Snail(SNAL) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Unaudited condensed consolidated financial statements reveal a significant net loss, decreased total assets, and increased total liabilities Condensed Consolidated Balance Sheets (June 30, 2025 vs. December 31, 2024) | Metric | June 30, 2025 | December 31, 2024 | | :-------------------------------- | :------------ | :---------------- | | Total current assets | $38,811,455 | $31,246,538 | | Total assets | $57,957,425 | $62,193,364 | | Total current liabilities | $55,160,840 | $36,181,080 | | Total liabilities | $71,449,089 | $58,024,202 | | Total stockholders' equity (deficit) | $(13,491,664) | $4,169,162 | Condensed Consolidated Statements of Operations (Three Months Ended June 30) | Metric | 2025 | 2024 | | :-------------------------------- | :----------- | :----------- | | Revenues, net | $22,185,750 | $21,606,650 | | Gross profit | $6,954,745 | $8,102,476 | | Income (loss) from operations | $(1,817,434) | $2,670,962 | | Net income (loss) | $(16,562,706) | $2,254,616 | | Basic EPS | $(0.44) | $0.06 | Condensed Consolidated Statements of Operations (Six Months Ended June 30) | Metric | 2025 | 2024 | | :-------------------------------- | :----------- | :----------- | | Revenues, net | $42,296,622 | $35,722,379 | | Gross profit | $12,802,272 | $10,176,507 | | Income (loss) from operations | $(5,918,273) | $463,063 | | Net income (loss) | $(18,509,671) | $474,158 | | Basic EPS | $(0.50) | $0.01 | Condensed Consolidated Statements of Cash Flows (Six Months Ended June 30) | Metric | 2025 | 2024 | | :-------------------------------- | :----------- | :----------- | | Net cash (used in) provided by operating activities | $(2,413,125) | $6,983,748 | | Net cash used in investing activities | $(3,026,645) | $0 | | Net cash provided by (used in) financing activities | $5,977,229 | $(6,657,130) | | Net increase in cash and cash equivalents, and restricted cash and cash equivalents | $601,482 | $298,274 | Snail, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements Detailed notes to financial statements cover accounting policies, revenue, fair value, related-party transactions, and deferred tax assets NOTE 1 – PRESENTATION AND NATURE OF OPERATIONS - Snail, Inc. was incorporated in Delaware in January 2022, formed for an IPO to carry on the business of Snail Games USA Inc., which develops, markets, publishes, and distributes games across various platforms[24] - The condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim reporting, with certain disclosures condensed or omitted if they duplicate annual report information[25] Consolidated Subsidiaries and Equity Ownership | Subsidiary Name | Equity % Owned | | :------------------------ | :------------- | | Snail Games USA Inc. | 100% | | Snail Innovation Institute | 70% | | Frostkeep Studios, Inc. | 100% | | Eminence Corp | 100% | | Wandering Wizard, LLC | 100% | | Donkey Crew, LLC | 99% | | Interactive Films, LLC | 100% | | Project AWK Productions, LLC | 100% | | BTBX.IO, LLC | 70% | | Matrioshka Games, LLC | 100% | NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Revenue is generated from digital and physical game sales, downloadable content (DLC), and in-app purchases of virtual goods. Revenue recognition occurs at a point in time for product delivery or over time for consumable/durable virtual items and technical support[34][36][38] - The Company acts as an agent for sales via platforms like Xbox Live, PlayStation Network, and Steam, reporting revenue on a net basis. For Apple App Store and Google Play Store sales, it acts as principal, reporting gross revenue[41] Cost of Revenues (Three Months Ended June 30) | Category | 2025 | 2024 | | :-------------------------------- | :----------- | :----------- | | Software license royalties – related parties | $5,754,679 | $4,658,272 | | Licensing fees – related party | $6,000,000 | $6,000,000 | | Merchant fees | $484,461 | $220,051 | | Engine fees | $945,877 | $1,340,897 | | Internet, server and data center | $1,467,078 | $1,221,318 | | Total | $15,231,005 | $13,504,174 | Cost of Revenues (Six Months Ended June 30) | Category | 2025 | 2024 | | :-------------------------------- | :----------- | :----------- | | Software license royalties – related parties | $11,028,407 | $7,932,292 | | Licensing fees – related party | $12,000,000 | $12,000,000 | | Merchant fees | $1,039,156 | $441,500 | | Engine fees | $1,758,826 | $2,302,338 | | Internet, server and data center | $2,763,016 | $2,621,325 | | Total | $29,494,350 | $25,545,872 | - The Company capitalized $2.6 million in software development costs under ASC 985 for various titles during the six months ended June 30, 2025, compared to none in the prior year[62] Fair Value Measurements (Level 3 Inputs) | Instrument | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Convertible notes | $2,415,050 | $0 | | Convertible notes warrants | $1,066,542 | $1,448,109 | | Equity line of credit warrants | $259,075 | $292,004 | | Total | $3,740,667 | $1,740,113 | - The Company has significant customer concentration, with four customers accounting for approximately 91% of gross receivables and 44%, 26%, 15%, and 6% individually as of June 30, 2025[78] - SDE, a related party, is a significant vendor, accounting for 56% and 50% of combined cost of revenues and operating expenses for the three months ended June 30, 2025 and 2024, respectively[80] Outstanding Warrants as of June 30, 2025 | Type | Number Outstanding | Exercise Price | Class | Expiration Date | | :-------------------------- | :----------------- | :------------- | :------ | :-------------- | | Equity line of credit warrants | 334,314 | $1.50 | Liability | August 24, 2028 | | Convertible notes warrants | 1,216,185 | $0.84 | Liability | November 24, 2028 | | Underwriters warrants | 120,000 | $6.25 | Equity | November 9, 2025 | | Total warrants | 1,670,499 | | | | - As of June 30, 2025, 1,350,275 shares of Class A common stock were repurchased under the Share Repurchase Program for approximately $3.7 million, with $1.3 million remaining available[95] NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS Net Revenue by Timing of Recognition (Three Months Ended June 30) | Timing | 2025 | 2024 | | :----------- | :----------- | :----------- | | Over time | $1,556,192 | $1,165,995 | | Point in time | $20,629,558 | $20,440,655 | | Total | $22,185,750 | $21,606,650 | Net Revenue by Timing of Recognition (Six Months Ended June 30) | Timing | 2025 | 2024 | | :----------- | :----------- | :----------- | | Over time | $3,374,000 | $2,221,659 | | Point in time | $38,922,622 | $33,500,720 | | Total | $42,296,622 | $35,722,379 | Net Revenue by Geographic Region (Six Months Ended June 30) | Region | 2025 | 2024 | | :------------- | :----------- | :----------- | | United States | $36,818,303 | $30,811,457 | | International | $5,478,319 | $4,910,922 | | Total | $42,296,622 | $35,722,379 | Net Revenue by Platform (Six Months Ended June 30) | Platform | 2025 | 2024 | | :------- | :----------- | :----------- | | Console | $17,797,060 | $14,338,122 | | PC | $19,038,686 | $16,922,466 | | Mobile | $4,384,328 | $2,095,406 | | Other | $1,076,548 | $2,366,385 | | Total | $42,296,622 | $35,722,379 | Deferred Revenue Activity (Six Months Ended June 30) | Metric | 2025 | 2024 | | :------------------------------------------ | :----------- | :----------- | | Deferred revenue, beginning balance | $25,467,447 | $34,316,706 | | Revenue recognized | $(1,472,534) | $(9,607,237) | | Revenue deferred | $8,547,580 | $15,608,213 | | Deferred revenue, ending balance | $32,542,493 | $40,317,682 | | Less: current portion | $(16,601,595) | $(21,451,307) | | Deferred revenue, long term | $15,940,898 | $18,866,375 | NOTE 4 – CASH AND CASH EQUIVALENTS, AND RESTRICTED CASH AND CASH EQUIVALENTS Cash and Cash Equivalents (June 30) | Category | 2025 | 2024 | | :------------------------------------------ | :----------- | :----------- | | Cash and cash equivalents | $7,905,426 | $15,494,156 | | Restricted cash and cash equivalents | $935,000 | $1,118,437 | | Total | $8,840,426 | $16,612,593 | - Restricted cash and cash equivalents of $935,000 as of June 30, 2025, are held to secure a standby letter of credit with landlords[106] NOTE 5 – ACCOUNTS RECEIVABLE (PAYABLE) – RELATED PARTY - The Company has an offset agreement with SDE (a related party) to offset $0.5 million per month ($6.0 million annually) against payables for royalties, internet, server, and datacenter costs[107] Net Accounts (Payable) Receivable - Related Party (June 30) | Category | 2025 | 2024 | | :------------------------------------------ | :----------- | :----------- | | Accounts receivable – related party | $4,500,592 | $7,500,592 | | Less: accounts payable – related party | $(5,887,468) | $(3,663,726) | | Net accounts (payable) receivable - related party | $(1,386,876) | $3,836,866 | | Less: accounts receivable – related party, net of current portion | $0 | $(1,500,592) | | Net accounts (payable) receivable - related party, current | $(1,386,876) | $2,336,274 | NOTE 6 – PREPAID EXPENSES - RELATED PARTY - The Company made $1.7 million in prepaid royalty payments for ARK: Survival Ascended DLCs during the six months ended June 30, 2025, which have not yet been released[110] Prepaid Expenses - Related Party (June 30) | Category | 2025 | 2024 | | :------------------------------------------ | :----------- | :----------- | | Prepaid royalties | $6,109,122 | $4,378,594 | | Prepaid licenses | $7,500,000 | $7,500,000 | | Other prepaids | $19,429 | $21,291 | | Total prepaid expenses - related party | $13,628,551 | $11,899,885 | | Less: short-term portion | $(5,658,551) | $(2,521,291) | | Total prepaid expenses - related party, long-term | $7,970,000 | $9,378,594 | NOTE 7 – PREPAID EXPENSES AND OTHER CURRENT ASSETS - In October 2024, the Company entered a collaborative arrangement for a new title, making $0.5 million in prepaid royalty payments capitalized in other prepaids[111] Prepaid Expenses and Other Current Assets (June 30) | Category | 2025 | 2024 | | :------------------------------------------ | :----------- | :----------- | | Other receivables | $250,442 | $549,103 | | Deferred offering costs | $105,411 | $105,411 | | Other prepaids | $681,495 | $550,270 | | Other current assets | $270,877 | $641,240 | | Total | $1,308,225 | $1,846,024 | NOTE 8 – PROPERTY AND EQUIPMENT, NET Property and Equipment, Net (June 30) | Category | 2025 | 2024 | | :------------------------------------------ | :----------- | :----------- | | Property and equipment | $9,521,752 | $9,521,752 | | Accumulated depreciation | $(5,279,066) | $(5,143,400) | | Property and equipment, net | $4,242,686 | $4,378,352 | Depreciation Expense (Six Months Ended June 30) | Period | Amount | | :------------------------------------------ | :----------- | | Six months ended June 30, 2025 | $135,665 | | Six months ended June 30, 2024 | $162,892 | NOTE 9 – INTANGIBLE ASSETS Intangible Assets, Net (June 30, 2025) | Category | Gross Carrying Amount | Accumulated Amortization | Net Book Value | | :------------------------------------------ | :-------------------- | :----------------------- | :------------- | | Software and license rights from related parties | $136,665,000 | $(136,665,000) | $0 | | License rights | $5,242,760 | $(3,057,395) | $2,185,365 | | Software | $1,139,232 | $(80,784) | $1,058,448 | | In-progress patent | $270,886 | $0 | $270,886 | | Total | $143,328,623 | $(139,813,924) | $3,514,699 | Amortization Expense (Six Months Ended June 30) | Period | Amount | | :------------------------------------------ | :----------- | | Six months ended June 30, 2025 | $79,424 | | Six months ended June 30, 2024 | $20,864 | - The weighted average remaining useful life for amortization of intangible assets is 4.5 years as of June 30, 2025[114] NOTE 10 – ACCOUNTS PAYABLE — RELATED PARTIES - The Company entered into a software development, publishing, and distribution agreement with Suzhou Snail in July 2024, involving $4.5 million in milestone payments and ongoing royalties[116] - In December 2024, an agreement with Suzhou Snail for SaltyTV app development resulted in a $290,000 development fee capitalized as an intangible asset[116] Accounts Payable – Related Parties (June 30) | Category | 2025 | 2024 | | :------------------------------------------ | :----------- | :----------- | | Accounts payable - Suzhou | $52,362,069 | $52,998,084 | | Less: accounts receivable - Suzhou | $(37,614,912) | $(37,614,913) | | Accounts payable – SDE | $1,386,876 | $0 | | Total accounts payable – related parties | $16,134,033 | $15,383,171 | NOTE 11 – LOAN AND INTEREST RECEIVABLE — RELATED PARTY - The Company has a loan and interest receivable from a wholly-owned subsidiary of Suzhou Snail, totaling $106,751 as of June 30, 2025[119] Interest Income - Related Party Loans Receivable (Six Months Ended June 30) | Period | Amount | | :------------------------------------------ | :----------- | | Six months ended June 30, 2025 | $992 | | Six months ended June 30, 2024 | $997 | NOTE 12 – REVOLVING LOAN, SHORT TERM NOTES AND LONG - TERM DEBT - The Company was not in compliance with debt covenants for its 2021 Revolving Loan, 2021 Promissory Note, and 2025 Term Loan for the trailing twelve months ended June 30, 2025, but received waivers from the lender[122] - Due to probable future covenant failures, the long-term portions of the promissory note, revolving loan, and term loan have been classified as current liabilities[122] Total Debt (June 30) | Debt Type | 2025 | 2024 | | :------------------------------------------ | :----------- | :----------- | | 2021 Revolving Loan | $3,000,000 | $3,000,000 | | 2021 Promissory Note | $2,679,531 | $2,722,549 | | 2025 Convertible Notes | $2,415,050 | $0 | | 2025 Term Loan | $3,500,000 | $0 | | Total debt | $11,594,581 | $5,722,549 | Interest Expense (Six Months Ended June 30) | Period | Amount | | :------------------------------------------ | :----------- | | Six months ended June 30, 2025 | $229,106 | | Six months ended June 30, 2024 | $538,259 | - The 2025 Convertible Notes, issued in February 2025 for $3.3 million principal, are accounted for at fair value, with a fair value adjustment of $53,803 recognized during the six months ended June 30, 2025[133][136] NOTE 13 – INCOME TAXES Income Tax Expense (Six Months Ended June 30) | Period | Amount | | :------------------------------------------ | :----------- | | Six months ended June 30, 2025 | $12,397,768 | | Six months ended June 30, 2024 | $111,562 | - The effective tax rate for the six months ended June 30, 2025, was 203%, primarily due to a full valuation allowance recorded against U.S. net deferred tax assets[141][142] - The Company recorded a full valuation allowance on the opening balance of $10,815,239 for U.S. net deferred tax assets due to cumulative pre-tax losses and revised profitability projections[142] NOTE 14 – OPERATING LEASE RIGHT-OF-USE ASSETS Operating Lease Right-of-Use Assets, Net (June 30) | Category | 2025 | 2024 | | :------------------------------------------ | :----------- | :----------- | | Net operating lease right-of-use assets | $676,918 | $1,279,330 | Operating Lease Costs (Six Months Ended June 30) | Period | Amount | | :------------------------------------------ | :----------- | | Six months ended June 30, 2025 | $848,780 | | Six months ended June 30, 2024 | $796,512 | NOTE 15 – COMMITMENTS AND CONTINGENCIES - The Company settled a lawsuit with Angela Game in September 2023, involving an upfront payment and ongoing payments[151] - A lawsuit filed by Bel Air Soto, LLC against Snail Games USA Inc. and INDIEV (an affiliate) for breach of contract seeks damages over $3 million. The Company denies allegations and believes the likelihood of a material loss is remote[152][154] - Aggregate development commitments to related party developers total $3.5 million as of June 30, 2025, in addition to a fixed monthly license fee of $2.0 million to SDE for ARK franchise publishing rights[155] NOTE 16 – INCOME (LOSS) PER SHARE Basic Earnings (Loss) Per Share (Six Months Ended June 30) | Metric | 2025 | 2024 | | :------------------------------------------ | :----------- | :----------- | | Net income (loss) attributable to Class A common stockholders | $(4,210,496) | $103,656 | | Net income (loss) attributable to Class B common stockholders | $(14,297,937) | $373,166 | | Total net income (loss) attributable to Snail Inc. | $(18,508,433) | $476,822 | | Class A and B basic earnings (loss) per share | $(0.50) | $0.01 | Diluted Earnings (Loss) Per Share (Six Months Ended June 30) | Metric | 2025 | 2024 | | :------------------------------------------ | :----------- | :----------- | | Diluted earnings (loss) per Class A share | $(0.50) | $0.01 | | Diluted earnings (loss) per Class B share | $(0.50) | $0.01 | - For the three and six months ended June 30, 2025, convertible notes were excluded from diluted EPS calculation due to anti-dilutive effects[158] NOTE 17 – EQUITY - The Company has two classes of common stock: Class A (one vote) and Class B (ten votes), with Class B convertible to Class A upon transfer[159] - Convertible Note Warrants and Equity Line Warrants are classified as liabilities and measured at fair value due to adjustment provisions and potential partial cash settlement[164][176][178] Fair Value of Convertible Note Warrants (June 30) | Period | Value | | :------------------------------------------ | :----------- | | Fair value at December 31, 2024 | $1,448,109 | | Change in fair value (six months ended June 30, 2025) | $(487,857) | | Exercises (six months ended June 30, 2025) | $(323,113) | | Fair value at June 30, 2025 | $1,066,542 | Fair Value of Equity Line Warrants (June 30) | Period | Value | | :------------------------------------------ | :----------- | | Fair value at December 31, 2024 | $292,004 | | Change in fair value (six months ended June 30, 2025) | $(32,929) | | Fair value at June 30, 2025 | $259,075 | Stock-Based Compensation Expense (Six Months Ended June 30) | Category | 2025 | 2024 | | :------------------------------------------ | :----------- | :----------- | | General and administrative expenses | $257,642 | $(848,685) | | Research and development expenses | $23,246 | $(63,208) | | Total unrecognized compensation cost (as of June 30, 2025) | $1.7 million | | NOTE 18 – OPERATING SEGMENTS - The Company operates as a single operating and reportable segment, with the Founder, Co-Chief Executive Officer, Chief Strategy Officer, and Chairman, Mr. Hai Shi, serving as the Chief Operating Decision Maker (CODM)[195] Segment Revenue and Operating Profit (Six Months Ended June 30) | Metric | 2025 | 2024 | | :------------------------------------------ | :----------- | :----------- | | Revenues, net | $42,296,622 | $35,722,379 | | Gross profit | $12,802,272 | $10,176,507 | | (Loss) income from operations | $(5,918,273) | $463,063 | | Net (loss) income | $(18,509,671) | $474,158 | NOTE 19 – BUSINESS COMBINATION - On May 2, 2025, the Company acquired the remaining 66.0% equity interest in Matrioshka Games LLC, increasing ownership to 100% and obtaining a controlling financial interest[196] - The acquisition resulted in a gain on remeasurement of previously held equity interest of $7,857 and is expected to enhance human capital and software development capabilities[196] NOTE 20 – SUBSEQUENT EVENTS - The Company is exploring a strategic digital asset initiative, including developing a proprietary stablecoin, and has set up a legal entity, Snail Coins, LLC[197] - Federal income tax refunds of $3.1 million and $0.6 million were received from the IRS for the 2022 and 2017 tax years, respectively[197] - In August 2025, the Company entered into two new agreements with Suzhou Snail for quality control services ($60,000 quarterly) and management of the SaltyTV application ($180,000 quarterly)[197] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and operations, focusing on ARK franchise revenue, strategic investments, recent developments, and liquidity Overview - The ARK franchise is the primary revenue driver, contributing 90.1% and 90.8% of revenues for the three and six months ended June 30, 2025, respectively[199] Net Revenue and Net Income (Loss) | Period | Net Revenue | Net Income (Loss) | | :------------------------------------------ | :----------- | :---------------- | | Three months ended June 30, 2025 | $22.2 million | $(16.6) million | | Three months ended June 30, 2024 | $21.6 million | $2.3 million | | Six months ended June 30, 2025 | $42.3 million | $(18.5) million | | Six months ended June 30, 2024 | $35.7 million | $0.5 million | - Daily Active Users (DAUs) for ARK: Survival Evolved and ARK: Survival Ascended averaged 242,000 for both the three and six months ended June 30, 2025, an increase from 218,241 and 213,691 in the prior year periods[199] Key Factors Affecting Our Business - The Company is investing in content strategy, expanding its gaming pipeline, developing media/eSports content, and growing its micro-influencer platform, NOIZ[202] - User base growth is driven by creating interactive and unique content, including DLCs, to enhance gameplay and retain players. The Company sold 2.1 million units in Q2 2025, up from 1.3 million in Q2 2024[203] - Continued investment in proprietary video game technology, including game engines, development tools, and advanced rendering, is crucial for competitive advantage and new product offerings[205] - Strategic relationships with developers like Studio Wildcard (for ARK franchise) and Suzhou Snail are vital for original content creation and ongoing game development support[208] - Reliance on third-party distribution platforms (e.g., Xbox Live, PlayStation Network, Steam) for nearly all revenue means platform policies and fees can significantly impact operations and financial performance[209] Recent Developments - Released ARK: Astraeos DLC for ARK: Survival Ascended in February 2025, selling over 480K units across platforms[211] - Announced ARK: Aquatica DLC and Lost Colony expansion for ARK: Survival Ascended, along with teaser trailers for two in-house developed projects: Nine Yin Sutra: Wushu and Nine Yin Sutra: Immortal[212] - ARK: Survival Ascended was added to PlayStation Plus, driving over 8 million installs and a healthy uplift in ASA DLC sales on PlayStation[214] - The Lost Colony Expansion Pass pre-sale exceeded expectations, selling over 160K units through June 30, 2025[215] - Released five indie games in Q2 2025 and expanded the short film mobile application, Salty TV, with 55 dramas and an MOU with Mega Matrix Inc. for joint development[216][217] - Announced exploration of a strategic digital asset initiative, including a proprietary stablecoin, to position the company as an early mover in digital entertainment[218] - Entered into an At The Market Offering Agreement (ATM Sales Agreement) on August 7, 2025, to sell up to $4.5 million in Class A Common Stock[220][221] Components of Results of Operations - Revenue is primarily from game sales through platforms, with recognition varying based on principal/agent determination (net for most platforms, gross for Apple/Google App Stores)[224] - Cost of revenues includes license royalties, merchant fees, engine fees, and server costs, expected to fluctuate proportionately with revenues[226] - General and administrative expenses are expected to increase due to public company administrative burdens and inflationary pressures[227] - Research and development costs are expected to increase with new content, games, and outsourced development[228] - Impairment of film assets reflects write-downs due to underperforming titles, changes in marketing strategies, or shifts in market demand[230] - The effective tax rate of (515%) for the six months ended June 30, 2025, significantly differed from the federal statutory rate of 21% due to a valuation allowance against U.S. net deferred tax assets[231] Results of Operations Comparison of the three months ended June 30, 2025 versus the three months ended June 30, 2024 Financial Performance (Three Months Ended June 30) | Metric | 2025 (in millions) | 2024 (in millions) | $ Change (in millions) | % Change | | :-------------------------- | :----------------- | :----------------- | :--------------------- | :--------- | | Revenues, net | $22.2 | $21.6 | $0.6 | 2.7% | | Cost of revenues | $15.2 | $13.5 | $1.7 | 12.8% | | Gross profit | $7.0 | $8.1 | $(1.1) | (14.2)% | | Total operating expenses | $8.8 | $5.5 | $3.3 | 61.5% | | Income (loss) from operations | $(1.8) | $2.6 | $(4.4) | (168.0)% | - Net revenues increased by $0.6 million (2.7%) due to increased ARK sales ($3.3M), ARK: Survival Ascended platform subscription ($3.0M), and ARK Mobile sales ($0.6M), partially offset by increased deferred revenues ($3.7M) and decreased Bellwright revenues ($3.0M)[233] - Cost of revenues increased by $1.7 million (12.8%) primarily due to higher software license royalties from related parties ($1.1M) and increased license and amortization costs ($0.4M)[234][235] - Operating expenses increased by $3.3 million (61.5%), driven by increases in general and administrative ($0.7M), research and development ($1.4M), advertising and marketing ($0.8M), and impairment of film assets ($0.4M)[236][237][238][239] Other Factors Affecting Net Loss (Three Months Ended June 30) Other Factors Affecting Net Loss (Three Months Ended June 30) | Metric | 2025 (in millions) | 2024 (in millions) | $ Change (in millions) | % Change | | :-------------------------- | :----------------- | :----------------- | :--------------------- | :--------- | | Interest income | $0.0 | $0.1 | $(0.1) | (50.4)% | | Interest expense | $(0.2) | $(0.1) | $(0.1) | (19.0)% | | Other income | $(0.7) | $0.2 | $(0.9) | (389.5)% | | Income tax provision | $(13.9) | $(0.6) | $(13.3) | (2,452.6)% | - Interest income decreased due to lower average cash deposits, while interest expense increased slightly due to a new term loan[241][242] - Other income decreased by $0.9 million, primarily due to revaluation losses on warrant liabilities ($0.5M) and convertible notes ($0.4M) in 2025[243] - Income tax provision increased significantly to $13.9 million (effective rate of -515%) due to the valuation allowance against U.S. net deferred tax assets[244] Comparison of the six months ended June 30, 2025 versus the six months ended June 30, 2024 Financial Performance (Six Months Ended June 30) | Metric | 2025 (in millions) | 2024 (in millions) | $ Change (in millions) | % Change | | :-------------------------- | :----------------- | :----------------- | :--------------------- | :--------- | | Revenues, net | $42.3 | $35.7 | $6.6 | 18.4% | | Cost of revenues | $29.5 | $25.5 | $4.0 | 15.5% | | Gross profit | $12.8 | $10.2 | $2.6 | 25.8% | | Total operating expenses | $18.7 | $9.7 | $9.0 | 92.7% | | Income (loss) from operations | $(5.9) | $0.5 | $(6.4) | (1,378.1)% | - Net revenues increased by $6.6 million (18.4%) driven by higher ARK sales ($6.1M), ARK: Survival Ascended platform subscription ($3.0M), and ARK: Ultimate Mobile Edition sales ($1.9M), partially offset by decreased Bellwright revenue ($2.2M) and a non-recurring Angela Games settlement in 2024 ($1.2M)[246] - Cost of revenues increased by $4.0 million (15.5%) due to increased software license royalties from related parties ($3.0M) and higher license and amortization costs ($0.7M)[247][248] - Operating expenses increased by $9.0 million (92.7%), primarily due to increases in general and administrative ($3.4M), research and development ($3.3M), advertising and marketing ($2.0M), and impairment of film assets ($0.4M)[249][250][251][252] Other Factors Affecting Net Income (Loss) (Six Months Ended June 30) Other Factors Affecting Net Income (Loss) (Six Months Ended June 30) | Metric | 2025 (in millions) | 2024 (in millions) | $ Change (in millions) | % Change | | :-------------------------- | :----------------- | :----------------- | :--------------------- | :--------- | | Interest income | $0.1 | $0.2 | $(0.1) | (62.0)% | | Interest expense | $(0.3) | $(0.5) | $0.2 | (52.0)% | | Other income | $0.1 | $0.5 | $(0.4) | (86.9)% | | Income tax provision | $(12.4) | $(0.1) | $(12.3) | 11,012.9% | - Interest income decreased due to lower average cash deposits, while interest expense decreased due to lower average debt[255][256] - Other income decreased by $0.4 million, primarily due to a $0.4 million expense from warrant liability revaluation in 2025, compared to litigation revenues in 2024[257] - Income tax provision increased to $12.4 million (effective rate of -203%) due to the valuation allowance against U.S. net deferred tax assets[258] Key Performance Metrics Units Sold (in millions) | Period | 2025 | 2024 | Change | % Change | | :------------------------------------------ | :--- | :--- | :----- | :------- | | Three months ended June 30 | 2.1 | 1.3 | 0.8 | 58.4% | | Six months ended June 30 | 3.7 | 2.4 | 1.3 | 52.4% | - Units sold increased due to higher sales of ARK: Survival Evolved and its DLCs (0.7M units in Q2, 0.8M units in H1) and ARK: Survival Ascended and its DLCs (0.3M units in Q2, 0.6M units in H1)[262][263] Bookings (in millions) | Period | 2025 | 2024 | $ Change | % Change | | :------------------------------------------ | :--- | :--- | :------- | :------- | | Three months ended June 30 | $27.1 | $22.9 | $4.2 | 18.5% | | Six months ended June 30 | $49.4 | $42.4 | $7.0 | 16.3% | - Bookings increased due to various sales promotions for ARK: Survival Evolved and the pre-sale release of ARK: Lost Colony in 2025[265][266] Non-GAAP Measures - EBITDA is presented as a non-GAAP measure to evaluate operating performance, excluding interest income/expense, income taxes, and depreciation[267][269] EBITDA (in millions) | Period | 2025 | 2024 | $ Change | % Change | | :------------------------------------------ | :---- | :--- | :------- | :-------- | | Three months ended June 30 | $(2.4) | $3.1 | $(5.5) | (182.9)% | | Six months ended June 30 | $(5.8) | $1.2 | $(7.0) | (616.3)% | - EBITDA decreased significantly for both periods, primarily due to an increase in net loss, partially offset by changes in income tax provision and interest income/expense[272][273] Liquidity and Capital Resources - Primary liquidity sources are cash flows from operations, with unrestricted cash at $7.9 million (June 30, 2025) and $7.3 million (December 31, 2024)[275] - The Company has a $3.0 million revolving loan (due June 2026), $3.3 million convertible notes (mature Feb 2026), and a $3.5 million term loan (mature June 2028)[278] - The Company was not in compliance with debt covenants for its 2021 Revolving Note, 2021 Promissory Note, and 2025 Term Loan but received waivers. All long-term portions of these debts are classified as current due to probable future non-compliance[278] - The Company has the right, but not the obligation, to sell up to $5.0 million in Class A common stock to an investor under an Equity Line Purchase Agreement until December 31, 2025[278] Net Cash Flows (in millions) | Activity | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Operating activities | $(2.4) | $7.0 | | Investing activities | $(3.0) | $0 | | Financing activities | $6.0 | $(6.7) | | Net increase in cash and cash equivalents | $0.6 | $0.3 | - Net cash used in operating activities increased by $9.4 million, primarily due to a $19.0 million decrease in net income/loss and a $21.2 million decrease in net accounts receivable[282][283] - Net cash used in investing activities was $3.0 million in H1 2025, including acquisitions of software, license rights, and capitalized R&D expenditures[287] - Net cash provided by financing activities was $6.0 million in H1 2025, driven by convertible notes issuance ($3.0M), new term loan ($3.5M), and warrant exercises ($0.2M), partially offset by debt repayments[288] Critical Accounting Policies and Estimates - Deferred revenue recognition and classification rely on estimates of release dates, technical support obligations, and timing of performance obligations, which can materially impact financial statements if estimates change[305] - Deferred income taxes depend on estimates of future taxable income and utilization of tax loss carryforwards, requiring significant judgment in assessing the realizability of deferred tax assets[307] Emerging Growth Company and Smaller Reporting Company Status - The Company is an 'emerging growth company' and 'smaller reporting company,' allowing it to take advantage of reduced reporting requirements and an extended transition period for new accounting standards[309][311][313] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Snail, Inc. is not required to provide quantitative and qualitative disclosures about market risk - The Company is exempt from providing quantitative and qualitative disclosures about market risk due to its status as a 'smaller reporting company'[314] Item 4. Controls and Procedures Management concluded disclosure controls were ineffective due to a material weakness in warrant fair value valuation - Disclosure controls and procedures were not effective as of June 30, 2025, due to a material weakness in internal control over financial reporting[316] - The material weakness relates to the failure to properly value the fair value of warrants connected to convertible notes and the equity line of credit[316] - Remediation plans include enhancing review controls over fair value valuations and hiring qualified external valuation specialists[317][319] PART II. OTHER INFORMATION Item 1. Legal Proceedings Legal proceedings information is detailed in Note 15 – Commitments and Contingencies-Litigation - Legal proceedings information is detailed in Note 15 – Commitments and Contingencies-Litigation[318] Item 1A. Risk Factors Significant risks include ARK franchise reliance, third-party platform dependence, internal control weaknesses, financing needs, and stablecoin initiative risks Risks Related to Our Business and Industry - The Company is highly dependent on the future success of its ARK franchise, which contributed 90.8% of net revenue for the six months ended June 30, 2025. Failure to publish new 'hit' titles or sequels could substantially decrease revenue and profits[320] - Reliance on license agreements, particularly with related parties like SDE for the ARK franchise, poses a risk if agreements are not renewed on favorable terms or if disputes arise[321][323] - The Company relies on third-party platforms (e.g., Xbox Live, PlayStation Network, Steam) for 94.6% of its revenue. Changes in platform policies, fees, or access could materially harm the business[324] - Business and operating results may be volatile during console transitions, as consumer purchases shift and development costs are incurred for both old and new platforms[328][329] - Changes in tax laws or rates, including potential tariffs on R&D operations outsourced to China and Europe, could affect the effective tax rate, increase costs, and disrupt technical development[330][331] - The Company identified a material weakness in internal control over financial reporting related to the fair value valuation of warrants, which could lead to inaccurate financial reporting[333][334] - Additional financing may be required, and the terms of subsequent financings (e.g., equity line, convertible notes, ATM offering) could be dilutive to stockholders or subject to limitations[337][338][340][341] - Defaulting on credit obligations could interrupt operations, accelerate debt, and seriously harm the business, especially given past non-compliance with debt covenants[343][344] Risks relating to Stablecoins - The strategic digital asset initiative, including a proprietary stablecoin, may require additional capital and subject the Company to various licensing requirements and significant compliance costs due to an evolving regulatory environment[347][349][350] - Negative publicity regarding stablecoins or the broader digital asset industry could significantly harm consumer confidence in the Company's proposed stablecoins, potentially delaying wider acceptance and use[351] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities occurred; details on the share repurchase program are provided - No unregistered sales of equity securities occurred during the six months ended June 30, 2025[352] - No share repurchases were settled in the three months ended June 30, 2025. As of June 30, 2025, 1,350,275 shares of Class A common stock were repurchased for approximately $3.7 million, with $1.3 million remaining available under the program[353] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities during the period - There were no defaults upon senior securities[355] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Mine safety disclosures are not applicable to the Company[356] Item 5. Other Information No director or officer adopted or terminated any Rule 10b5-1 trading arrangement during the quarter - No director or officer adopted or terminated any 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement' during the quarter ended June 30, 2025[357] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including the At The Market Offering Agreement and certifications - Key exhibits include the At The Market Offering Agreement (dated August 7, 2025), Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, and certifications from the Co-Chief Executive Officer and Chief Financial Officer[359] SIGNATURES The report is duly signed on behalf of Snail, Inc. by its Co-Chief Executive Officer and Chief Financial Officer - The report was signed by Xuedong Tian, Co-Chief Executive Officer, and Heidy Chow, Chief Financial Officer, on August 19, 2025[362]