Snail, Inc.

Notes to Condensed Consolidated Financial Statements

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 condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and generally accepted accounting principles as promulgated in the United States of America (“U.S. GAAP”) for interim reporting. Accordingly, certain notes or other information that are normally required by U.S. GAAP have been condensed or omitted if they substantially duplicate disclosures contained in our annual audited consolidated financial statements. Additionally, the year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements but does not include all disclosures required by U.S. GAAP. Accordingly, the unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2025 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2025, filed with the SEC on March 19, 2026. The condensed consolidated results of operations for any interim period are not necessarily indicative of the results to be expected for the full year or for any other future annual or interim period.

In the opinion of management, all adjustments considered necessary for the fair presentation of the Company’s financial position and its results of operations in accordance with U.S. GAAP (consisting of normal recurring adjustments) have been included in the accompanying unaudited condensed consolidated financial statements.

The condensed consolidated financial statements include the accounts of Snail, Inc. and the following subsidiaries:

The Company incorporated wholly owned subsidiaries to facilitate future business operations and strategic initiatives. All intercompany accounts, transactions, and profits have been eliminated upon consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the amounts reported in our 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, the fair value of warrants and convertible debt. 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. 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. No internally developed software costs were capitalized during the three months ended March 31, 2026. Financial information about our geographic regions is included in Note 3 –Revenue from Contracts with Customersand information about our reportable operating segment is included in Note 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 a 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 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 is a publisher of games, developed by SDE Inc. (“SDE”), a related party, 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. Under this arrangement, the Company licenses intellectual property rights from SDE. The Company serves as the principal for the publisher of games in its arrangement with SDE, recognizing revenue on a gross basis. The Company’s mobile games are developed by Suzhou Snail, a related party. For these mobile games sales sold 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 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 non-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 either ratably over their estimated service period or as virtual items are consumed, as applicable to the respective game. 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 is two years and will renew each subsequent year unless it is cancelled. As of March 31, 2026, 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 our game related services to our players, as it is the best representation of the period during which our players play our 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, server and database center costs, game licenses, engine fees and amortization costs. Cost of revenues for the three months ended March 31, 2026 and 2025 were comprised of the following:

General and Administrative Costs

General and administrative costs include rent, salaries, stock-based compensation, legal and professional expenses, expenses related to being a publicly traded company, 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, included in general and administrative costs, of $42,091 and $788,177 was incurred during the three months ended March 31, 2026 and 2025, respectively.

Research and Development

Research and development costs are expensed as incurred. Research and development costs include travel, payroll, and other general expenses specific to research and development activities. Stock-based compensation expense, included in research and development costs, of $2,789 and $55,442 was incurred during the three months ended March 31, 2026 and 2025, respectively.

Advertising and Marketing Costs

The Company expenses advertising and marketing costs as incurred. For the three months ended March 31, 2026 and 2025, advertising and marketing expenses totaled $868,789 and $1,306,365, respectively.

Impairment Expenses

The Company evaluates its intangible assets, including game licenses, software, and film assets, for impairment when events or circumstances indicate the carrying amount may not be recoverable, and recognizes an impairment loss for the amount by which the carrying value exceeds the asset's fair value. For the three months ended March 31, 2026 and 2025, impairment expenses were $69,149 and $0, respectively.

Non-controlling Interests

Non-controlling interests on the condensed consolidated balance sheets and condensed consolidated statements of operations and comprehensive income (loss) include the equity allocated to non-controlling interest holders. As of March 31, 2026 and December 31, 2025, 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. 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 our customers, and reasonable forecasts of the collectability of the 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 our allowance for credit losses in any accounting period. The amount and timing of our 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 three months ended March 31, 2026 and 2025.

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. During the three months ended March 31, 2026 and 2025, the Company capitalized $170,639 and $996,566 of license usage costs within intangible assets, net, respectively.

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 March 31, 2026 and December 31, 2025, $45,500 and $244,450, respectively, of film costs are capitalized and included in other noncurrent assets, net in the accompanying condensed consolidated balance sheets. During the three months ended March 31, 2026 and 2025, $140,709 and $212,709 of film costs were amortized respectively, and reported in the cost of revenues in the Company’s condensed consolidated statement of operations and comprehensive income (loss).

The Company recognized an impairment of $69,149 and $0 for the three months ended March 31, 2026 and 2025, 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 of film assets on the condensed 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, 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 three months ended March 31, 2026 and 2025, the Company capitalized $170,639 and $1,220,743, respectively, of software development costs under ASC 985 for various titles, which are included in intangible assets, net, in the Company’s condensed consolidated balance sheets.

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. Our 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 plus 0.50%. The fair value of the Company’s term loan note has a floating rate that approximates the Wall Street Journal Prime Rate plus 0.50% 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. 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 March 31, 2026 and December 31, 2025.

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 March 31, 2026 and December 31, 2025:

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. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our consolidated reporting results and financial positions.

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the condensed 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. At March 31, 2026, the Company has accrued uncertain tax position liability of $625,354, which is included within accrued expenses on the accompanying condensed consolidated balance sheets. At December 31, 2025, $157,247 is included in accrued expenses and other liabilities, and $468,106 is included in the long-term accrued expenses. The Company accrues and recognizes interest and penalties related to unrecognized tax benefits in operating expenses.

Concentration of Credit Risk, Significant Customers and Vendors

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 March 31, 2026 and December 31, 2025, the Company had deposits of $14,255,274 and $8,619,889, 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 condensed 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 our 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 March 31, 2026 and December 31, 2025, who accounted for approximately 71% and 73% of consolidated gross receivables, respectively. Among the two customers as of March 31, 2026, one accounted for 53% and another accounted for 18%, of the consolidated gross receivables. Among the two customers as of December 31, 2025, one accounted for 56% and another accounted for 17%, of the consolidated gross receivables outstanding. The Company has two customers in the three months ended March 31, 2026 and four customers as of March 31, 2025, that accounted for 62% and 11% and 44%,14%,14% and 12% 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 March 31, 2026 and December 31, 2025, the Company had one vendor who accounted for approximately 33% and 41% of consolidated gross payables, respectively. The loss of this vendor could have a significant impact on the Company’s financial performance.

The Company had one vendor, SDE, a related party, that accounted for 49% and 47% of the Company’s combined cost of revenues and operating expenses during the three months ended March 31, 2026 and 2025, respectively. Amounts payable to SDE are included in accounts payable – related party in the condensed consolidated balance sheets as of March 31, 2026 and December 31, 2025, respectively. The loss of SDE as a vendor would significantly and adversely affect the Company’s core business.

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 adopted ASU 2024-04 on January 1, 2026. Adoption did not have a material impact on the Company’s financial statements and disclosures.

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 effective 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 $35,254 and $32,762 for the three months ended March 31, 2026 and 2025, 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 zero restricted stock units (“Restricted Stock Units” or “restricted stock units”) during the three months March 31, 2026 to its non-employee directors and did not grant any restricted stock units during the three months ended March 31, 2025. The fair value of Restricted Stock Units is determined based on the quoted market price of our 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 our 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 March 31, 2026 and December 31, 2025, there were 4,185,390 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 during the initial public offering and grants restricted stock units under the plan to directors over certain periods. 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 condensed consolidated balance sheets. Changes in the estimated fair value of the Warrants are recognized as a non-cash gain or loss on the statements of operations. 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 March 31, 2026.

A summary of our outstanding warrants as of March 31, 2026 and December 31, 2025 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 condensed consolidated balance sheets under treasury stock. No treasury stock was sold during the three months ended March 31, 2026 and 2025. As of March 31, 2026 and 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.

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 – Income (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 three months ended March 31, 2026 and 2025 were as follows:

Geography

The Company attributes net revenue to geographic regions based on customer location. Net revenue by geographic region for the three months ended March 31, 2026 and 2025 were as follows:

No individual country accounted for more than 10% of total revenue.

Platform

Net revenue by platform for the three months ended March 31, 2026 and 2025 were as follows:

Our net revenues through our current period top four platform providers as a proportion of our total net revenue for the three months ended March 31, 2026 and 2025 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 three months ended March 31, 2026 and 2025 was as follows:

Deferred Revenue

The Company records deferred revenue when payments are due or received in advance of the fulfilment of our associated performance obligations; reductions to deferred revenue balance were primarily due to the recognition of revenue upon fulfilment of its performance obligations, which were in the ordinary course of business. As of March 31, 2026, the balance of deferred revenue was $31.7 million, of which $30.6 million is due to non-refundable payments. The Company is expecting to recognize $24.0 million of the non-refundable payments in the next 12 to 60 months through the platform releases of certain DLCs. The remaining $3.7 million of current non-refundable deferred revenues and $2.9 million of long term non-refundable deferred revenue will be recognized as revenue primarily on a straight-line basis over the next 12 and 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 March 31, 2026 and 2025 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 as of March 31, 2026 and December 31, 2025. The amounts of restricted cash and cash equivalents held as of March 31, 2026, 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 March 31, 2026 and 2025:

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. During the three months ended March 31, 2026 and 2025, the Company made cash payments to SDE in the amount of $10.0 million and $9.4 million, respectively, and anticipates continuing to make cash payments to SDE in future years. As of March 31, 2026 and December 31, 2025, 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 three months ended March 31, 2026, the Company made $0.5 million in prepaid royalty payments related toARK: Survival AscendedDLC’s which have not yet been released. During the year ended December 31, 2025, the Company made $1.6 million in prepaid royalty payments related to theARK: Survival AscendedDLC’s which have not yet been released. Prepaid expenses — related party consisted of the following as of March 31, 2026 and December 31, 2025:

The amount classified as short-term, as of March 31, 2026 and December 31, 2025, 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 March 31, 2026 and December 31, 2025:

NOTE 8 –PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following as of March 31, 2026 and December 31, 2025:

Depreciation expense was $12,734 and $67,904 for the three months ended March 31, 2026, and 2025, respectively. The Company didnot have any disposals in the three months ended March 31, 2026 or 2025.

NOTE 9 –INTANGIBLE ASSETS

Intangible assets consist of game licenses, game software underlying intellectual property rights, internally developed software, 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 condensed consolidated balance sheets as of March 31, 2026 and December 31, 2025:

Amortization expense was $400,442 and $35,516 for the three months ended March 31, 2026 and 2025, respectively. These amounts are included in cost of revenues in the accompanying condensed consolidated statements of operations and comprehensive income (loss). The weighted average remaining useful life for which amortization expense will be recognized is 3.4 years as of March 31, 2026. The Company has capitalized $0.2 million in development costs for titles that have reached technological feasibility but have not yet launched, and as such, are included in the thereafter amount in the table below. 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 $0.5 million in milestone payments under the July contract, in 2026. 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 March 31, 2026 and 2025, the development fee has been capitalized in software under intangible assets, net in the Company’s condensed consolidated balance sheets.

As of March 31, 2026, 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 the research and development ofFor the Stars. 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 three months ended March 31, 2026 and 2025, the Company incurred $19,842 and $35,829, respectively as license costs due to Suzhou Snail that are included in cost of revenues. During the three months ended March 31, 2026 and 2025, respectively, the Company incurred $1,223,000 and$1,521,800 of research and development costs from Suzhou Snail; and made $1,442,100 and $1,724,200 in payments to Suzhou Snail for royalties and research and development costs. The royalty payments are included in costs of revenues and research and development costs are included in operating expenses in the condensed consolidated statements of operations and comprehensive income (loss) or capitalized as intangible assets, net in the condensed consolidated balance sheets. Accounts payable – related parties consisted of the following as of March 31, 2026 and December 31, 2025:

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 $108,252 and $107,759, as of March 31, 2026 and December 31, 2025, respectively. The Company earned $493 in interest on the related party loans receivable during the three months ended March 31, 2026 and 2025.

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

Total interest expense for the above debt and revolver loan amounted to $201,308 and $80,746 for the three months ended March 31, 2026 and 2025, respectively. Amortization of loan origination expenses and loan discounts of $2,949 and $2,611 are included as part of interest expense for the three months ended March 31, 2026 and 2025, respectively. The Company has a weighted average interest rate of 5.7% and 5.7% on its short-term obligations as of March 31, 2026 and December 31, 2025, respectively. The Company was in compliance with its financial covenants related to the 2021 Revolving Loan, 2021 Promissory Note and 2025 Term Loan for the trailing twelve months ended March 31, 2026, 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 March 31, 2026:

Convertible Debt

As of March 31, 2026, 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 March 31, 2026. The February 2025 Convertible Notes, October 2025 Convertible Notes and November 2025 Convertible notes had net carrying amounts, or fair values, of $0, $1,522,928 and $859,327 as of March 31, 2026, 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 March 31, 2026 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. For the three months ended March 31, 2026, the change in fair value was 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 March 31, 2026 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. For the three months ended March 31, 2026, the change in fair value was as follows:

The loss in change in fair value of $57,790 is reported in other income in our condensed consolidated statement of operations and comprehensive income (loss) and ($3,225) is recorded in other comprehensive income (loss) due to the change in credit spread from issuance to March 31, 2026. 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 (34.0%) 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 (33.0%). 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 as of March 31, 2026 and 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 March 31, 2026 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. For the three months ended March 31, 2026, the change in fair value was as follows:

The loss in change in fair value of $39,007 is reported in other income in our condensed consolidated statement of operations and comprehensive income (loss) and ($2,085) is recorded in other comprehensive income (loss) due to the change in credit spread from issuance to March 31, 2026. The portion of the total change in the fair value of the November 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 (34.0%) 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 (33.0%). 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 as of March 31, 2026 and December 31, 2025 are as follows:

NOTE 13 –INCOME TAXES

The Company is required to calculate its interim income tax provision using the estimated annual effective tax rate (“AETR”) method which involves the use of forecasted information, adjusted for the effect of discrete items arising in that quarter. Under the AETR method, the income tax provision is calculated by applying the estimated AETR for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding discrete items) for the reporting period. This could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings or losses versus forecasted earnings for the full fiscal year. In each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual tax rate changes, a cumulative adjustment is made in that quarter.

The Company recognized an income tax expense of $106,824 and income tax benefit of $1,470,830 for the three months ended March 31, 2026 and 2025, respectively. For the three months ended March 31, 2026 and 2025, the Company’s effective tax rate was 5% and 43%, respectively. For the three months ended March 31, 2026, the Company’s effective tax rate differed from the federal statutory rate of 21% primarily due to the permanent differences, state taxes, and change in valuation allowance. For the three months ended March 31, 2025, the Company’s effective tax rate differed from the federal statutory rate of 21% primarily due to permanent differences, state taxes, global intangible low-taxed income related to the Company’s foreign subsidiary, and the ratio of forecasted permanent book-tax differences compared to forecasted pre-tax income used in the AETR method is higher than expected to be at year-end, elevating the interim effective tax rate.

The Company reassessed the realizability of its net deferred tax assets as of March 31, 2026. After considering all available positive and negative evidence—including cumulative losses in recent periods and updated projections of future taxable income—the Company concluded that it remains more likely than not that its net deferred tax assets will not be realized. Accordingly, the full valuation allowance recorded continues to be maintained.

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 March 31, 2026 and December 31, 2025, the Company’s net operating lease right-of-use assets amounted to $4,581,907 and $4,722,366, respectively. The Company had variable lease payments of approximately $2,624 and $38,277 during the three months ended March 31, 2026 and 2025, respectively, which consisted primarily of common area maintenance charges and administrative fees.

Operating lease costs included in the general and administrative expenses in our condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2026 and 2025, are as follows:

Supplemental information related to operating leases for lease liabilities as of March 31, 2026 and 2025, is as follows:

Future undiscounted lease payments for operating leases and a reconciliation of these payments to our operating lease liabilities as of March 31, 2026 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. In addition, the Company may receive notifications alleging infringement of patent or other intellectual property rights. The Company has elected to expense legal costs associated with legal contingencies as incurred.

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 trial date is 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 agrees 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 has filed for bankruptcy and the Company does not expect to recover its costs from INDIEV. 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 $4.1 million as of March 31, 2026. 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 $1.5 million untilARK IIreleases. Our commitments assume satisfactory performance by our related party software developer. See Note 10 –Accounts Payable – Related Party and Note 19 –Subsequent Eventsfor more information.

NOTE 16 –INCOME (LOSS) PER SHARE

The Company uses the two class method to compute its basic loss per share (“Basic EPS”) and diluted 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 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 toten 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.

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 condensed 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 condensed 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 1,216,185. The fair value of the warrants at issuance has been estimated using a Black-Scholes pricing model as of March 31, 2026 and December 31, 2025 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. The measured fair value may be uncertain due to the use of unobservable inputs. At March 31, 2026 and December 31, 2025, the fair value of the warrant liability was $301,679 and $632,876, respectively, and was included in the accrued expenses and other liabilities in the Company’s condensed consolidated balance sheets. The changes in fair value during the three months ended March 31, 2026 and 2025, respectively, amounted to an income of $331,197 and $615,943 included in other income in our condensed consolidated statements of operations and comprehensive income (loss).

During the three months ended March 31, 2026, there have been no such exercises. During the three months ended March 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 the exercised warrants. The loss is included in other income in our condensed consolidated statements of operations and comprehensive loss. As of March 31, 2026,391,664 of the convertible notes warrants have been exercised.

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 three months ended March 31, 2026 and 2025, 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.

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.

We have registered shares for potential issuance on exercise of the warrants, or drawing of the equity line, on a Registration Statement on Form S-1 that was declared effective on October 30, 2023. As of December 31, 2025, we have not sold any Class A common stock under the Equity Line Purchase Agreement and the agreement has expired.

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 condensed 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 March 31, 2026 and December 31, 2025 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 March 31, 2026 and December 31, 2025, the fair value of the warrant liability was $64,214 and $143,675 respectively, and included in the accrued expenses and other liabilities in the Company’s condensed consolidated balance sheets. The changes in fair value during the three months ended March 31, 2026 and 2025, amounted to income of $79,461 and $151,661, respectively, and is included in other income in our condensed consolidated statements of operations and comprehensive income (loss).

As of March 31, 2026,33,333 warrants have been exercised.

The Equity Line 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 three months ended March 31, 2026 and 2025, was as follows:

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. There was no RSU units’ activity with directors for the three months ended March 31, 2025. The following table summarizes our RSU units’ activity with directors for the three months ended March 31, 2026:

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 three months ended March 31, 2026 and 2025.

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 March 31, 2026,1,350,275 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 three months ended March 31, 2026 and 2025.

Stock-Based Compensation Expense

During the three months ended March 31, 2026, the Company determined that it is probable that the Company will not meet the performance-based milestones required by the RSU’s granted to employees. During the three months ended March 31, 2025, the Company determined it is probable it will meet the performance-based milestones required by said RSU’s, then in the three months ended June 30, 2025, the milestone was reverted back to not probable.

Stock-based compensation expense resulting from RSUs and PSUs of $42,091 and $788,177 are recorded under general and administrative expenses included in our condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2026 and 2025, respectively. Stock-based compensation expense resulting from PSUs of $2,789 and $55,442 are recorded under research and development expenses included in our condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2026 and 2025, respectively.

During the three months ended March 31, 2026 and 2025, the Company recognized approximately $9,775 of deferred income tax expense, and $175,291 of deferred income tax expense, respectively, related to our stock-based compensation expense.

As of March 31, 2026, our total unrecognized compensation cost related to RSUs and PSUs was approximately $0.6 million and is expected to be recognized over a weighted-average service period of 1.1 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 condensed consolidated balance sheets as total assets. The table below presents segment revenue, operating profit and significant expenses for the three months ended March 31, 2026 and 2025:

Depreciation expense is consistent with those presented in the condensed 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, 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 –SUBSEQUENT EVENTS