SEC Filing — Snail, Inc

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-41556

SNAIL, INC.

(Exact name of registrant as specified in its charter)


Delaware		88-4146991
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

12049 Jefferson Blvd

Culver City, CA 90230

(Address of principal executive offices) (zip code)

+1 (310) 988-0643

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Class A Common Stock, par value $0.0001 per share	SNAL	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.


Class of Common Stock		Outstanding Shares as of May 10, 2023
Class A Common Stock, par value $0.0001 per share		7,901,145
Class B Common Stock, par value $0.0001 per share		28,748,580

Table of Contents

SNAIL, INC. AND SUBSIDIARIES

Form 10-Q

For the Quarter Ended March 31, 2023

Table of Contents


		Page
	Cautionary Statement	F-3

PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	F-4

	Snail, Inc. and Subsidiaries Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 (Unaudited)	F-4

	Snail, Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2023 and 2022 (Unaudited)	F-5

	Snail, Inc. and Subsidiaries Condensed Consolidated Statements of Equity for the three months ended March 31, 2023 and 2022 (Unaudited)	F-6

	Snail, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (Unaudited)	F-7

	Snail, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)	F-8

Item 2.	Management’s Discussion and Analysis of the Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39

Item 4.	Controls and Procedures	39

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65

Item 3.	Defaults Upon Senior Securities	66

Item 4.	Mine Safety Disclosures	66

Item 5.	Other Information	66

Item 6.	Exhibits	67

Signatures		68

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains statements that constitute forward-looking statements. Many of the forward-looking statements contained in this Quarterly Report can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “may,” “predict,” “continue,” “estimate” and “potential,” or the negative of these terms or other similar expressions.

Forward-looking statements appear in a number of places in this Quarterly Report and include, but are not limited to, statements regarding our intent, belief or current expectations. These forward-looking statements include information about possible or assumed future results of our business, financial condition, results of operations, liquidity, plans and objectives. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements due to various factors, including, but not limited to, those identified described in “Part II, Item 1A. – Risk Factors,” of this Quarterly Report. The statements we make regarding the following matters are forward-looking by their nature:

●

our ability to re-establish profitable operations, raise additional capital or renegotiate our debt arrangements;

●

our growth prospects and strategies;

●

launching new games and additional functionality to games that are commercially successful;

●

our expectations regarding significant drivers of our future growth;

●

our ability to retain and increase our player base and develop new video games and enhance our existing games;

●

competition from companies in a number of industries, including other casual game developers and publishers and both large and small, public and private multimedia companies;

●

our ability to attract and retain a qualified management team and other team members while controlling our labor costs;

●

our relationships with third-party platforms such as Xbox Live and Game Pass, PlayStation Network, Steam, Epic Games Store, the Apple App Store, the Google Play Store, My Nintendo Store and the Amazon Appstore;

●

our ability to successfully enter new markets and manage our international expansion;

●

protecting and developing our brand and intellectual property portfolio;

●

costs associated with defending intellectual property infringement and other claims;

●

our future business development, results of operations and financial condition;

●

rulings by courts or other governmental authorities;

●

our Share Repurchase Program (as defined below), including expectations regarding the timing and manner of repurchases made under the program;

●

our plans to pursue and successfully integrate strategic acquisitions;

●

other risks and uncertainties described in this Quarterly Report, including those described in Item 1A of Part II, “Risk Factors”; and

●

assumptions underlying any of the foregoing.

Further information on risks, uncertainties and other factors that could affect our financial results are included in our filings with the Securities and Exchange Commission (the “SEC”) from time to time, including in Part II, Item 1A. – “Risk Factors,” of this Quarterly Report and other periodic reports on Form 10-K and 10-Q filed or to be filed with the SEC. You should not rely on these forward-looking statements, as actual outcomes and results may differ materially from those expressed or implied in the forward-looking statements as a result of such risks and uncertainties. All forward-looking statements in this Quarterly Report are based on management’s beliefs and assumptions and on information currently available to us, and we do not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made.

F-3

Table of Contents

PART I

Item 1. Condensed Consolidated Financial Statements (Unaudited).

Snail, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022

(Unaudited)


	March 31,		December 31,
	2023		2022
ASSETS
Current Assets:
Cash and cash equivalents	$	4,108,251	$	12,863,817
Restricted escrow deposit		1,013,678		1,003,804
Accounts receivable, net of allowances for credit losses of $19,929 and $31,525, respectively		6,988,909		6,758,024
Accounts receivable - related party, net		11,296,440		11,344,184
Loan and interest receivable - related party		102,247		101,753
Prepaid expenses - related party		2,500,000		—
Prepaid expenses and other current assets		11,197,381		10,565,141
Total current assets		37,206,906		42,636,723
Restricted cash and cash equivalents		6,380,657		6,374,368
Prepaid expenses - related party		5,582,500		5,582,500
Property, plant and equipment, net		4,999,739		5,114,799
Intangible assets, net - license - related parties		688,406		1,384,058
Intangible assets, net - other		272,320		272,521
Deferred income taxes		7,602,536		7,602,536
Other noncurrent assets		190,005		198,668
Operating lease right-of-use assets, net		3,321,332		3,606,398
Total assets	$	66,244,401	$	72,772,571
LIABILITIES, NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	8,111,718	$	9,452,391
Accounts payable - related party		19,540,783		19,918,259
Accrued expenses and other liabilities		1,990,490		1,474,088
Interest payable - related parties		527,770		527,770
Revolving loan		9,000,000		9,000,000
Short term note		4,166,667		5,416,666
Current portion of long-term debt		80,568		86,524
Current portion of deferred revenue		4,517,573		4,335,404
Current portion of operating lease liabilities		1,403,978		1,371,227
Total current liabilities		49,339,547		51,582,329
Accrued expenses		384,150		457,024
Long-term debt, net of current portion		2,784,749		3,221,963
Deferred revenue, net of current portion		4,882,744		5,216,042
Operating lease liabilities, net of current portion		2,563,302		2,930,529
Total liabilities		59,954,492		63,407,887
Commitments and contingencies
Stockholders’ Equity:
Class A common stock, $0.0001 par value, 500,000,000 shares authorized, 9,251,420 shares issued, and 7,901,145 and 8,053,771 shares outstanding, respectively		925		925
Class B common stock, $0.0001 par value, 100,000,000 shares authorized, 28,748,580 issued and outstanding		2,875		2,875
Additional paid-in capital		23,589,537		23,436,942
Accumulated other comprehensive loss		(304,880)		(307,200)
Accumulated deficit		(7,834,628)		(4,863,250)
		15,453,829		18,270,292
Treasury stock at cost (1,350,275 and 1,197,649 shares, respectively)		(3,671,806)		(3,414,713)
Total Snail, Inc. equity		11,782,023		14,855,579
Noncontrolling interests		(5,492,114)		(5,490,895)
Total stockholders’ equity		6,289,909		9,364,684
Total liabilities, noncontrolling interests and stockholders’ equity	$	66,244,401	$	72,772,571

See accompanying notes to condensed consolidated financial statements (unaudited).

F-4

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Snail, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2023 and 2022

(Unaudited)


For the Three Months Ended March 31,	2023		2022
Revenues, net	$	13,458,488	$	28,054,591
Cost of revenues		9,816,397		14,889,017
Gross profit		3,642,091		13,165,574
Operating expenses:
General and administrative (including stock-based compensation expense of $152,595 and $0, respectively)		5,570,291		5,620,010
Research and development		1,373,797		183,956
Advertising and marketing		104,549		158,670
Depreciation and amortization		115,060		168,317
Total operating expenses		7,163,697		6,130,953
Income (loss) from operations		(3,521,606)		7,034,621
Other income (expense):
Interest income		31,473		15,372
Interest income - related parties		493		450,928
Interest expense		(294,583)		(166,055)
Interest expense - related parties		—		(1,726)
Other income		8,175		2,684
Foreign currency transaction loss		(2,367)		(2,406)
Total other income, net		(256,809)		298,797
Income (loss) before (benefit from) provision for income taxes		(3,778,415)		7,333,418
(Benefit from) provision for income taxes		(805,818)		1,529,651
Net income (loss)		(2,972,597)		5,803,767
Net (loss) attributable to non-controlling interests		(1,219)		(7,290)
Net income (loss) attributable to Snail, Inc. and Snail Games USA Inc.		(2,971,378)		5,811,057
Comprehensive income statement:
Other comprehensive income (loss) related to currency translation adjustments, net of tax		2,320		(51,203)
Total comprehensive income (loss)	$	(2,969,058)	$	5,759,854
Net income (loss) attributable to Class A common stockholders:
Basic	$	(642,340)	$	5,811,057
Diluted	$	(642,340)	$	5,811,057
Net loss attributable to Class B common stockholders:
Basic	$	(2,329,038)	$	—
Diluted	$	(2,329,038)	$	—
Income (loss) per share attributable to Class A and B common stockholders:
Basic	$	(0.08)	$	0.17
Diluted	$	(0.08)	$	0.17
Weighted-average shares used to compute income per share attributable to Class A common stockholders:
Basic		7,928,742		35,000,000
Diluted		7,928,742		35,000,000
Weighted-average shares used to compute income per share attributable to Class B common stockholders:
Basic		28,748,580		—
Diluted		28,748,580		—

(1)	The shares used for the denominator in the calculation of EPS are the number of shares transferred in the reorganization transaction for comparative purposes. Snail Games USA Inc. did not have Class A common stock as of March 31, 2022.

See accompanying notes to condensed consolidated financial statements (unaudited).

F-5

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Snail, Inc. and Subsidiaries

Condensed Consolidated Statements of Equity for the Three Months Ended March 31, 2023 and 2022

(Unaudited)


												Due from
												Shareholder		Accumulated
	Common Stock - Snail									Additional		Loan and		Other							Snail Games		Non
	Games USA Inc.			Class A Common Stock			Class B Common Stock			Paid-In-		Interest		Comprehensive		Retained		Treasury Stock			USA Inc.		controlling
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Receivable		Loss		Earnings		Shares	Amount		Equity		Interests		Total Equity
Balance at December 31, 2021	500,000	$	5,000	—	$	—	—	$	—	$	94,159,167	$	(94,353,522)	$	(266,557)	$	16,045,231	—	$	—	$	15,589,319	$	(5,537,266)	$	10,052,053
Loan to shareholder	—		—	—		—	—		—				(450,681)		—		—	—		—		(450,681)		—		(450,681)
Foreign currency translation	—		—	—		—	—		—		—		—		(51,203)		—	—		—		(51,203)		—		(51,203)
Net income	—		—	—		—	—		—		—		—		—		5,811,057	—		—		5,811,057		(7,290)		5,803,767
Balance at March 31, 2022	500,000	$	5,000	—	$	—	—	$	—	$	94,159,167	$	(94,804,203)	$	(317,760)	$	21,856,288	—	$	—	$	20,898,492	$	(5,544,556)	$	15,353,936


									Accumulated
							Additional		Other									Non
	Class A Common Stock			Class B Common Stock			Paid-In-		Comprehensive		Accumulated		Treasury Stock			Snail, Inc.		controlling
	Shares		Amount	Shares		Amount	Capital		Loss		Deficit		Shares		Amount	Equity		Interests		Total Equity
Balance at December 31, 2022	9,251,420	$	925	28,748,580	$	2,875	$	23,436,942	$	(307,200)	$	(4,863,250)	(1,197,649)	$	(3,414,713)	$	14,855,579	$	(5,490,895)	$	9,364,684
Stock based compensation related to restricted stock units	—		—	—		—		152,595		—		—	—		—		152,595		—		152,595
Repurchase of common stock	—		—	—		—		—		—		—	(152,626)		(257,093)		(257,093)		—		(257,093)
Foreign currency translation	—		—	—		—		—		2,320		—	—		—		2,320		—		2,320
Net loss	—		—	—		—		—		—		(2,971,378)	—		—		(2,971,378)		(1,219)		(2,972,597)
Balance at March 31, 2023	9,251,420	$	925	28,748,580	$	2,875	$	23,589,537	$	(304,880)	$	(7,834,628)	(1,350,275)	$	(3,671,806)	$	11,782,023	$	(5,492,114)	$	6,289,909

See accompanying notes to condensed consolidated financial statements (unaudited).

F-6

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Snail, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022

(Unaudited)


For the Three Months Ended March 31,	2023		2022
Cash flows from operating activities:
Net income (loss)	$	(2,972,597)	$	5,803,767
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Amortization - intangible assets - license		—		150,000
Amortization - intangible assets - license, related parties		695,652		1,850,979
Amortization - intangible assets - other		201		224
Amortization - loan origination fees		8,911		5,966
Depreciation and amortization - property and equipment		115,060		168,317
Stock-based compensation expense		152,595		—
Loss on disposal of fixed assets		—		2,433
Interest income from shareholder loan		—		(450,681)
Interest income from restricted escrow deposit		(9,874)		—
Changes in assets and liabilities:
Accounts receivable		(230,885)		1,240,699
Accounts receivable - related party		47,744		(1,792,450)
Prepaid expenses - related party		(2,500,000)		(1,375,000)
Prepaid expenses and other current assets		(632,240)		(208,180)
Other noncurrent assets		—		(9,035)
Accounts payable		(1,248,355)		1,665,542
Accounts payable - related party		(377,476)		(317,976)
Accrued expenses		443,528		930,942
Interest receivable - related parties		(493)		(247)
Interest payable - related parties		—		1,244
Lease liabilities		(49,411)		(34,595)
Deferred revenue		(151,130)		(2,636,431)
Net cash (used in) provided by operating activities		(6,708,770)		4,995,518
Cash flows from investing activities:
Purchases of property and equipment		—		(5,256)
Repayment on Pound Sand note		—		1,496,063
Net cash provided by investing activities		—		1,490,807
Cash flows from financing activities:
Repayments on long-term debt		(26,503)		(19,438)
Repayments on short-term note		(1,666,667)		(833,333)
Borrowings on short-term note		—		10,000,000
Payments on paycheck protection program and economic injury disaster loan		—		(90,198)
Purchase of treasury stock		(257,093)		—
Payments of offering costs in accounts payable		(92,318)		—
Net cash (used in) provided by financing activities		(2,042,581)		9,057,031
Effect of currency translation on cash and cash equivalents		2,074		(40,485)
Net increase (decrease) in cash and cash equivalents, and restricted cash and cash equivalents		(8,749,277)		15,502,871
Cash and cash equivalents, and restricted cash and cash equivalents - beginning of period		19,238,185		16,554,115
Cash and cash equivalents, and restricted cash and cash equivalents – end of period	$	10,488,908	$	32,056,986
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	285,672	$	160,089
Income taxes	$	182,387	$	94,421
Noncash transactions during the period for:
Loan and interest payable - related parties	$	—	$	103,890
Loan and interest receivable - related parties	$	—	$	(103,890)

See accompanying notes to condensed consolidated financial statements (unaudited).

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Snail Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 Registrant 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. The Company is a global developer and publisher of interactive entertainment content and support on video game consoles, personal computers, mobile devices, and other platforms.

On July 13, 2022, Suzhou Snail transferred all of its right, title, and interest to all of the 500,000 shares of common stock of the Company (“Shares”) to Snail Technology (HK) Limited (“Snail Technology”), an entity organized under the laws of Hong Kong, pursuant to the certain Share Transfer Agreement dated July 13, 2022 between Suzhou Snail and Snail Technology. Subsequently, Snail Technology transferred all of its right, title, and interest in the shares to certain individuals per the Share Transfer Agreement. In connection with the reorganization transaction described below the individuals contributed their interest in the Company to Snail, Inc. in return for common stock of Snail, Inc in connection with Snail, Inc.’s IPO. Because the Company and Suzhou Snail are owned by the same shareholders, Suzhou Snail is considered a related party to the Company.

Reorganization Transaction and IPO

On September 16, 2022, Snail, Inc., filed a Registration Statement on Form S-1 with the United States Securities and Exchange Commission in connection with its IPO. On November 9, 2022, effective as of the IPO pricing, Snail Games USA Inc.’s existing shareholders transferred their 500,000 shares of common stock of Snail Games USA Inc. to Snail, Inc. in exchange for 6,251,420 shares of Class A common stock and 28,748,580 shares of Class B common stock of Snail, Inc., and Snail, Inc. became the parent of Snail Games USA Inc. Because the reorganization transaction was considered a transaction between entities under common control, the financial statements for periods prior to the reorganization transaction and the IPO have been adjusted to combine the previously separate entities for presentation purposes. On November 9, 2022, Snail, Inc. priced its IPO, and on November 10, 2022, Snail, Inc.’s Class A common stock began trading on The Nasdaq Capital Market under the ticker symbol SNAL. In the IPO, Snail, Inc. issued 3,000,000 shares of Class A common stock at $5.00 per share and net proceeds from the IPO were distributed to Snail Games USA Inc. in November 2022 in the amount of approximately $12.0 million, net of the underwriting discount and offering costs of $3.0 million. In connection with the IPO, $1.0 million of the IPO proceeds were remitted to an escrow account which is held to provide a source of funding for certain indemnification obligations of Snail, Inc. to the underwriters. The amount in escrow is reported as a restricted escrow deposit in the consolidated balance sheets for 12 months from the date of the offering, at which time the restrictions will be removed and the balance will be reverted to unrestricted cash.

Basis of Presentation and Consolidation

The accompanying condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC and generally accepted accounting principles as promulgated in the United States of America (“U.S. GAAP”) 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 the 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, 2022 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed on March 29, 2023. 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.

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Snail Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Certain comparative amounts have been reclassified to conform with the current period presentation. The common stock of Snail Games USA Inc., as of March 31, 2022, has been reclassified as Class A common stock as the stockholders of the Snail Games USA Inc. common stock had their shares converted to Class A shares of Snail Inc. during the reorganization transaction that occurred amongst a common controlled group. For more information regarding the reorganization transaction see Note 20 - Equity.

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


	Equity %
Subsidiary Name	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	%

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 condensed consolidated financial statements and the accompanying notes. Such estimates include revenue recognition, provisions for credit losses, deferred income tax assets and associated valuation allowances, deferred revenue, income taxes, valuation of intangibles, including those with related parties, impairment of intangible assets, stock-based compensation and fair value of warrants. 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 has one 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 parties. Financial information about our segment and geographic regions is included in Note 3 – Revenue from Contracts with Customers.

Liquidity and Going Concern

The Company incurred a net loss of $3.0 million and negative cash flows of $6.7 million for the three months ended March 31, 2023. As of March 31, 2023, the Company had cash and cash equivalents of $4.1 million, restricted cash of $7.3 million and current debt of $13.2 million.

As of March 31, 2023, the Company’s 2021 Revolving Loan (as defined below) and 2022 Short Term Note (as defined below) of $9.0 million and $4.2 million are due in December 2023 and January 2024, respectively. Management intends to renegotiate with the lender to extend the maturity date of the 2021 Revolving Loan. However, there is no guarantee that management will be able to renegotiate the terms of the 2021 Revolving Loan with its lender at terms acceptable to the Company or at all. Additionally, management plans to repay the outstanding amounts under the 2022 Short Term Note pursuant to the terms of the 2022 Short Term Note agreement and to secure an additional debt arrangement. Currently, management expects that the Company will not be in compliance with its quarterly debt covenant for the three months ending June 30, 2023. Management is working with the lender to resolve the expected non-compliance with the debt covenant.

The Company may need to raise additional capital. The need for additional capital depends on many factors, including, among other things, whether the Company can successfully renegotiate the terms of its debt arrangements, the rate at which the Company’s business

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Snail Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

grows, demands for working capital, revenue generated from existing DLCs and game titles and launches of new DLCs and new game titles, and any acquisitions that the Company may pursue. From time to time, the Company could be required, or may otherwise attempt, to seek additional sources of capital, including, but not limited to, equity and/or debt financings. The Company cannot provide assurance that it will be able to successfully access any such equity or debt financings or that the required equity or debt financings would be available on terms acceptable to the Company, if at all, or that any such financings would not be dilutive to its stockholders.

The Company’s recent net loss, level of cash used in operations, debt obligations coming due in less than 12 months, potential need for additional capital, and the uncertainties surrounding its ability to raise additional capital and renegotiate its debt arrangements raise substantial doubt about its ability to continue as a going concern. The unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

In order for the Company to continue operations beyond the next 12 months and be able to discharge its liabilities and commitments in the normal course of business, the Company must re-establish profitable operations in order to generate cash from operations by increasing revenue or controlling or potentially reducing expenses, renegotiate the terms of its debt arrangements, or obtain additional funds when needed.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

The Company’s revenue includes the publishing of software games delivered digitally and through physical discs (e.g., packaged goods). The Company’s digital games may include additional downloadable content that are new feature releases to digital full-game downloads. Revenue also includes sales of mobile in-app purchases that require the Company’s hosting support in order to utilize the game or related content. Such games include virtual goods that can be purchased by the end users, as desired. When control of the promised products and services is transferred to the customers, 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 end consumers download the games and the control of the license is transferred to them.

The Company recognizes revenue using the following five steps as provided by Accounting Standards Codification (“ASC”) Topic 606 Revenue 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 net 30 to 75 days terms.

Principal vs Agent Consideration

The Company offers certain software products via third-party digital storefronts, such as Microsoft’s Xbox Live, Sony’s PlayStation Network, Valve’s Steam, Epic Games Store, My Nintendo Store, Apple’s App Store, the Google Play Store, and retail distributors. For sales of our software products via third-party digital storefronts and retail distributor, the Company determines whether or not it is acting as the principal in the sale to the end user, which the Company considers in determining if revenue should be reported based on the gross transaction price to the end user or based on the transaction price net of fees retained by the third-party digital storefront. An entity is the principal if it controls a good or service before it is transferred to the customer. Key indicators that the Company uses in evaluating these sales transactions include, but are not limited to, the following:

●

The underlying contract terms and conditions between the various parties to the transaction;

●

Which party is primarily responsible for fulfilling the promise to provide the specified good or service; and

●

Which party has discretion in establishing the price for the specified good or service.

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Snail Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Based on our evaluation of the above indicators, for sales arrangements via Microsoft’s Xbox Live, Sony’s PlayStation Network, Valve’s Steam, Epic Games Store, and retail distributor, the digital platforms and distributors have discretion in establishing the price for the specified good or service and the Company has determined it is the agent in the sales transaction to the end user and therefore the Company reports revenue on a net basis based on the consideration received from the digital storefront. For sales arrangements via Apple’s App Store and the Google Play Store, the Company has discretion in establishing the price for the specified good or service and it has determined that the Company is the principal to the end user and thus reports revenue on a gross basis and mobile platform fees charged by these digital storefronts are expensed as incurred and reported within cost of revenues.

Contract Balance

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

Deferred revenue is comprised of the transaction price allocable to the Company’s performance obligation on technical support and the sale of virtual goods available for in-app purchases, and payments received from customers prior to launching the games on the platforms. The Company categorizes the virtual goods as either “consumable” or “durable.” Consumable virtual goods represent goods that can be consumed by a specific player action; accordingly, the Company recognizes revenues from the sale of consumable virtual goods as the goods are consumed and the performance obligation is satisfied. Durable virtual goods represent goods that are accessible to the players over an extended period of time; accordingly, the Company recognize revenues from the sale of durable virtual goods ratably over the period of time the goods are available to the player and the performance obligation is satisfied, which is generally the estimated service period, 30 to 90 days from date of activation.

The Company has a long-term title license agreement with a platform. The agreement was initially made between the parties in November 2018 and valid through December 31, 2021. The agreement was subsequently amended in June 2020 to extend the ARK 1 availability on the platform perpetually, effective January 1, 2022 and to put ARK 2 on the platform for three years upon release. The Company recognized $2.5 million in revenue related to ARK 1 perpetual license during the three months ended March 31, 2022 and deferred $2.3 million related to ARK 2 that is included in the long-term portion of deferred revenue.

In November 2021, the Company entered an agreement with a platform to make ARK 1 available on a platform for a period of 5 weeks in exchange for $3.5 million. The platform launched the 5-week program on March 1, 2022 and the Company recognized the full amount of revenue from this contract during the period ended March 31, 2022, as the significant performance obligation of making the game available on the platform was met on the first day of the contract period.

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 our software products (“user life”) which most faithfully depicts the timing of satisfying our performance obligation.

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

The distributor, as the principal, is responsible for the shipping of the game discs to the 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.

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Snail Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Cost of Revenues

Cost of revenues include software license royalty fees, merchant fees, server and database center costs, game localization costs, game licenses, engine fees and amortization costs. Cost of revenues for the three months ended March 31, 2023 and 2022 were comprised of the following:


	2023		2022
Software license royalties - related parties	$	2,863,013	$	6,521,178
Software license royalties		352,439		—
License and amortization - related parties		5,195,651		6,350,979
License and amortization		201		150,224
Merchant fees		459,471		657,536
Engine fees		424,227		713,993
Internet, server and data center		496,150		495,107
Costs related to advertising revenue		25,245		—
Total:	$	9,816,397	$	14,889,017

General and Administrative Costs

General and administrative costs include rents, salaries, stock-based compensation, legal and professional expenses, internet and server, contractor costs, insurance expense, licenses and permits, other taxes and travel expenses. These costs are expensed as they are incurred. For the three months ended March 31, 2023 and 2022, general and administrative expenses totaled $5,570,291 and $5,620,010, respectively. Stock-based compensation of $152,595 was incurred during the three months ended March 31, 2023; no such compensation was incurred in the three months ended March 31, 2022.

Advertising and Marketing Costs

The Company expenses advertising costs as incurred. For the three months ended March 31, 2023 and 2022, advertising expenses totaled $104,549 and $158,670, 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. Research and development costs for the three months ended March 31, 2023 and 2022 were $1,373,797 and $183,956, 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, 2023 and December 31, 2022, there were non-controlling interests with the following subsidiaries:


Subsidiary Name	Equity % Owned		Non-Controlling %
Snail Innovative Institute	70	%	30	%
BTBX.IO, LLC	70	%	30	%
Donkey Crew, LLC	99	%	1	%

Cash 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 security to our debts with a financial institution and the issuance of a standby letter of credit to landlords.

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Snail Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Restricted Escrow Deposits

Our restricted deposits held in escrow are to provide a source of funding for certain indemnification obligations of Snail, Inc. to our underwriters in connection with our IPO. The deposit and related interest earnings are restricted for one year from the IPO date.

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 a allowance made for credit losses. The Company uses a combination of quantitative and qualitative 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.

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:

●

Level 1: Quoted prices in active markets for identical assets or liabilities that the Company has an ability to access as of the measurement date.

●

Level 2: Inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the same term of the assets or liabilities.

●

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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, accounts payable and current liabilities. The carrying values of these financial instruments approximate their fair value due to their short maturities. The carrying amount of our debt approximates fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available to us for a similar duration with the exception of the Company’s promissory note which has a fixed rate for 5 years, then a floating rate that approximates

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Snail Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

the Wall Street Journal Prime Rate plus 0.50%. The Company considers the carrying amount of the loan 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 does not have any other assets or liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2023 and December 31, 2022.

Amortizable Intangibles and Other Long-lived Assets

The Company’s long-lived assets and other assets consisting of property, plant and equipment and purchased intangible assets, are reviewed for impairment in accordance with the guidance of Financial Accounting Standards Board (“FASB”) Topic ASC 360, Property, Plant, 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 condensed 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 condensed 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. Such amounts are included in the current and long-term accrued expenses on the accompanying condensed consolidated balance sheets in the amount of $457,024 as of March 31, 2023 and December 31, 2022. The Company accrues and recognizes interest and penalties related to unrecognized tax benefits in operating expenses.

Concentration of Credit Risk and Significant Customers

The Company maintains cash balances at several major financial institutions. While the Company attempts to limit credit exposure with any single institution, balances often exceed insurable amounts. As of March 31, 2023 and December 31, 2022, the Company had

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Snail Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

deposits of $9,443,584 and $17,929,308, respectively, that were not insured by the Federal Deposit Insurance Corporation and are included in the cash and cash equivalents, restricted escrow deposit 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 performs ongoing credit evaluations of customers and maintains reserves for potentially uncollectible accounts. As of March 31, 2023 and December 31, 2022, the Company had three customers who accounted for approximately 71% and two customers who accounted for approximately 57% of consolidated gross receivables, respectively. Among the three customers as of March 31, 2023 and two customers as of December 31, 2022, each customer accounted for 30%, 23% and 18% as of March 31, 2023, and 29% and 28% as of December 31, 2022 of the consolidated gross receivables outstanding. During the three months ended March 31, 2023 and 2022, approximately 60% and 61%, respectively, of net revenue was derived from these customers. 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, 2023 and December 31, 2022, the Company had two vendors who accounted for approximately 67% and two vendors who accounted for approximately 55% of consolidated gross payables, respectively. Among the two vendors as of March 31, 2023 and December 31, 2022, each vendor accounted for 55% and 12% as of March 31, 2023, and 43% and 12% as of December 31, 2022 of our consolidated gross payables outstanding. The loss of these vendors could have a significant impact on the Company’s financial performance and regulatory compliance.

The Company had one vendor, SDE Inc. (“SDE”), a related party, that accounted for 58% and 53% of the Company’s combined cost of revenues and operating expenses during the three months ended March 31, 2023 and 2022, respectively. Amounts payable to SDE are netted with receivables from them and presented as accounts receivable - related party in the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022. The loss of SDE as a vendor would significantly and adversely affect the Company’s core business.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which replaces the incurred loss impairment methodology in current US GAAP with a methodology that requires the reflection of expected credit losses and also requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. For most financial instruments, the standard requires the use of a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses, which generally results in the earlier recognition of credit losses on financial instruments. The Company adopted ASC 2016-13 on January 1, 2023. The impact of adopting the new standard did not have a material impact on the Company’s condensed consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, Contracts in Entity’s Own Equity (Subtopic 815-40) – Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to simplify the application of GAAP for certain financial instruments with characteristics of liabilities and equity. The FASB decided to eliminate certain accounting models to simplify the accounting for convertible instruments, reduce complexity for preparers and practitioners, and improve the decision usefulness and relevance of the information provided to financial statement users. The GASB also amended the guidance for derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusion and amended the related earnings per share guidance. The Company has elected to delay implementation of this standard until January 1, 2024 based on its emerging growth status. The impact of adopting the new accounting standard is being evaluated.

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 $26,619 and $13,182 for the three months ended March 31, 2023 and 2022.

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Notes to Condensed Consolidated Financial Statements (Unaudited)

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 issued restricted stock units (“Restricted Stock Units” or “restricted stock units”) during the year ended December 31, 2022. 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, 2023, there were 4,498,666 shares reserved for issuance under the 2022 Plan.

Restricted Stock Units

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

Warrants

In connection with the IPO, offering costs related to legal, accounting, and underwriting costs were net with the proceeds and recorded as a reduction in additional paid in capital, in the stockholders’ equity section of the condensed consolidated balance sheets. The Company also issued Underwriters Warrants (as defined below) for services provided during the IPO to purchase 120,000 shares of Class A common stock. The Underwriters Warrants are accounted for as equity instruments and are included in the stockholders’ equity section of the condensed consolidated balance sheets. The fair value of the Underwriters Warrants has been estimated using the Black-Scholes option pricing model.

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, 2023. As of March 31, 2023, 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 diluted EPS for the period is calculated by dividing the net income (loss) applicable to common stockholders for the period by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. The Company’s common stock equivalents are measured using the treasury stock method and represent unvested restricted stock units and warrants. The Company issues two classes of common stock

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Notes to Condensed Consolidated Financial Statements (Unaudited)

with differing voting rights, and as such, reports EPS using the dual class method. For comparative purposes the Company has presented EPS for the three months ended March 31, 2022 using the number of shares exchanged in the reorganization of the Company as the denominator. For more information see Note 19 – Earnings (Loss) Per Share.

Dividend Restrictions

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

NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of revenue

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, 2023 and 2022 were as follows:


	2023		2022
United States	$	11,777,874	$	26,286,796
International		1,680,614		1,767,795
Total revenue from contracts with customers:	$	13,458,488	$	28,054,591

Platform

Net revenue by platform for the three months ended March 31, 2023 and 2022 were as follows:


	2023		2022
Console	$	5,773,590	$	17,991,579
PC		5,012,180		6,684,436
Mobile		1,718,032		2,791,320
Other		954,686		587,256
Total revenue from contracts with customers:	$	13,458,488	$	28,054,591

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, 2023 and 2022 was as follows:


	2023		2022
Digital	$	10,785,770	$	24,676,015
Mobile		1,718,032		2,791,320
Physical retail and other		954,686		587,256
Total revenue from contracts with customers:	$	13,458,488	$	28,054,591

Deferred Revenue

The Company records deferred revenue when payments are due or received in advance of the fulfillment of our associated performance obligations; reductions to deferred revenue balance were primarily due to the recognition of revenue upon fulfillment of our performance obligations, which were in the ordinary course of business. As of March 31, 2023, the balance of deferred revenue was $