Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q (the "Quarterly Report"). This discussion and analysis contains forward-looking statements that involve certain risks and uncertainties. Our actual results could differ materially from those discussed in these statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report, particularly under "Risk Factors," in Part II, Item 1A of this Quarterly Report and Part 1, Item 1A of the Company's Form 10-K for the year ended December 31, 2025, and the "Cautionary Statement Regarding Forward-Looking Statements" section of this Quarterly Report.

On July 2, 2026, we effected the Reverse Stock Split of our outstanding shares of Class A common stock and Class B common stock at a ratio of 1-for-5. We have retrospectively adjusted all references to Class A common stock, Class B common stock, stock warrants to purchase common stock, stock options to purchase common stock, share data, per share data and related information contained in the following discussion to reflect the effect of the Reverse Stock Split.

Overview

Our mission is to provide high-quality entertainment experiences to audiences around the world. We are a leading, global independent developer and publisher of interactive digital entertainment for consumers around the world. We have built a premier portfolio of premium games designed for use on a variety of platforms, including consoles, PCs, and mobile devices. ARK: Survival Evolved, which has consistently ranked among top-grossing titles on Steam. Our expertise in technology, in-game ecosystems and monetization of online multiplayer games has enabled us to assemble a broad portfolio of intellectual property across multiple media formats and technology platforms. Our flagship franchise from which we generate the substantial majority of our revenues, ARK, is a leader within the sandbox survival genre with 114.1 million console and PC installs through September 30, 2026. See below for discussion of key performance metrics and non-GAAP measures. In the three and nine months ended September 30, 2026, ARK: Survival Evolved and ARK: Survival Ascended combined for an average total of 220,000 and 230,000 daily active users ("DAUs") on the Steam and Epic platforms, as compared to 216,000 and 233,000 in the three and nine months ended September 30, 2025, respectively. We define "daily active users" as the number of unique users who play any given game on any given day. For the three months ended September 30, 2026 and 2025, we generated 91.5% and 88.4%, respectively, of our revenues from the ARK franchise. For the nine months ended September 30, 2026 and 2025, we generated 87.4% and 90.3%, respectively, of our revenues from the ARK franchise

Our dedication to providing audiences with high-quality entertainment experiences utilizing the latest gaming technology has produced strong user engagement, continued revenue growth, and increased cash flows. Through September 30, 2026, our ARK franchise game has been played for 4.6 billion hours with an average playing time per user of 159 hours and with the top 21.4% of all players spending over 100 hours in the game, according to data from the Steam platform. For the three months ended September 30, 2026 and 2025, our net revenue was $33.1 million and $13.8 million, respectively. For the nine months ended September 30, 2026 and 2025, our net revenue was $80.0 million and $56.1 million, respectively. During the three months ended September 30, 2026, approximately 40.6% of our revenue came from consoles, 53.8% from PC and 3.8% from mobile as compared to 33.2% from consoles, 49.5% from PC and 13.1% from mobile during the three months ended September 30, 2025. During the nine months ended September 30, 2026, approximately 36.0% of our revenue came from consoles, 57.2% came from PC and 5.1% from mobile platforms as compared to 39.9% from consoles, 46.1% from PC and 11.0% from mobile platforms during the nine months ended September 30, 2025. We had a net income of $6.7 million compared to a net loss of $7.9 million, for the three months ended September 30, 2026 and 2025, respectively. For the nine months ended September 30, 2026, we had a net income of $5.8 million as compared to net loss of $26.4 million for the nine months ended September 30, 2025.

Key Factors Affecting Our Business

There are a number of factors that affect the performance of our business, and the comparability of our results from period to period, including:

Investments in our content strategy

We continuously evaluate and invest in content strategy to improve and innovate our games and features and to develop current technological platforms. We are currently actively investing in expanding our gaming pipeline as well as developing media related to our gaming intellectual property. We also continue to invest to grow our micro-influencer platform, NOIZ, by attracting new influencers and brand customers. We have established a new division internally under the Interactive Films brand. This division will focus on creating content in the vertical short film segment of the digital entertainment market. The mobile application has already launched on iOS and Android platforms. As of September 30, 2026, we have released over 350 short film dramas on the SaltyTV app. We expect a consistent roll out of new short film dramas. Short film dramas include internally produced and licensed films from external organizations.

Growth of user base

We have experienced significant growth in our number of downloads over the last several years. We have sold 62.4 million units between January 1, 2016 and September 30, 2026. During the three months ended September 30, 2026, we sold 2.0 million units compared to 1.1 million in the three months ended September 30, 2025. Our video games provide highly engaging, differentiated entertainment experiences where the combination of challenge and progress drives player engagement and long-term franchise value. The success of our franchise hinges on our ability to keep our current players engaged while also growing our user base by innovating our platform and monetizing new offerings. The degree to which gamers are willing to engage with our platform is driven by our ability to create interactive and unique content that will enhance the game-play experience. We sell DLCs which are supplementary to our master games and expand the gaming universe to continuously evolve the game and retain players. Our master games are the base versions of a specific title, for example, ARK: Survival Evolved is our master game and ARK: Genesis is a DLC.

While we believe we have a significant opportunity to grow our installed base, we anticipate that our overall user growth rate will fluctuate over time as we continue to release new master games and companion DLCs. Download rates and user engagement may increase or decrease based on other factors such as growth in console, PC and mobile games, ability to release content, market effectively and distribute to users.

Investments in our technology platform

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

Ability to release content, market effectively through cross media and expand the gaming group

Establishing and maintaining a loyal network of players for our premium games is vital for our business and drives revenue growth. To grow and maintain our player base, we invest in developing new games to attract and engage players, and in providing existing audiences with proven content in the form of new DLCs. In the near-term, we may increase spending on original content creation with new studios, and on sales and marketing as a percentage of revenue to grow our player network. The scale of our player base is determined by a number of factors, including our ability to strengthen player engagement by producing content that players play regularly and our effectiveness in attracting new players, both of which may in turn affect our financial performance.

Strategic relationship with developers, Studio Wildcard & Suzhou Snail

We have grown and expect to continue to grow our business by collaborating with game studios that we believe can benefit from our team's decades of experience developing successful games. We have strategic relationships with many developer studios that create original content for us. The relationships allow for valuable knowledge sharing between Suzhou Snail, a related party, and the developer studios. We enjoy a long-term relationship with Studio Wildcard, a related party, which develops our ARK franchise. We have an exclusive license with Studio Wildcard for rights to ARK, and we work with them and our other studio developer partners to provide ongoing support across numerous aspects of game development. Our financial results may be affected by our relationship with game studios, including Studio Wildcard, and our ability to create self-developed titles.

Relationship with third party distribution platforms

We derive nearly all of our revenue from third-party distribution platforms, these include but are not limited to, Xbox Live and Game Pass, PlayStation Network, Steam, Epic Games Store, the Apple App Store, the Google Play Store and My Nintendo Store. These digital distribution platforms have policies that may impact our reachability to our potential audience, including the discretion to amend their terms of service, which could affect our current operations and our financial performance. As we expand to new markets, we anticipate similar relationships with additional distribution partners that could similarly impact our performance.

Seasonality

We experience fluctuations in quarterly and annual operating results as a result of the timing of the introduction of new titles, variations in sales of titles developed for particular platforms, market acceptance of our titles, development and promotional activities relating to the introduction of new titles, releases of expansion packs and DLCs, and to coincide with the global holiday season in the fourth and first quarters of each year. Seasonality in our revenue also tends to coincide with promotional cycles on platforms, typically on a quarterly basis.

Recent Developments

Gaming

During the first quarter of 2026, we continued to execute on our multi-year expansion strategy for our foundational ARK franchise. Building upon the successful launch and reception of ARK: Lost Colony late last year, we outlined an ambitious roadmap consisting of four major downloadable content (DLC) expansions for ARK: Survival Ascended in 2026 and three subsequent releases planned for 2027. We anticipate this cadence will provide significant revenue visibility. The 2026 roadmap included ARK: Survival of the Fittest, ARK: Tides of Fortune, ARK: World Creator, and ARK: Dragontopia, of which ARK: Tides of Fortune and ARK: Dragontopia launched in July 2026.

A core component of our long-term growth strategy is diversifying our revenue profile beyond the ARK ecosystem by investing in internally developed. Bellwright, our medieval survival/strategy title, maintained strong momentum through the Steam Spring Sale and has officially surpassed 1 million units sold. We are actively developing console ports to further monetize this IP. As part of our ongoing initiative to expand our third-party publishing portfolio and diversify our revenue profile, on January 27, 2026, the Company, in partnership with developer Loric Games, successfully launched Echoes of Elysium into Early Access on the Steam platform.

At Game Developers Conference ("GDC") 2026, we provided key updates regarding our product pipeline and unveiled new intellectual property. We provided an exclusive look at For The Stars, our upcoming open-universe AAA space survival RPG. The title continues to progress, with demonstrations of its open-ended exploration and player-driven research systems presented at the GDC Tech Demo Stage. We introduced PixARK Worlds, a new title in development by Studio Sirens and Snail Games, created with guidance from Studio Wildcard, featuring revolutionary user-generated content designed. In broadening our indie portfolio, we officially announced Gobby Gang, a new cooperative multiplayer party game on the Steam platform.

During the second quarter of 2026, we continued to execute on our multi-year expansion strategy for our foundational ARK franchise, celebrating the game's 11-year anniversary on June 2, 2026. Building upon the momentum of our first-quarter releases, we launched the ARK: Fantastic Tames Season 1 expansion pack in May 2026. At IGN Live in June 2026, we unveiled new ARK franchise content, laying the necessary groundwork for our third-quarter launches in July 2026, which included ARK: Genesis Part 1 Ascended, ARK: Tides of Fortune, and the ARK: Dragontopia DLC. We anticipate this consistent release cadence will provide significant and ongoing revenue visibility.

During the third quarter of 2026, our multi-year expansion strategy for our foundational ARK franchise continues. Building upon our summer content slate, in early July, we launched ARK: Genesis Part 1 Ascended, ARK: Tides of Fortune, and ARK: Dragontopia DLCs. We anticipate that these major releases will contribute significantly to our near-term performance, with approximately $11.9 million from our deferred revenue backlog recognized in the third quarter of 2026.

As part of our ongoing initiative to diversify our revenue profile beyond the core ARK ecosystem through both internally developed and third-party titles, we achieved several critical milestones across our publishing pipeline. On August 26, 2026, we launched PixARK: Terracrypt on Steam, marking the first major premium DLC expansion for our voxel-based sandbox survival game. Following this, on September 8, 2026, in partnership with developer Frozen Way, we globally launched our sci-fi survival adventure Honeycomb: The World Beyond across Steam, PlayStation, Xbox, and Epic platforms. Additionally, as we expand our indie portfolio, our publisher label Wandering Wizard unveiled a radically revamped art direction and rebuilt gameplay mechanics for Matrioshka Games' upcoming 4-player co-op physics heist title, Gobby Gang, on September 24, 2026.

To reinforce our long-term pipeline visibility and global reach, we maintained a strong presence at major industry events. In August 2026, we showcased our expanding product portfolio at Gamescom 2026, highlighted by extended looks at two major upcoming internally developed AAA titles. First, we revealed an announcement trailer and extended gameplay details for 9 Yin Sutra: Wuxia, an open-world martial arts RPG featuring fast-paced combat, player-driven progression, and a sprawling, dynamic Jianghu world. Concurrently, we unveiled a new gameplay trailer for our ambitious space survival RPG, For The Stars, detailing its massive thirty-kilometer procedural planets, advanced base-building mechanics, and unique shared-galaxy multiplayer logistics. Following Gamescom, we presented our strategic vision and updated pipeline to the financial community at the H.C. Wainwright 28th Annual Global Investment Conference on September 14, 2026.

Film and TV

We continue to build on our short film mobile application, SaltyTV, bringing exclusive, original stories to our viewers. As of September 30, 2026, we have released over 350 short film dramas on the SaltyTV app. To support our expanding content library and ensure a robust technical foundation, we entered into new related-party service agreements with Suzhou Snail Digital Technology Co., Ltd. ("Suzhou Snail") to provide dedicated platform support and game testing for SaltyTV, covering August 1, 2026 through July 31, 2027. Concurrently, we are advancing our Interactive Films publishing initiative, executing our experimental strategy to transform high-engagement vertical narrative content into immersive, gameplay-driven Full Motion Video (FMV) Role Playing Game experiences.

Technology and Artificial Intelligence (AI)

In alignment with our strategic focus on innovation and software development, on August 4, 2026, our subsidiary Egofold unveiled "AI Ranch" and "Non-Human Players" (NHPs™, an artificial intelligence initiative) at the Ai4 2026 conference. This initiative introduces a new generation of AI gaming companions designed to bridge modern digital technology with gameplay-driven interactivity across our platforms.

Corporate

On August 5, 2026, we entered into a Short Drama Production Business Agreement with Suzhou Snail Digital Technology Co., Ltd. ("Suzhou Snail") through our wholly-owned subsidiary Interactive Films LLC, for technical development, marketing, and commercial operation services related to the SaltyTV platform, covering the period from August 1, 2026 through July 31, 2027 for a total contract sum of $864,000, payable in four quarterly installments of $216,000 beginning September 30, 2026. Also on August 5, 2026, we entered into a Game Testing Service Agreement with Suzhou Snail through our wholly-owned subsidiary Snail Games USA, Inc., for functionality, compatibility, network, compliance, regression, and cross-platform game testing services, covering the period from August 1, 2026 through July 31, 2027 for a total contract sum of $252,000, payable in four quarterly installments of $63,000 beginning September 30, 2026.

Nasdaq Compliance

On December 30, 2025, we received written notice from the Listing Qualifications Department (the "Staff") of The Nasdaq Stock Market LLC ("Nasdaq") notifying us that for thirty (30) consecutive business days from November 11, 2025 through December 29, 2025, our Class A common stock did not maintain a minimum closing bid price of $1.00 per share (the "Minimum Bid Price Requirement") as required by Nasdaq Listing Rule 5550(a)(2). At that time, we were afforded 180 calendar days, or until June 29, 2026, to regain compliance with the Minimum Bid Price Requirement.

On March 26, 2026, we received another deficiency letter (the "Letter") from the Nasdaq Staff notifying us that we were not in compliance with the requirement to maintain a minimum of $500,000 in net income from continuing operations in the most recently completed fiscal year, or two of the last three fiscal years (the "Net Income Requirement"). Although we reported net income from continuing operations in our Condensed Consolidated Statement of Operations for the year ended December 31, 2024, we reported net losses from continuing operations in our Condensed Consolidated Statements of Operations for the years ended December 31, 2023 and 2025. Additionally, we did not meet either of the alternative Nasdaq continued listing standards under the Nasdaq Listing Rules, which include (i) a market value of listed securities of at least $35 million or (ii) a minimum stockholders' equity requirement of at least $2,500,000 (the "Equity Rule," and collectively with the Net Income Requirement, the "Nasdaq Requirements").

In accordance with Nasdaq rules, we submitted a plan to the Staff to regain compliance (the "Compliance Plan") with the Nasdaq Requirements on May 11, 2026. On May 20, 2026, we received a letter from Nasdaq (the "Extension Letter") stating that the Compliance Plan was accepted and that we would have until September 22, 2026, to evidence compliance with the Nasdaq Requirements. The Extension Letter further stated that if we fail to evidence compliance with the Nasdaq Requirements upon filing our quarterly report for the quarter ending September 30, 2026, our Class A common stock would be subject to delisting.

On July 1, 2026, we received written notice from the Nasdaq Staff notifying us that Nasdaq had determined to delist our Class A common stock from The Nasdaq Capital Market as a result of our continued noncompliance with the Minimum Bid Price requirement (the "Staff Determination"). We subsequently requested a hearing before the Nasdaq Hearings Panel (the "Panel") to appeal the Staff Determination.

On July 2, 2026, we effected the Reverse Stock Split of our outstanding shares of Class A common stock and Class B common stock at a ratio of 1-for-5. The Class A common stock began trading on the Nasdaq Capital Market on a split-adjusted basis on July 6, 2026. On July 21, 2026, we received a letter from the Nasdaq Staff confirming that we had then regained compliance with the Minimum Bid Price Requirement. On August 13, 2026, the Panel held a hearing at which we presented our plan to regain compliance with the Equity Rule.

On August 26, 2026, we received a written decision from the Panel granting our request to continue the listing of the Class A common stock on The Nasdaq Capital Market, subject to the following condition: we must demonstrate compliance with the Equity Rule by filing timely public disclosure (i) describing the transactions undertaken by us to achieve such compliance and demonstrate long-term compliance with the Equity Rule and (ii) providing an indication of our equity following those transactions. The Panel's decision also requires us to provide prompt notification of any significant events occurring during the exception period that may affect our compliance with Nasdaq requirements, including any event that may call into question our ability to meet the terms of the exception granted. The Panel has reserved the right to reconsider the terms of the exception based on any event, condition or circumstance that exists or develops that would, in the opinion of the Panel, make continued listing of our securities on Nasdaq inadvisable or unwarranted. The foregoing summarizes certain terms of the Panel's decision and does not describe all of the terms and conditions of the decision.

Nasdaq Listing Rule 5810(c)(2)(B)(i) ("Rule 5810(c)(2)") allowed the Panel to grant an exception period of up to 180 calendar days from the date of the Staff Determination, or until December 28, 2026, for us to regain compliance with the Equity Rule. We requested and were granted an exception period lasting through November 13, 2026, in which to demonstrate compliance. As of the date of filing of this Quarterly Report, we have not achieved compliance with the Equity Rule. Accordingly, we are requesting that the Panel further extend the exception period, subject to Rule 5810(c)(2), to allow us additional time to take actions to bring our Company into compliance. Our Class A common stock continues to be listed and traded on The Nasdaq Capital Market under the symbol "SNAL" during the exception period, subject to our satisfaction of the conditions set forth in the Panel's decision. We are working to regain compliance with the Equity Rule. Any compliance submission by us will be subject to review by the Panel. There can be no assurance that the Panel will grant our request to further extend the exception period, or that we will satisfy the conditions of the Panel's decision or otherwise regain compliance with the applicable listing requirements within such exception period, and a failure to do so would result in the delisting of our securities from Nasdaq.

Components of Results of Operations

Revenues

We primarily derive revenue from the sale of our games through various gaming platforms. Through these platforms, users can download our games and, for certain games, purchase virtual items to enhance their game-playing experience. We offer certain software products through third-party digital storefronts, such as Xbox Live and Game Pass, PlayStation Network, Steam, Epic Games Store, the Apple App Store, the Google Play Store and My Nintendo Store, and certain retail distributors.

We record deferred revenue when payments are due or received in advance of the fulfillment of our associated performance obligations.

Cost of revenues

Cost of revenues includes license royalty fees, merchant fees, engine fees, server and database cost centers, game licenses and license right amortization. For a description of our licensing arrangements, please see Note 2 - Summary of Significant Accounting Policies to our unaudited condensed consolidated financial statements included in this Quarterly Report. We generally expect cost of revenues to fluctuate proportionately with revenues.

General and administrative

General and administrative expenses include rent expense, salaries, stock-based compensation, legal and professional expenses, administrative internet and server expenses, contract costs, insurance expenses, license and permits, other taxes and travel expenses. We expect salaries and wages to increase as we increase headcount when expanding our product offerings. Stock-based compensation will be recorded within research and development and general and administrative expense. We also record legal settlement expenses as components of general and administrative expenses. We expect general and administrative expenses will increase in absolute dollars due to the additional administrative and regulatory burden of becoming and operating as a public company and the inflationary pressures of recent years.

Research and development

Research and development consists primarily of consulting expenses and salaries and wages devoted towards the development of new games and related technologies and development costs outsourced through Suzhou Snail. We expect our research and development to increase as we develop new content, games or technologies.

Advertising and marketing

Advertising and marketing consists of costs related to advertising and user acquisition efforts, including payments to third-party marketing agencies. We occasionally offer our early access trial, through which we sell our games that are in development and testing. The early access trial allows us to both monetize and receive feedback on how to improve our games over time. We plan to continue to invest in advertising and marketing to retain and acquire players. However, sales and marketing expenses may fluctuate as a percentage of revenues depending on the timing and efficiency of our marketing efforts.

Impairment of film assets

Impairment expenses consists of costs related to short films and game titles produced or licensed by Snail. When projected future cash flows were no longer expected to recover from the carrying value of film projects and game licenses, we recognize an impairment charge to write down the assets in full, or in part, to their estimated fair value. Impairments during the period primarily resulted from changes in marketing strategies, underperformance of certain titles, or shifts in market demand. These charges negatively impact operating income and reflect our continuous assessment of content performance in a rapidly evolving landscape.

Provision for income taxes

The provision for income taxes consists of current income taxes in the various jurisdictions where we are subject to taxation, primarily the United States, as well as deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities in each of these jurisdictions for financial reporting purposes and the amounts used for income tax purposes. Under current U.S. tax law, the federal statutory tax rate applicable to corporations is 21%. Our effective tax rate of 6.6% differed from the federal statutory tax rate of 21% primarily due to state income taxes, permanent differences, and change in valuation allowance.

Results of Operations

Comparison of the three months ended September 30, 2026 versus the three months ended September 30, 2025

		Three Months Ended September 30,
		2026				2025				$ Change				% Change
		(in millions)
Revenues, net		$	33.1			$	13.8			$	19.2				139.2	%
Cost of revenues			15.4				13.8				1.6				11.7	%
Gross profit			17.6				-				17.6				122,372.7	%
Operating expenses:
General and administrative			4.9				4.8				0.1				1.4	%
Research and development			4.6				3.7				0.9				23.8	%
Advertising and marketing			0.9				0.9				-				1.9	%
Depreciation			-				0.2				(0.1	)			(80.8	)%
Impairment of film assets			-				0.3				(0.3	)			(92.8	)%
Total operating expenses			10.5				9.9				0.6				6.1	%
Income (loss) from operations		$	7.2			$	(9.9	)		$	17.0				172.8	%

Revenues

Net revenues for the three months ended September 30, 2026 increased by $19.2 million, or 139.2%, compared to the three months ended September 30, 2025. The increase in net revenues is primarily attributed to $13.9 million change in deferred revenue, a $4.9 million increase in sales from ARK: Survival Ascended, which is mostly driven by the base game and the release of ARK: Tides of Fortune and ARK: Dragontopia, a $1.0 million increase in sales of Bellwright, and a $0.4 million increase in sales of Honeycomb: The World Beyond, partially offset by a decrease of $0.5 million in sales from ARK: Survival Evolved and a decrease in ARK: Ultimate Mobile Edition of $0.2 million, and a decrease in SaltyTV sales of $0.2 million for the three months ended September 30, 2026 as compared to the three months ended September 30, 2025.

Cost of revenues

Cost of revenues for the three months ended September 30, 2026 increased by $1.6 million, or 11.7% when compared to the three months ended September 30, 2025, primarily due to higher license royalties costs driven by an increase in revenue during the period, partially offset by a reduction in monthly licensing cost to SDE.

Cost of revenues for the three months ended September 30, 2026 and 2025 comprised the following:

		Three Months Ended September 30,
		2026				2025				$ Change				% Change
		(in millions)
Software license royalties - related parties		$	7.9			$	3.3			$	4.6				137.8	%
Software license royalties			0.2				-				0.1				342.2	%
Licensing fees - related party			4.8				6.0				(1.3	)			(20.8	)%
License and amortization			0.2				0.5				(0.3	)			(55.9	)%
Merchant fees			0.3				0.5				(0.2	)			(40.8	)%
Engine fees			0.8				1.9				(1.1	)			(56.4	)%
Internet, server and data center			1.2				1.6				(0.4	)			(23.0	)%
Other			-				-				-				131.2	%
Total:		$	15.4			$	13.8			$	1.6				11.7	%

Cost of revenues increased for the three months ended September 30, 2026 primarily due to a $4.6 million increase in software license royalties - related parties, resulting from an increase in ARK revenue, partially offset by a decrease in licensing fees - related party of $1.3 million due to a reduction in licensing costs to SDE, a decrease in merchant fees of $0.2 million related to ARK: Ultimate Mobile Edition revenues, and a decrease in internet, server and data center costs of $0.4 million and a decrease in engine fees of $1.1 million due to an EPIC royalty true-up related to prior periods.

General and administrative expenses

General and administrative expenses for the three months ended September 30, 2026 increased by $0.1 million, or 1.4%, compared to the three months ended September 30, 2025. The increase in general and administrative expenses was due to an increase in office and insurance expense of $0.2 million, an increase in contractors and public company expense of $0.2 million and an increase in travel expense of $0.1 million, partially offset by a decrease in rent expense of $0.2 million and legal and professional fees of $0.2 million.

Research and development expenses

Research and development expenses for the three months ended September 30, 2026 increased by $0.9 million, or 23.8%, compared to the three months September 30, 2025. The increase in research and development expenses was due to an increase in internal research and development salaries as the Company continues to expand its internal development team.

Advertising and marketing expenses

Advertising and marketing expenses remained relatively unchanged at $0.0 million, or an increase of 1.9%, and were relatively unchanged when compared to the three months September 30, 2025. There was an increase in advertising and marketing expenses of $0.4 million due to Gamescom tradeshow and Ai4 artificial intelligence conference costs. This was fully offset by a decrease in advertising and marketing expenses of $0.4 million due to large promotional costs related to the launch of ARK: Aquatica and higher marketing costs for SaltyTV application in 2025.

Impairment of film assets

Impairment of film assets for the three months ended September 30, 2026 decreased by $0.3 million, or 92.8%, compared to the three months ended September 30, 2025. The decrease was primarily due to a lower amortizable base, as one film asset was impaired during the three months ended September 30, 2026, compared to four film assets with higher amortizable base during the three months ended September 30, 2025.

Other Factors Affecting Net Income (Loss)

		Three Months Ended September 30,
		2026				2025				$ Change				% Change
		(in millions)
Interest income		$	0.1			$	0.5			$	(0.4	)			(88.6	)%
Interest expense			(0.2	)			(0.2	)			-				(2.7	)%
Other income			0.1				0.1				(0.1	)			(57.1	)%
Income tax (provision) benefit			(0.4	)			1.6				(2.0	)			(127.9	)%

Interest income

Interest income was $0.1 million and $0.5 million for the three months ended September 30, 2026 and September 30, 2025, respectively. The decrease was due to the interest portion of IRS refunds received during the three months ended September 30, 2025.

Interest expense

Interest expense primarily related to our outstanding indebtedness with third-party lenders. Interest expense remained relatively consistent for the three months ended September 30, 2026 compared to the three months ended September 30, 2025, as interest on our outstanding debt remained relatively unchanged.

Other income

Other income was $0.1 million for the three months ended September 30, 2026 and 2025, respectively. There was an increase in the revaluation of warrant liabilities of $0.2 million, fully offset by the decrease in the revaluation of convertible notes of $0.2 million in the three months ended September 30, 2026.

(Provision for) benefit from income taxes

The Company had an income tax provision of $0.4 million and an income tax benefit of $1.6 million for the three months ended September 30, 2026 and 2025, respectively. This is primarily due to the Company being in a net income position during the three months ended September 30, 2026 while recognizing a net loss in the three months ended September 30, 2025. Our effective income tax rate was 6.1% and 16.6% during the three months ended September 30, 2026 and 2025, respectively.

Comparison of the nine months ended September 30, 2026 versus the nine months ended September 30, 2025

		Nine Months Ended September 30,
		2026				2025				$ Change				% Change
		(in millions)
Revenues, net		$	80.0			$	56.1			$	23.9				42.6	%
Cost of revenues			43.0				43.3				(0.3	)			(0.6	)%
Gross profit			37.0				12.8				24.2				188.6	%
Operating expenses:
General and administrative			14.5				13.3				1.3				9.4	%
Research and development			13.1				10.6				2.5				23.1	%
Advertising and marketing			2.6				3.7				(1.1	)			(30.3	)%
Depreciation			-				0.2				(0.2	)			(81.0	)%
Impairment of film assets			0.2				0.8				(0.6	)			(74.7	)%
Total operating expenses			30.4				28.6				1.9				6.5	%
Income (loss) from operations		$	6.5			$	(15.8	)		$	22.3				(141.5	)%

Revenue

Net revenues for the nine months ended September 30, 2026 increased by $23.9 million, or 42.6%, compared to the nine months ended September 30, 2025. The increase in net revenues is primarily due to the change in deferred revenue of $19.2 million, an increase in ARK: Survival Ascended sales of $4.8 million, which is driven by the sales of the base game, ARK: Bob's Tall Tales, ARK: Lost Colony, and the newly released ARK: Tides of Fortune, and ARK: Dragontopia, an increase of $4.6 million in Bellwright sales, and an increase of $0.4 million in Honeycomb: The World Beyond sales. The increase in revenue was partially offset by a decrease in revenue from ARK: Survival Evolved of $3.2 million, a decrease in ARK: Ultimate Mobile Edition revenue of $1.5 million, and a decrease in revenue of SaltyTV application of $0.4 million.

Cost of revenues

Cost of revenues for the nine months ended September 30, 2026 decreased by $0.3 million, or 0.6%, compared to the nine months ended September 30, 2025.

Cost of revenues for the nine months ended September 30, 2026 and 2025 comprised the following:

		Nine Months Ended September 30,
		2026				2025				$ Change				% Change
		(in millions)
Software license royalties - related parties		$	18.8			$	14.4			$	4.4				30.8	%
Software license royalties			0.3				0.1				0.2				111.0	%
Licensing fees - related party			15.8				18.0				(2.3	)			(12.5	)%
License and amortization			0.8				1.2				(0.4	)			(32.2	)%
Merchant fees			0.9				1.5				(0.6	)			(40.7	)%
Engine fees			2.7				3.6				(1.0	)			(27.2	)%
Internet, server and data center			3.8				4.3				(0.6	)			(12.9	)%
Other			0.1				0.1				-				(32.0	)%
Total:		$	43.0			$	43.2			$	(0.3	)			(0.6	)%

The decrease in cost of revenues for the nine months ended September 30, 2026 decreased by $0.3 million or 0.6%. For the nine months ended September 30, 2026, there was a decrease of $2.3 million in licensing fees - related party attributable to decreased licensing costs to SDE, a decrease in engine fees of $1.0 million, a decrease in merchant fees of $0.6 million related to a reduction in ARK: Ultimate Mobile Edition revenues, a decrease in license and amortization of $0.4 million primarily due to a lower depreciable base, and a decrease in internet, server, and data center of $0.6 million related to lower cloud infrastructure costs, partially offset by an increase of $4.4 million in software license royalties - related parties, a result of increased ARK revenues and an increase of $0.2 million in software license royalties.

General and administrative expenses

General and administrative expenses for the nine months ended September 30, 2026 increased by $1.3 million, or 9.4%, compared to the nine months ended September 30, 2025. The increase in general and administrative expenses was due to larger contractors expense of $0.8 million, an increase in office expense of $0.3 million, an increase in insurance costs of $0.2 million, an increase in public company expenses of $0.2 million and an increase in travel expense of $0.1 million, partially offset by a decrease in rent expense of $0.5 million.

Research and development expenses

Research and development expenses for the nine months ended September 30, 2026 increased by $2.5 million, or 23.1%, compared to the nine months ended September 30, 2025. The increase in research and development expenses was due to the outsourced development of For The Stars and 9 Yin Sutra: Immortal paid to Suzhou Snail and an increase in internal research and development salaries as the Company continues to expand its internal development team.

Advertising and marketing expenses

Advertising and marketing expenses for the nine months ended September 30, 2026 decreased by $1.1 million, or 30.3%, compared to the nine months ended September 30, 2025. The decrease was primarily attributable to higher advertising and marketing expenses during the nine months ended September 30, 2025, which included higher costs associated with the Company's presence at the Game Developers Conference ("GDC") and increased advertising campaigns for our ARK: Aquatica and Wandering Wizard titles, and SaltyTV application and related offerings.

Impairment of film assets

Impairment of film assets for the nine months ended September 30, 2026 decreased by $0.6 million, or 74.7%, compared to the nine months ended September 30, 2025. The decrease in impairment of film assets was due to the Company's underperformance of two films during the nine months ended September 30, 2026 compared to the underperformance of eight films and changes in the market conditions affecting expected future cash flow during the nine months ended September 30, 2025.

Other Factors Affecting Net Income (Loss)

		Nine Months Ended September 30,
		2026				2025				$ Change				% Change
		(in millions)
Interest income		$	0.2			$	0.6			$	(0.4	)			(71.7	)%
Interest expense			(0.5	)			(0.4	)			(0.1	)			23.1	%
Other income			-				0.2				(0.2	)			(102.1	)%
Income tax provision			(0.4	)			(10.8	)			10.4				(96.2	)%

Interest income

Interest income was $0.2 million and $0.6 million for the nine months ended September 30, 2026 and September 30, 2025, respectively. The decrease was due to the interest portion of IRS refunds received during the nine months ended September 30, 2025.

Interest expense

Interest expense primarily related to our outstanding indebtedness with third-party lenders. Interest expense increased by $0.1 million for the nine months ended September 30, 2026 because of higher average debt during the nine months ended September 30, 2026.

Other income

Other income decreased by $0.2 million for the nine months ended September 30, 2026, in comparison to the nine months ended September 30, 2025. The decrease is due to a $0.3 million expense from the revaluation of warrants, partially offset by an increase of $0.1 million income from revaluation of convertible notes in the nine months ended September 30, 2026.

Provision for income taxes

The Company had provision of income taxes of $0.4 million and $10.8 million for the nine months ended September 30, 2026 and 2025, respectively. This is primarily due to permanent differences, state taxes, and a change in valuation allowance. Our effective income tax rate was 6.6% and (69.7%) during the nine months ended September 30, 2026 and 2025, respectively.

Key Performance Metrics

Units Sold

We monitor Units Sold as a key performance metric in evaluating the performance of our console and PC game business. We define Units Sold as the number of game titles purchased through digital channels by an individual end user. Under this metric, the purchase of a standalone game, DLC, Season Pass or bundle on a specific platform are individually counted as a unit. For example, an individual who purchases a standalone game and DLC on one platform, a Season Pass on another platform, and a bundle on a third platform would count as four Units Sold. Similarly, an individual who purchases three standalone game titles on the same platform would count as three Units Sold.

Units Sold may be impacted by several factors that could cause fluctuations on a quarterly basis, such as game releases, our promotional activities, which most often coincide with the global holiday season in the fourth and first quarters of each year, promotional sales on digital platforms, console release cycles and new digital platforms. Future growth in Units Sold will depend on our ability to launch new games and features and the effectiveness of marketing strategies.

		Three Months Ended September 30,															Nine Months Ended September 30,
		2026				2025				Change				% Change				2026				2025				Change				% Change
		(in millions)
Units Sold(1)			2.0				1.1				0.9				73.3	%			6.2				4.8				1.4				28.0	%

(1)	Units include master games, DLCs, season pass and bundles and excludes skins, soundtracks and other items.

Units sold increased during the three months ended September 30, 2026, by 0.9 million units or 73.3%, as compared to the three months ended September 30, 2025. The Company's units sold increased due to increased sales of ARK: Survival Ascended by 0.7 million units and an increase in sales of Bellwright of 0.1 million units. Units sold increased during the nine months ended September 30, 2026, by 1.4 million units or 28.0% as compared to the nine months ended September 30, 2025. The Company's units sold increased due to the sale of ARK: Survival Ascended of 1.7 million units and an increase in sales of Bellwright of 0.3 million units, partially offset by a decrease in sales of ARK: Survival Evolved of 0.8 million units.

Bookings

Bookings is a key operating metric in assessing our financial performance. Bookings adjusts for the impact of deferrals and, we believe, provides a useful indicator of sales in a given period. It reflects the net amount of products and services sold digitally or physically in a given period, excluding the impact of revenue deferrals. Bookings is used by management to understand sales trends and assess the volume of our sales activity over time. Bookings should not be considered as alternatives to net income (loss), as measures of financial performance or any other performance measure derived in accordance with GAAP. Below is a reconciliation of total net revenue to Bookings, the closest GAAP financial measure.

		Three Months Ended September 30,																Nine Months Ended September 30,
		2026				2025				$ Change				% Change				2026				2025				$ Change				% Change
		(in millions)
Total net revenue		$	33.1			$	13.8			$	19.2				139.2	%		$	80.0			$	56.1			$	23.9				42.6	%
Change in deferred net revenue			(10.1	)			3.8				(13.9	)			(362.8	)%			(8.3	)			10.9				(19.2	)			(176.4	)%
Bookings		$	23.0			$	17.6			$	5.4				30.4	%		$	71.7			$	67.0			$	4.7				7.0	%

For the three months ended September 30, 2026, bookings increased by $5.4 million or 30.4%, compared to the three months ended September 30, 2025, primarily due to higher sales of ARK: Survival Ascended and Bellwright, partially offset by decrease in booking from ARK: Survival Evolved.

For the nine months ended September 30, 2026, bookings increased by $4.7 million, or 7.0%, compared to the nine months ended September 30, 2025, primarily due to higher sales of ARK: Survival Ascended and Bellwright, which benefited from promotional pricing during the period. This was offset by ARK: Survival Evolved as the title continued to mature and consumer demand shifted toward ARK: Survival Ascended and its related downloadable content.

Non-GAAP Measures

In addition to our financial results determined in accordance with U.S. generally accepted accounting principles ("U.S. GAAP" or "GAAP"), we believe EBITDA, as a non-GAAP measure, is useful in evaluating our operating performance. EBITDA, as used in this Quarterly Report on Form 10-Q, is a non-GAAP financial measure that is presented as supplemental disclosures and should not be construed as an alternative to net loss or any other GAAP measure as an indicator of operating performance.

We present EBITDA because it is used by management to assess our financial performance, excluding certain expenses that management believes do not reflect the ongoing operating performance of the business. Management uses EBITDA to supplement GAAP measures of performance when evaluating our business strategies, making budgeting decisions and comparing performance against peer companies.

EBITDA

We define EBITDA as net income (loss) before (i) interest income, (ii) interest expense, (iii) provision for (benefit from) income taxes, and (iv) depreciation expense, property and equipment.

EBITDA as calculated herein may not be comparable to similarly titled measures reported by other companies within the industry and is not determined in accordance with GAAP. Our presentation of EBITDA should not be construed as an inference that our future results will be unaffected by unusual or unexpected items. We may also incur expenses that are the same, or similar to, some of the adjustments in this presentation.

Below is a reconciliation of net income (loss) to EBITDA, the closest GAAP financial measure.

		Three Months Ended September 30,																Nine Months Ended September 30,
		2026				2025				$ Change				% Change				2026				2025				$ Change				% Change
		(in millions)
Net income (loss)		$	6.7			$	(7.9	)		$	14.5				(184.8	)%		$	5.8			$	(26.4	)		$	32.1				(121.9	)%
Interest income and interest income - related parties			(0.1	)			(0.5	)			0.4				(88.6	)%			(0.2	)			(0.6	)			0.4				(71.7	)%
Interest expense			0.2				0.2				-				(2.7	)%			0.5				0.4				0.1				23.1	%
Provision for (benefit from) income taxes			0.4				(1.6	)			2.0				(127.9	)%			0.4				10.8				(10.4	)			(96.2	)%
Depreciation expense			-				0.1				(0.1	)			(80.8	)%			-				0.2				(0.2	)			(81.0	)%
EBITDA		$	7.2			$	(9.7	)		$	16.9				(175.1	)%		$	6.5			$	(15.6	)		$	22.1				(142.7	)%

For the three months ended September 30, 2026, EBITDA increased by $16.9 million, or 175.1%, compared to the three months ended September 30, 2025. The increase was primarily driven by $14.5 million increase in net income, a decrease in interest income and interest income - related parties of $0.4 million, and an increase in the provision of income taxes of $2.0 million.

For the nine months ended September 30, 2026, EBITDA increased by $22.1 million, or 142.7%, compared to the nine months ended September 30, 2025, primarily due to an increase in net income of $32.1 million, partially offset by a decrease in provision for income taxes of $10.4 million.

Liquidity and Capital Resources

Capital spending

We incur capital expenditures in the normal course of business and perform ongoing enhancements and updates to our social and mobile games to maintain their quality standards. Cash used for capital expenditures in the normal course of business is typically made available from cash flows generated by operating activities. We may also pursue acquisition opportunities for additional businesses or games that meet our strategic and return on investment criteria. Capital needs for investment opportunities are evaluated on an individual opportunity basis and may require significant capital commitments.

Liquidity

Our primary sources of liquidity are the cash flows generated from our operations, that are currently available as unrestricted cash. Our unrestricted cash was $12.1 million and $8.6 million as of September 30, 2026 and December 31, 2025, respectively.

Our restricted cash and cash equivalents were $2.3 million and $1.9 million as of September 30, 2026 and December 31, 2025, respectively. Our restricted cash primarily consists of time deposits and is used to secure standby letters of credit with certain of our landlords and insurance providers, and to hold collateral in reserve related to our revolving line of credit.

As of September 30, 2026, our 2021 Revolving Loan has a balance of $2.5 million and matures in March 2027, at which time the loan will convert into a term loan with a maturity date of March 31, 2030. Additionally, in February 2025 we issued convertible notes with a stated value of $3.3 million that matured in February 2026 and have been fully repaid as of September 30, 2026. We obtained a term loan note of $3.5 million in June 2025 with a maturity date of June 2028. In October 2025, we issued a convertible note with a stated value of $2.2 million, which would have matured in October 2026; and in November 2025, we issued a convertible note with a par value of $1.1 million, which would have matured in November 2026. Both convertible notes were repaid in full as of September 30, 2026. Additionally, we have available to issue up to $4.4 million of convertible notes to our existing noteholders. We are in compliance with our debt covenants related to the 2021 Revolving Loan, 2021 Promissory note and 2025 Term Loan for the trailing twelve months ended September 30, 2026. For the trailing twelve months ended December 31, 2025, the Company was in compliance with its debt covenants related to the 2021 Revolving Note, 2021 Promissory Note and 2025 Term Loan. There is no guarantee we will receive a waiver from the applicable lender if the covenants of the loans are breached in the future. In the event of a future breach of the debt covenants the lender has the right, but not the obligation, to declare all or any part of the debt as due immediately and cease making any advances or extend any further credit to us.

The Company has raised capital through the issuance of the convertible notes and shares of Class A common stock and through the distribution agreement entered into with our retail partner which provided advanced royalties. The need for additional capital depends on many factors, including, among other things, whether we can successfully renegotiate the terms of our debt arrangements, the rate at which our business grows, demands for working capital, revenue generated from existing DLCs and game titles and launches of new DLCs and new game titles, and any acquisitions that we may pursue. From time to time, we could be required, or may otherwise attempt, to seek additional sources of capital, including, but not limited to, equity and/or debt financings. We cannot provide assurance that we will be able to successfully access any such equity or debt financings, that the required equity or debt financings would be available on terms acceptable to us, if at all, or that any such financings would not be dilutive to our stockholders.

Our current unrestricted cash position of approximately $12.1 million, and our expected revenue receipts will allow the Company to continue operations beyond the next 12 months and service its current debts.

Cash flows

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

		Nine Months Ended September 30,
		2026				2025				$ Change				% Change
		(in millions)
Net cash flows provided by operating activities		$	6.1			$	4.2			$	1.9				45.3	%
Net cash flows used in investing activities			(0.4	)			(4.1	)			3.8				(90.9	)%
Net cash flows provided by (used in) financing activities			(1.7	)			4.9				(6.6	)			(134.5	)%
Net increase in cash and cash equivalents and restricted cash and cash equivalents		$	3.9			$	5.0			$	(1.1	)			(21.5	)%

Operating activities

Net cash flows provided by operating activities for the nine months ended September 30, 2026 increased by $1.9 million as compared to the nine months ended September 30, 2025, which resulted primarily from an increase in net income of $32.1 million, an increase in prepaid expenses related party and prepaid expenses and other current assets of $3.8 million, an increase in lease liabilities of $0.4 million, an increase in accrued expenses and other liabilities of $0.3 million, and an increase in other noncurrent assets of $0.2 million. This was partially offset by the decrease in deferred revenue of $20.4 million, a decrease in noncash deferred taxes of $10.8 million, a decrease in accounts payable and accounts payable - related parties of $3.9 million, and a decrease in other noncash reconciling items of $0.3 million.

The Company had a net income of $5.8 million and a net loss of $26.4 million, for the nine months ended September 30, 2026 and 2025, respectively, representing an increase of $32.1 million. The increase was primarily due to an increase in revenue of $23.9 million, a decrease in the provision of income taxes of $10.4 million, a decrease in cost of revenue of $0.3 million, partially offset by an increase in total operating expenses of $1.9 million, and total other expense of $0.6 million.

Non-cash reconciling items were $1.9 million and $13.1 million for the nine months ended September 30, 2026 and 2025, respectively, representing a decrease of $11.1 million. The decrease in the non-cash reconciling items was due to a decrease in deferred taxes of $10.8 million, a decrease in impairment expenses of $0.6 million, a decrease in stock based compensation expense of $0.2 million, a decrease in depreciation expense of $0.2 million, a decrease in the change in fair value of convertible notes of $0.1 million, partially offset by an increase in the gain on change in fair value of warrants of $0.4 million, and an increase in amortization expense of $0.3 million.

Our accounts receivable - related party represent revenues attributable to certain mobile games that, for administrative reasons, were collected on our behalf by SDE Inc. ("SDE"), an affiliated entity, from fiscal year 2018 through 2021. SDE no longer collects such payments on our behalf; all such payments are received directly from the platforms through which we offer the relevant games. As of September 30, 2026 and December 31, 2025, the net outstanding balances of receivables due from SDE were $0.0 million and $1.5 million, respectively. The Company and SDE have entered into an agreement to offset uncollected amounts against monthly payments due to SDE for operating expenses and costs of revenue. See Note 5 - Accounts (Payable) Receivable - Related Party to our unaudited condensed consolidated financial statements included in this Quarterly Report.

Investing activities

Net cash flows used in investing activities for the nine months ended September 30, 2026 were $0.4 million compared to $4.1 million in the nine months ended September 30, 2025. Investing activities for the nine months ended September 30, 2026 included $0.4 million for the acquisition of license rights to certain titles that are capitalized as research and development expenditures to be sold or marketed. Investing activities for the nine months ended September 30, 2025 included $0.3 million for the acquisition of software applications, $3.0 million for the acquisition of license rights to certain titles, and $0.8 million in capitalized research and development expenditures for the development of software to be sold or marketed.

Financing activities

Net cash flows (used in) provided by financing activities for the nine months ended September 30, 2026 were ($1.7) million compared to $4.9 million for the nine months ended September 30, 2025. Financing activities for the nine months ended September 30, 2026 included a $2.5 million repayment on the 2021 Revolving Loan, $3.1 million repayment on the February 2025, October 2025 and November 2025 Convertible Notes and a $0.9 million repayment on the 2021 Promissory Note and 2025 Term Loan, partially offset by the At-The-Market common stock offering of $4.8 million. Financing activities for the nine months ended September 30, 2025 included $3.0 million from the issuance of convertible notes, $3.5 million obtained from the new term loan, and $0.2 million received upon the exercise of warrants during the period. This was partially offset by the repayments of the convertible notes of $1.4 million and a $0.3 million repayment on the 2021 Promissory Note and 2025 Term Loan.

Registered Offerings and Registration Statements

In October 2023, we filed a Registration Statement on Form S-1 with the SEC in connection with our issuance of convertible note, equity line of credit and warrants related to each financing as noted below.

In September 2024, we filed a universal shelf Registration Statement on Form S-3 that registered $50,000,000 of any combination of our Class A common stock, preferred stock, debt securities, warrants or units described therein, either individually or in combination with other securities. The "shelf" Registration Statement was declared effective on September 20, 2024 and was used to register pursuant to a prospectus supplement, dated August 7, 2025, to the "shelf" Registration Statement for the potential sale of shares of our Class A common stock in the "at the market offering" program with Wainwright.

On December 15, 2025, we filed a Registration Statement on Form S-1 with the SEC registering shares of our Class A common stock underlying two convertible notes issued in the aggregate principal amount of $3.3 million. The first note, issued October 24, 2025, had a principal amount of $2.2 million for proceeds of $2.0 million, bore a 5% interest rate, was repayable in 10 monthly installments starting January 24, 2026, and had a maturity date of October 24, 2026. The second note, issued November 26, 2025, had a principal amount of $1.1 million for proceeds of $1.0 million, bore a 5% interest rate, was repayable in 10 monthly installments starting February 26, 2026, and had a maturity date of November 26, 2026. These notes were convertible into Class A common stock at $25.00 per share, subject to certain exceptions as discussed below.

Capital resources

We fund our operations from our net cash flows provided by operating activities as well as through public and private sales of our securities, and we expect to continue to seek and obtain additional capital in a similar manner. In addition to these cash flows, we have entered into certain debt arrangements to provide additional liquidity and to finance our operations.

Revolving Loan and First Term Loan

We have outstanding borrowings pursuant to a Third Amended and Restated Loan and Security Agreement dated June 21, 2023, with Cathay Bank, as subsequently amended on December 28, 2023, December 31, 2024, June 10, 2025, January 2, 2026, and March 16, 2026 (as so amended, the "2023 Loan Agreement"), consisting of (i) a term loan in the original principal amount of Ten Million and No/100 Dollars ($10,000,000) (the "First Term Loan"), and (ii) a revolving line of credit in the maximum principal amount of Six Million and No/100 Dollars ($6,000,000.00) (the "Revolving Loan"). As of September 30, 2026, there is no outstanding balance under the First Term Loan, and the outstanding balance under the Revolving Loan is $2,500,000. The Revolving Loan has a maximum principal balance of $5,000,000 and bears interest at a rate equal to the prime rate less 0.25% and a floor rate of 6.50%. Interest is due and payable under the Revolving Loan on a monthly basis. On and after March 31, 2027, we will no longer be permitted to borrow any further amounts under the Revolving Loan. At such time, the revolving Loan will be converted to a term loan with maturity date of March 31, 2030, and we will be required to repay any principal balance then outstanding in monthly installments.

Promissory Note

In June 2021, we entered into a loan agreement with a financial institution providing for a term loan in an aggregate principal amount of $3.0 million (the "2021 Promissory Note"). The 2021 Promissory Note, which was originally set to mature in June 2031, bears interest at a fixed rate of 3.5% for the first five years and then at a floating rate of the Wall Street Journal prime rate until maturity. The 2021 Promissory Note is secured by our principal headquarters.

2025 Term Loan

In June 2025, we entered into a loan agreement with a financial institution providing for a term loan (the "2025 Term Loan") in an aggregate principal amount of $3.5 million. This loan is set to mature in June 2028, bears interest at a floating rate of 0.50% in excess of Wall Street Journal prime rate or a floor of 6.50% rate until maturity.

Convertible Notes

In February 2025, we issued convertible notes (the "February 2025 Convertible Notes") with an aggregate principal amount of $3,300,000 for gross proceeds of $3,000,000. The February 2025 Convertible Notes, which matured on February 21, 2026, carried an original issue discount of 10%, and were subject to a guaranteed interest equal to 5% of the principal amount. The principal and interest charges were payable in 10 equal monthly payments starting May 21, 2025. We have accounted for the convertible notes at fair value. As of February 28, 2026, the February 2025 Convertible Notes have been fully repaid and no amounts remain outstanding thereafter.

In October 2025, we issued a convertible note (the "October 2025 Convertible Note") with an aggregate principal amount of $2,200,000 for gross proceeds of $2,000,000. The October 2025 Convertible Note, which would have matured on October 24, 2026, carried an original issue discount of 10%, and was subject to a guaranteed interest equal to 5% of the principal amount. The principal and interest charges were payable in 10 equal monthly payments starting January 24, 2026. We are accounting for the convertible note at fair value. As of September 30, 2026, the October 2025 Convertible Note was fully repaid and no amounts remain outstanding thereafter.

In November 2025, we issued a convertible note (the "November 2025 Convertible Note" and, together with the February 2025 Convertible Notes, and the October 2025 Convertible Note, the "2025 Convertible Notes") with an aggregate principal amount of $1,100,000 for gross proceeds of $1,000,000. The November 2025 Convertible Note, which would have matured on November 26, 2026, carries an original issue discount of 10%, and was subject to a guaranteed interest equal to 5% of the principal amount. The principal and interest charges were payable in 10 equal monthly payments starting February 26, 2026. We are accounting for the convertible note at fair value. As of September 30, 2026, the November 2025 Convertible Note was fully repaid and no amounts remain outstanding thereafter.

The 2025 Convertible Notes were ranked as a senior unsecured obligation of the Company with priority over all existing and future unsecured indebtedness. Subject to certain ownership limitations, all or portion of the then outstanding and unpaid principal and interest of the 2025 Convertible Notes could be converted at the option of the holder at any time into shares of our Class A common stock, at a conversion price of $25.00 per share, except that, for an aggregate of $577,500 of the conversion amount with respect to the October 2025 Convertible Note, and an aggregate of $288,750 of the conversion amount with respect to the November 2025 Convertible Note, the conversion price could be equal to the lesser of $25.00 per share or 92% of the lowest daily volume weighted average price of the Class A common stock during the 5 trading days period prior the receipt of the notice of conversion. These amounts under the October 2025 Convertible Note and the November 2025 Convertible Note were converted during the nine months ended September 30, 2026, into 465,992 shares of Class A common stock. As of September 30, 2026, the remaining outstanding balances under all of the Convertible Notes were fully repaid, and no amounts remained outstanding under any such note as of that date.

At the Market Offering Program

On August 7, 2025, we entered into an At The Market Offering Agreement (the "ATM Sales Agreement") with H.C. Wainwright & Co., LLC, as sales agent (the "Sales Agent" or "Wainwright") to sell shares of our Class A common stock from time to time, in an "at the market offering" program through Wainwright, with certain limitations on the amount of Class A common stock that may be offered and sold thereunder. The sales, if any, of the shares of Class A common stock made under the ATM Sales Agreement will be made by any method permitted by law deemed to be an "at the market offering" as defined in Rule 415(a)(4) promulgated under the Securities Act, including sales made directly on or through the Nasdaq or on any other existing trading market for the Class A common stock, directly to Wainwright as principal, in negotiated transactions at market prices prevailing at the time of sale or at prices related to such prevailing market prices, and/or in any other method permitted by law. Offers and sales of shares of Class A common stock by the Company, if any, under the ATM Sales Agreement, will be made through a prospectus supplement, dated August 7, 2025 and an accompanying base prospectus, dated September 20, 2024, contained therein (the "ATM Prospectus Supplement"), which ATM Prospectus Supplement forms a part of our shelf registration statement on Form S-3 (File 333-282030), initially filed by the Company with the SEC on September 11, 2024, and declared effective by the SEC on September 20, 2024. The aggregate market value of the shares of Class A common stock that were initially registered for sale under the ATM Prospectus Supplement was $4,500,000, which was based on the limitations of General Instruction I.B.6 of Form S-3. On May 20, 2026, we filed Amendment No. 1 ("Amendment No. 1") to the ATM Prospectus Supplement to increase the shares available for sale thereunder to $3,660,000 of shares of Class A common stock. During the three months ended September 30, 2026, we sold 112,341 shares of Class A common stock under the ATM Sales Agreement for gross proceeds of $582,763 and incurred offering costs of $18,958, approximately $3.1 million of shares of Class A common stock remain available for sale.

Financial covenants

The loan agreements governing the Revolving Loan, the First Term Loan, and the 2025 Term Loan require us to maintain a minimum debt service coverage ratio of 1.5 to 1.0. Additionally, the Revolving Loan requires us to maintain an outstanding principal balance of no more than $2.5 million for 30 consecutive days during any twelve-month period. For the trailing twelve months ended September 30, 2026, the Company has met the minimum debt service coverage ratio required by its debt covenants. Any failure to comply with the covenants, or receive waivers for the covenants, could lead to the acceleration of payments due under the debt facilities with the lender, cause the lender to cease making advances under the revolving agreement, or allow the lender to take possession of collateral.

For additional information regarding our indebtedness, see Note 12, Revolving Loan, Short Term Note and Long-Term Debt to our unaudited condensed consolidated financial statements included in this Quarterly Report.

Critical Accounting Policies and Estimates

Our discussion and analysis of results of operations, financial condition, and liquidity are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and judgements that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may materially differ from these estimates under different assumptions or conditions. On an on-going basis, we review our estimates to ensure that they appropriately reflect changes in our business or new information as it becomes available. For additional information on our significant accounting policies, please refer to Note 2 - Summary of Significant Accounting Policies to our condensed consolidated financial statements included in this Quarterly Report. We believe that the following critical accounting policies and estimates have the greatest potential impact on our condensed consolidated financial statements.

Determining the Fair Value of Debt

The fair value of debt instruments for which we have elected the fair value option is estimated using an industry-standard binomial lattice framework incorporating unobservable inputs - including our own credit spread, equity volatility derived from historical stock prices, and risk-free rates - resulting in a Level 3 classification within the fair value hierarchy. These estimates are affected by fluctuations in our stock price, changes in our creditworthiness, shifts in market interest rates, and the probability and timing of conversion, prepayment and other settlement events. While most of these inputs are derived from objective market data or contractual terms, expected volatility requires significant management judgement as it is not directly observable. Changes in these inputs, including our credit spread or assumed equity volatility, could result in material fluctuations in the reported fair value of these liabilities, with corresponding gains or losses recognized in earnings.

Deferred Income Taxes

Our deferred income tax assets reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Changes in tax laws or the level of future taxable income could affect the realizability of deferred income tax assets. We recognize deferred income taxes based on estimates of future taxable income and the utilization of tax loss carryforwards. In evaluating the realizability of deferred taxes, we evaluate all available positive and negative evidence of whether sufficient future taxable income will be generated to realize the deferred tax assets, including the results of recent operations and projections of future taxable income. The weighing of positive and negative evidence and the projection of future taxable income requires significant judgment and estimates. In addition, changes in these estimates may have a material impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements

For a description of recently issued and adopted accounting pronouncements, including the respective dates of adoption and expected effects on our results of operations and financial condition, please see Note 2 - Summary of Significant Accounting Policies to our Condensed Consolidated Financial Statements included in this Quarterly Report.

Emerging Growth Company and Smaller Reporting Company Status

We are an "emerging growth company," as defined in the JOBS Act. As such, we are eligible for exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and an exemption from the requirements to obtain a non-binding advisory vote on executive compensation or golden parachute arrangements. We have elected to take advantage of certain of the reduced disclosure obligations and may elect to take advantage of other reduced reporting requirements in our future filings with the SEC. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

In addition, an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this provision of the JOBS Act. As a result, we will not be subject to new or revised accounting standards at the same time as other public companies that are not emerging growth companies. Therefore, our Consolidated Financial Statements may not be comparable to those of companies that comply with new or revised accounting pronouncements as of public company effective dates.

We will remain an emerging growth company until the earliest of: (a)(i) the last day of the fiscal year following the fifth anniversary of the closing of our initial public offering; (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.235 billion; or (iii) the last day of the fiscal year in which we are deemed to be a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year and (b) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

We are also a "smaller reporting company" as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.