for impairment whenever events or changes in circumstances indicate that fair value of the film may be less than its unamortized film costs. If the fair value of an episodic series is less than its unamortized film costs, the Company will write off the excess amount. The Company groups its film and content rights by monetization strategy. As of December 31, 2025 and December 31, 2024, the capitalized film costs were $244,450 and $1,512,960, respectively, which are included in other noncurrent assets, net of accumulated amortization, in the accompanying consolidated balance sheets.

The Company recognized an impairment of $868,722 and $0 for the year ended December 31, 2025 and 2024, respectively. The impairment is primarily related to the underperforming titles released during the period and the elimination of marketing plans for these titles. The impairment charges are included in the impairment expenses on the consolidated statement of operations and comprehensive income (loss). The Company continues to monitor the performance of its film assets and may record additional impairments in future periods if conditions warrant.

Software Development Costs and Licenses

We account for software products intended to be sold, leased or otherwise marketed in accordance with ASC 985. Accordingly, we capitalize costs incurred for internally developed titles and payments made to third-party software developers under development agreements as software. These software development costs may include payroll, materials, third-party costs, and other costs directly related to development activities subsequent to establishing technological feasibility of the software. Significant management judgments are made in the assessment of when technological feasibility is established. Technological feasibility is evaluated on a product-by-product basis. Prior to establishing technological feasibility of a product, we record any costs incurred by their-party developers as research and development expenses.

During the year ended December 31, 2025, the Company capitalized $3,652,165 of software development costs under ASC 985 for various titles, which are included in intangible assets, net, in the Company’s consolidated balance sheets. There wereno software development costs capitalized under ASC 985 during the year ended December 31, 2024.

Fair Value Measurements

The Company follows FASB ASC Topic 820, Fair Value Measurements. ASC 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.

ASC 820 establishes a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect market data obtained from sources independent of the reporting entity and unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.

The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by the Company for financial instruments measured at fair value.

The three levels of inputs are as follows:

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s financial instruments include cash and cash equivalents, restricted cash and cash equivalents, short-term financial instruments, short-term loans, accounts receivable and accounts payable. The carrying values of receivables, payables, and other amounts arising out of the normal course of business approximate their fair value due to their short maturities or economic substance. The carrying amount of the Company’s short-term and long-term borrowings, which are considered level 2 liabilities, approximate their fair value based on current rates and terms available to the Company for similar debt. The fair value of the Company’s promissory note has a fixed rate until June 2026, then a floating rate that approximates the Wall Street Journal Prime Rate. The fair value of the Company’s term loan note has a floating rate that approximates the Wall Street Journal Prime Rate or a floor rate of 6.50%, whichever is higher. The Company considers the carrying amount of the loans to approximate fair value as the discounted cost in comparison to market rates would not be materially different than the cost to acquire a loan with similar terms. The Company’s convertible notes are measured at fair value using a binomial lattice framework and a range of level 3 inputs as described in Note 12 –Revolving Loan, Short Term Notes and Long-Term Debt.

The Company also has liability classified warrants measured at fair value on a recurring basis. During the year ended December 31, 2025, the Company transitioned its valuation methodology from a Monte Carlo simulation model to a Black-Scholes option-pricing model. The Company had historically valued the warrants using a Monte Carlo simulation due to certain anti dilutive features that are no longer expected to occur. The change represents a change in accounting estimate and is applied prospectively. See Note 17 –Equity for the fair value disclosures related to the Company’s convertible notes, and the Company’s warrant liability and derivative instruments. The Company does not have any other assets or liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2025 and December 31, 2024.

The following table presents the Company’s convertible notes, convertible notes warrants, and equity line of credit warrants measured at fair value and classified within the fair value hierarchy as of December 31, 2025 and December 31, 2024:

Amortizable Intangibles and Other Long-lived Assets

The Company’s long-lived assets and other assets consisting of property and equipment and purchased intangible assets, are reviewed for impairment in accordance with the guidance of FASB Topic ASC 360, Property and Equipment. Intangible assets subject to amortization are carried at cost less accumulated amortization and amortized over the estimated useful life in proportion to the economic benefits received. The Company evaluates the recoverability of definite-lived intangible assets and other long-lived assets in accordance with ASC Subtopic 360-10, which generally requires the assessment of these assets for recoverability when events or circumstances indicate a potential impairment exists. The Company considers certain events and circumstances in determining whether the carrying value of identifiable intangible assets and other long-lived assets, other than indefinite lived intangible assets, may not be recoverable including, but not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in the Company’s business strategy. If the Company determines that the carrying value may not be recoverable, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of the asset group to determine whether an impairment exists. If an impairment is indicated based on a comparison of the asset groups’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the asset group exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. There can be no assurance, however, that market conditions will not change or demand for the Company’s products under development will continue. Either of these could result in future impairment of long-lived assets. During the year ended December 31, 2025, the Company recognized impairment charges of $451,447 related to game licenses and $216,013 related to other intangible assets based on the Company’s assessment that projected cash flows of underlying game titles were insufficient to support recovery of the carrying values. No impairment charges were recognized during the year ended December 31, 2024. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on the Company’s consolidated reporting results and financial positions.

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the Consolidated Financial Statements and consisted of taxes currently due and deferred taxes. Deferred taxes are recognized for the differences between the basis of assets and liabilities for financial statement and income tax purposes.

The Company follows FASB Topic ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns.

Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

FASB ASC 740-10-25 provides criteria for the recognition, measurement, presentation, and disclosure of uncertain tax positions. The Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company recognizes liabilities for uncertain tax positions pursuant to FASB ASC 740-10-25. As of December 31, 2025, $157,247 is included in accrued expenses and other liabilities, and $468,106 is included in the long-term accrued expenses, compared to $265,251 in long-term accrued expenses as of December 31, 2024, on the accompanying consolidated balance sheets. The Company accrues and recognizes interest and penalties related to unrecognized tax benefits in operating expenses.

Concentration of Credit Risk and Significant Customers

The Company maintains cash balances at several major financial institutions. While the Company attempts to limit credit exposure with any single institution, balances often exceed insurable amounts. As of December 31, 2025 and 2024, the Company had deposits of $8,619,889 and $6,610,066, respectively, that were not insured by the Federal Deposit Insurance Corporation and are included in the cash and cash equivalents, and restricted cash and cash equivalents, in the accompanying consolidated balance sheets.

The Company extends credit to various digital resellers and partners. Collection of trade receivables may be affected by changes in economic or other industry conditions and may, accordingly, impact the Company’s overall credit risk. The Company does not require collateral or other security to support financial instruments subject to credit risk. The Company performs ongoing credit evaluations of customers and maintains reserves for potentially uncollectible accounts. The Company has two customers as of December 31, 2025 and four customers as of December 31, 2024, who accounted for approximately 73% and 85% of consolidated gross receivables, respectively. Among the two customers as of December 31, 2025, one accounted for 56% and another accounted for 17%, of the consolidated gross receivables, as of December 31, 2025. Among the four customers as of December 31, 2024, one customer accounted for 42%, and other customers accounted for 19%,14% and 10% as of December 31, 2024 of the consolidated gross receivables outstanding. The Company had three customers in the year ended December 31, 2025, and four customers in the year ended December 31, 2024, that accounted for 49%,15%,12%, and 46%,15%,14%, and 11% of the Company’s net revenue, respectively. The loss of these customers or declines in the forecasts of their accounts receivable collectability would have a significant impact on the Company’s financial performance.

As of December 31, 2025, the Company had one vendor who accounted for approximately 41% of consolidated gross payables, respectively, and as of December 31, 2024 the Company had one vendor who accounted for approximately 36% of consolidated gross payables. The loss of these vendors could have a significant impact on the Company’s financial performance.

The Company had one vendor, SDE, Inc., a related party, that accounted for 48% and 55% of the Company’s combined cost of revenues and operating expenses during the years ended December 31, 2025 and 2024, respectively. Amounts payable to SDE are included in accounts payable – related parties and accounts receivable – related party in the consolidated balance sheets as of December 31, 2025 and 2024, respectively. The loss of SDE as a vendor would significantly and adversely affect the Company’s core business.

Leases

The Company has leases relating primarily to office facilities. The Company determines if an arrangement is or contains a lease at contract inception. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The lease liability is measured as the present value of the unpaid lease payments, and the right-of-use asset value is derived from the calculation of the lease liability. Lease payments include fixed and in-substance fixed payments, variable payments based on the level of services provided by the landlords of our leases, reasonably certain purchase options, and termination penalties. Variable lease payments related to the services provided by the landlords are non-lease components that are recognized as rent expenses as incurred. For leased assets with similar lease terms and asset types, the Company applied a portfolio approach in determining a single incremental borrowing rate for the leased assets. The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments because the Company does not have the information necessary to determine the rate implicit in the lease. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The Company’s lease term includes any option to extend the lease when it is reasonably certain to be exercised based on considering all relevant factors. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Operating leases are included in operating lease right-of-use assets, net, current portion of operating lease liabilities, and operating lease liabilities, net of current portion on the consolidated balance sheets.

Recently Adopted Accounting Pronouncements

In December 2023, the FASB issued ASU 2023-09,*Income Taxes (Topic 740): Improvements to Income Tax Disclosures,to improve the transparency of income tax disclosures requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. The amendments in the update requires that public business entities, on an annual basis, disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. The amendments in this update are effective for annual periods beginning after December 15, 2024, and the Company has adopted this standard as of the effective date. See Note 13–*Income Taxes for required additional disclosures.

In July 2025, the FASB issued ASU 2025-05,Financial Instruments – Credit losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets, provides a practical expedient for measuring expected credit losses on current receivables and contract assets. The amendments in this update are effected for annual reporting periods beginning after December 15, 2025, and interim reporting periods within those annual reporting periods. The Company elected to early adopt this standard prospectively during the year ended December 31, 2025. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

In November 2024, the FASB issued ASU 2024-03,*Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses,*to improve the disclosures about a public business entity’s expenses and address requests from investors for more detailed information about the types of expenses in commonly presented expense captions. The amendments in this update are effective for annual periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, though early adoption is permitted. The Company is evaluating the impact of adopting the new standard.

In November 2024, the FASB issued ASU 2024-04,*Debt – Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments,*to clarify the requirements for determining whether certain settlements of convertible debt instruments should be accounted for as an induced conversion. The amendments in this update are effective for annual periods beginning after December 15, 2025, and interim reporting periods within those annual periods. Early adoption is permitted for all entities that have adopted the amendments in update 2020-06. The Company is evaluating the impact of adopting the new standard.

In September 2025, the FASB issued ASU 2025-06,*Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40):*streamlines guidance for internal-use software costs by removing development stage references, incorporating website development costs, and clarifying when capitalization should begin. The amendments in this update are effected for annual reporting periods beginning after December 15, 2027, and interim reporting periods within those annual reporting periods. The Company is evaluating the impact of adopting the new standard.

In December 2025, the FASB issued ASU 2025-11,*Interim Reporting – Narrow-Scope Improvements (Topic 270):*improves and clarifies existing interim reporting guidance and requires disclosure of material subsequent events in interim periods. The amendments in this update are effective for interim periods with annual reporting periods beginning after December 15, 2027, with early adoption being permitted. The Company is evaluating the impact of adopting the new standard.

In December 2025, the FASB issued ASU 2025-12,*Codification Improvements:*to improve technical corrections and clarifications to various topics in the Accounting Standards Codification. The amendments in this update are effective for annual reporting periods beginning after December 15, 2026, with early adoption being permitted. The Company is evaluating the impact of adopting the new standard.

Employee Savings Plans

The Company maintains a 401(k) for its United States based employees. The plan is offered to all eligible employees to make voluntary contributions. Employer contributions to the plan are reported under general and administrative costs in the amounts of $132,423 and $102,406 for the years ended December 31, 2025 and 2024, respectively.

Stock-Based Compensation

The Company recognizes compensation cost for stock-based awards to employees based on the awards’ estimated grant-date fair value using a straight-line approach over the service period for which such awards are expected to vest. The Company accounts for forfeitures as they occur. The Company granted 337,774 restricted stock units (“Restricted Stock Units” or “restricted stock units”) during the year ended December 31, 2025 to its non-employee directors and didnot grant any restricted stock units during the year ended December 31, 2024. The fair value of Restricted Stock Units is determined based on the quoted market price of the Company’s common stock on the date of grant.

The Company’s 2022 Omnibus Incentive Plan (the “2022 Plan”) became effective upon the consummation of the IPO. The 2022 Omnibus Incentive allows us to grant options to purchase the Company’s common stock and to grant stock options, stock appreciation rights, restricted stock, restricted stock units and performance awards and other cash-based awards and other stock-based awards to our employees, officers, and directors, up to a maximum of 5,718,000 shares. Stock options may be granted to employees and officers and non-qualified options may be granted to employees, officers, and directors, at not less than the fair market value on the date of grant. The number of shares of common stock available for issuance under the 2022 Plan will be increased annually on the first day of each fiscal year during the term of the 2022 Plan, beginning with the 2023 fiscal year, by an amount equal to the lesser of (a)5,718,000 shares, (b)1% of the shares of the Company’s Class B common stock outstanding (on a fully diluted basis) on the final day of the immediately preceding calendar year or (c) such smaller number of shares as determined by the Company’s board of directors. As of December 31, 2025 and December 31, 2024, there were 4,185,390 and 4,508,239 shares reserved for issuance under the 2022 Plan, respectively.

Restricted Stock Units

The Company granted restricted stock units under our 2022 Omnibus Incentive Plan to employees and directors. Restricted stock units are unfunded, unsecured rights to receive common stock upon the satisfaction of certain vesting criteria. Upon vesting, a number of shares of common stock equivalent to the number of restricted stock units is typically issued net of required tax withholding requirements, if any. Restricted stock units are subject to forfeiture and transfer restrictions.

Warrants

The Company accounts for Warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in FASB ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the Warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the Warrants meet all of the requirements for equity classification under ASC 815, including whether the Warrants are indexed to the Company’s own shares of Class A common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the Warrants are outstanding.

For issued or modified Warrants that meet all of the criteria for equity classification, the Warrants are required to be recorded as a component of equity at the time of issuance. For issued or modified Warrants that do not meet all the criteria for equity classification, the Warrants are required to be recorded as liabilities at their initial fair value on the date of issuance, and each balance sheet date thereafter. Warrant liabilities are presented within accrued expenses and other liabilities on the consolidated balance sheets. Changes in the estimated fair value of the Warrants are recognized as a non-cash gain or loss in other income (expense) on the statements of operations and comprehensive income (loss). Each of the outstanding warrants is convertible on a one-for-one basis into the Company’s common stock and are fully exercisable as of December 31, 2025. A summary of our outstanding warrants as of December 31, 2025 is included below:

A summary of our outstanding warrants as of December 31, 2024 is included below:

Share Repurchase Program

On November 10, 2022, the Company’s board of directors authorized a share repurchase program under which the Company may repurchase up to $5 million of outstanding shares of Class A common stock of the Company, subject to ongoing compliance with the Nasdaq listing rules. The program does not have a fixed expiration date. Repurchased shares are accounted for at cost and reported as a reduction of equity in the consolidated balance sheets under treasury stock. No treasury stock was sold during the years ended December 31, 2025 and 2024. As of December 31, 2025 and 2024,1,350,275 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.

Earnings (loss) Per Share

Earnings (loss) per share (“EPS”) is calculated by dividing the net income (loss) that is applicable to the common stockholders for the period by the weighted average number of shares of common stock during that period. The computation of diluted EPS for the period assumes the potential dilutive effect of potential common shares, which includes common shares, consisting of (a) unvested restricted stock units and warrants using the treasury stock method, and (b) convertible debt using the if-converted method. The Company issues two classes of common stock with differing voting rights, and as such, reports EPS using the dual class method. For more information see Note 16*– Earnings (Loss) Per Share.*

Dividend Restrictions

Our ability to pay cash dividends is currently restricted by the terms of our credit facilities.

NOTE 3 –REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of revenue

Timing of recognition

The Company recognizes revenue at a point in time for performance obligations that are met at the time of sale or at the time of a release. The Company recognizes revenue over a period based on the estimated service period of the product and additional performance obligations met over time for technical support. Net revenue by timing of recognition during the years ended December 31, 2025 and 2024 were as follows:

Geography

The Company attributes net revenue to geographic regions based on customer location. Net revenue by geographic region for the years ended December 31, 2025 and 2024 were as follows:

Platform

Net revenue by platform for the years ended December 31, 2025 and 2024 were as follows:

Our net revenues through our top four platform providers, as a proportion of our total net revenue, for the years ended December 31, 2025 and 2024 were as follows:

Distribution channel

Our products are delivered through digital online services (digital download, online platforms, and cloud streaming), mobile, and retail distribution and other. Net revenue by distribution channel for the years ended December 31, 2025 and 2024 was as follows:

Other Revenues

As discussed in Note 15, the Company recognized the $1.2 million payment related to the Angela Games settlement upon satisfaction of performance obligations included in the contract. This amount is included in other revenues for the year ended December 31, 2024. No amounts were recognized for the year ended December 31, 2025.

Deferred Revenue

The Company records deferred revenue when payments are due or received in advance of the fulfillment of our associated performance obligations; reductions to deferred revenue balance were primarily due to the recognition of revenue upon fulfillment of its performance obligations, which were in the ordinary course of business. As of December 31, 2025, the balance of deferred revenue was $32.1 million, of which $31.0 million is due to non-refundable payments. The Company is expecting to recognize $24.5 million of non-refundable payments in the next 12 to 60 months through the release of DLC’s and additionalARKtitles. The remaining $3.7 million of current non-refundable deferred revenues and $2.8 million of long term non-refundable deferred revenue will be recognized as revenue primarily on a straight-line basis over the next 60 months, based on our estimates of technical support obligations, the usage of consumable virtual goods and estimated period of time an end user will play the game. The Company’s refundable deferred revenue consists of $1.1 million in advance payments received in accordance with the agreement the Company has made with its retail distributor. Activities in the Company’s deferred revenue as of December 31, 2025 and 2024 were as follows:

NOTE 4 –CASH AND CASH EQUIVALENTS, AND RESTRICTED CASH AND CASH EQUIVALENTS

Cash equivalents are valued using quoted market prices or other readily available market information. The Company has restricted cash and cash equivalents of $1,935,000 and $935,000 as of December 31, 2025 and 2024, respectively. The amounts of restricted cash and cash equivalents held as of December 31, 2025 and 2024, are to secure the standby letter of credit with landlords and reflect collateral held in reserve related to the Company’s revolving line of credit. The following table summarizes the components of the Company’s cash and cash equivalents, and restricted cash and cash equivalents as of December 31, 2025 and 2024:

NOTE 5 –ACCOUNTS RECEIVABLE (PAYABLE) – RELATED PARTY

Accounts receivable – related party represents receivables in the ordinary course of business attributable to certain mobile game revenues that, for administrative reasons, were collected by a related party and that the related party has not yet remitted back to the Company. Accounts receivable – related party is non-interest bearing and due on demand. The related party, SDE Inc. (“SDE”), is 100% owned and controlled by the wife of the Founder, Chief Executive Officer, Chief Strategy Officer and Chairman of the Company. In January 2024, the Company entered into an offset agreement with SDE. The Company has the right to offset payables due to the related party for royalties, internet, server, and datacenter costs (“IDC”) and marketing costs as they are determinable, mutual, and the right is enforceable by law. The Company will offset $0.5 million per month, or $6.0 million annually, beginning in January 2024, until the receivable has been collected or offset in full. To reflect the timing of the offset agreement, a portion of the SDE receivable is presented as a long-term asset as of December 31, 2024. During the years ended December 31, 2025 and 2024, the Company made cash payments to SDE in the amount of $40.2 million and $43.5 million, respectively and anticipates continuing to make cash payment to SDE in future years. As of December 31, 2025 and 2024, the outstanding balance of net accounts (payable) receivable from related party was as follows:

NOTE 6 –PREPAID EXPENSES - RELATED PARTY

On March 10, 2023, the Company amended its exclusive software license agreement with SDE relating to theARK franchise. For DLC’s, the Company plans to release during the term of the agreement, the Company has the option to pay the $5.0 million DLC payment in whole or in part, when paid in advance; or in full, upon the DLC release. No payment for any DLC under this agreement will exceed $5.0 million.

During the year ended December 31, 2025, the Company made $1.6 million in prepaid royalty payments related toARK: Survival AscendedDLC’s which have not yet been released. During the year ended December 31, 2024, the Company made $1.7 million in prepaid royalty payments related to theARK: Survival AscendedDLC’s which have not yet been released. During the year ended December 31, 2025, the Company recognized $2.5 million of license costs upon the commercial release of theLost Colony DLC and recorded the amount in intangible assets – related party, net. The license fee had been previously prepaid to SDE in the prior year and was recorded as prepaid expenses until the DLC’s release in 2025. Upon release, the licensed content was placed in service and the Company began amortizing the license over its estimated useful life. Prepaid expenses – related party consisted of the following as of December 31, 2025 and 2024:

The amount classified as short-term, as of December 31, 2025, and 2024, includes prepaid royalties forARK: Survival AscendedDLC’s which have not yet been released and various operational software licenses obtained through SDE.

NOTE 7 –PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following as of December 31, 2025 and 2024:

Other receivables consist of receivables related toMyth of Empiresand our aforementioned interest receivable on the federal tax refund. Also included in other receivables is $759,580 of interest income accrued on a federal income tax refund receivable arising from a carryback of the Company’s 2022 net operating loss to tax year 2016. The refund, including accrued interest, was received in February 2026 and is disclosed further in Note 20 – Subsequent Events.

NOTE 8 –PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following as of December 31, 2025 and 2024:

Depreciation expense was $247,976 and $303,714 for the years ended December 31, 2025 and 2024, respectively. During the year ended December 31, 2025, the Company disposed of $457,484 in computer equipment with an accumulated depreciation of $457,484. The Company didnot have any disposals in the year ended December 31, 2024.

NOTE 9 –INTANGIBLE ASSETS

Intangible assets consist of game licenses, game software underlying intellectual property rights, game trademarks and other branding items. The Company amortizes the intangible assets over its useful life.

The following tables reflect all the intangible assets presented on the consolidated balance sheets as of December 31, 2025 and 2024:

Amortization expense was $394,462 and $7,804 for the years ended December 31, 2025 and 2024, respectively. These amounts are included in cost of revenues in the accompanying consolidated statements of operations and comprehensive income (loss). The weighted average remaining useful life for which amortization expense will be recognized is 3.2 years as of December 31, 2025. Future amortization expense of intangible assets is as follows:

NOTE 10 –ACCOUNTS PAYABLE — RELATED PARTIES

Accounts payable due to related parties represents payables in the ordinary course of business primarily for purchases of game distribution licenses, research and development costs and also the royalties due to Suzhou Snail. In July 2024, the Company entered into another software development, publishing and distribution agreement with Suzhou Snail. Under the terms of the agreements Suzhou Snail will develop a game for distribution by the Company and the Company will make $4.5 million in milestone payments during the development of the game and an ongoing royalty on sales of the game. The Company made $2.5 million in milestone payments under the July contract, in 2025. In December 2024, the Company entered into an agreement with Suzhou Snail for the development of an application to deliver short film content to end users. In accordance with the agreement, Suzhou Snail developed the app for release and received $290,000 as a development fee. As of December 31, 2025, the development fee has been capitalized in software under intangible assets, net in the Company’s consolidated balance sheets. As of December 31, 2024, the development fee was capitalized in software and license rights from related parties under intangible assets, net, in the Company’s consolidated balance sheets and was reclassified in 2025.

As of December 31, 2025, the Company had an accounts payable – related party balance for payments made on behalf of Suzhou Snail for licensing, legal and marketing costs prior to the Company’s IPO. The Company also has accounts receivable – related party balance due from Suzhou for royalties collected on behalf of the Company prior to its IPO. The accounts receivable – Suzhou are due on demand. The Company has the legal right to offset amounts payable to the related party, including royalties and research and development fees, against the related party accounts receivable. The offset right is determinable, mutual and enforceable under applicable law. The Company intends to exercise this right to offset in future periods. In addition, Suzhou has committed not to collect more than 20% of the net outstanding payable from the Company within the next twelve months. Furthermore, no repayment will be demanded if such payment would cause Snail to be in default of its lending requirements or impair its ability to meet working capital requirements.

In January 2025, the Company extended its outsource agreement with Suzhou Snail for research and development of a game. In consideration, the Company will pay Suzhou Snail twelve equal monthly payments of $340,600, beginning on January 1, 2025. In August 2025, the Company entered into a Game Testing Service agreement with Suzhou Snail for the research and development testing for cross-platform game testing services. In consideration, the Company will pay $240,000 in four quarterly installments of $60,000 through June 2026. Additionally, in August 2025, the Company entered into a Short Drama Production agreement with Suzhou Snail in providing technical development, marketing and operational services related to theSaltyTV platform. In consideration, the Company will pay $720,000, payable in quarterly installments of $180,000 through June 2026. During the years ended December 31, 2025 and 2024, respectively, the Company incurred $7,495,192 and $4,728,213 of research and development costs from Suzhou Snail; and made $7,029,600 and $7,783,000 in payments to Suzhou Snail for royalties and research and development costs. During the years ended December 31, 2025 and 2024, the Company incurred $137,993 and $192,213, respectively as license costs due to Suzhou Snail and included in cost of revenues. The royalty payments are included in costs of revenues and research and development costs are included in operating expenses in the consolidated statements of operations and comprehensive income (loss) or capitalized as intangible assets, net in the consolidated balance sheets. Accounts payable – related parties consisted of the following as of December 31, 2025 and December 31, 2024:

NOTE 11 –LOAN AND INTEREST RECEIVABLE — RELATED PARTY

In February 2021, the Company loaned $200,000 to a wholly owned subsidiary of Suzhou Snail. The loan bears 2.0% per annum interest, interest and principal were due in February 2022. In February 2022, Suzhou Snail signed an agreement with this subsidiary and assumed the loan and related interest for a total of $203,890. Subsequently, $103,890 was offset against the loan and interest payable owed to Suzhou Snail on a separate note. The total amount of loan and interest receivable — related party was $107,759 and $105,759, as of December 31, 2025 and 2024, respectively. The Company earned $2,000 and $2,005 in interest on the related party loans receivable during the years ended December 31, 2025 and 2024, respectively.

NOTE 12 –REVOLVING LOAN, SHORT TERM NOTES AND LONG - TERM DEBT

Total interest expense for the above debt and revolving loan amounted to $641,923 and $713,475 for the years ended December 31, 2025 and 2024, respectively. Accretion of the convertible notes and amortization of loan origination expenses and loan discounts of $13,109 and $345,837 are included as part of interest expense for the years ended December 31, 2025 and 2024, respectively. The Company has a weighted average interest rate of 5.7% and 5.6% on its short-term obligations as of December 31, 2025 and 2024, respectively. The Company was in compliance with its debt covenants related to the 2021 Revolving Loan, 2021 Promissory Note and 2025 Term Loan for the trailing twelve months ended December 31, 2025, and it is reasonably possible it will remain in compliance for the twelve months thereafter.

The following table provides future minimum payments of its long-term debt based on contractual payments, as of December 31, 2025:

Convertible Debt

As of December 31, 2025, because the Company elected the fair value option for the February 2025 Convertible Notes, October 2025 Convertible Notes and November 2025 Convertible Notes, there were no separately recognized unamortized premium, debt discount, or deferred issuance cost balances associated with these instruments. Accordingly, the net carrying amount of each such instrument equaled its fair value as of December 31, 2025. The February 2025 Convertible Notes, October 2025 Convertible Notes and November 2025 Convertible notes had net carrying amounts, or fair values, of $691,010, $2,115,856 and $1,035,323 as of December 31, 2025, respectively, and were classified within Level 3 of the fair value hierarchy.

February 2025 Convertible Notes

In February 2025, pursuant to a securities purchase agreement (the “SPA”), the Company issued to two accredited investors (the “Investors”) convertible notes with an aggregate principal amount of $3,300,000 (the “February 2025 Convertible Notes”) for gross proceeds of $3,000,000. The February 2025 Convertible Notes, which mature on February 21, 2026, carry an original issue discount of 10%, and were subject to a guaranteed interest equal to 5% of the principal amount. The principal and interest charges were payable in 10 equal monthly payments starting May 21, 2025. The notes were fully paid in February 2026.

Subject to certain ownership limitations, all or a portion of the then outstanding and unpaid principal and interest (the “conversion amount”) of the February 2025 Convertible Notes could be converted at the option of the holder at any time into shares of the Company’s Class A common, at a conversion price of $5.00 per share, except that, for an aggregate of $866,250 ofthe conversion amount, the conversion price was equal to the lesser of $5.00 per share or 92% of the lowest daily volume weighted average price (“VWAP”) of the Class A common stock during the 5 trading days period prior the receipt of the notice of conversion (the “Market Price”). The conversion price could be adjusted for certain customary dilutive events. Accordingly, the number of shares issuable upon conversion of the February 2025 Convertible Notes was not fixed as of December 31, 2025 and depended on (i) the amount of principal and interest outstanding at the conversion date and (ii) for the portion of the conversion amount subject to a Market Price-based conversion feature, the market price of the Company’s Class A common stock on the applicable conversion date.

The February 2025 Convertible Notes could be prepaid by the Company upon giving the Investors a ten-calendar day notice by paying an amount equal to the outstanding balance. In event of default the Investors could require the Company to prepay the February 2025 Convertible Notes at a 120% premium and have the option to convert any amount then outstanding into shares of Common Stock at the lesser of the then applicable conversion price or the Market Price. If the Company fails to make the monthly payment, the Noteholders had the right to convert the amount of the monthly payment into shares of Common Stock at the lesser of the then applicable Conversion Price or the Market Price.

The February 2025 Convertible Notes include multiple features that would require bifurcation, analysis and to be revalued at each reporting date. Accordingly, the Company has elected to apply the fair value option to the February 2025 Convertible Notes to simplify the reporting. The February 2025 Convertible Notes were initially measured at fair value and are being re-measured at fair value at each subsequent reporting date. From the date of issuance through December 31, 2025, the change in fair value was as follows:

During the year ended December 31, 2025, holders converted $331,500 of the February 2025 Convertible Notes into 295,873 shares of the Company’s Class A common stock. The loss from change in fair value of $350,434 is reported in other income in our consolidated statement of operations and comprehensive income (loss) and other income of ($24,397) is recorded in other comprehensive income (loss) due to the change in credit spread from issuance to December 31, 2025, prior to tax adjustment. The portion of the total change in the fair value of the February 2025 Convertible Notes that is attributable to changes in the instrument-specific credit risk (the “credit component”) is estimated each reporting date. Management first measures fair value using all updated valuation inputs, including the credit spread implied by current market data (33.0%) then management re-measures fair value holding every assumption constant except for the credit spread, which is reset to the spread at the prior measurement date. The difference between the two fair-value estimates isolates the effect of instrument-specific credit risk.

The Company used the binomial lattice framework to determine the fair value of each amortization payout. Accordingly, the valuation uses a range of level 3 inputs to evaluate each maturity payout individually. The range of level 3 inputs used on the issuance date and as of December 31, 2025 are as follows:

October 2025 Convertible Notes

In October 2025, pursuant to a SPA, the Company issued to one accredited investor convertible notes with an aggregate principal amount of $2,200,000 (the “October 2025 Convertible Notes”) for gross proceeds of $2,000,000. The October 2025 Convertible Notes, which mature on October 24, 2026, carry an original issue discount of 10%, and are subject to a guaranteed interest equal to 5% of the principal amount. The principal and interest charges are payable in 10 equal monthly payments starting January 24, 2026.

Subject to certain ownership limitations, all or portion of the then outstanding and unpaid principal and interest (the “conversion amount”) of the October 2025 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 of $5.00 per share, except that, for an aggregate of $577,500 ofthe conversion amount, the conversion price is equal to the lesser of $5.00 per share or 92% of the lowest daily volume weighted average price (“VWAP”) of the Class A common stock during the 5 trading days period prior the receipt of the notice of conversion (the “Market Price”). The conversion price may be adjusted for certain customary dilutive events. Accordingly, the number of shares issuable upon conversion of the October 2025 Convertible Notes was not fixed as of December 31, 2025 and depended on (i) the amount of principal and interest outstanding at the conversion date and (ii) for the portion of the conversion amount subject to a Market Price-based conversion feature, the market price of the Company’s Class A common stock on the applicable conversion date.

The October 2025 Convertible Notes may be prepaid by the Company upon giving the Investors a ten-calendar day notice by paying an amount equal to the outstanding balance. In event of default, the Investors may require the Company to prepay the October 2025 Convertible Notes at a 120% premium and have the option to convert any amount then outstanding into shares of Common Stock at the lesser of the then applicable conversion price or the Market Price. If the Company fails to make the monthly payment, the Noteholders have the right to convert the amount of the monthly payment into shares of Common Stock at the lesser of the then applicable Conversion Price or the Market Price.

The Convertible Notes include multiple features that would require bifurcation, analysis and to be revalued at each reporting date. Accordingly, the Company has elected to apply the fair value option to the October 2025 Convertible Notes to simplify the reporting. The October 2025 Convertible Notes were initially measured at fair value and are being re-measured at fair value at each subsequent reporting date. From the date of issuance through December 31, 2025, the change in fair value was as follows:

The loss in change in fair value of $118,900 is reported in other income in our consolidated statement of operations and comprehensive income (loss) and ($3,044) is recorded in other comprehensive income (loss) due to the change in credit spread from issuance to December 31, 2025, prior to tax adjustment. The portion of the total change in the fair value of the October 2025 Convertible Notes that is attributable to changes in the Company’s own credit risk (the “credit component”) is estimated each reporting date using awith-and-without approach. Management first measures fair value using all updated valuation inputs, including the credit spread implied by current market data (33.0%) then management re-measures fair value holding every assumption constant except for the credit spread, which is reset to the spread calibrated on the issuance date (32.5%). The difference between the two fair-value estimates isolates the effect of instrument-specific credit risk.

The Company used the binomial lattice framework to determine the fair value of each maturity payout. Accordingly, the valuation uses a range of level 3 inputs to evaluate each maturity payout individually. The range of level 3 inputs used on the issuance date and as of December 31, 2025 are as follows:

November 2025 Convertible Notes

In November 2025, pursuant to a SPA, the Company issued to one accredited investor convertible notes with an aggregate principal amount of $1,100,000 (the “November 2025 Convertible Notes”) for gross proceeds of $1,000,000. The November 2025 Convertible Notes, which mature on November 26, 2026, carry an original issue discount of 10%, and are subject to a guaranteed interest equal to 5% of the principal amount. The principal and interest charges are payable in 10 equal monthly payments starting February 26, 2026.

Subject to certain ownership limitations, all or portion of the then outstanding and unpaid principal and interest (the “conversion amount”) of the November 2025 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 of $5.00 per share, except that, for an aggregate of $288,750 ofthe conversion amount, the conversion price is equal to the lesser of $5.00 per share or 92% of the lowest daily volume weighted average price (“VWAP”) of the Class A common stock during the 5 trading days period prior the receipt of the notice of conversion (the “Market Price”). The conversion price may be adjusted for certain customary dilutive events. Accordingly, the number of shares issuable upon conversion of the November 2025 Convertible Notes was not fixed as of December 31, 2025 and depended on (i) the amount of principal and interest outstanding at the conversion date and (ii) for the portion of the conversion amount subject to a Market Price-based conversion feature, the market price of the Company’s Class A common stock on the applicable conversion date.

The November 2025 Convertible Notes may be prepaid by the Company upon giving the Investors a ten-calendar day notice by paying an amount equal to the outstanding balance. In event of default the Investors may require the Company to prepay the November 2025 Convertible Notes at a 120% premium and have the option to convert any amount then outstanding into shares of Common Stock at the lesser of the then applicable conversion price or the Market Price. If the Company fails to make the monthly payment, the Noteholders have the right to convert the amount of the monthly payment into shares of Common Stock at the lesser of the then applicable Conversion Price or the Market Price.

The Convertible Notes include multiple features that would require bifurcation, analysis and to be revalued at each reporting date. Accordingly, the Company has elected to apply the fair value option to the November 2025 Convertible Notes to simplify the reporting. The November 2025 Convertible Notes were initially measured at fair value and are being re-measured at fair value at each subsequent reporting date. From the date of issuance through December 31, 2025, the change in fair value was as follows:

The loss in change in fair value of $35,323 is reported in other income in our consolidated statement of operations and comprehensive income (loss) as of December 31, 2025. Management first measures fair value using all updated valuation inputs, including the credit spread implied by current market data (32.0%) then management re-measures fair value holding every assumption constant except for the credit spread, which is reset to the spread calibrated on the issuance date (31.2%). The difference between the two fair-value estimates isolates the effect of instrument-specific credit risk.

The Company used the binomial lattice framework to determine the fair value of each maturity payout. Accordingly, the valuation uses a range of level 3 inputs to evaluate each maturity payout individually. The range of level 3 inputs used on the issuance date and as of December 31, 2025 are as follows:

2023 Convertible Notes

In August 2023, pursuant to a securities purchase agreement, the Company issued to two accredited investors (the convertible debt “Investors”) convertible notes with an aggregate principal amount of $1,080,000 (the “2023 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 “2023 Convertible Notes Financing”).

The 2023 Convertible Notes carried an original issue discount of approximately 7.4%, bore interest at a rate of 7.5% per annum (16% per annum in case of an event of default), were repaid in equal consecutive monthly installments that began in February 2024 and matured on May 24, 2024.

The Company determined that the 2023 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 year ended December 31, 2024, was not significant and as such, was not recorded.

The debt discount was amortized to interest expense over the maturity period using the effective interest method at a 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. For the year ended December 31, 2024, the Company recognized $309,433 of interest expense related to the Convertible Notes, comprising of $22,725 of contractual interest expense, $222,628 in accretion and $64,080 of amortization of debt discount and issuance costs.

During the year ended December 31, 2024, the Company repaid the balance of $1,071,750 of principal and accrued interest and the investors converted $60,000 of principal into 71,460 shares of Class A common stock.

NOTE 13 – INCOME TAXES

The components of income (loss) before provision for income taxes for the years ended December 31, 2025 and 2024 are as follows:

The income tax provision for the years ended December 31, 2025 and 2024 are as follows:

The Company implemented FASB ASU 2023-09 on a prospective basis, as such, we have presented two separate rate reconciliation tables, one under the FASB ASU 2023-09 requirements and a second carried forward from the year ended December 31, 2024. The provision for income taxes differs from the amounts computed by applying the federal statutory tax rate of 21.0% to earnings before income taxes for the year ended December 31, 2025, after adoption of ASU 2023-09, is as follows:

The state and local income taxes which comprise the majority of the state and local income taxes, net of federal effect category is California.

A reconciliation of the statutory U.S. federal rate and effective rate for the year ended December 31, 2024, prior to adoption of ASU 2023-09, is as follows:

The Company recognized an income tax expense of $10,688,900 and $632,124 for the years ended December 31, 2025 and 2024, respectively; and reflects a tax rate of(64.6)% and 25.7%, respectively. The negative effective tax rate in 2025 is primarily due to the Company recording a full valuation allowance against its net deferred tax assets since it is more likely than not that the net deferred tax assets will not be realized. As of December 31, 2024, the Company’s effective tax rate differed from the federal statutory rate of 21% primarily due to foreign research and development deduction, permanent differences, changes in valuation allowance and change in warrant revaluation.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities consisted of the following as of December 31, 2025 and 2024:

The cash paid for income taxes (net of refunds) during the years as of December 31, 2025 and 2024 are as follows:

Included in these consolidated financial statements are two entities that are not consolidated in the U.S. tax return filing due to one entity being less than 80% ownership by Snail Games USA Inc.

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted, introducing several changes to U.S. tax law. Among other provisions, the OBBBA permits taxpayers to immediately expense domestic research and experimental (“R&E”) expenditures beginning in 2025 and allows an election to accelerate the amortization of any remaining unamortized domestic R&E costs over a one- or two-year period.

The Company elected to immediately expense domestic R&E expenditures incurred in 2025 and to accelerate the amortization of its remaining unamortized domestic R&E costs over a one-year period beginning in 2025. As a result, the enactment of the OBBBA reduced the Company’s U.S. current income tax expense for the year ended December 31, 2025. The legislation did not result in a net impact to the Company’s U.S. deferred tax balances, as the related deferred tax assets continue to be fully offset by a valuation allowance established in the second quarter of 2025.

The Company maintained a total valuation allowance of $20,011,238 and $5,429,353 as of December 31, 2025 and 2024, respectively. The non-includable entities had a valuation allowance of $4,044,251 and $4,024,497 as of December 31, 2025 and 2024. The Company’s consolidated tax filing group had a domestic valuation allowance of $14,899,697 and $673,049 as of December 31, 2025 and 2024, respectively. The Company had a foreign valuation allowance of $1,067,290 and $731,807 as of December 31, 2025 and 2024, respectively.

The Company has established a full valuation allowance for its net deferred tax assets since it is not more likely than not to be realized. Management considered all available evidence, both positive and negative, including but not limited to the Company’s historical operating results, income or loss in recent periods, cumulative losses in recent years, forecasted earnings, future taxable income, and significant risk and uncertainty related to forecasts, and concluded the deferred tax assets are not more likely than not to be realized. Overall, the Company’s valuation allowance had a net increase of $14,581,885 during 2025, and $285,551 during 2024.

As of December 31, 2025, the non-includable entities have U.S. federal NOL carryforwards of $2,884,392 which begin to expire in 2037 and $11,538,117 with an indefinite carryforward period. As of December 31, 2025, the non-includable entities have $14,434,371 of California net operating loss carryforwards, which begin to expire in 2037. The Company’s consolidated group federal NOL carryforwards are $19,286,436 with an indefinite carryforward period. The Company’s consolidated group state NOL carryforwards are $5,620,429 and begin to expire in 2039. As of December 31, 2025, the Company did not have any foreign NOL carryforwards.

As of December 31, 2025, the Company has foreign tax credit carryforwards of $192,180 which begin to expire in 2027 and has foreign R&D credit carryforwards of $1,065,391 which begin to expire in 2027. The Company has California R&D credit carryforwards of $340,088 with an indefinite carryforward period.

Under Section 382/383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which generally occurs if the percentage of the corporation’s stock owned by 5% stockholders increases by more than 50% over a three year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited. The annual limitation may result in the expiration of net operating losses and credits before utilization. The Company has not performed a Section 382 analysis through December 31, 2025. Subsequent ownership changes may affect the limitation in future years. The Company will evaluate performing a Section 382 analysis in future periods.

The Company and its subsidiaries currently file tax returns in the United States (federal and states) and Poland. The statute of limitations for its consolidated federal income tax returns is open for tax years ended December 31, 2022 and after. The statute of limitations for its consolidated state income tax returns is open for tax years ended December 31, 2019 and after. Net operating loss carryforwards generated in early years remains subject to examination by taxing authorities when utilized. The statute of limitations for its Polish tax returns is open for tax years ended December 31, 2019 and after. The Internal Revenue Service completed its examination of the Company’s 2022 federal income tax return during 2025 with no adjustments.

Management intends to permanently reinvest any future foreign earnings to support operations and business growth of its affiliated company in Poland. As such, no deferred tax liability was recorded on the unremitted earnings of the foreign subsidiary as of December 31, 2025 and 2024. As of December 31, 2025, the Company had $1,663,858 of unremitted earnings that will be indefinitely reinvested in its Poland subsidiary.

The following table reflects changes in gross unrecognized tax benefits for the years ended December 31, 2025 and 2024:

As of December 31, 2025 and 2024, the Company had $403,281 and $265,251, respectively, of unrecognized tax benefits that if recognized would impact the Company’s effective tax rate. The Company accrued and recognized interest and penalties related to unrecognized tax benefits in operating expense. As of December 31, 2025 and 2024, the Company had accrued $207,844 and $143,020 of interest and penalties, respectively.

NOTE 14 –OPERATING LEASE RIGHT-OF-USE ASSETS

The Company’s right-of-use assets represent arrangements related primarily to office facilities used in the ordinary business operations of the Company and its subsidiaries. In April 2018, a commercial bank issued an irrevocable standby letter of credit on behalf of the Company to the landlord for $1,075,000 to lease office space. The standby letter of credit is valid for a seven-year term and was amended in December 2025 to extend to March 31, 2033. The Company leases office space in Beverly Hills, California pursuant to a lease agreement, as amended, with an original commencement date of April 5, 2018, which was extended for an additional 86-month term commencing December 1, 2025 and expiring January 31, 2033, with one five-year renewal option but the Company is not reasonably certain to exercise the option at lease commencement. For purposes of measuring the right-of-use asset and lease liability under ASC 842, the Company applied an incremental borrowing rate of 8.50%. The incremental borrowing rate is the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. In determining that rate, the company considers prevailing economic conditions at the commencement date, as well as factors such as company-specific credit risk, term of the lease and options, and the effect of collateralization based on the nature and quality of the underlying asset As of December 31, 2025 and 2024, the Company’s net operating lease right-of-use assets amounted to $4,722,366 and $1,279,330, respectively. The Company had variable lease payments of approximately $139,930 and $129,752 during the years ended December 31, 2025 and 2024, respectively, which consisted primarily of common area maintenance charges and administrative fees.

Operating lease costs included in the general and administrative expenses in our consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2025 and 2024, are as follows:

Supplemental information related to operating leases for lease liabilities as of December 31, 2025 and, 2024, is as follows:

Future undiscounted lease payments for operating leases and a reconciliation of these payments to our operating lease liabilities as of December 31, 2025 are as follows:

NOTE 15 –COMMITMENTS AND CONTINGENCIES

Litigation

The Company is subject to claims and contingencies related to lawsuits and other matters arising out of the normal course of business, including matters related to employment, labor and workplace practices as well as notifications alleging infringement of patent or other intellectual property rights. We are subject to a variety of claims and we evaluate these claims on a case-by-case basis. While claims and contingencies of such matters cannot be predicted, the Company may be involve in legal proceedings. Such proceedings may include claims involving former or current employees, such as those relating to wrongful termination, discrimination, harassment, wage and hour compliance, or other employment-related matters. The Company has elected to expense legal costs associated with legal contingencies as incurred.

On December 1, 2021, the Company and Studio Wildcard sent a notice of claimed infringement (the “DCMA Takedown Notice”) to Valve Corporation, which operates the Steam platform, pursuant to the Digital Millennium Copyright Act (“DCMA”). The DCMA Takedown Notice concerned a videogame titledMyth of Empires, which was developed by Suzhou Angela Online Game Technology Co., Ltd. (“Angela Game”) and published by Imperium Interactive Entertainment Limited (“Imperium”).

On December 9, 2021, Angela Game and Imperium sued the Company and Studio Wildcard in the United States District Court for the Central District of California (the “District Court”) in response to the DCMA Takedown Notice. The lawsuit sought a declaratory judgment on non-liability for copyright infringement and non-liability for trade secret misappropriation, as well as unspecified damages for alleged misrepresentations in the DCMA Takedown Notice. Angela Game and Imperium also filed an application for a temporary restraining order asking the court to order us and Studio Wildcard to rescind the DCMA Takedown Notice so that Steam could reinstate Myth of Empires for download. On December 20, 2021, the Company and Studio Wildcard filed an answer to the complaint, which included counterclaims against Angela Game and Imperium and a third-party complaint against Tencent seeking unspecified damages resulting from the alleged copyright infringement and misappropriation of trade secrets in connection with theARK: Survival Evolved source code.

On September 8, 2023, the Company entered into a settlement agreement with Angela Game. The settlement agreement includes an upfront payment from Angela Game to the Company plus ongoing payments.

On March 14, 2023, Bel Air Soto, LLC (“Plaintiff”) filed suit in the Superior Court of California, County of Los Angeles, against Snail Games USA Inc. and INDIEV, an affiliate company that is owned by Mr. Hai Shi, the Company’s Founder, Chief Executive Officer, Chief Strategy Officer, and Chairman, for breach of contract and related claims arising out of a commercial lease for premises located in Los Angeles County. Plaintiff alleges that the defendants exercised an option to extend the lease and was harmed when defendants instead terminated the lease and vacated the premises. The complaint seeks damages in excess of $3 million. The Company disputes the allegations and the amount of damages. The Company has responded to the complaint with an answer and cross-complaint. The cross-complaint seeks return for the $130,000 security deposit. The landlord has answered and denied the allegations of the cross-complaint. Snail Games USA Inc. denies exercising the option to extend and has vigorously defended against the claims asserted. The Plaintiff recently amended its complaint to expand its claims in the ongoing litigation by adding Mr. Hai Shi and the Company as additional defendants. The landlord alleges that the Company is exclusively controlled by Mr. Shi and they act as the alter egos of Snail Games USA, Inc. and INDIEV and therefore should be liable for the underlying liability. Once again, the Company denies these new allegations and will vigorously defend against these new claims. The present trail date is December 2, 2026.

There was a mandatory settlement conference in the case which did not yield a settlement. The trial is presently scheduled to commence in December 2026.

On April 21, 2023, Snail Games USA Inc. entered into an indemnity and reimbursement agreement with INDIEV, dated as of April 1, 2023, pursuant to which INDIEV agreed to assume all obligations and liabilities pursuant to the lease and indemnify and reimburse Snail Games USA Inc. for any amounts, damages, expenses, costs or other liability incurred by Snail Games USA Inc. arising under or pursuant to the lease or relating to the premises.

In October 2023, INDIEV filed for bankruptcy and the Company does not expect to recover its costs from INDIEV. Accordingly, INDIEV will not be able to indemnify the Company due to its bankruptcy. At this time, the Company is unable to quantify the magnitude of the potential loss should the plaintiffs’ lawsuit succeed and accordingly no accrual for loss has been recorded in the accompanying financial statements. However, the Company does not believe that the outcome of this litigation will have a material adverse effect on its consolidated financial position, results of operations, or cash flows and believes the likelihood of a loss to the Company to be remote.

Commitments

The Company routinely enters contracts with related party developers for the development of new games. These agreements ordinarily include contractual payments to the developers for several milestones that occur at various times through 2026. The aggregate amount of development commitments to related party developers is $1.5 million as of December 31, 2025. The Company also has a license agreement with its related party SDE for the exclusive publishing rights of theARK franchise. In consideration of the publishing rights the Company will pay SDE a fixed monthly license fee of $2.0 million untilARK IIreleases. Our commitments assume satisfactory performance by our related party software developer. See Note 10 –Accounts Payable – Related Parties and Note 20 –Subsequent Eventsfor more information.

NOTE 16 –EARNINGS (LOSS) PER SHARE

The Company uses the two class method to compute its basic earnings (loss) per share (“Basic EPS”) and diluted earnings (loss) per share (“Diluted EPS”). The following table summarizes the computations of basic EPS and diluted EPS. The allocation of earnings between Class A and Class B shares is based on their respective economic rights to the undistributed earnings of the Company. Basic EPS is computed as net income (loss) divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur using the treasury stock and if-converted methods, as applicable. The following table provides a reconciliation of the weighted average number of shares used in the calculation of Basic and Diluted EPS.

The following table provides a listing of shares excluded from the calculation of Diluted EPS due to their anti-dilutive effects:

NOTE 17 –EQUITY

The Company has authorizedtwo 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 toone vote. Each share of Class B common stock will be entitled to ten votes and will be convertible intoone 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.

In connection with our IPO, on November 9, 2022, the Company issued to the Underwriters warrants to purchase 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 Annual Report and expired on November 9, 2025 in accordance with their terms.

The Underwriters Warrants are legally detachable and separately exercisable from the Class A common stock; 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 were issued to the Underwriters for their services and can be exercised immediately (subject to certain transfer conditions) they were measured at their fair value on their date of issuance and recorded within stockholders’ deficit. As long as the Underwriters Warrants remain classified as equity, they shall not be revalued.

Convertible Note Warrants

On August 24, 2023, the Company issued warrants in connection with its convertible debt for the purchase of 714,285 shares (the “Convertible Note Warrants”). The Convertible Note Warrants are accounted for as liabilities and are included in the accrued expenses and other liabilities in the consolidated balance sheets. The Convertible Note Warrants may require partial cash settlement in the future, include various adjustment provisions, meet the definition of a derivative and are classified as a liability, as such the warrants are measured at fair value in accordance with ASC 815 –“Derivatives and Hedging”.

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 consolidated balance sheet. In January 2024 there was a conversion which triggered anti-dilutive features of the convertible note warrants, decreasing the exercise price and increasing the number of outstanding convertible notes warrants to 1,405,470. The fair value of the warrants at issuance has been estimated using a Black-Scholes pricing model as of December 31, 2025 and a Monte Carlo pricing model as of December 31, 2024 as follows:

Expected volatility is the estimate of the expected volatility of the Company’s Class A common stock, based on the Company’s weekly trading history then reduced by 5% as it is generally accepted that market participants to not pay for the full volatility.

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). The measured fair value may be uncertain due to the use of unobservable inputs. At December 31, 2025 and 2024, the fair value of the warrant liability was $632,876 and $1,448,109, respectively, and was included in the accrued expenses and other liabilities in the Company’s consolidated balance sheets. The changes in fair value during the years ended December 31, 2025 and 2024, amounted to a loss of $620,206 and $1,006,294, respectively, included in other income (expense) in our consolidated statements of operations and comprehensive income (loss).

During the year ended December 31, 2025, the Investors exercised 189,285 warrants for which the Company received $159,000 in proceeds and recorded a loss of $128,085 upon revaluation of exercised warrants. During the year ended December 31, 2024, the Investors exercised 202,379 warrants, for which the Company received $170,000 in proceeds and recorded a loss of $115,800 upon revaluation of the exercised warrants. The loss is included in other income (expense) in our consolidated statements of operations and comprehensive income (loss).

The Convertible Notes Warrants were initially measured at fair value and are being re-measured at fair value at each subsequent reporting date. The change in fair value during the years ended December 31, 2025 and 2024, was as follows:

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. As of December 31, 2025, the Company has not sold any Class A common stock under the Equity Line Purchase Agreement.

The registration statement covering the offer and sale of up 15,093,768 shares of Class A common stock was effective 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 deferred offering costs associated with the equity line warrant were written off during the year ended December 31, 2025 upon the expiration of the Equity Line Purchase Agreement, and accordingly are no longer reflected in other assets on the consolidated balance sheets.

Equity Line Warrants

On August 24, 2023, the Company issued a warrant to an investor (the “Equity Line Warrant”) for the purchase of 367,647 shares of Class A common stock in consideration of the investor’s commitment to purchase Class A common stock. The fair value of the Equity Line Warrant is recorded as a warrant liability and is included in the accrued expenses and other liabilities in the Company’s consolidated balance sheets. The Equity Line Warrants may require partial cash settlement in the future, include various adjustment provisions, meet the definition of a derivative and are classified as a liability, as such the warrants are measured at fair value in accordance with ASC 815 –“Derivatives and Hedging”.

The Investors warrants allow them to purchase the 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 has been estimated using a Black-Scholes pricing model as of December 31, 2025 and a Monte Carlo pricing model as of December 31, 2024 as follows:

Expected volatility is the estimate of the expected volatility of the Company’s Class A common stock, based on the Company’s weekly trading history then reduced by 5%.

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. The measured fair value may be uncertain due to the use of unobservable inputs. At December 31, 2025 and 2024, the fair value of the warrant liability was $143,675 and $292,004, respectively, and included in the accrued expenses and other liabilities in the Company’s consolidated balance sheets. The changes in fair value during the years ended December 31, 2025 and 2024, amounted to a gain of($148,329) and a loss of($192,945), respectively, and is included in other income (expense) in our consolidated statements of operations and comprehensive income (loss).

During the years ended December 31, 2025 and 2024, the Investor exercised 0 and 33,333 warrants, respectively. For the year ended December 31, 2024, the Company received $50,000 in proceeds and recorded a loss of $17,776 upon revaluation of the exercised warrants. The loss is included in other income (expense) in our consolidated statements of operations and comprehensive income (loss).

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 overone 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 years ended December 31, 2025 and 2024.

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

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 years ended December 31, 2025 and 2024.

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

As of December 31, 2025,1,350,275 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.

There wereno share repurchases made during the years ended December 31, 2025 and 2024.

Stock-Based Compensation Expense (Income)

Stock-based compensation expense (income) resulting from RSUs of $342,925 and($828,495) are recorded under general and administrative expenses included in our consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2025 and 2024, respectively. Stock-based compensation expense (income) resulting from PSUs of $28,571 and($61,713) are recorded under research and development expenses included in our consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2025 and 2024, respectively.

During the twelve months ended December 31, 2025 and 2024, the Company recognized approximately $83,178 of deferred income tax benefit, and $201,815 of deferred income tax expense, respectively, related to our stock-based compensation expense.

As of December 31, 2025, our total unrecognized compensation cost related to RSUs and PSUs was approximately $1.8 million and is expected to be recognized over a weighted-average service period of 1.3 years.

NOTE 18 –OPERATING SEGMENTS

The Company’s Chief Operating Decision Maker (“CODM”) is our Founder, Chief Executive Officer, Chief Strategy Officer, and Chairman Mr. Hai Shi. The CODM assesses performance and decides how to allocate resources based on net income (loss) to evaluate operational efficiency and direct resources of the Company. Segment assets are reported on the consolidated balance sheets as total assets. The table below presents segment revenue, operating profit and significant expenses for the years ended December 31, 2025 and 2024:

Depreciation expense is consistent with that presented in the consolidated statements of cash flows. There are no additional segment items requiring separate disclosure. Interest income, interest expense, other income and foreign currency transactions are captured in the total other income (expense), net line item. The Company continues to report revenue by geographic region as part of its revenue disclosures, see Note 3 –*Revenue from Contracts with Customers.*The CFO provides reports to the CODM for key decision making purposes.

NOTE 19 –OTHER INCOME (EXPENSE)

Other income (expense) consisted of the following as of December 31, 2025 and 2024:

NOTE 20 –SUBSEQUENT EVENTS