What changed in this filing

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Item 1. Financial Statements

2025-05-06 compared with 2024-11-07 · 169 added, 495 removed, 270 unchanged (71% of the section changed)

4 unchanged sentences

(In thousands, except par value)

September 30, 2024 December 31, 2023

March 31, 2025 December 31, 2024

Current assets:

17 unchanged sentences

Operating lease liabilities, current 1,522 2,089

Debt, net 16,338 15,271

Current debt, net 18,970 16,405

Total current liabilities 89,682 105,095

Operating lease liabilities, non-current 1,327 1,365

Long-term debt, net 259,236 334,232

Non-current debt, net 248,464 255,118

Warrant liability 334 302

3 unchanged sentences

Commitments and contingencies (Note 7)

Stockholder's Equity:

Stockholders' equity:

Class A common stock $ 0.0001 par value;

500,000 shares authorized, 70,460 and 65,855 Class A shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively

500,000 shares authorized, 74,855 and 73,653 Class A shares issued and outstanding as of March 31, 2025 and December 31, 2024, respectively

Class C common stock $ 0.0001 par value;

25,000 shares authorized, 21,204 and 21,513 Class C shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively

25,000 shares authorized, 18,704 and 18,704 Class C shares issued and outstanding as of March 31, 2025 and December 31, 2024, respectively

Additional paid-in capital 865,832 863,033

10 unchanged sentences

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except for per share)

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

(In thousands, except for per share amounts)

Three Months Ended March 31,

Revenue $ 74,513 $ 84,917

Operating expenses:

Cost of revenue (excluding depreciation and amortization) 51,171 50,585 160,667 190,195

Cost of revenue 46,077 66,318

Salaries and benefits 24,988 24,483

Selling, general, and administrative 16,574 19,912

Depreciation and amortization 20,128 19,584 59,875 58,666

Total operating expenses 87,639 110,713

2 unchanged sentences

Interest expense, net 7,085 7,970

(Gain) loss from debt extinguishment — 619 ( 20,109 ) 619

Gain on extinguishment of debt — ( 19,676 )

Change in fair value of warrant liabilities 32 ( 251 )

1 unchanged sentence

Loss before income tax ( 20,243 ) ( 13,839 )

Income tax expense (benefit) 585 ( 1,116 ) 359 ( 11,614 )

Net loss from continuing operations ( 30,639 ) ( 25,928 ) ( 79,275 ) ( 85,831 )

Net loss from discontinued operations, net of tax — ( 137,209 ) — ( 163,222 )

Income tax benefit ( 387 ) ( 48 )

Net loss ( 19,856 ) ( 13,791 )

Net loss from continuing operations attributable to non-controlling interest ( 7,037 ) ( 6,081 ) ( 18,763 ) ( 18,989 )

Net loss from discontinued operations attributable to non-controlling interest — ( 25,566 ) — ( 30,472 )

Net loss attributable to System1, Inc.

$ ( 23,602 ) $ ( 131,490 ) $ ( 60,512 ) $ ( 199,592 )

Amounts attributable to System1, Inc.:

Net loss from continuing operations $ ( 23,602 ) $ ( 19,847 ) $ ( 60,512 ) $ ( 66,842 )

Net loss from discontinued operations — ( 111,643 ) — ( 132,750 )

Net loss attributable to non-controlling interest ( 3,973 ) ( 3,254 )

Net loss attributable to System1, Inc.

1 unchanged sentence

Basic and diluted net loss per share:

Continuing operations $ ( 0.34 ) $ ( 0.21 ) $ ( 0.88 ) $ ( 0.71 )

Discontinued operations — ( 1.18 ) — ( 1.42 )

Basic and diluted net loss per share $ ( 0.34 ) $ ( 1.39 ) $ ( 0.88 ) $ ( 2.13 )

$ ( 0.21 ) $ ( 0.16 )

Weighted average number of shares outstanding - basic and diluted 74,389 67,781

2 unchanged sentences

and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

(In thousands)

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

Three Months Ended March 31,

Net loss $ ( 19,856 ) $ ( 13,791 )

Other comprehensive (loss) income:

Foreign currency translation loss ( 44 ) ( 188 ) ( 275 ) ( 110 )

Other comprehensive income (loss):

Foreign currency translation income (loss) 13 ( 135 )

Comprehensive loss ( 19,843 ) ( 13,926 )

17 unchanged sentences

Net loss — — — — — ( 15,883 ) — ( 3,973 ) ( 19,856 )

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 309 — ( 309 ) — 241 — — ( 241 ) —

Tax receivable agreement liability and deferred taxes arising from LLC interest ownership exchanges and the issuance of common stock from equity incentive plans — — — — ( 110 ) — — — ( 110 )

Issuance of restricted stock, net of forfeitures and shares withheld for taxes 1,202 — — — 33 — — ( 325 ) ( 292 )

Other comprehensive loss — — — — — — ( 90 ) ( 45 ) ( 135 )

Other comprehensive income — — — — — — 11 2 13

Stock-based compensation — — — — 2,766 — — 44 2,810

Contributions from members, net of distributions — — — — — — — 5 5

Distributions to members, net of contributions — — — — — — — ( 12 ) ( 12 )

Balance at March 31, 2025 74,855 $ 7 18,704 $ 2 $ 865,832 $ ( 798,218 ) $ ( 432 ) $ 468 $ 67,659

Net loss — — — — — ( 26,373 ) — ( 8,472 ) ( 34,845 )

Issuance of restricted stock, net of forfeitures and shares withheld for taxes 623 — — — 284 — — ( 308 ) ( 24 )

Other comprehensive loss — — — — — — ( 24 ) ( 72 ) ( 96 )

Stock-based compensation — — — — 3,784 — — 87 3,871

Distributions to members — — — — — — — ( 32 ) ( 32 )

Balance at June 30, 2024 69,255 $ 7 21,204 $ 2 $ 854,270 $ ( 744,572 ) $ ( 295 ) $ 19,867 $ 129,279

Net loss — — — — — ( 23,602 ) — ( 7,037 ) ( 30,639 )

Issuance of restricted stock, net of forfeitures and shares withheld for taxes 1,205 — — — 288 — — ( 308 ) ( 20 )

Other comprehensive loss — — — — — — 33 ( 77 ) ( 44 )

Stock-based compensation — — — — 4,182 — — 88 4,270

Balance at September 30, 2024 70,460 $ 7 21,204 $ 2 $ 858,740 $ ( 768,174 ) $ ( 262 ) $ 12,533 $ 102,846

System1, Inc.

and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

(In thousands)

Class A Common Stock

8 unchanged sentences

Net loss — — — — — ( 10,537 ) — ( 3,254 ) ( 13,791 )

Cumulative-effect of adoption of ASU 2016-13 — — — — — ( 326 ) — — ( 326 )

Issuance of restricted stock, net of forfeitures and shares withheld for taxes 832 — — — ( 1,449 ) — — ( 281 ) ( 1,730 )

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 309 — ( 309 ) — 241 — — ( 241 ) —

Increase in tax receivable agreement liability — — — — ( 441 ) — — — ( 441 )

Other comprehensive loss — — — — — — ( 62 ) ( 47 ) ( 109 )

Stock-based compensation — — — — 6,203 — — 958 7,161

Balance at March 31, 2023 93,147 $ 9 21,513 $ 2 $ 838,745 $ ( 473,424 ) $ ( 322 ) $ 68,949 $ 433,959

Net loss — — — — — ( 34,301 ) — ( 8,690 ) ( 42,991 )

Issuance of restricted stock, net of forfeitures and shares withheld for taxes 455 — — — ( 133 ) — — ( 181 ) ( 314 )

Other comprehensive income (loss) — — — — — — 208 ( 22 ) 186

Stock-based compensation — — — — 4,956 — — 615 5,571

Balance at June 30, 2023 93,602 $ 9 21,513 $ 2 $ 843,568 $ ( 507,725 ) $ ( 114 ) $ 60,671 $ 396,411

Net loss — — — — — ( 131,490 ) — ( 31,647 ) ( 163,137 )

Issuance of restricted stock, net of forfeitures and shares withheld for taxes 1,498 — — — 178 — — ( 1,169 ) ( 991 )

1 unchanged sentence

Stock-based compensation — — — — 4,317 — — 88 4,405

Balance at September 30, 2023 94,258 $ 9 21,513 $ 2 $ 850,265 $ ( 639,215 ) $ ( 279 ) $ 29,358 $ 240,140

Contributions from members, net of distributions — — — — — — — 5 5

Balance at March 31, 2024 68,632 $ 7 21,204 $ 2 $ 850,202 $ ( 718,199 ) $ ( 271 ) $ 28,664 $ 160,405

The accompanying notes are an integral part of these condensed consolidated financial statements.

3 unchanged sentences

(In thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash Flows from Operating Activities

3 unchanged sentences

Stock-based compensation 2,651 3,970

Impairment of goodwill — 115,483

Impairment of assets held for sale — 3,276

Amortization of debt issuance costs 911 1,030

2 unchanged sentences

Deferred tax benefits ( 588 ) ( 656 )

(Gain) loss from debt extinguishment ( 20,109 ) 619

Gain on extinguishment of debt — ( 19,676 )

Share-based compensation liabilities 806 —

6 unchanged sentences

Deferred revenue 100 ( 65 )

Long-term earnout liabilities — ( 20,000 )

Other non-current liabilities ( 20 ) ( 587 )

2 unchanged sentences

Purchases of property and equipment ( 46 ) —

Purchases of intangible asset ( 275 ) —

Capitalized software development costs ( 1,227 ) ( 1,622 )

1 unchanged sentence

Cash Flows from Financing Activities

Proceeds from related-party loan, net of lender fees — 63,000

Repayments of related party loan, inclusive of lender fees — ( 44,000 )

Repayment of Term Loan ( 5,000 ) ( 46,071 )

Payment of acquisition holdback — ( 1,935 )

Taxes paid related to net settlement of stock awards ( 292 ) ( 2,092 )

8 unchanged sentences

Restricted cash 1,243 7,764

Cash and restricted cash included in assets held for sale from discontinued operations — 12,391

Total cash, cash equivalents and restricted cash $ 45,156 $ 77,684

Supplemental cash flow information:

Capitalized assets financed by accounts payable $ — $ 53

Stock-based compensation included in capitalized software development costs 1,113 1,644

Settlement of incentive plan through issuance of common stock 1,707 1,658

The accompanying notes are an integral part of these condensed consolidated financial statements.

4 unchanged sentences

System1, Inc.

and subsidiaries (the "Company", "we", "our" or "us") operates an omnichannel customer acquisition platform, delivering high-intent customers to brands, advertisers and publishers.

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 high-intent end-users, RAMP allows us to monetize these acquired end-users through our relationships with third party advertisers and advertising networks ("Advertising Partners").

RAMP operates across our network of owned and operated websites, allowing us to monetize end-user traffic that we source from various acquisition marketing channels, including Google, Facebook, Outbrain, and TikTok.

RAMP also allows third party advertising platforms and publishers ("Network Partners") to send end-user traffic to, and monetize end-user traffic on, our owned and operated websites or through our monetization agreements.

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 ("Advertising 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.

We have two reportable segments:

1 unchanged sentence

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 interest, 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 associated with our owned and operated products, which includes 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.

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 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.

1 unchanged sentence

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements and related disclosures are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.

Our condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries.

All intercompany transactions and balances have been eliminated in consolidation.

The accompanying unaudited interim condensed consolidated financial statements and related disclosures are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.

Our condensed consolidated financial statements include the accounts of System1, Inc.

and its subsidiaries.

All intercompany accounts and transactions have been eliminated in the consolidation.

Our fiscal year ends on December 31, 2025.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as filed with the Securities and Exchange Commission on March 15, 2024.

In our opinion, the unaudited interim condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair statement of our financial position, results of operations, and cash flows.

The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2024 or future operating periods.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, as filed with the Securities and Exchange Commission on March 10, 2025.

In our opinion, the condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair statement of our financial position, results of operations, and cash flows.

The results of operations for the three months ended March 31, 2025 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2025 or future operating periods.

There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024 that have had a material impact on our condensed consolidated financial statements and related notes.

2 unchanged sentences

Notes to Condensed Consolidated Financial Statements (Unaudited)

We completed the sale of Total Security Limited, formerly known as Protected.net Group Limited ("Protected") on November 30, 2023.

The results of operations of our Protected business are presented as net loss from discontinued operations in our condensed consolidated statements of operations in the periods applicable (see Note 12, Discontinued Operations).

Revision of Previously Issued Consolidated Financial Statements

During the fourth quarter of 2023, we identified certain errors related to our previously issued financial statements as of and for the three and nine months ended September 30, 2023 as follows:

Additional paid-in capital was understated by $ 0.9 million as of September 30, 2023, and salaries and benefits expense was understated by an immaterial amount for the three months ended September 30, 2023 and overstated by $ 0.6 million f or the nine months ended September 30, 2023, as a result of not accelerating expenses upon the forfeiture of certain cash and equity Replacement Awards (as defined in Note 9, Net Loss Per Share ) previously granted in 2022.

This impacted the condensed consolidated balance sheet, condensed consolidated statements of operations, condensed consolidated statements of changes in stockholders' equity, and condensed consolidated statement of cash flows.

We did not appropriately account for changes in equity and earnings per share, specifically:

the carrying amount of non-controlling interest was not updated as changes in ownership events occurred during each reporting period;

certain equity Replacement Awards granted during 2022 were not properly considered in the allocation of net income (loss) to controlling and non-controlling interest and earnings per share.

These errors impacted the condensed consolidated balance sheets, condensed consolidated statement of operations, condensed consolidated statements of changes in stockholders' equity, and condensed consolidated statement of cash flows.

We made additional corrections for other immaterial errors.

We adjusted for the tax impacts of the revisions related to such errors described above.

We concluded that the errors were not material, either individually or in the aggregate, to our previously issued condensed consolidated financial statements for the impacted period.

To correct the immaterial errors, we have revised our previously issued condensed consolidated financial statements as of and for the period ended September 30, 2023 .

We have revised the condensed consolidated balance sheet, condensed consolidated statement of operations, condensed consolidated statement of comprehensive income (loss), condensed consolidated statement of changes in stockholders' equity, and condensed consolidated statement of cash flows for the period ended September 30, 2023 , as well as the associated Notes to the condensed consolidated financial statements to reflect the correction of these immaterial errors in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 .

The following tables reflect the errors discussed in a through d above.

The following table reflects the revisions to the previously issued condensed consolidated balance sheet as of September 30, 2023 (in thousands):

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

As Previously Reported Revision Adjustment As Currently Reported

Liabilities and Stockholders' Equity

Deferred tax liability $ 15,009 $ 338 $ 15,347 (d)

Total liabilities 687,066 338 687,404

Stockholders’ Equity / Members’ Deficit

Additional paid-in capital $ 849,398 $ 867 $ 850,265 (a) (b)

Accumulated deficit ( 646,242 ) 7,027 ( 639,215 ) (a) (b) (d)

Accumulated other comprehensive loss ( 435 ) 156 ( 279 ) (d)

Total stockholders' equity attributable to System1, Inc.

$ 202,732 $ 8,050 $ 210,782

Non-controlling interest 37,746 ( 8,388 ) 29,358 (b)

Total stockholders' equity $ 240,478 $ ( 338 ) $ 240,140

Total liabilities and stockholders' equity $ 927,544 $ — $ 927,544

The following tables reflect the revisions to the previously issued condensed consolidated statement of operations for the three and nine months ended September 30, 2023 (in thousands):

Three Months Ended September 30, 2023

As Previously Reported Revision Adjustment As Currently Reported

Salaries and benefits $ 26,689 $ 6 $ 26,695 (a)

Total operating expenses 108,666 6 108,672

Operating loss ( 20,848 ) ( 6 ) ( 20,854 )

Loss before income tax $ ( 27,038 ) $ ( 6 ) $ ( 27,044 )

Income tax expense (benefit) ( 920 ) ( 196 ) ( 1,116 ) (d)

Net loss from continuing operations ( 26,118 ) 190 ( 25,928 )

Net loss from discontinued operations, net of tax ( 137,209 ) — ( 137,209 )

Net loss ( 163,327 ) 190 ( 163,137 )

Net loss from continuing operations attributable to non-controlling interest ( 6,328 ) 247 ( 6,081 ) (b)

Net loss from discontinued operations attributable to non-controlling interest ( 25,566 ) — ( 25,566 )

Net loss attributable to System1, Inc.

$ ( 131,433 ) $ ( 57 ) $ ( 131,490 )

Amounts attributable to System1, Inc.:

Net loss from continuing operations $ ( 19,790 ) $ ( 57 ) $ ( 19,847 ) (a) (b) (d)

Net loss from discontinued operations ( 111,643 ) — ( 111,643 )

Net loss attributable to System1, Inc.

$ ( 131,433 ) $ ( 57 ) $ ( 131,490 )

Basic and diluted net loss per share:

Continuing operations $ ( 0.21 ) $ — $ ( 0.21 )

Discontinued operations ( 1.19 ) 0.01 ( 1.18 ) (b)

Basic and diluted net loss per share $ ( 1.40 ) $ 0.01 $ ( 1.39 )

Weighted average number of shares outstanding - basic and diluted 93,941 418 94,359 (b)

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Nine Months Ended September 30, 2023

As Previously Reported Revision Adjustment As Currently Reported

Salaries and benefits $ 82,484 $ ( 588 ) $ 81,896 (a)

Total operating expenses 373,349 ( 588 ) 372,761

Operating loss ( 67,498 ) 588 ( 66,910 )

Loss before income tax $ ( 98,033 ) $ 588 $ ( 97,445 )

Income tax expense (benefit) ( 10,626 ) ( 988 ) ( 11,614 ) (d)

Net loss from continuing operations ( 87,407 ) 1,576 ( 85,831 )

Net loss from discontinued operations, net of tax ( 163,222 ) — ( 163,222 )

Net loss ( 250,629 ) 1,576 ( 249,053 )

Net loss from continuing operations attributable to non-controlling interest ( 19,543 ) 554 ( 18,989 ) (b)

Net loss from discontinued operations attributable to non-controlling interest ( 30,472 ) — ( 30,472 )

Net loss attributable to System1, Inc.

$ ( 200,614 ) $ 1,022 $ ( 199,592 )

Amounts attributable to System1, Inc.:

Net loss from continuing operations $ ( 67,864 ) $ 1,022 $ ( 66,842 ) (a) (b) (d)

Net loss from discontinued operations ( 132,750 ) — ( 132,750 )

Net loss attributable to System1, Inc.

$ ( 200,614 ) $ 1,022 $ ( 199,592 )

Basic and diluted net loss per share:

Continuing operations $ ( 0.73 ) $ 0.02 $ ( 0.71 ) (b)

Discontinued operations ( 1.42 ) — ( 1.42 )

Basic and diluted net loss per share $ ( 2.15 ) $ 0.02 $ ( 2.13 )

Weighted average number of shares outstanding - basic and diluted 93,281 368 93,649 (b)

The following tables reflect the revisions related to the previously issued condensed consolidated statement of comprehensive loss for the three and nine months ended September 30, 2023 (in thousands):

Three Months Ended September 30, 2023

As Previously Reported Revision Adjustment As Currently Reported

Net loss $ ( 163,327 ) $ 190 $ ( 163,137 ) (a) (d)

Other comprehensive loss:

Foreign currency translation loss ( 188 ) — ( 188 )

Comprehensive loss ( 163,515 ) 190 ( 163,325 )

Comprehensive loss attributable to non-controlling interest ( 31,932 ) 247 ( 31,685 ) (b)

Comprehensive loss attributable to System1, Inc.

$ ( 131,583 ) $ ( 57 ) $ ( 131,640 )

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Nine Months Ended September 30, 2023

As Previously Reported Revision Adjustment As Currently Reported

Net loss $ ( 250,629 ) $ 1,576 $ ( 249,053 ) (a) (d)

Other comprehensive loss:

Foreign currency translation loss ( 109 ) ( 1 ) ( 110 ) (c)

Comprehensive loss ( 250,738 ) 1,575 ( 249,163 )

Comprehensive loss attributable to non-controlling interest ( 50,019 ) 554 ( 49,465 ) (b)

Comprehensive loss attributable to System1, Inc.

$ ( 200,719 ) $ 1,021 $ ( 199,698 )

The following tables reflect the revisions to the previously issued condensed consolidated statement of changes in stockholders' equity for the nine months ended September 30, 2023 (in thousands).

Although the impact of such revisions is pervasive throughout the condensed consolidated statement of changes in stockholders' equity as a result of the errors described above, the most significant revisions include a reduction of net loss of $ 1.6 million, an increase of non-controlling interest of $ 1.8 million, a reduction in accumulated deficit of $ 1.0 million and a reduction in additional paid-in-capital of $ 1.0 million.

Class A Common Stock

Class C Common Stock

Amount Shares

Amount Additional Paid-In-Capital

Accumulated Deficit

Accumulated Other Comprehensive Loss

Non-Controlling Interest

Total Stockholders’

As Previously Reported

Balance at December 31, 2022 91,674 $ 9 21,747 $ 2 $ 831,566 $ ( 439,296 ) $ ( 260 ) $ 78,650 $ 470,671

Net loss — — — — — ( 33,952 ) — ( 9,174 ) ( 43,126 )

Cumulative-effect of adoption of ASU 2016-13 — — — — — ( 326 ) — — ( 326 )

Issuance of restricted stock, net of forfeitures and shares withheld for taxes 832 — — — ( 1,730 ) — — — ( 1,730 )

Issuance of common stock in connection with settlement of incentive plan 407 — — — 1,659 — — — 1,659

Conversion of Class C shares to Class A shares 234 — ( 234 ) — 955 — — ( 955 ) —

Increase in tax receivable agreement liability — — — — ( 441 ) — — — ( 441 )

Other comprehensive loss — — — — — — ( 62 ) ( 47 ) ( 109 )

Stock-based compensation — — — — 6,963 — — — 6,963

Balance at March 31, 2023 93,147 $ 9 21,513 $ 2 $ 838,972 $ ( 473,574 ) $ ( 322 ) $ 68,474 $ 433,561

Net loss — — — — — ( 35,230 ) — ( 8,947 ) ( 44,177 )

Issuance of restricted stock, net of forfeitures and shares withheld for taxes 455 — — — ( 314 ) — — — ( 314 )

Other comprehensive income (loss) — — — — — — 209 ( 22 ) 187

Stock-based compensation — — — — 5,571 — — — 5,571

Balance at June 30, 2023 93,602 $ 9 21,513 $ 2 $ 844,229 $ ( 508,804 ) $ ( 113 ) $ 59,505 $ 394,828

Net loss — — — — — ( 131,433 ) — ( 31,894 ) ( 163,327 )

Issuance of restricted stock, net of forfeitures and shares withheld for taxes 656 — — — ( 54 ) — — — ( 54 )

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Class A Common Stock

Class C Common Stock

Amount Shares

Amount Additional Paid-In-Capital

Accumulated Deficit

Accumulated Other Comprehensive Loss

Non-Controlling Interest

Total Stockholders’

Other comprehensive loss — — — — — — ( 165 ) ( 23 ) ( 188 )

Stock-based compensation — — — — 7,102 — — — 7,102

Balance at September 30, 2023 94,258 $ 9 21,513 $ 2 $ 851,277 $ ( 640,237 ) $ ( 278 ) $ 27,588 $ 238,361

Revision Adjustments

Net loss — $ — — $ — $ — $ 150 $ — $ 50 $ 200 (a) (b) (d)

Issuance of restricted stock, net of forfeitures and shares withheld for taxes — — — — 281 — — ( 281 ) — (a) (b)

Issuance of common stock in connection with settlement of incentive plan — — — — 160 — — ( 160 ) — (b)

Conversion of Class C shares to Class A shares — — — — 92 — — ( 92 ) — (b)

Stock-based compensation — — — — ( 760 ) — — 958 198 (a) (b)

Balance at March 31, 2023 — $ — — $ — $ ( 227 ) $ 150 $ — $ 475 $ 398

Net loss — — — — — 929 — 257 1,186 (a) (b) (d)

Issuance of restricted stock, net of forfeitures and shares withheld for taxes — — — — 181 — — ( 181 ) — (a) (b)

Other comprehensive loss — — — — — — ( 1 ) — ( 1 ) (c)

Stock-based compensation — — — — ( 615 ) — — 615 — (a) (b)

Balance at June 30, 2023 — $ — — $ — $ ( 661 ) $ 1,079 $ ( 1 ) $ 1,166 $ 1,583

Net loss — — — — — ( 57 ) — 247 190 (a) (b) (d)

Issuance of restricted stock, net of forfeitures and shares withheld for taxes — — — — 258 — — ( 258 ) — (a) (b)

Stock-based compensation — — — — ( 609 ) — — 615 6 (a) (b)

Balance at September 30, 2023 — $ — — $ — $ ( 1,012 ) $ 1,022 $ ( 1 ) $ 1,770 $ 1,779

Net loss — $ — — $ — $ — $ ( 33,802 ) $ — $ ( 9,124 ) $ ( 42,926 )

Cumulative-effect of adoption of ASU 2016-13 — — — — — ( 326 ) — — ( 326 )

Issuance of restricted stock, net of forfeitures and shares withheld for taxes 832 — — — ( 1,449 ) — — ( 281 ) ( 1,730 )

Issuance of common stock in connection with settlement of incentive plan 407 — — — 1,819 — — ( 160 ) 1,659

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Class A Common Stock

Class C Common Stock

Amount Shares

Amount Additional Paid-In-Capital

Accumulated Deficit

Accumulated Other Comprehensive Loss

Non-Controlling Interest

Total Stockholders’

Conversion of Class C shares to Class A shares 234 — ( 234 ) — 1,047 — — ( 1,047 ) —

Increase in tax receivable agreement liability — — — — ( 441 ) — — — ( 441 )

Other comprehensive loss — — — — — — ( 62 ) ( 47 ) ( 109 )

Stock-based compensation — — — — 6,203 — — 958 7,161

Balance at March 31, 2023 93,147 $ 9 21,513 $ 2 $ 838,745 $ ( 473,424 ) $ ( 322 ) $ 68,949 $ 433,959

Net loss — — — — — ( 34,301 ) — ( 8,690 ) ( 42,991 )

Issuance of restricted stock, net of forfeitures and shares withheld for taxes 455 — — — ( 133 ) — — ( 181 ) ( 314 )

Other comprehensive income (loss) — — — — — — 208 ( 22 ) 186

Stock-based compensation — — — — 4,956 — — 615 5,571

Balance at June 30, 2023 93,602 $ 9 21,513 $ 2 $ 843,568 $ ( 507,725 ) $ ( 114 ) $ 60,671 $ 396,411

Net loss — — — — — ( 131,490 ) — ( 31,647 ) ( 163,137 )

Issuance of restricted stock, net of forfeitures and shares withheld for taxes 656 — — — 204 — — ( 258 ) ( 54 )

Other comprehensive loss — — — — — — ( 165 ) ( 23 ) ( 188 )

Stock-based compensation — — — — 6,493 — — 615 7,108

Balance at September 30, 2023 94,258 $ 9 21,513 $ 2 $ 850,265 $ ( 639,215 ) $ ( 279 ) $ 29,358 $ 240,140

The following table reflects the revisions to the previously issued condensed consolidated statement of cash flows for the nine months ended September 30, 2023 (in thousands):

As Previously Reported Revision Adjustment As Currently Reported

Cash Flows from Operating Activities

Net loss $ ( 250,629 ) $ 1,576 $ ( 249,053 ) (a) (d)

Stock-based compensation 43,909 203 44,112 (a)

Deferred tax benefits ( 18,397 ) ( 988 ) ( 19,385 ) (d)

Changes in operating assets and liabilities:

Accrued expenses and other current liabilities 1,708 ( 1,779 ) ( 71 ) (c)

Other non-current liabilities ( 4,510 ) 988 ( 3,522 ) (d)

Net cash used by operating activities ( 5,908 ) — ( 5,908 )

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

To conform to the current period’s presentation, depreciation and amortization expense was reclassified to cost of revenue and selling, general, and administrative in the prior period condensed consolidated statement of operations.

Use of Estimates

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Actual results could differ from those estimates.

Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, valuation of goodwill, acquired intangible assets, assets held for sale and long-lived assets, valuation and recognition of stock-based compensation awards, income taxes, contingent consideration and determination of the fair value of the warrant liabilities.

Significant estimates and assumptions reflected in these condensed 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.

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.

As of September 30, 2024 , we had two paid search advertising partnership agreements with Google and one paid search advertising partnership agreement with Microsoft.

One of the Google agreements expires on February 28, 2025.

Concentrations

As of March 31, 2025, 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, 2027 and September 30, 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 .

We recorded revenue of $ 6.6 million from an Advertising Partner and an estimated contra revenue liability of $ 5.8 million at September 30, 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 Partners.

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.

Goodwill, Internal-Use Software Development Costs, Net, and Intangible Assets, Net

Goodwill was $ 82.4 million as of September 30, 2024 and December 31, 2023, all of which is attributable to the Partner Network reporting unit.

No impairment of goodwill was recognized in any of the periods presented for our continuing operations.

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 with 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 beginning with the year ending December 31, 2027 and interim periods during the year 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.

System1, Inc.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements (Unaudited)

Goodwill, Internal-Use Software Development Costs, Net, and Intangible Assets, Net

Goodwill was $ 82.4 million as of March 31, 2025 and December 31, 2024, all of which is attributable to the Partner Network reporting unit.

No impairment of goodwill was recognized in any of the periods presented.

Internal-use Software Development Costs, Net and Intangible Assets, Net

Internal-use software development costs and intangible assets consisted of the following (in thousands):

September 30, 2024

March 31, 2025

Gross Carrying Amount Accumulated Amortization Net Carrying Amount

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Total $ 440,181 $ ( 217,840 ) $ 222,341

The internal-use software development costs include construction in progress (which amounts are not subject to amortization until placed in service) of $ 4.5 million and $ 3.5 million as of September 30, 2024 and December 31, 2023 , respectively.

The internal-use software development costs include work in progress which is not being amortized of $ 2.9 million and $ 5.0 million as of March 31, 2025 and December 31, 2024 , respectively.

Amortization expense for internal-use software development costs and intangible assets were as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

Three Months Ended March 31,

Amortization expense for internal-use software development $ 1,619 $ 934

$ 1,229 $ 716 $ 3,238 $ 2,112

Amortization expense for intangible assets $ 18,651 $ 18,665

No impairment of internal-use software development cost or intangible assets was recognized for any of the periods presented.

For the three months ended March 31, 2025, $ 13.1 million and $ 7.2 million of amortization were recorded within cost of revenue and selling, general and administrative expenses, respectively.

For the three months ended

System1, Inc.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2024, $ 12.6 million and $ 7.0 million of amortization were recorded within cost of revenue and selling, general and administrative expenses, respectively.

No impairment of internal-use software development cost or intangible assets was recognized for any of the periods presented.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following items as of the periods presented (in thousands):

September 30, 2024 December 31, 2023

Accrued expenses and other current liabilities consisted of the following (in thousands):

March 31, 2025 December 31, 2024

Accrued revenue share $ 25,081 $ 27,656

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CouponFollow Incentive Plan

As of September 30, 2024 , we determined that it is probable the CouponFollow business would achieve all performance conditions during the Performance Periods, and accordingly, has recognized a short-term liability within accrued expenses and other current liabilities of $ 9.4 million and a non-current liability of $ 6.7 million within other non-current liabilities in our condensed consolidated balance sheets for all Tier amounts set forth in the CouponFollow Incentive Plan.

The total amount to be earned under the CouponFollow Incentive Plan is $ 21.3 million The carrying amount of the share-based liabilities approximates its fair value.

For the nine months ended September 30, 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 installment of the Fixed Amount.

We recognized a gain of $ 0.5 million for the difference between the fair value of the Class A common stock issued and the carrying value of the liability.

For the three and nine months ended September 30, 2024, we recognized $ 0.8 million and $ 2.5 million for the third installment of the Fixed Amount within salaries and benefits expenses on the condensed consolidated statements of operation s, respectively.

During the 2024 Performance Period, the CouponFollow business achieved all applicable performance conditions under the CouponFollow Incentive Plan.

As a result, the full performance-based award of $ 21.3 million vested or was expected to vest.

Accordingly, we recognized a current share-based compensation liability of $ 17.8 million within accrued expenses and other current liabilities as December 31, 2024 , of which $ 7.8 million was paid in cash in February 2025.

The final payment to settle the achievement of all the performance conditions of $ 13.5 million is payable 60 days following December 31, 2025 .

The carrying amount of the share-based liabilities approximates its fair value, which is determined using Level 3 inputs under the fair value hierarchy.

For the three months ended March 31, 2025, we recognized $ 0.8 million in share-based compensation expense within salaries and benefits expenses on the condensed consolidated statements of operations for the performance-based portion of the awards under the CouponFollow Incentive Plan.

As of March 31, 2025, the remaining share-based compensation expense to be recognized in 2025 is $ 2.6 million.

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 September 30, 2024 , there was no balance outstanding on the 2022 Revolving Facility, and principal of $ 285.1 million was outstanding on the Term Loan.

Through December 31, 2025, the outstanding Term Loan is subject to quarterly amortization payments of $ 5.0 million.

From March 31, 2026, the Term Loan is subject to quarterly amortization payments of $ 7.5 million.

As of March 31, 2025 , principal of $ 275.1 million was outstanding on the Term Loan and there was no balance outstanding on the 2022 Revolving Facility.

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.

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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 our financial covenants as of September 30, 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 September 30, 2024, we had $ 50.0 million available on the 2022 Revolving Facility.

System1, Inc.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements (Unaudited)

During nine months ended September 30, 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 an average discount of 64.12 % of its par value).

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 March 31, 2025.

The interest rate on the 2022 Revolving Facility is the adjusted SOFR plus 2.5 % with an adjusted SOFR floor of 0 %.

As of March 31, 2025 and December 31, 2024, respectively, we had $ 50.0 million available on the 2022 Revolving Facility.

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 an average discount of 64.1 % of its par value) pursuant to a Dutch auction tender offer and a privately negotiated repurchase transaction.

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 repurchases were $ 20.1 million before fees and expenses incurred to negotiate, document and consummate the repurchase.

We used available cash on hand to fund the repurchase.

Our aggregate gain on the repurchase during 2024 was $ 20.1 million before fees and expenses incurred to negotiate, document and consummate the repurchase.

The carrying values of our debt, net of discounts, deferred financing and debt issuance costs were as follows (in thousands):

September 30, 2024 December 31, 2023

March 31, 2025 December 31, 2024

Term Loan 1, 2

2 unchanged sentences

_______________

1 Includes unamortized discount of $ 9.0 million and $ 14.7 million and unamortized loan fees of $ 0.5 million and $ 0.8 million, as of September 30, 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 $ 181.0 million and $ 222.7 million as of September 30, 2024 and December 31, 2023, respectively.

We are the sole managing member of System1 Holdings and, as a result, consolidate the financial results of System1 Holdings .

1 Includes unamortized discount of $ 7.3 million and $ 8.1 million and unamortized loan fees of $ 0.4 million and $ 0.4 million, as of March 31, 2025 and December 31, 2024, 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 $ 163.0 million as of March 31, 2025.

During 2023 and through July 31, 2024, we were the sole managing member of S1 Holdco and, as a result, consolidated the financial results of S1 Holdco .

S1 Holdco was treated as a partnership for U.S.

federal and most applicable state and local income tax purposes.

As a partnership, S1 Holdco was not subject to U.S.

federal and certain state and local income taxes.

Any taxable income or loss generated by S1 Holdco was passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis.

We were 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 S1 Holdco, as well as any stand-alone income or loss generated by us.

As of August 1, 2024, 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.

5 unchanged sentences

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 recorded an income tax expense of $ 0.6 million and $ 0.4 million for the three and nine months ended September 30, 2024 and a benefit from income taxes of $ 1.1 million and $ 11.6 million for the three and nine months ended September 30, 2023, respectively .

The effective tax rate was ( 2.0 )% and ( 0.5 )% for the three and nine months ended September 30, 2024, respectively and 4.1 % and 11.9 % for the three and nine months ended September 30, 2023, respectively.

We recorded an income tax benefit of $ 0.4 million for the three months ended March 31, 2025 and an immaterial income tax benefit for the three months ended March 31, 2024 , respectively .

The effective tax rate for the three months ended March 31, 2025 and 2024, was 2.0 % and 0.4 %, respectively.

The provision for income taxes differs from the amount of income tax computed by applying the U.S.

statutory federal tax rate of 21% to the loss before income taxes due to the exclusion of non-controlling loss, state taxes, foreign rate differential, non-deductible expenses, changes to tax reserves, return to provision true-ups, increase to the valuation allowance related to unrealizable deferred tax assets, and outside basis adjustments.

As of September 30, 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.

During the three and nine months ended September 30, 2024 and 2023 , inclusive of interest, no payments were made to the parties to the Tax Receivable Agreement.

The total amount of Tax Receivable Agreement Payments due under the Tax Receivable Agreement was $ 0.9 million and $ 0.8 million as of September 30, 2024 and December 31, 2023 , respectively.

statutory federal tax rate of 21% to the loss before income taxes due to the exclusion of non-controlling loss, state taxes, foreign rate differential, non-deductible expenses, increase to the valuation allowance related to unrealizable deferred tax assets, and outside basis

System1, Inc.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements (Unaudited)

As of March 31, 2025 , 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.

During the three months ended March 31, 2025 and 2024 , inclusive of interest, no payments were made to the parties to the Tax Receivable Agreement.

The total amount of Tax Receivable Agreement Payments due under the Tax Receivable Agreement was $ 5.3 million as of March 31, 2025 and December 31, 2024 .

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 September 30, 2024, we remain contractually obligated to spend $ 8.0 million towards this commitment.

As of September 30, 2024, we had various non-cancelable operating lease commitments for office space which have been recorded as Operating lease liabilities.

As of March 31, 2025, we remain contractually obligated to spend $ 5.0 million towards this commitment.

As of March 31, 2025, we had various non-cancelable operating lease commitments for office space which have been recorded as Operating lease liabilities.

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 condensed 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 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 tentative settlement during June 2024.

During September 2024 we entered into a Settlement Agreement, that still remains subject to court approval.

The amount of such settlement has been accrued accordingly in a ccrued expenses and other current liabilities in our condensed consolidated balance sheet as of September 30, 2024.

We accrue for losses when the loss is deemed probable and the liability can reasonably be estimated.

Indemnifications

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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 September 30, 2024 .

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Accordingly, we have no liabilities recorded for these agreements as of March 31, 2025 or December 31, 2024, respectively .

Fair Value Measurement

Financial Liabilities Measured at Fair Value on a Recurring Basis

The following tables present our fair value hierarchy for liabilities measured at fair value on a recurring basis (in thousands):

September 30, 2024 December 31, 2023

Public Warrants $ 1,217 $ 2,688

The fair value of the Public Warrants has been estimated using the Public Warrants’ quoted market price.

Level 1 liabilities measured at fair value on a recurring basis are summarized below (in thousands):

March 31, 2025 December 31, 2024

Warrants $ 334 $ 302

There were no transfers in or out of levels during the periods presented.

On May 5, 2025, the New York Stock Exchange ("NYSE" or the "Exchange") completed the removal from listing and registration of the Warrants from the Exchange.

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Net Loss Per Share

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) :

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

Basic and diluted net loss per share

Net loss from continuing operations attributable to System1, Inc.

$ ( 0.34 ) $ ( 0.21 ) $ ( 0.88 ) $ ( 0.71 )

Net loss from discontinued operations, net of tax attributable to System1, Inc.

— ( 1.18 ) — ( 1.42 )

For the three months ended March 31, 2025 and 2024, 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) :

Three Months Ended March 31,

Basic and diluted net loss per share

Net loss from continuing operations attributable to System1, Inc.

$ ( 23,602 ) $ ( 19,847 ) $ ( 60,512 ) $ ( 66,842 )

Net loss from discontinued operations, net of tax attributable to System1, Inc.

Net loss attributable to System1, Inc.

$ ( 0.21 ) $ ( 0.16 )

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Weighted-average common shares outstanding used in computing basic and diluted net loss per share 74,389 67,781

For the periods presented in the table above, a total of 16.8 million Public Warrants were excluded from the computation of net loss per share as the impact was anti-dilutive.

In addition, for the three and nine months ended September 30, 2024, we excluded stock appreciation rights ("SARs") of 22.3 million as they are contingently issuable based on certain performance conditions, which were not achieved as of September 30, 2024 .

Refer to Note 11, Stock-Based Compensation for further details.

During 2022, we replaced certain unvested profits interests awards, value creation units and Class F units that were outstanding, with a combination of a restricted stock unit and cash awards (collectively, "Replacement Awards").

Shares of Class C common stock, restricted stock units and Warrants outstanding for the three months ended March 31, 2025 and 2024, are considered potentially dilutive to 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.

In addition, for the three months ended March 31, 2025, we excluded 20.8 million Stock Appreciation Rights ("SARs") as they are contingently issuable based on certain performance conditions, which were not achieved.

See Note 11, 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

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

point the common stock underlying the 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 vest or forfeiture.

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.

Segment Reporting

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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 operating revenue as well as adjusted gross profit.

The tables below include the following operating expenses that are not allocated to the reporting segments presented to our CODM :

depreciation and amortization of property, equipment and leasehold improvements, amortization of intangible assets 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 condensed consolidated net loss from continuing operations before income tax and are included in the reconciliation that follows.

The following table summarizes revenue by reportable segments (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

Owned and Operated Advertising $ 70,798 $ 66,187 $ 217,224 $ 249,512

Partner Network 18,034 21,631 51,106 56,339

Total revenue $ 88,832 $ 87,818 $ 268,330 $ 305,851

The following table summarizes Adjusted gross profit by reportable segments (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

Owned and Operated Advertising $ 26,406 $ 23,886 $ 76,246 $ 81,314

Partner Network 13,053 15,312 37,462 40,337

Adjusted gross profit 39,459 39,198 113,708 121,651

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, segment 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.

Segment adjusted gross profit is also used to determine variable compensation expense for certain employees.

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 and agency fees), salaries and benefits, selling, general and administrative expenses 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 condensed consolidated net loss before income tax and are included in the reconciliation that follows.

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table summarizes revenue, segment cost of revenue and segment adjusted gross profit by reportable segments (in thousands):

Three Months Ended March 31, 2025

Owned and Operated Advertising Partner Network Total

Revenue $ 57,921 $ 16,592 $ 74,513

segment cost of revenue 30,143 1,629 31,772

Segment adjusted gross profit 27,778 14,963 42,741

Other cost of revenue 14,305

1 unchanged sentence

Selling, general, and administrative 16,574

Depreciation and amortization 20,128 19,584 59,875 58,666

Interest expense, net 7,085

(Gain) loss from debt extinguishment — 619 ( 20,109 ) 619

Gain on extinguishment of debt —

Change in fair value of warrant liabilities 32

Loss before income tax $ ( 20,243 )

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Three Months Ended March 31, 2024

Owned and Operated Advertising Partner Network Total

Revenue $ 69,030 $ 15,887 $ 84,917

segment cost of revenue 46,568 4,968 51,536

Segment adjusted gross profit 22,462 10,919 33,381

Other cost of revenue 14,782

Salaries and benefits 24,483

Selling, general, and administrative 19,912

Interest expense, net 7,970

Gain on extinguishment of debt ( 19,676 )

Change in fair value of warrant liabilities ( 251 )

Loss before income tax $ ( 13,839 )

The following table summarizes revenue by geographic region (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

Three Months Ended March 31,

United States $ 71,687 $ 81,682

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Stock-Based Compensation

We recorded the following total stock-based compensation expense (in thousands) :

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

Stock-based compensation expense $ 3,783 $ 5,267 $ 11,196 $ 15,393

Stock Appreciation Rights Plan

During the quarter ended June 30, 2024, we adopted the 2024 Stock Appreciation Rights Plan (the "2024 Plan"), to enhance our ability to attract, retain, and motivate individuals who are expected to make significant contributions to our future financial and operating performance.

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 Plan is determined by the achievement of Adjusted EBITDA.

The Plan defines Adjusted EBITDA as, with respect to any particular period, the Company’s net income (loss) before interest expense, 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 Plan administrator.

In July 2024, we granted 22.4 million SARs in accordance with the Plan.

Each Award is subject to the employee's continued service through the applicable Vesting Date (as defined in the Plan) and the term of any Stock Appreciation Right 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.

We will assess whether it is probable that the award will vest for each of the four tranches 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.

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 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:

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 three months ended September 30, 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 ( 135 ) 1.44

Outstanding at September 30, 2024

22,311 1.44 5.25

Expected to vest as of September 30, 2024

— $ 1.44 5.25 $ —

As of September 30, 2024, we determined that none of the performance conditions related to the SARs are probable of being achieved.

Accordingly, no stock-based compensation expense for the three and nine months ended September 30, 2024 was recognized.

As of September 30, 2024, the total unrecognized compensation cost related to unvested SARs was $ 21.0 million.

Discontinued Operations

Sale of Protected

On November 30, 2023, we completed the sale of our Protected business , 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 Just Develop It ("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 financial benchmarks included in the Protected Incentive Plan (as defined below), will, as a result of the Protected sale, no longer be achievable.

Impairment of Protected

Upon classifying our Protected business 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 of $ 115.5 million.

This impairment was the result of decreases in long-term forecasts due to adverse customer trends and other macroeconomic outcomes.

We recorded a further impairment loss 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 three and nine months ended September 30, 2023.

There was no tax benefit of this charge for the three and nine months ended September 30, 2023.

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

The financial results of Protected are presented as a loss from discontinued operations, net of taxes in the condensed consolidated statements of operations.

The following table presents the summarized discontinued operations condensed consolidated statements of operations (in thousands) :

Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023

Revenue $ 54,550 $ 151,610

Operating expenses:

Cost of revenue (excluding depreciation and amortization) 51,373 126,047

Salaries and benefits 10,144 36,738

Selling, general, and administrative 6,796 11,507

Depreciation and amortization 8,385 26,729

Impairment of goodwill 115,483 115,483

Impairment of assets held for sale 3,276 3,276

Total operating expenses 195,457 319,780

Operating loss ( 140,907 ) ( 168,170 )

Other (income) expense, net ( 47 ) 10

Loss from discontinued operations before income taxes ( 140,860 ) ( 168,180 )

Income tax benefit ( 3,651 ) ( 4,958 )

Net loss from discontinued operations $ ( 137,209 ) $ ( 163,222 )

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 condensed consolidated statements of cash flows (in thousands):

Nine Months Ended September 30, 2023

Impairment of goodwill $ 115,483

Impairment of assets held for sale 3,276

Depreciation and amortization 26,729

Stock-based compensation 28,716

Capital expenditures 1,451

Transition Service Agreement

In connection with a transition service agreement entered into with the sale of our Protected business, we agreed to provide certain services for which full reimbursement of cost will be provided through the earlier of November 30, 2024 or the date Protected is able to independently participate in Google's advertising purchasing programs.

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, a special purpose acquisition company sponsored by entities affiliated with a sponsor of Trebia who was also a member of our Board of Directors.

We incurred credit card processing fees related to Paysafe for the three and nine months ended September 30, 2023 of $ 4.2 million and $ 11.9 million, respectively.

We are authorized to issue and/or grant stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents or other stock-based and cash-based awards under our 2022 Incentive Award Plan.

System1, Inc.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements (Unaudited)

Office Facilities

Protected had an agreement with JDI Property Holdings Limited, an entity controlled by one of our directors, which allowed Protected to use space at their property in exchange for GBP 0.1 million per year.

Protected Incentive Plan Installment Payments

In 2022, in connection with the acquisition of Protected, we effected an incentive plan for eligible recipients (the "Protected Incentive Plan"), providing up to $ 100.0 million payable in fully-vested shares of our Class A common stock contingent upon the achievement of the future performance of Protected’s business.

The Protected 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 $ 20.0 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 on or before December 31, 2024.

On November 30, 2023, none of the performance thresholds were met, and therefore, none of the additional cash bonus payments have been paid.

We recorded the following stock-based compensation expense for equity-classified awards included within salaries and benefits in the condensed consolidated statement of operations (in thousands):

Three Months Ended March 31,

Stock-based compensation expense $ 2,651 $ 3,970

Stock Appreciation Rights

As of March 31, 2025, there has been no change to our conclusion at December 31, 2024 for achieving the performance conditions of the Tranche I awards of the 2024 Stock Appreciation Rights Plan ("2024 SAR Plan"), before the fourth anniversary date of the award.

Accordingly, we recognized $ 0.4 million in stock-based compensation expense within equity for the three months ended March 31, 2025 .

The 2024 SAR Plan was not adopted as of March 31, 2024.

As of March 31, 2025, the total unrecognized compensation cost related to unvested Tranche I SARs was $ 2.9 million, expected to be recognized in the second quarter of 2025 upon plan administrator certification of achievement of the performance conditions for the Tranche I awards.

No SARs vested or were exercised for the three months ended March 31, 2025.

Subsequent Events

On April 28, 2025, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with The Blend Family Foundation (the "Purchaser"), pursuant to which the Company agreed to sell to the Purchaser 4,500,000 shares (the "Shares") of the Company’s Class A common stock, par value $ 0.0001 per share, at a price of $ 0.50 per share (the "Private Placement").

The aggregate proceeds to the Company from the Private Placement, which occurred on May 2, 2025 was $ 2.25 million.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements