System1, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. Index to Consolidated Financial Statements Reports of Independent Registered Public Accounting Firms (PCAOB ID 34 and 238 ) 67 Consolidated Balance Sheets 69 Consolidated Statements of Operations 70 Consolidated Statements of Comprehensive Loss 71 Consolidated Statements of Stockholders’ Equity 72 Consolidated Statements of Cash Flows 73 Notes to Consolidated Financial Statements 74 66 Report of Independent Registered Public Accounting Firm To the stockholders and the Board of Directors of System1, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of System1, Inc. and subsidiaries (the "Company") as of December 31, 2024, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows, for the year ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024, and the results of its operations and its cash flows for the year ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ Deloitte & Touche LLP Los Angeles, California March 10, 2025 We have served as the Company’s auditor since 2024. 67 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of System1, Inc. Opinion on the Financial Statements We have audited the consolidated balance sheet of System1, Inc. and its subsidiaries (the "Company") as of December 31, 2023, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity and cash flows for the year then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Los Angeles, California March 15, 2024 We served as the Company's auditor from 2020 to 2024. 68 System1, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except per share amounts) December 31, 2024 December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 63,607 $ 135,343 Restricted cash, current 3,970 3,813 Accounts receivable, net 62,916 56,093 Prepaid expenses and other current assets 3,984 6,754 Total current assets 134,477 202,003 Restricted cash, non-current 371 4,294 Property and equipment, net 2,104 3,084 Internal-use software development costs, net 14,436 11,425 Intangible assets, net 222,341 297,001 Goodwill 82,407 82,407 Operating lease right-of-use assets 2,644 4,732 Other non-current assets 349 524 Total assets $ 459,129 $ 605,470 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 10,401 $ 9,499 Accrued expenses and other current liabilities 76,200 59,314 Operating lease liabilities, current 2,089 2,333 Debt, net 16,405 15,271 Total current liabilities 105,095 86,417 Operating lease liabilities, non-current 1,365 3,582 Long-term debt, net 255,118 334,232 Warrant liability 302 2,688 Deferred tax liability 6,199 8,307 Other non-current liabilities 6,054 929 Total liabilities 374,133 436,155 Commitments and contingencies (Note 8) Stockholders’ equity: Class A common stock - $ 0.0001 par value; 500,000 shares authorized, 73,653 and 65,855 Class A shares issued and outstanding as of December 31, 2024 and 2023, respectively 7 7 Class C common stock - $ 0.0001 par value; 25,000 shares authorized, 18,704 and 21,513 Class C shares issued and outstanding as of December 31, 2024 and 2023, respectively 2 2 Additional paid-in capital 863,033 843,112 Accumulated deficit ( 782,335 ) ( 707,662 ) Accumulated other comprehensive loss ( 443 ) ( 181 ) Total stockholders' equity attributable to System1, Inc. 80,264 135,278 Non-controlling interest 4,732 34,037 Total stockholders' equity 84,996 169,315 Total liabilities and stockholders' equity $ 459,129 $ 605,470 The accompanying notes are an integral part of these consolidated financial statements. 69 System1, Inc. and Subsidiaries Consolidated Statements of Operations (In thousands, except for per share amounts) For the Year Ended December 31, 2024 December 31, 2023 Revenue $ 343,925 $ 401,971 Operating expenses: Cost of revenue (excluding depreciation and amortization) 191,561 248,745 Salaries and benefits 113,512 106,505 Selling, general, and administrative 47,346 54,307 Depreciation and amortization 80,107 78,403 Total operating expenses 432,526 487,960 Operating loss ( 88,601 ) ( 85,989 ) Other expense (income): Interest expense, net 31,562 48,745 Gain on extinguishment of debt ( 20,109 ) — Loss on extinguishment of related-party debt — 2,004 Change in fair value of warrant liabilities ( 2,386 ) ( 5,109 ) Total other expense, net 9,067 45,640 Loss before income tax ( 97,668 ) ( 131,629 ) Income tax benefit ( 370 ) ( 20,371 ) Net loss from continuing operations ( 97,298 ) ( 111,258 ) Net loss from discontinued operations, net of tax — ( 174,327 ) Net loss ( 97,298 ) ( 285,585 ) Less: Net loss from continuing operations attributable to non-controlling interest ( 22,625 ) ( 25,531 ) Less: Net loss from discontinued operations attributable to non-controlling interest — ( 32,833 ) Net loss attributable to System1, Inc. $ ( 74,673 ) $ ( 227,221 ) Amounts attributable to System1, Inc.: Net loss from continuing operations $ ( 74,673 ) $ ( 85,727 ) Net loss from discontinued operations — ( 141,494 ) Net loss attributable to System1, Inc. $ ( 74,673 ) $ ( 227,221 ) Basic and diluted net loss per share: Continuing operations $ ( 1.07 ) $ ( 0.94 ) Discontinued operations — ( 1.54 ) Basic and diluted net loss per share $ ( 1.07 ) $ ( 2.48 ) Weighted average number of shares outstanding - basic and diluted 69,554 91,454 The accompanying notes are an integral part of these consolidated financial statements. 70 System1, Inc. and Subsidiaries Consolidated Statements of Comprehensive Loss (In thousands) For the Year Ended December 31, 2024 December 31, 2023 Net loss $ ( 97,298 ) $ ( 285,585 ) Other comprehensive (loss) income Foreign currency translation (loss) income ( 500 ) 35 Comprehensive loss ( 97,798 ) ( 285,550 ) Comprehensive loss attributable to non-controlling interest ( 22,863 ) ( 58,364 ) Comprehensive loss attributable to System1, Inc. $ ( 74,935 ) $ ( 227,186 ) The accompanying notes are an integral part of these consolidated financial statements. 71 System1, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity (In thousands) Class A common stock Class C common stock Shares Amount Shares Amount Additional Paid-In-Capital Accumulated Deficit Accumulated Other Comprehensive Income Non-Controlling Interest Total Stockholders’Equity Balance at December 31, 2022 91,674 $ 9 21,747 $ 2 $ 831,566 $ ( 439,296 ) $ ( 260 ) $ 78,650 $ 470,671 Net loss — — — — — ( 227,221 ) ( 58,364 ) ( 285,585 ) Cumulative-effect of adoption of ASU 2016-13 — — — — — ( 327 ) — — ( 327 ) Issuance of common stock in connection with settlement of incentive plan 407 — — — 1,818 — — ( 160 ) 1,658 Conversion of Class C shares to Class A shares 234 — ( 234 ) — 1,048 — — ( 1,048 ) — Tax receivable agreement liability and deferred taxes arising from LLC interest ownership exchanges and the issuance of common stock from equity incentive plans — — — — 286 — — — 286 Issuance of restricted stock, net of forfeitures and shares withheld for taxes 2,615 1 — — ( 1,108 ) — — ( 1,011 ) ( 2,118 ) Common stock cancelled in connection with disposition of business ( 29,075 ) ( 3 ) — — ( 13,570 ) ( 40,818 ) — 13,571 ( 40,820 ) Other comprehensive income (loss) — — — — — — 79 ( 44 ) 35 Stock-based compensation — — — — 23,072 — — 2,540 25,612 Distribution to members — — — — — — — ( 97 ) ( 97 ) Balance at December 31, 2023 65,855 $ 7 21,513 $ 2 $ 843,112 $ ( 707,662 ) $ ( 181 ) $ 34,037 $ 169,315 Net loss — — — — — ( 74,673 ) — ( 22,625 ) ( 97,298 ) Issuance of common stock in connection with settlement of incentive plan 970 — — — 2,464 — — ( 757 ) 1,707 Conversion of Class C shares to Class A shares 2,809 — ( 2,809 ) — 3,291 — — ( 3,291 ) — Tax receivable agreement liability and deferred taxes arising from LLC interest ownership exchanges and the issuance of common stock from equity incentive plans — — — — ( 4,502 ) — — — ( 4,502 ) Issuance of restricted stock, net of forfeitures and shares withheld for taxes 3,551 — — — 1,583 — — ( 2,630 ) ( 1,047 ) Issuance of restricted stock for vested replacement awards 468 — — — — — — — — Other comprehensive income (loss) — — — — — — ( 262 ) ( 238 ) ( 500 ) Stock-based compensation — — — — 17,085 — — 263 17,348 Distribution to members — — — — — — — ( 27 ) ( 27 ) Balance at December 31, 2024 73,653 $ 7 18,704 $ 2 $ 863,033 $ ( 782,335 ) $ ( 443 ) $ 4,732 $ 84,996 The accompanying notes are an integral part of these consolidated financial statements. 72 System1, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) For the Year Ended December 31, 2024 December 31, 2023 Cash Flows from Operating Activities Net loss $ ( 97,298 ) $ ( 285,585 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 80,107 105,208 Stock-based compensation 15,763 53,085 Impairment of goodwill — 115,483 Shared-based compensation liabilities 17,949 — Impairment of assets held for sale — 3,276 Loss on sale of business — 4,247 Amortization of debt issuance costs 3,914 6,418 Noncash lease expense 1,991 1,680 Change in fair value of warrant liabilities ( 2,386 ) ( 5,109 ) Deferred tax benefits ( 2,103 ) ( 22,330 ) Gain on extinguishment of debt ( 20,109 ) — Loss on extinguishment of related-party debt — 2,004 Other, net ( 161 ) 2,042 Changes in operating assets and liabilities Accounts receivable ( 6,802 ) 20,857 Prepaid expenses and other current assets 2,846 5,207 Accounts payable 903 ( 6,796 ) Accrued expenses and other current liabilities 1,992 ( 19,438 ) Deferred revenue ( 364 ) 15,273 Long-term earnout liabilities — ( 20,000 ) Other non-current liabilities ( 1,497 ) ( 264 ) Net cash used in operating activities ( 5,255 ) ( 24,742 ) Cash Flows from Investing Activities Purchases of property and equipment ( 31 ) ( 2,353 ) Capitalized software development costs ( 6,224 ) ( 5,607 ) Proceeds from sale of business, net of cash sold — 211,139 Net cash (used in) provided by investing activities ( 6,255 ) 203,179 Cash Flows from Financing Activities Proceeds from related-party loan, net of lender fees — 11,278 Repayments of related party loan, inclusive of lender fees — ( 2,699 ) Proceeds from 2023 Revolving Note — 64,000 Repayment of 2023 Revolving Note, inclusive of lender fees — ( 66,400 ) Repayment of Term Loan ( 61,786 ) ( 20,000 ) Repayment of 2022 Revolving Facility — ( 50,000 ) Payment of acquisition holdback — ( 1,935 ) Payment of promissory note — ( 5,156 ) Taxes paid related to net settlement of stock awards ( 2,148 ) ( 3,063 ) Distributions to members, net of contributions ( 27 ) ( 97 ) Net cash used in financing activities ( 63,961 ) ( 74,072 ) Effect of exchange rate changes in cash, cash equivalent and restricted cash ( 31 ) 10 Net (decrease) increase in cash, cash equivalents and restricted cash ( 75,502 ) 104,375 Cash and cash equivalents and restricted cash, beginning of the period 143,450 39,075 Cash and cash equivalents and restricted cash, end of the period $ 67,948 $ 143,450 Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets: Cash and cash equivalents $ 63,607 $ 135,343 Restricted cash 4,341 8,107 Total cash, cash equivalents and restricted cash $ 67,948 $ 143,450 Supplemental cash flow information: Cash (refunds) paid for income taxes $ ( 1,617 ) $ 7,102 Cash paid for interest $ 30,677 $ 42,875 Cash paid for operating lease liabilities $ 2,583 $ 2,141 Stock-based compensation included in capitalized software development costs $ 1,382 $ 2,008 Settlement of incentive plan through issuance of common stock $ 1,707 $ 1,658 Restructuring of holdback liability to promissory note $ — $ 5,156 The accompanying notes are an integral part of these consolidated financial statements. 73 System1, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Organization and Description of Business System1, Inc. and subsidiaries (the "Company", "we", "our" or "us") operate an omnichannel customer acquisition platform, delivering high-intent customers to brands, advertisers and publishers. We provide our omnichannel customer acquisition platform services through our proprietary responsive acquisition marketing platform ("RAMP") . Operating seamlessly across major advertising networks and advertising category verticals to acquire end-users, RAMP allows us to monetize such end users through our relationships with third party advertisers and advertising networks ("A dvertising Partners ") . RAMP operates across our network of owned and operated websites and related products, allowing us to monetize user traffic that we source from various acquisition marketing channels, including Google, Meta, Outbrain, and TikTok. RAMP also allows third party advertising platforms and publishers (" Network Partners ") , to send user traffic to, and monetize end user traffic on, our owned and operated websites or through our monetization agreements . Our primary operations are in the United States, and we also have operations in Canada and the Netherlands. Operations outside the United States are subject to risks inherent in operating under different legal systems, as well as various political and economic environments. Among these risks are changes in existing tax laws, changes in the regulatory framework in foreign jurisdictions , data privacy laws, possible limitations on foreign investment and income repatriation, government foreign exchange controls, exposure to currency exchange fluctuations and employment laws impacting foreign employees . We do not engage in hedging activities to mitigate our exposure to fluctuations in foreign currency exchange rates. On June 28, 2021, we entered into a Business Combination Agreement (as amended on November 30, 2021, January 10, 2022 and January 25, 2022), ("Business Combination Agreement") by and among us, S1 Holdco, LLC ("S1 Holdco") and Total Security Limited, formerly known as Protected.net Group Limited ("Protected") . On January 26, 2022 ("Closing Date"), we consummated the business combination ("Merger") pursuant to the Business Combination Agreement. We, through Total Security Limited, formerly known as Protected.net Group Limited ("Protected"), also provided antivirus software solutions, offering customers a single packaged solution that provides protection and reporting to the end user. On November 30, 2023, we completed the sale of Protected, including our antivirus and consumer privacy software solutions, pursuant to the terms of a share purchase agreement ("Share Purchase Agreement"). Pursuant to the Share Purchase Agreement, Just Develop It Limited ("JDI"), one of our significant shareholders, which is principally owned and managed by certain members of the Protected management team ("Purchasing Parties"), acquired all of the outstanding preference and ordinary shares ("Protected Disposition") of Protected for total consideration comprised: (a) $ 240.0 million in cash, subject to certain adjustments, (b) the return and subsequent cancellation of approximately 29.1 million shares of our Class A common stock, par value $ 0.0001 per share, owned by the Purchasing Parties and (c) confirmation from JDI, Protected and the Protected CEO that the financial performance benchmarks related to certain contingent earnout payments (the "Protected Incentive Plan") based on the future performance of Protected’s business in an aggregate amount of up to $ 60.0 million contemplated by the Business Combination Agreement related to the Merger, will, as a result of the Protected Disposition, no longer be achievable. The results of operations of our Protected business prior to its sale are presented as net loss from discontinued operations in our consolidated statements of operations for all periods presented (see Note 17, Discontinued Operations). On August 1, 2024, we undertook a corporate reorganization, the result of which was that all of the assets and business operations of the company are now held by System1 Holdings, LLC ("System1 Holdings"), a newly formed intermediate holding company of which we maintain the controlling interest and in which the non-controlling interest is owned by the holders of our Class C common stock. Following the corporate reorganization, (a) System1 Holdings now owns 100 % of S1 Holdco, LLC ("S1 Holdco"), the previous intermediate holding company with the non-controlling interests, and 100 % of S1 Media, LLC (“S1 Media”), another new subsidiary formed in connection with the corporate reorganization, (b) S1 Media holds the assets and business operations 74 System1, Inc. and Subsidiaries Notes to Consolidated Financial Statements associated with our owned and operated products businesses, which include CouponFollow, Startpage and Mapquest, and (c) S1 Holdco holds our remaining assets and business operations associated with our digital advertising businesses, including our proprietary RAMP platform. S1 Holdco and its subsidiaries remain obligors and guarantors under our Term Loan and 2022 Revolving Facility, and System1 Holdings and S1 Media are not parties thereto. We have two reportable segments: Owned and Operated Advertising and Partner Network ( see Note 14, Segment Reporting) . 2. Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements include the accounts of System1, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in the consolidation of the financial statements. The accompanying consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). Risks We are subject to certain business and operational risks, including competition from alternative technologies, as well as dependence on key Advertising Partners, key employees, key contracts, and growth to achieve our business and operational objectives. W e recorded revenue of $ 6.6 million from an Advertising Partner and an estimated contra revenue liability of $ 5.8 million for the year ended December 31, 2024 , due to certain Network Partners related to traffic sent to our platform by those Network Partners that generated search advertising revenue. We have currently withheld payment to the impacted Network Partners pending our comprehensive ongoing review of whether such traffic generating the search advertising revenue was valid or otherwise complied with the terms of our commercial arrangements with such Network P artners. For any traffic determined to be either invalid or not in compliance with such commercial arrangements, the corresponding amounts may be withheld from our Network Partners as a result of such violations and, in such cases, would be recognized as revenue in the period in which such final determinations are made. Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Management’s estimates are based on historical information available as of the date of the consolidated financial statements and various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from those estimates. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, valuation of goodwill, intangible assets and long-lived assets, valuation and recognition of stock-based compensation awards and income taxes. On an ongoing basis, management evaluates our estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities. Cash and Cash Equivalents Cash and cash equivalents consist of amounts held as bank deposits. Cash is deposited with high-credit-quality financial institutions and, at times, such balances with any one financial institution may exceed the insurance 75 limits of the prevailing regulatory body. Historically, we have not experienced any losses related to these cash balances and we believe that there is minimal risk of expected future losses. However, there can be no assurance that there will not be losses on these deposits. Restricted Cash Restricted cash as of December 31, 2024 and December 31, 2023 primarily related to; (i) cash collateralized letter of credit we maintain in connection with our corporate office lease, (ii) escrow account related to unvested equity awards as of the closing of the Merger that will be cash settled and (iii) escrow account related to the postcombination compensation arrangement related to the CouponFollow acquisition. Accounts Receivable, Net We maintain an allowance for doubtful accounts receivable for expected credit losses. In estimating the required allowance, we take into consideration the overall quality and aging of the receivable portfolio, creditworthiness of customers based on ongoing credit evaluation, the number of customers, specifically identified customer risks, historical write-off experience and the current economic environment, reasonable and supportable forecasts of future economic conditions, and other factors that may affect our ability to collect from customers. The payment term for our accounts receivable is typically 30 days. Property and Equipment, Net Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Repairs and maintenance are charged to expense as incurred, while improvements are capitalized. Upon the sale or retirement of property and equipment, the accounts are relieved of the cost and the related accumulated depreciation, and any resulting gain or loss is included in selling, general, and administrative expense on the consolidated statements of operations. The estimated useful lives of our property and equipment for purposes of computing depreciation are as follows (in years): Computer equipment 3 Office equipment 3 Furniture, fixtures and equipment 3 - 7 Leasehold improvements Shorter of the remaining lease term or estimated useful life for leasehold improvements. Internal-Use Software Development Costs, Net Internal-use software development costs are stated at cost, less accumulated amortization. We capitalize certain internal-use software development costs associated with creating and enhancing internally developed software related to our technology infrastructure, including continuing to develop and deploy our RAMP platform. Deployment activities focus on enhancement of our customer acquisition capabilities, including website enhancements and tools for marketing support, and upgrades of dashboards and reporting tools. These costs are comprised of personnel costs, which include salaries, bonuses, stock-based compensation and employee benefits’ expenses for employees who are directly associated with, and who devote significant time to, software projects, as well as services consumed in developing or obtaining the software. Internal-use software development costs that do not meet the qualification for capitalization are expensed as incurred, and are recorded in salaries and benefits expense on the consolidated statement of operations. 76 Internal-use software development activities generally consist of three stages: (i) the planning stage, (ii) the application and infrastructure development stage, and (iii) the post-implementation stage. Costs incurred in the planning and post-implementation stages of software development, including costs associated with the post configuration training and repairs and maintenance of the developed technologies, are expensed as incurred. Costs incurred in the application and infrastructure development stage, including significant enhancements and upgrades, are capitalized once the preliminary project stage is completed, management has authorized further funding for the completion of the project, and it is probable that the project will be completed and the software will perform as intended. Capitalization ends once a project is substantially complete, and the software and technologies are ready for their intended purpose(s). Internal-use software development costs are amortized using a straight-line method over an estimated useful life of three years , commencing when the software is ready for our intended use, which approximates the period over which the expected benefits will be derived. We do not transfer ownership of our software or lease our software to third parties. Intangible Assets, Net Intangible assets primarily consist of acquired technology, customer relationships and trademarks and trade names. We determine the appropriate useful life based on management’s estimate of the applicable intangible asset’s remaining economic useful life at the time of acquisition. Intangible assets are generally amortized over their estimated economic useful lives using a straight-line method, which approximates the pattern in which the economic benefits are consumed . The fair value of the intangible assets acquired in a business combination are determined as follows; (i) trademarks using the relief from royalty method under the income-based approach. Key assumptions include forecasted revenue, an estimated royalty rate applicable to the trademarks, and a discount rate; (ii) customer relationships using an excess-earnings method utilizing distributor inputs. Key assumptions include customer attrition rate, revenue growth rate, existing customer revenue, deferred revenue, and a discount rate; and (iii) technology using the excess-earnings method. Key assumptions include forecasted revenue, technology migration rate and a discount rate. The estimated useful lives of our intangible assets are as follows (in years): Developed technology 4 Customer relationships 3 - 5 Trademarks and trade names 10 Other intangibles 4 Impairment of Long-Lived Assets We assess the recoverability of our long-lived assets when events or changes in circumstances indicate that their carrying amount may not be recoverable. Such events or changes in circumstances may include a significant adverse change in the extent or manner in which a long-lived asset is being used; significant adverse changes in legal factors or in the business climate that could affect the value of a long-lived asset; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset; current or future operating or cash flow losses that demonstrate continuing losses associated with the use of a long-lived asset; or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of our previously estimated useful life. We perform impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We assess recoverability of our long-lived assets by determining whether the carrying amount of the asset group can be recovered through projected undiscounted cash flows over their remaining useful lives inclusive of an estimated residual value. If the carrying amount of the asset group exceeds the forecasted undiscounted cash flows, an impairment loss is recognized and measured as the amount by which the carrying amount exceeds the estimated fair value. An impairment loss is recognized in the statement of operations in the 77 period in which management determines such impairment has occurr ed. See Note 4, Goodwill, Internal-Use Software Development Costs, Net, and Intangible Assets, Net . Goodwill We perform annual impairment testing on goodwill in the fourth quarter of each fiscal year or whenever events or changes in circumstances indicate the carrying amount of a reporting unit may exceed its fair value. We have the option to assess goodwill for possible impairment by performing a qualitative analysis to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount; or to perform a quantitative goodwill impairment test. The fair values of our reporting units are determined by weighting a discounted cash flow model and a reference transaction model which include inputs developed using both internal and market-based data, or in a disposal transaction based on the best indicator of fair value which might include the proceeds to be received upon sale. Our key assumptions in the discounted cash flow model included, but are not limited to, the weighted average cost of capital, revenue growth rates (including long-term growth rates), and operating margins. The weighted average cost of capital reflect the increases in market interest rates. Our reference transaction model derives indications of value based on mergers and acquisition transactions in the digital advertising industry. Key assumptions in this model include, but are not limited to, the selection of comparable transactions, and the revenue and EBITDA multiples and EBITDA margins from those transactions. Unanticipated events or circumstances may occur that could affect the accuracy or validity of such assumptions, estimates or actual results. We completed a quantitative assessment of our Partner Network reporting unit, the only reporting unit with goodwill, and determined it is not more likely than not that the fair value of the reporting unit is less than the carrying amount for fiscal year 2024. See Note 4, Goodwill, Internal-Use Software Development Costs, Net, and Intangible Assets, Net . For our discontinued operations impairments in fiscal year 2023 s ee Note 17, Discontinued Operations. Discontinued Operations We present discontinued operations when there is a disposal of a component or a group of components that represents a strategic shift that will have a major effect on operations and financial results. The results of discontinued operations are reported in net income from discontinued operations in the consolidated statements of operations for all periods presented, commencing in the period in which the business is either disposed of or is classified as held for sale, including any gain or loss recognized on closing or adjustment of the carrying amount to fair value less costs to sell. Assets and liabilities related to a business classified as held for sale which also meets the criteria for discontinued operations are segregated in the consolidated balance sheets for the current and prior periods presented. See Note 17, Discontinued Operations. Leases We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets, operating lease liabilities, current and operating lease liabilities, non-current in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other non-current liabilities in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. 78 Warrant Liability We account for Public Warrants ("Warrants") as liabilities measured at fair value each balance sheet date, with changes in fair value recorded in Change in fair value of warrant liabilities in the consolidated statements of operations. See Note 11, Warrants and Note 12, Fair Value Measurement. Fair Value of Financial Instruments Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We measure fair value based on a three-level hierarchy of inputs, maximizing the use of observable inputs, where available, and minimizing the use of unobservable inputs when measuring fair value. A financial instrument’s level within the three-level hierarchy is based on the lowest level of input that is significant to the fair value measurement. The three-level hierarchy of inputs is as follows: Level 1 : Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2 : Observable inputs other than Level 1 prices, 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 full term of the assets or liabilities; and 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. These inputs are based on our own assumptions about current market conditions and require significant management judgment or estimation. Financial instruments consist of cash, cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, and warrant liabilities. Cash equivalents and restricted cash are stated at fair value on a recurring basis. Accounts receivable, accounts payable and accrued liabilities are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date. As of December 31, 2024 and 2023, our outstanding debt included a Term Loan, for which fair value was estimated using an observable market quotation (Level 2). Our liabilities measured at fair value relate to the Warrant liabilities (Level 1) and share-based liabilities (Level 3). Certain assets, including goodwill, intangible assets and other long-lived assets, are also subject to measurement at fair value on a nonrecurring basis if they are deemed to be impaired as a result of an impairment review. We determine the fair value by applying Level 3 unobservable inputs. 79 Foreign Currency The functional currency of our wholly-owned subsidiaries is the currency of the primary economic environment in which they operate. Assets and liabilities are translated into U.S. dollars, our reporting currency, using exchange rates prevailing at the balance sheet date, while revenue and expenses are translated at average exchange rates during the year. Gains and losses resulting from the translation of our consolidated balance sheets are recorded as a component of accumulated other comprehensive (loss) inco me. Foreign currency transaction gains and losses are recorded in Total other expense, net on our consolidated statement of operations. Non-Controlling Interest We report a non-controlling interest representing the economic interest in System1 Holdings held by certain individuals and entities other than us. The non-controlling interest is comprised of certain selling equity holders of System1 Holdings that retained an economic interest through their ownership of Class B units in System1 Holdings, along with the same number of corresponding shares of Class C common stock in us. The non-controlling interest holders may, from time to time, require us to convert all or a portion of their economic interest via a redemption of their Class B units in System1 Holdings together with surrendering their corresponding shares of Class C common stock in us in exchange for shares of Class A common stock on a one -for-one basis. Upon the redemption of Class B Units, our Board of Directors may also elect to settle the non-controlling interest holder's Class B units in cash. We are required to maintain a one -to-one ratio of Class A common stock outstanding to our Class A units in System1 Holdings and Class C common stock to the non-controlling interest’s Class B units. As redemptions occur or other transactions result in the issuance or retirement of a share of Class A common stock, System1 Holdings is required to issue or retire a Class A unit in System1 Holdings to maintain in parity with the corresponding number of outstanding shares of Class A common stock. These transactions may result in a change in the total number of units outstanding in System1 Holdings and/or a change in the percentage that we own of System1 Holdings. As a result, any change in ownership that does not result in a change of control is accounted for as an equity transaction and we adjust for the re-allocation of equity between us and our non-controlling interest. The following table summarizes the ownership interest in System1 Holdings as of December 31, 2024, based on shares issued and outstanding. Units (in thousands) Ownership Percentage Class A units of S1 Holdings 73,675 79.8 % Class B units of S1 Holdings 18,695 20.2 % Revenue Recognition We recognize revenue when or as control of the promised services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. We determine revenue recognition through the following steps; (i) Identification of a contract with a customer, (ii) Identification of the performance obligations in the contract, (iii) Determination of the transaction price, (iv) Allocation of the transaction price to the performance obligations in the contract, and (v) Recognition of revenue when or as the performance obligations are satisfied. Revenue recognized from performance obligations satisfied in prior periods is immaterial. Advertising We earn revenue by directly acquiring traffic to our owned and operated websites and utilizing our RAMP platform and additional services to monetize end-users for our Advertising Partners. For this revenue stream, we have a single performance obligation and have determined that we are the principal in the transaction. Revenue is reported on a gross basis for the amounts received from Advertising Partners. We are the principal since we direct the use of our owned and operated websites, and as such have risk of loss on the user-traffic that we are acquiring 80 for monetization with our Advertising Partners. Additionally, we maintain the website, provide the content and bear the cost and risk of loss associated with the digital online inventory available on our website. Revenue is also earned from revenue-sharing arrangements with our Network Partners related to the use of our RAMP platform and additional services in order to facilitate the placement of advertising by our Advertising Partners in the Network Partners digital online inventory. For this revenue stream, we have a single performance obligation and have determined that we are the agent in these transaction. Revenue is reported on a net basis, because our network partner runs the campaign to acquire user-traffic, including managing traffic acquisition cost. We report the revenue generated under our revenue-sharing arrangements on a net basis, based on the difference between amounts received by us from our Advertising Partners, less amounts remitted to the Network Partners based on the underlying revenue-sharing agreements. Revenue may fluctuate from period to period due to a number of factors including seasonality and the shift in mix of user acquisition sources from Advertising Partners. We recognize revenue as we deliver user-traffic to our Advertising Partners based on a cost-per-click or cost-per-thousand impression basis. Cost of Revenue Cost of revenue primarily consists of traffic acquisition costs, which are the costs to place advertisements to acquire customers to our websites, as well as domain name registration costs and licensing costs to provide mapping services to Mapquest.com. We do not pre-pay any traffic acquisition costs, and therefore, we expense such costs as incurred. Salaries and Benefits Salaries and benefits expenses include salaries, bonuses, stock-based compensation and employee benefits costs. Selling, General, and Administrative Expenses Selling, general, and administrative expenses consist of fees for professional and subscription services, occupancy costs, travel and entertainment. These costs are expensed as incurred. Depreciation and Amortization Depreciation and amortization expenses are primarily attributable to our capital investments and consist of property and equipment depreciation and amortization of intangible assets with finite lives. Stock-Based Compensation Stock based compensation expense is recognized in salaries and benefits expenses on our consolidated statement of operations. Restricted Stock Units For awards granted, the fair value of the related restricted stock units is derived from the market price of our Class A common stock, which is traded on the NYSE. As these awards are subject only to time-based service conditions, we recognize compensation expense for these awards on a straight-line basis over the requisite service period for each award, generally three years, and recognize forfeitures as they occur. 81 Replacement Awards Pursuant to the Merger, we were required to replace certain profits interests awards, the value creation units ("VCU") and Class F Units ("F Units"), with a combination of a restricted stock unit ("RSU") in our shares and a cash award (collectively, "Replacement Awards"). The fair value of the Replacement Awards was derived utilizing the transaction closing price of $ 10.00 . The Merger triggered a liquidating event, therefore, the portion of the Replacement Awards issued in connection with the Merger that was associated with services rendered through the date of the Merger was included in the total consideration transferred, with the exception of the unvested awards subject to service vesting conditions where the service condition had not been completed. With regards to the remaining unvested portion of the Replacement Awards, we continue to recognize compensation expense on a straight-line basis over the original requisite service period and recognize forfeitures as they occur. For Replacement Awards forfeited prior to vesting, we recognize accelerated compensation expense for the remaining unvested shares and unpaid cash amount, as the shares of our common stock become issuable and the cash amount becomes payable to the previous investors immediately upon forfeiture. Share-based Liability Awards In connection with the acquisition of CouponFollow we effected an incentive plan for eligible recipients. See Note 6, Accrued Expenses and Other Current Liabilities. We recognize compensation cost for these share-based liability awards with performance and service conditions if and when it is deemed probable that the performance condition will be achieved. The probability of vesting is evaluated at each reporting period taking into consideration actual results to-date and forecasts, and compensation cost is adjusted to reflect the completed portion of the service period with a graded vesting attribution . Stock Appreciation Rights We use the Black-Scholes option pricing model to estimate the grant date fair value of each Stock Appreciation Right award granted under the 2024 Stock Appreciation Rights Plan ("2024 SAR Plan"). The expected term is estimated using the simplified method, which is the midpoint between the vesting date and the contractual term. Volatility is based on a blend of the historical volatility of our common stock and the peer-leveraged volatility. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. Income Taxes We are the sole managing member of System1 Holdings and, as a result, consolidate the financial results of System1 Holdings. System1 Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, System1 Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by System1 Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss of System1 Holdings, as well as any stand-alone income or loss generated by us . We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities ("DTAs" and "DTLs", as applicable) for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine DTAs and DTLs on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on DTAs and DTLs is recognized in income in the period that includes the enactment date. We recognize DTAs to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted under the tax law, and results of operations. If we determine that we would not be able to realize our 82 DTAs in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance, which would increase the provision for income taxes. We record uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of our technical merits and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than fifty percent likely to be realized upon ultimate settlement with the related tax authority. We recognize both accrued interest and penalties, when appropriate, in the provision for income taxes on the consolidated statements of operations. Accounting Pronouncements Recently Adopted In November 2023, the Financial Accounting Standards Board issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07), which requires an enhanced disclosure of significant segment expenses on an annual and interim basis. This guidance was adopted during the year ended December 31, 2024, and for interim periods beginning January 1, 2025. The guidance was applied retrospectively to all prior periods presented in the financial statements. The adoption of this new accounting pronouncement did not have a material impact on our consolidated financial statements, see Note 14, Segment Reporting. Accounting Pronouncements Not Yet Adopted In December 2023, the Financial Accounting Standards Board issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU 2023-09), which improves the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the effective tax rate reconciliation and income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. This guidance will be effective for the annual periods beginning the year ending December 31, 2025. Early adoption is permitted. Upon adoption, the guidance can be applied prospectively or retrospectively. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements. In November 2024, the Financial Accounting Standards Board issued ASU No. 2024-03, Income Statement Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40), which improves the disclosures about a public business entity's expenses and requires detailed information about the types of expenses in commonly presented expense financial statement captions. This guidance will be effective for the annual periods ending December 31, 2027 and interim periods ending December 31, 2028. Early adoption is permitted. Upon adoption, the guidance can be applied prospectively or retrospectively. We are evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures 83 3. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): December 31, 2024 2023 Computer equipment $ 786 $ 812 Furniture and equipment 885 928 Leasehold improvements 2,389 2,511 Total 4,060 4,251 Less accumulated depreciation ( 1,956 ) ( 1,167 ) Property and equipment, net $ 2,104 $ 3,084 The aggregate depreciation expense related to property and equipment was $ 0.9 million and $ 0.8 million for the year ended December 31, 2024 and 2023, respectively. 4. Goodwill, Internal-Use Software Development Costs, Net, and Intangible Assets, Net Goodwill Goodwill was $ 82.4 million as of December 31, 2024 and 2023, all of which was attributable to the Partner Network reporting unit. Upon classifying Protected as held for sale as of September 30, 2023, we performed a goodwill impairment test on the Subscription reporting unit resulting in a goodwill impairment charge. We recorded an impairment upon the classification of the disposal group as held for sale, see Note 17, Discontinued Operations. During the fourth quarter of 2024, we performed our annual impairment test and determined each reporting unit's fair value exceeded its carrying amount. No impairment of goodwill was identified for any of the periods presented relating to continuing operations. There were no events or changes in circumstances subsequent to the fourth quarter assessment that indicate that the carrying amount of a reporting unit may exceed its fair value as of December 31, 2024. Internal-use software development costs, net and intangible assets, net Internal-use software development costs and intangible assets consisted of the following (in thousands): December 31, 2024 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Internal-use software development costs $ 21,393 $ ( 6,957 ) $ 14,436 Intangible assets: Developed technology $ 196,128 $ ( 143,386 ) $ 52,742 Trademarks and trade names 236,053 ( 68,650 ) 167,403 Software 5,100 ( 3,616 ) 1,484 Customer relationships 2,900 ( 2,188 ) 712 Total $ 440,181 $ ( 217,840 ) $ 222,341 84 December 31, 2023 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Internal-use software development costs $ 13,788 $ ( 2,363 ) $ 11,425 Intangible assets: Developed technology $ 196,128 $ ( 94,354 ) $ 101,774 Trademarks and trade names 236,053 ( 45,050 ) 191,003 Software 5,100 ( 2,341 ) 2,759 Customer relationships 2,900 ( 1,435 ) 1,465 Total $ 440,181 $ ( 143,180 ) $ 297,001 The internal-use software development costs includes construction in progress which is not being amortized of $ 5.0 million and $ 3.5 million as of December 31, 2024 and 2023, respectively. Amortization expense for internal-use software development costs and intangible assets were as follows (in thousands): For the Year Ended December 31, 2024 December 31, 2023 Amortization expense for internal-use software development $ 4,594 $ 2,981 Amortization expense for intangible assets $ 74,660 $ 74,660 We test our amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Our amortizable intangible assets primarily consist of trademarks and trade names and developed technology. During 2024 and 2023, no impairment of our amortizable intangible assets relating to continuing operations was identified. As of December 31, 2024, the expected amortization expense associated with our intangible assets and internal-use software development costs was as follows (in thousands): 2025 $ 80,767 2026 32,415 2027 25,746 2028 24,846 2029 23,600 Thereafter 49,403 Total amortization expense $ 236,777 As of December 31, 2024, the weighted average amortization period for all intangible assets was 7 years. 5. Leases We lease office facilities under noncancelable operating lease agreements. During the years ended December 31, 2024 and 2023 , we had leases for office facilities in Los Angeles, California; Bellevue, Washington; and Guelph, Canada. 85 The components of lease expense consisted of the following (in thousands) : For the Year Ended December 31, 2024 December 31, 2023 Operating lease expense $ 2,396 $ 2,141 Short-term lease expense 126 122 Variable lease expense 286 311 Total lease expense $ 2,808 $ 2,574 Variable lease expense is primarily attributable to amounts paid to lessors for common area maintenance and utility charges under our real estate leases. Supplemental information related to leases was as follows: December 31, 2024 Weighted average remaining lease terms (in years) 6.3 Weighted average discount rate 5.2 % Maturities of our operating leases liabilities by fiscal year are as follows (in thousands): December 31, 2024 2025 $ 2,223 2026 256 2027 260 2028 260 2029 268 Thereafter 636 Total lease payments 3,903 Less: Imputed interest ( 449 ) Present value of operating lease liabilities $ 3,454 6. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): December 31, 2024 December 31, 2023 Accrued revenue share $ 27,656 $ 16,365 Accrued marketing expenses 9,440 19,737 Accrued payroll and related benefits 15,893 13,751 Shared-based compensation liability 17,821 — Other current liabilities 5,390 9,461 Accrued expenses and other current liabilities $ 76,200 $ 59,314 86 CouponFollow Incentive Plan In connection with the acquisition of CouponFollow, we approved and adopted the CouponFollow Incentive Plan, which includes CouponFollow’s key employees, including CouponFollow’s founder ("Principal Participant" and together collectively "Participants"). The CouponFollow Incentive Plan at the time of acquisition provided for total payments of $ 35.0 million payable at our option in cash or in fully-vested shares of our Class A common s tock, up to a maximum of 4.7 million shares, which subjects these awards to ASC 718, Compensation - Stock Compensation and are therefore classified as share-based liabilities. The awards consist of a fixed amount of $ 10.0 million (which vests and is settled in three equal annual installments on December 31, 2022, 2023, and 2024) and performance-based amounts of $ 25.0 million which could be earned by achieving three Tiers of EBITDA targets, representing performance conditions. During the first quarter of 2023, we issued 0.4 million shares of Class A Common stock with an aggregate fair value of $ 1.7 million, net of shares withheld for taxes, on the date of settlement to settle the first $ 3.3 million fixed award that vested on December 31, 2022. The settlement is net of a $ 0.6 million adjustment to remeasure the liability to its fair value as of the settlement date. The adjustment represents the difference in fair value between the share-based liability carrying value as of December 31, 2022, and the fair value of the Class A shares issued upon settlement. On September 6, 2023, the parties made certain modifications to the CouponFollow Incentive Plan. The restructured CouponFollow Incentive Plan provides for total payments of $ 31.3 million. There was no change to the fixed amount, except for the requirement for the Company to make the last payment in cash. The performance-based amount decreased to $ 21.3 million, with the performance terms changed to allow for achieving three Tiers of EBITDA-target performance conditions over a three calendar year period between each January 1 to December 31 of 2023, 2024 and 2025 (each a "Performance Period" and collectively, “Performance Periods”). These modifications did not result in the recognition of any incremental compensation costs. As of December 31, 2023, the business had not achieved any performance conditions nor was it probable that the performance conditions would be met, so no amount was recognized for the performance-based awards. During the first quarter of 2024, we issued 1.0 million shares of Class A common stock with an aggregate fair value of $ 1.7 million, net of shares withheld for taxes, on the date of the settlement to settle the second $ 3.3 million fixed award that vested on December 31, 2023. The settlement is net of a $ 0.5 million adjustment to remeasure the liability to its fair value as of the settlement date. The adjustment represents the difference in fair value between the share-based liability carrying value as of December 31, 2023, and the fair value of the Class A shares issued upon settlement. During the 2024 Performance Period, the CouponFollow business achieved all performance conditions such that the entire performance-based portion of the award vested or is expected to vest, and accordingly, we recognized a short-term liability in shared-based compensation liability within accrued expenses and other current liabilities of $ 17.8 million for the amount vested as of the year ended December 31, 2024 , of which $ 7.8 million was paid in cash in February 2025, and $ 10.0 million is payable 60 days after December 31, 2025. The carrying amount of the share-based liabilities approximates its fair value, determined using Level 3 fair value inputs . The total amount to be earned under the CouponFollow Incentive Plan relating to the performance conditions is $ 21.3 million. For the year ended December 31, 2024, w e recognized $ 3.3 million for the third installment of the fixed amount within salaries and benefits expenses on the consolidated statements of operations, which was settled in cash in February 2025. If a Participant’s continued employment is terminated prior to vesting, with the exception of the Principal Participant as discussed above, we will reverse all cumulative compensation cost recorded for the forfeited award(s). If we elect to settle the payment obligations in shares of our Class A common stock, the number of shares payable under the CouponFollow Incentive Plan will be determined based on the VWAP of our Class A common stock. 87 7. Income Taxes Domestic and foreign components of our loss before income taxes from continuing operations were as follows (in thousands): For the Year Ended December 31, 2024 December 31, 2023 Domestic $ ( 92,190 ) $ ( 126,830 ) Foreign ( 5,478 ) ( 4,799 ) Loss before income tax $ ( 97,668 ) $ ( 131,629 ) The components of the income tax provision (benefit) were as follows (in thousands): For the Year Ended December 31, 2024 December 31, 2023 Current: Federal $ 145 $ ( 64 ) State 291 ( 662 ) Foreign 1,297 1,431 Total current provision $ 1,733 $ 705 Deferred: Federal $ — $ ( 17,103 ) State — ( 1,829 ) Foreign ( 2,103 ) ( 2,144 ) Total deferred benefit ( 2,103 ) ( 21,076 ) Income tax benefit $ ( 370 ) $ ( 20,371 ) A reconciliation of the statutory tax rate to the effective income tax rate for the periods presented was as follows (in thousands): For the Year Ended December 31, 2024 December 31, 2023 Amount % Amount % Income tax (benefit) provision at statutory tax rate $ ( 20,510 ) 21.0 % $ ( 27,642 ) 21.0 % State tax, net of federal ( 797 ) 0.8 % ( 1,718 ) 1.3 % Non-Controlling interest 6,661 ( 6.8 ) % 5,865 ( 4.5 ) % Changes in unrecognized tax benefits 754 ( 0.8 ) % 2,320 ( 1.8 ) % Foreign income taxes at different statutory rate ( 248 ) 0.3 % ( 93 ) 0.1 % Investment in partnership basis adjustments ( 3,571 ) 3.7 % ( 17,627 ) 13.4 % Share-based compensation 1,966 ( 2.0 ) % 3,408 ( 2.6 ) % Change in valuation allowance 15,798 ( 16.2 ) % 19,521 ( 14.8 ) % Other ( 423 ) 0.4 % ( 4,405 ) 3.4 % Effective income tax rate $ ( 370 ) 0.4 % $ ( 20,371 ) 15.5 % 88 The aggregate amount of gross unrecognized tax benefits related to uncertain tax positions were as follows (in thousands) : December 31, 2024 December 31, 2023 Balance at the beginning of the period $ 1,850 $ 593 Increases (decreases) based on tax positions related to prior periods 490 ( 46 ) Increases based on tax positions related to current periods 192 1,303 Balance at the end of the period $ 2,532 $ 1,850 Interest and penalties related to our unrecognized tax benefits are recorded as components of the provision for income taxes. Interest or penalties accrued for the years ended December 31, 2024 and 2023 were not material. Due to our full valuation allowance, the total amount of unrecognized benefits that, if recognized, would favorably affect the effective tax by $ 0.8 million (net of Federal benefit) at December 31, 2024. We are not currently under examination in any material jurisdiction. It is reasonably possible that, within the next twelve months, statutes of limitation will expire which could have the effect of reducing the balance of unrecognized tax benefits by an immaterial amount. The earliest tax years that remain subject to examination in the major tax jurisdictions in which we operate were as follows: Tax year United States 2021 California 2020 Netherlands 2018 The components of the deferred income taxes consisted of the following (in thousands): December 31, 2024 December 31, 2023 Deferred tax assets: Net operating loss and capital loss carryforwards $ 6,638 $ 6,362 Tax credits 4,894 4,289 Interest expense 2,346 3,234 Investment in partnerships 24,760 8,950 Other 225 231 Total gross deferred tax assets 38,863 23,066 Valuation allowance ( 38,616 ) ( 22,658 ) Total net deferred tax assets $ 247 $ 408 Deferred tax liabilities: Intangibles $ ( 6,026 ) $ ( 8,243 ) Other ( 420 ) ( 472 ) Total gross deferred tax liabilities $ ( 6,446 ) $ ( 8,715 ) Net deferred tax liability $ ( 6,199 ) $ ( 8,307 ) 89 As of December 31, 2024, we had a full valuation allowance on our U.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets would not be realized. As of December 31, 2024, we had U.S. federal net operating loss carryovers ("NOLs") of $ 25.3 million that may be used indefinitely and various state NOLs that will expire at different times. Uncertainties that may affect the utilization of our tax attributes include future operating results, tax law changes, rulings by taxing authorities regarding whether certain transactions are taxable or deductible and expiration of carryforward periods. We had an ownership change and as a result certain federal and state NOLs were limited pursuant to Section 382 of the Internal Revenue Code (the "Code"). This limitation has been accounted for in calculating our available NOL carryforwards. The change in the valuation allowance was comprised of the following (in thousands) : December 31, 2024 December 31, 2023 Balance at the beginning of the period $ 22,658 $ 1,087 Increases in valuation allowance recorded through earnings 15,798 19,521 Increases in valuation allowance not recorded through earnings 160 2,050 Balance at the end of the period $ 38,616 $ 22,658 Tax Receivable Agreement Pursuant to our election under Section 754 of the Code, we expect to obtain an increase in our share of the tax basis in the net assets of System1 Holdings when LLC interests are redeemed or exchanged by the other members of System1 Holdings. We intend to treat any redemptions and exchanges of LLC interests as direct purchases of LLC interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that would otherwise be paid in the future to various tax authorities. On January 27, 2022, we entered into a Tax Receivable Agreement with certain of the then-existing members of System1 Holdings that provides for the payment by us of 85 % of the amount of any tax benefits that are actually realized, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of System1 Holdings resulting from any redemptions or exchanges of LLC interests, (ii) tax basis increases attributable to payments made under the Tax Receivable Agreement, and (iii) deductions attributable to imputed interest pursuant to the Tax Receivable Agreement ("TRA Payments"). We expect to benefit from the remaining 15 % of any tax benefits that we may actually realize. We acquired an aggregate of 2.8 million and 0.2 million LLC interests in connection with the redemption of LLC interests in the years ended December 31, 2024 and 2023, respectively, which resulted in an increase in the tax basis of our investment in System1 Holdings subject to the provisions of the Tax Receivable Agreement. We have recognized a total liability in the amount of $ 5.3 million for the TRA Payments due to the redeeming members, representing 85 % of the aggregate tax benefits we expect to realize from the tax basis increases related to the redemption of LLC interests, after concluding it was probable that such TRA Payments would be paid based on estimates of future taxable income. During the year ended December 31, 2024, inclusive of interest, no payments were made to the parties to the Tax Receivable Agreement. The total amount of TRA Payments due under the Tax Receivable Agreement, was $ 5.3 million and $ 0.8 million as of December 31, 2024 and 2023, respectively. The Tax Receivable Agreement liabilities are classified within Other non-current liabilities on the consolidated balance sheets. 90 8. Commitments and Contingencies In June 2023, we entered into a multi-year agreement with a service provider whereby we are contractually obligated to spend $ 5.0 million in each annual period between July 2023 and June 2026. As of December 31, 2024, we remain contractually obligated to spend $ 6.2 million towards this commitment. As of December 31, 2024, we had various non-cancelable operating lease commitments for office space which have been recorded as Operating lease liabilities. See Note 5, Leases for additional information regarding lease commitments. Litigation We are subject to various legal proceedings and claims that arise in the ordinary course of business. We believe the ultimate liability, if any, with respect to these actions will not materially affect the consolidated financial position, results of operations, or cash flows reflected in the consolidated financial statements. There can be no assurance, however, that the ultimate resolution of such actions will not materially or adversely affect our consolidated financial position, results of operations, or cash flows. We accrued for losses when the loss is deemed probable and the liability can reasonably be estimated. In March 2023, we received a demand letter from counsel for Alta Partners, LLC ("Alta"), which purports to be a holder of certain Warrants of the Company ("Demand Letter"). The Demand Letter alleged, among other claims, that we breached the terms of the Warrant Agreement, and that Alta was entitled to approximately $ 5.7 million in damages, plus prejudgment interest, as a result, and subsequently sent us a draft complaint (the "Complaint") alleging substantially the same claims as those set forth in Alta’s Demand Letter. While we denied liability with respect to the claims set forth in the Demand Letter and the Complaint, the parties entered into a Confidential Settlement Agreement ("Settlement Agreement") in October 2023, which contemplated an immaterial settlement payment that was subsequently paid prior to December 31, 2023 consistent with the terms of the Settlement Agreement . In October 2023, a putative California class action complaint (the "Complaint") was filed against us and our Protected business regarding alleged violations of California’s Auto Renewal Law requirements related to the marketing and sale of its subscription service offerings for anti-virus and ad-blocking software (the "Protected Software") to consumers. The Complaint alleges claims under California’s false advertising and unfair competition laws and primarily alleges that the marketing and sales checkout flows for the Protected Software did not clearly and conspicuously disclose that the named plaintiffs set forth in the Complaint were purchasing the Protected Software for a promotional period which would auto-renew after the applicable promotional period. While we dispute the claims alleged, we reached a Settlement Agreement during September 2024 and paid $ 2.5 million during December 2024, presented within Selling, general, and administrative expenses in our consolidated statement of operations for the year ended December 31, 2024. Indemnifications In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions may not be subject to claims related to these indemnifications. As a result, we believe the estimated fair value of these agreements was immaterial . Accordingly, we have no liabilities recorded for these agreements as of December 31, 2024 or December 31, 2023, respectively. 91 9. Debt, Net We entered into a term loan ("Term Loan") and revolving facility ("2022 Revolving Facility") with Bank of America, N.A., on January 27, 2022, providing for a 5.5 year term loan with a principal balance of $ 400.0 million and with the net proceeds of $ 376.0 million. The 2022 Revolving Facility provided for borrowing availability of up to $ 50.0 million . As of December 31, 2024, there was no balance outstanding on the 2022 Revolving Facility and principal of $ 280.1 million was outstanding on the Term Loan. Through December 31, 2025, $ 5.0 million of the Term Loan is payable quarterly. From March 31, 2026, $ 7.5 million of the Term Loan is payable quarterly. The Term Loan matures in 2027. For every interest period, the interest rate on the Term Loan is the adjusted Secured Overnight Financing Rate ("SOFR") plus 4.75 %. The Term Loan is amortized in quarterly installments on each scheduled payment date. The Term Loan comes with a leverage covenant, which goes into effect only if the utilization on the 2022 Revolving Facility exceeds 35 % of the $ 50.0 million 2022 Revolving Facility at each quarter-end starting the second quarter 2022, such that the first lien leverage ratio (as defined in the credit agreement) should not exceed 5.40 . The facility has certain financial and nonfinancial covenants, including a leverage ratio. The facility also requires that we deliver our audited consolidated financial statements to our lender within 120 days of our fiscal year end, December 31. Should we fail to distribute the financial statements to our lender within 120 days, we are allowed an additional 30 days to cure. We were in compliance with the financial covenants under the Term Loan as of December 31, 2024 . The interest rate on the 2022 Revolving Facility is the adjusted SOFR plus 2.5 % with an adjusted SOFR floor of 0 %. As of December 31, 2024 and 2023, respectively, we had $ 50.0 million available on the 2022 Revolving Facility. The carrying values of our debt, net of discounts, deferred financing and debt issuance costs were as follows (in thousands): December 31, 2024 December 31, 2023 Term Loan 1,2 $ 271,523 $ 349,503 2022 Revolving Facility — — Total debt, net $ 271,523 $ 349,503 _______________ 1 Includes unamortized discount of $ 8.1 million and $ 14.7 million, and unamortized loan fees of $ 0.4 million and $ 0.8 million, as of December 31, 2024, and December 31, 2023, respectively, recorded as a reduction of the carrying amount of the debt and amortized to interest expense using the effective interest method. 2 Estimated fair value of the Term Loan was $ 175.1 million as of December 31, 2024. As of December 31, 2024, future minimum principal payments on long-term debt were as follows (in thousands) : 2025 $ 20,000 2026 30,000 2027 230,090 Total future minimum principal payment 280,090 Less: current portion ( 20,000 ) Long-term portion $ 260,090 92 During 2024, we completed the repurchase of $ 64.9 million in principal amount of our Term Loan for an aggregate purchase price of $ 41.6 million (at discount of 64.12 % of its par value). Following the repurchases on January 17, 2024 and April 30, 2024, the outstanding principal amount of the Term Loan was $ 301.3 million and $ 295.0 million, respectively. We used available cash on hand to fund the repurchases. Our gain on the repurchase was approximately $ 20.1 million before fees and expenses incurred. 10. Related-Party Transactions 2023 Revolving Note On April 10, 2023, we entered into a $ 20.0 million Revolving Note ("2023 Revolving Note") with trusts established for the benefit of our co-founders ("Lenders"). Each of the Lenders provided a $ 10.0 million commitment for an aggregate principal of $ 20.0 million under the 2023 Revolving Note. Any borrowed loan amounts outstanding under the 2023 Revolving Note accrue interest at the rate per annum equal to the SOFR plus 3.15 %. The Maturity Date under the 2023 Revolving Note is July 10, 2024 ("Maturity Date") with automatic three-month extensions, unless we or any Lenders provide written notice, or unless there is an event of default . The Lenders are also entitled to (i) an unused commitment fee equal to 1.0 % per annum of the actual daily amount of total unfunded commitments under the 2023 Revolving Note during the period from the closing date to the maturity date, payable quarterly in arrears and (ii) a loan fee equal to 12.0 % of each Lenders' commitment under the 2023 Revolving Note, or $ 2.4 million in total, was originally payable within 180 days of April 10, 2023, and subsequently extended to November 30, 2023. Upon completion of the Protected disposal, the 2023 Revolving Note and the related loan fee were settled. The previously unamortized portion of the loan fee of $ 1.2 million was included in loss on extinguishment of related-party debt on our consolidated statements of operations. The 2023 Revolving Note was subsequently terminated in December 2023. Senior Unsecured Promissory Note On September 6, 2023, we entered into a $ 5.2 million Senior Unsecured Promissory Note (the "Promissory Note") with the CouponFollow seller and an employee of ours ("Lender"), in order to convert the amount owed to him as a result of the acquisition of CouponFollow into a loan to us (the "Loan"). The amount of the Loan was equal to the amount of the Holdback liability of $ 5.2 million owed to the Lender. The Promissory Note accrues interest at SOFR plus 3.15 %. Under the terms of the agreement, the Promissory Note became due and payable immediately upon sale of Protected. Per the terms of the note we (i) must prepay the Loan under certain circumstances, which include consummation of a strategic transaction, the refinancing of the existing credit agreement, the incurrence by us of any indebtedness exceeding $ 2.5 million, or the sale of any of our assets in excess of $ 2.5 million; (ii) may prepay the Loan at any time without penalty or interest; and (iii) must make four substantially equal amortization payments on April 1, 2024, May 1, 2024, June 1, 2024, and July 1, 2024, unless there is an event of default, including a continuing event of default on the Credit Agreement, at which point the holder may declare all amounts due immediately. The Lender under the Promissory Note is also entitled to a closing fee equal to 12 % of the initial principal amount outstanding under the Promissory Note with 50 % paid on October 15, 2023 and the remaining 50 % due on December 15, 2023. We recorded expense of approximately $ 0.6 million within loss on extinguishment of related-party debt on our consolidated statements of operations, which related to the 12 % closing fee payable to the Lender. Upon completion of the Protected disposal, the Promissory Note, accrued interest and the remaining 50 % of the closing fee was settled. Term Note On October 6, 2023, we entered into a $ 2.5 million Term Loan Note ("Term Note") with Openmail2, LLC ("Term Lender"), which is principally owned and managed by trusts established for the benefit of our co-founders. 93 The amounts outstanding under the Term Note accrue interest at the rate per annum equal to the SOFR plus 5.75 %. The maturity date under the Term Note is December 31, 2024, unless there is an event of default, including a continuing event of default on the credit agreement, at which point the holder may declare all amounts due immediately . We must prepay the Loan under certain circumstances, which include (i) the consummation of a strategic transaction or (ii) upon the full refinancing and termination of the existing credit agreement. The Term Lender was also entitled to a closing fee equal to 10.0 % of the principal amount of the Term Note, payable within 180 days of October 6, 2023. Upon completion of the Protected disposal, the Term Note, accrued interest and closing fee was settled. The previously unamortized portion of the loan fee of $ 0.2 million was included in loss on extinguishment of related-party debt on our consolidated statements of operations. Secured Facility On October 6, 2023, Protected, our indirect wholly-owned subsidiary at the time, entered into a Secured Facility Agreement providing for a $ 10.0 million term loan ("Secured Facility") with a subsidiary of JDI ("Secured Lender") , one of our significant shareholders, which is principally owned and managed by certain members of the Protected management team . Pursuant to the Secured Facility, the Secured Lender provided a $ 10.0 million commitment to Protected, which amount was (i) drawn down in full on the closing date and (ii) secured by the assets of Protected pursuant to a deed granted in favor of the Secured Lender pursuant to a Debenture between Protected and the Secured Lender, dated October 6, 2023. The amounts outstanding under the Secured Facility accrue interest at the rate of 8.5 % per annum. The amounts outstanding under the Secured Facility are due upon the earlier of (i) October 6, 2024 or (ii) the date on which Protected undergoes a Change of Control. The Secured Lender was also entitled to a closing fee equal to 12.0 % the principal amount of the borrowings under the Secured Facility, which was paid in full on the closing date. In addition, Protected agreed to reimburse the Secured Lender for their reasonable and documented costs incurred in connection with the negotiation, documentation and execution of the Secured Facility. Upon completion of the Protected disposal, the Secured Facility, the related loan fee and an early settlement fee were settled by the sale. The previously unamortized portion of the loan fee and the early settlement fee for an aggregate amount of $ 1.4 million was included in net loss from discontinued operations, net of tax on our consolidated statements of operations. Services Agreement On June 20, 2023, we engaged with one of our significant shareholders, for management and consulting services . The agreement was terminated in August 2023. During the year ended December 31, 2023, we paid all amounts owed and outstanding, tot aling $ 0.1 million. 11. Warrants In June 2020, we issued Warrants. The Warrants may only be exercised for a whole number of shares. No fractional shares will be issued upon exercise of the Warrants. The Warrants became exercisable on April 18, 2022, when the S-1/A registration statement, which was required to be filed under the terms of the Warrant Agreement and the Business Combination Agreement, was declared effective. The Warrants will expire five years from the completion of the Merger, or earlier upon redemption or liquidation. Redemption of Warrants when the Price per Class A common stock equals or exceeds $ 18.00 —We may redeem the outstanding Warrants: • in whole and not in part; • at a price of $ 0.01 per Public Warrant; • upon not less than 30 days’ prior written notice of redemption to each warrant holder; and 94 • if, and only if, the last reported sale price of the Class A common stock for any 20 trading days within a 30 -trading day period ending three business days before sending the notice of redemption to warrant holders ("Reference Value") equals or exceeds $ 18.00 per share (as adjusted for share splits, share capitalizations, reorganizations, recapitalizations and the like). Redemption of Warrants When the Price per Class A common stock equals or exceeds $ 10.00 —Once the Warrants become exercisable, we may redeem the outstanding Warrants: • in whole and not in part; • at $ 0.10 per warrant upon a minimum of 30 days’ prior written notice of redemption provided that holders will be able to exercise their Warrants on a cashless basis prior to redemption and receive that number of shares determined by reference to the exhibit in the report on Form 10-K for the year ended December 31, 2021 filed on March 31, 2022, based on the redemption date and the "fair market value" of the Class A common stock; • if, and only if, the Reference Value (as defined above under "Redemption of Warrants When the Price per Class A common stock Equals or Exceeds $ 18.00 ") equals or exceeds $ 10.00 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like); and • if the Reference Value is less than $ 18.00 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) the Private Placement Warrants must also be concurrently -called for redemption on the same terms as the outstanding Warrants, as described above. If and when the Warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. However, we will not redeem the Warrants unless an effective registration statement under the Securities Act covering the underlying shares of Class A common stock issuable upon exercise of the Warrants is effective and a current prospectus relating to those shares of Class A common stock is available throughout the 30 -day redemption period. The exercise price and number of common stock issuable upon exercise of the Warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or recapitalization, reorganization, merger or consolidation. However, except as described below, the Warrants will not be adjusted for issuances of common stock at a price below our exercise price. Additionally, in no event will we be required to net cash settle the Warrants. The Warrants are accounted for as liabilities at fair market value at each reporting period, with changes in the fair value presented as change in fair value of warrant liabilities on the consolidated statements of operations. During the years ended December 31, 2024 and 2023 , there were no Warrants exercised. The total outstanding Warrants as of December 31, 2024 and 2023 was 16.8 million. 12. Fair Value Measurement Financial Liabilities Measured at Fair Value on a Recurring Basis Level 1 liabilities measured at fair value on a recurring basis are summarized below (in thousands): December 31, 2024 December 31, 2023 Liabilities: Warrants $ 302 $ 2,688 Fair value of liabilities $ 302 $ 2,688 95 There were no Level 3 financial liabilities as of December 31, 2023. There were no transfers in or out of levels for the years ended December 31, 2024 and 2023, respectively . Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis For further information on the fair value assessment of goodwill and impairment charge recorded for the discontinued operation, see Note 4, Goodwill, Internal-Use Software Development Costs, Net, and Intangible Assets, Net and Note 17, Discontinued Operations. 13. Net Loss Per Share For the years ended December 31, 2024 and 2023, the basic net loss per share was calculated by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding. Basic and diluted net loss per share was calculated as follows (in thousands, except per share data) : For the Year Ended December 31, 2024 December 31, 2023 Basic and diluted net loss per share Net loss from continuing operations attributable to System1, Inc. $ ( 1.07 ) $ ( 0.94 ) Net loss from discontinued operations, net of tax attributable to System1, Inc. — ( 1.54 ) Basic and Diluted net loss per share $ ( 1.07 ) $ ( 2.48 ) Numerator: Net loss from continuing operations attributable to System1, Inc. $ ( 74,673 ) $ ( 85,727 ) Net loss from discontinued operations, net of tax attributable to System1, Inc. — ( 141,494 ) Net loss attributable to System1, Inc. $ ( 74,673 ) $ ( 227,221 ) Denominator: Weighted-average common shares outstanding used in computing basic and diluted net loss per share 69,554 91,454 Shares of Class C common stock, RSUs and Warrants outstanding for the year December 31, 2024 and 2023, are considered potentially dilutive of the shares of Class A common stock and are included in the computation of diluted loss per share, except when the effect would be anti-dilutive. For the periods presented in the table above, a total of 16.8 million Warrants were excluded from the computation of net loss per share as the impact was anti-dilutive. For the year ended December 31, 2024, we excluded 21.9 million Stock Appreciation Rights as they are contingently issuable based on certain performance conditions, which were not achieved. See Note 16, Stock-Based Compensation, for additional details. We do not consider unvested Class A common stock related to the Replacement Awards as outstanding for accounting purposes as they are subject to continued service requirements or contingencies. These shares are not included in the denominator of the net loss per share calculation until the employee provides the requisite service resulting in the vesting of the award or the contingency is removed, or upon termination of an employee at which point the common stock underlying award becomes issuable to the previous investors. Shares associated with the vested or forfeited Replacement Awards are deemed to be issued and outstanding for accounting purposes on the day of vesting or forfeiture. 14. Segment Reporting We have two operating and reportable segments: Owned and Operated Advertising and Partner Network. Operating segments are defined as components of an enterprise about which separate financial information is 96 available that is evaluated regularly by the Chief Operating Decision Maker ("CODM"), in deciding how to allocate resources and assess performance. Our Chief Executive Officer, who is considered to be our CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. The CODM measures and evaluates reportable segments based on segment adjusted gross profit. The CODM evaluates both potential future, as well as historical budget to actual variances, adjusted gross profit by segment on a quarterly basis to determine the allocation of capital for acquisition marketing, as well as technical and personnel resources. Adjusted gross profit is also used to determine variable compensation expense for certain employees. We have not presented segment assets as our CODM does not use segment assets to evaluate or measure segment performance or allocate resources. The tables below include the following operating expenses that are not allocated to the reportable segments presented to our CODM, such as other cost of revenue (total cost of revenue excluding traffic acquisition cost), salaries and benefits, depreciation and amortization and, at times, certain other transactions or adjustments. The CODM does not consider these expenses for the purposes of making decisions to allocate resources among segments or to assess segment performance, however these costs are included in reported consolidated net loss from continuing operations before income tax and are included in the reconciliation that follows. The following table summarizes revenue, segment cost of revenue and adjusted gross profit by reportable segments (in thousands): For the Year Ended 2024 2023 Owned and Operated Advertising $ 281,930 $ 328,934 Partner Network 61,995 73,037 Total revenue $ 343,925 $ 401,971 Owned and Operated Advertising $ 173,721 $ 221,238 Partner Network 10,136 19,617 Total segment cost of revenue $ 183,857 $ 240,855 Owned and Operated Advertising $ 108,209 $ 107,696 Partner Network 51,859 53,420 Adjusted gross profit 160,068 161,116 Other cost of revenue 7,704 7,890 Salaries and benefits 113,512 106,505 Selling, general, and administrative 47,346 54,307 Depreciation and amortization 80,107 78,403 Interest expense, net 31,562 48,745 Gain on extinguishment of debt ( 20,109 ) — Loss on extinguishment of related-party debt — 2,004 Change in fair value of warrant liabilities ( 2,386 ) ( 5,109 ) Loss before income tax $ ( 97,668 ) $ ( 131,629 ) The following table summarizes revenue by geographic region (in thousands): For the Year Ended 2024 2023 United States $ 333,069 $ 385,847 Other countries 10,856 16,124 Total revenue $ 343,925 $ 401,971 97 Concentrations The following tables illustrate the concentrations as a percentage of total revenue and total accounts receivable for our key Advertising Partners: Concentration of revenue from key Advertising Partners For the Year Ended 2024 2023 Google 78 % 85 % Concentration of accounts receivable from key Advertising Partners December 31, 2024 December 31, 2023 Google 56 % 69 % Microsoft 8 % 5 % Yahoo 7 % 6 % As of December 31, 2024, we had two paid search advertising partnership agreements with Google, and one paid search advertising partnership agreement with Microsoft. The Google agreements are in effect through February 28, 2025 and September 30, 2027. The Google agreement set to expire on February 28, 2025 was extended through February 28, 2027. The agreement with Microsoft (our next largest Advertising Partner by revenue) is in effect through June 30, 2025. Under certain circumstances, each of these agreements may be terminated by either us or the respective Advertising Partner immediately, or with minimal notice. 15. Stockholders' Equity We have two classes of stock, Class A and Class C common stock. The voting rights of each class of our common stock is identical. Holders of Class C common stock have no economic rights, only voting rights. We will have at all times, authorized and unissued shares of Class A common stock for the purposes of effecting any redemptions or exchanges. We are not permitted to issue additional shares of Class C common stock other than in connection with the valid issuance of System1 Holdings Common Units under the New System1 Holdings Operating Agreement. Holders of Class C common stock may only transfer their Class C common stock to certain permitted transferees, while also simultaneously transferring an equal number of such holder’s System1 Holdings Common Units. Repurchase Program In August 2022, the Company announced that our Board of Directors authorized up to $ 25.0 million for the repurchase of our Class A common stock and Warrants ( " 2022 Repurchase Program " ). During the years ended December 31, 2024 and 2023 we did not repurchase Class A common stock or Warrants. The amount outstanding under the 2022 Repurchase Program is $ 23.9 million. 98 16. Stock-Based Compensation We are authorized to issue and/or grant restricted stock, restricted stock units, stock options, stock appreciation rights, and other stock-based and cash-based awards under our 2022 Incentive Award Plan ("2022 Plan"). During the year ended December 31, 2024, 1.1 million grant awards were reserved and authorized for issuance and/or grant under the 2022 Plan. In addition, the number of underlying shares authorized for issuance/grant under the 2022 Plan are subject to increase each year on January 1, equal to the lesser of (a) a number of shares equal to 2.5 % of the aggregate number of shares of common stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as is determined by the compensation committee of the board of directors. On January 1, 2025, the number of shares authorized and reserved for grant under the 2022 Plan was increased by 2.3 million shares in accordance with the foregoing provision of the 2022 Plan. As described in Note 2, Summary of Significant Accounting Policies, the Replacement Awards continue to vest over the original vesting schedule of the original underlying awards. We recognized stock-based compensation expense for the Replacement Awards of $ 2.2 million and $ 6.6 million during the years ended December 31, 2024 and 2023, respectively. The unrecognized stock-based compensation expense associated with these unvested Replacement Awards was $ 0.2 million a s of December 31, 2024, expected to be recognized during the first quarter of 2025. We recorded the following stock-based compensation expenses for equity-classified awards (in thousands) : For the Year Ended 2024 2023 Stock-based compensation expense $ 15,763 $ 21,235 The following summarizes RSU activity: Shares (in thousands) Weighted-Average Grant Date Fair Value per Share Unvested as of December 31, 2023 4,423 $ 5.41 Granted 6,135 $ 1.42 Vested ( 4,089 ) $ 4.55 Forfeited ( 544 ) $ 3.14 Unvested as of December 31, 2024 5,925 $ 2.08 The weighted average grant date fair value per share for the restricted stock units granted during the year ended December 31, 2023 was $ 3.04 . The weighted average grant date fair value per share for the 3.1 million restricted stock units vested during the year ended December 31, 2023 was $ 8.99 . At December 31, 2024, we had unrecognized stock-based compensation relating to restricted stock units of approximately $ 9.3 million , which is expected to be recognized over a weighted-average period of 0.9 years. Stock Appreciation Rights During the year ended December 31, 2024, we adopted the 2024 SAR Plan. The maximum number of Class A common stock that may be issued pursuant to awards of Stock Appreciation Rights ("SARs") granted under the 2024 Plan ("Awards") is 23.8 million shares. Financial performance in the 2024 Plan is determined by the achievement of Adjusted EBITDA performance targets, defined as, with respect to any particular period, our net income (loss) before interest expense, 99 income taxes, depreciation and amortization expense, stock-based compensation expenses, dividends or other distributions to equity holders, expense associated with revaluation of any warrants, costs associated with acquisitions or dispositions, deferred compensation, management fees, minority interest expense, restructuring charges, impairment and certain segment-specific adjustments, and such other adjustments as may be appropriate to accurately reflect performance, in each case, as determined by the 2024 Plan administrator. In July 2024, we granted 22.4 million SARs. Each Award is subject to the employee's continued service through the applicable vesting date (as defined in the SAR Plan). The term of any SARs shall not exceed seven years . The SARs will vest in four equal tranches upon achieving trailing twelve month Adjusted EBITDA targets of $ 50.0 million, $ 60.0 million, $ 70.0 million, and $ 80.0 million. Upon exercise, the SARs will be settled in shares of our Class A common stock or in cash at our election. The probability that the award will vest for each of the four tranches will be assessed at the end of every reporting period. If and when the award is deemed probable of vesting, we will recognize stock-based compensation expense for the award on a graded basis through the date of vesting for each individual tranche. Unvested SARs are forfeited upon termination of service. We use the Black-Scholes option pricing model to estimate the grant date fair value of each SARs award granted under the 2024 Plan. The expected term is estimated using the simplified method, which is the midpoint between the vesting date and the contractual term. Volatility is based on a blend of the historical volatility of our common stock and the peer-leveraged volatility. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The following table sets forth the key assumptions used to determine the fair value: Input Risk-free interest rate 4.01 % - 4.56 % Term (in years) 2.5 - 7.0 Volatility factor 73.18 % - 89.76 % Dividend yield 0.00 % The weighted-average grant date fair value of SARs granted during the year ended December 31, 2024 was $ 0.94 . A summary of our SARs activity is as follows: Number of Shares (in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value (in thousands) Outstanding at January 1, 2024 — $ — — $ — Granted 22,446 1.44 Forfeited/canceled ( 498 ) 1.44 Outstanding at December 31, 2024 21,948 1.44 5 Expected to vest as of December 31, 2024 — $ 1.44 5 $ — As of December 31, 2024, we determined the performance conditions of the Tranche I SARs awards were probable of being achieved before the fourth anniversary date of the awards. Accordingly, we recognized $ 0.9 million in stock-based compensation expense within equity for the twelve months ended December 31, 2024. As of December 31, 2024, the total unrecognized compensation cost related to unvested SARs was $ 3.5 million, expected 100 to be recognized over the remaining period of two years . No SARs vested or were exercised for the year ended December 31, 2024. 17. Discontinued Operations Sale of Protected On November 30, 2023, we completed the sale of Protected , our subscription reporting unit. Total consideration comprised of: (a) $ 240.0 million in cash, subject to certain adjustments, (b) the return and subsequent cancellation of approximately 29.1 million shares of our Class A common stock, par value $ 0.0001 per share, owned by JDI and other entities and individuals affiliated with the Purchasing Parties and (c) confirmation from JDI, Protected and the Protected CEO that the financial performance benchmarks related to the Protected Incentive Plan, will , as a result of the Protected Disposition, no longer be achievable. We used $ 51.0 million of the proceeds from the sale of Protected to repay certain of our outstanding indebtedness, including (i) the mandatory repayment of secured and unsecured obligations totaling $ 18.8 million and intercompany obligations totaling $ 9.6 million and (ii) the voluntary repayment of unsecured obligations (inclusive of certain fees and accrued but unpaid interest) totaling $ 22.7 million . We continue to use the remaining cash proceeds from the sale of Protected for general working capital purposes and to reduce certain of our other existing debt obligations. Additionally, the 29.1 million of Class A common stock returned to us pursuant to the Share Purchase Agreement as part of the sale of Protected were subsequently cancelled and are no longer outstanding shares of our capital stock. We have determined that the sale of Protected represents a strategic shift that will have a major effect on our results of operations. The Protected business met the criteria to be reported as assets held for sale and discontinued operations on September 30, 2023, and accordingly, all prior comparable periods have been recast to conform to the current period presentation. Impairment of the Subscription Reporting Unit (the Protected Business) Upon classifying the Protected Business as held for sale, we performed a goodwill impairment test on the Subscription reporting unit resulting in a goodwill impairment charge of $ 115.5 million. This impairment was the result of decreases in long-term forecasts due to recent adverse customer trends and other macroeconomic outcomes. We recorded a further impairment charge of $ 3.3 million upon the classification of the disposal group as held for sale, for a total impairment charge of $ 118.8 million that was recorded in the results of discontinued operations for the year ended December 31, 2023. There was no tax benefit of this charge for the year ended December 31, 2023. There were no assets and liabilities classified as held for sale from discontinued operations as of December 31, 2023. The financial results of Protected are presented as loss from discontinued operations, net of taxes in the consolidated statements of operations. The following table presents the summarized discontinued operations consolidated statements of operations (in thousands): 101 Year Ended December 31, 2023 Revenue $ 190,090 Operating expenses: Cost of revenue (excluding depreciation and amortization) 161,134 Salaries and benefits 41,972 Selling, general, and administrative 11,546 Depreciation and amortization 26,727 Impairment of assets held for sale 3,276 Impairment of goodwill 115,483 Total operating expenses 360,138 Operating loss ( 170,048 ) Other expense, net 548 Loss on sale of business 4,247 Loss from discontinued operations before income taxes ( 174,843 ) Income tax benefit ( 516 ) Net loss from discontinued operations $ ( 174,327 ) The following table presents the significant non-cash items and capital expenditures for the discontinued operations with respect to the subscription business that are included in the consolidated statements of cash flows (in thousands): Year Ended December 31, 2023 Impairment of assets held for sale $ 3,276 Impairment of goodwill $ 115,483 Loss on sale of business $ 4,247 Depreciation and amortization $ 26,727 Stock-based compensation $ 31,850 Capital expenditures $ 1,739 Transition Service Agreement In connection with a transition service agreement, we agreed to provide certain services for which full reimbursement of cost was provided through November 30, 2024. We were reimbursed $ 4.3 million in costs through the end of the transition service agreement. 102 Discontinued Operations Related-Party Transactions Payment Processing Agreement Protected utilizes multiple credit card payment processors, including Paysafe Financial Services Limited ("Paysafe"). In March 2021, Paysafe completed a merger with Foley Trasimene Acquisition Corp. II ("Foley Trasimene"), a special purpose acquisition company sponsored by entities affiliated with a sponsor of Trebia who was also a member of our Board of Directors. Protected's payment processing agreement with Paysafe was negotiated before the announcements of both (i) the Merger as well as (ii) the business combination between Paysafe and Foley Trasimene. We incurred credit card processing fees related to Paysafe for the year ended December 31, 2023 of $ 14.9 million. Office Facilities We had an agreement with JDI Property Holdings Limited ("JDIP"), an entity controlled by one of our former directors, which allows us to use space at their property in exchange for GBP 0.1 million per year. The agreement with JDIP terminated concurrently with the sale of Protected. Protected Incentive Plan Installment Payments In connection with the Merger, we effected an incentive plan for eligible recipients (the "Protected Incentive Plan") providing up to $ 100 million payable in fully-vested shares of our Class A common stock based contingent upon the achievement of the future performance of Protected’s business. The incentive plan originally was to be paid out in two tranches based on performance of the business for 2023 and 2024. The first award (2023), consisting of $ 50.0 million of Class A common stock payable in January 2024, was modified to a cash award resulting in $ 20 million of payments in 2022 and 2023 with an additional final $ 10.0 million, payable upon the achievement of certain performance thresholds around marketing spend and operating contribution of Protected are achieved on or before December 31, 2024. On November 30, 2023, none of the performance thresholds have been met, and therefore, none of the additional cash bonus payments have been paid. At the closing of the Protected Disposition, JDI, Protected and the Protected CEO confirmed that the financial performance benchmarks related to certain contingent earnout payments based on the future performance of Protected’s Business will no longer be achievable. As such, we reversed $ 40.8 million of expense during the year ended December 31, 2023 for the Protected Incentive Plan within loss on sale of business segment of discontinued operations on the consolidated statements of operations . Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.