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Item 2. Management’s Discussion and Analysis

2025-05-06 compared with 2024-11-07 · 109 added, 155 removed, 110 unchanged (71% of the section changed)

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

SYSTEM1 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise indicated or the context otherwise requires, references in this section to "the Company," "System1," "we," "us," "our" and other similar terms refer to System1, Inc and its subsidiaries.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ending December 31, 2023.

The following discussion and analysis of the financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ending December 31, 2024.

In addition to historical information, the following discussion and analysis contains forward-looking statements.

Our actual results may differ significantly from those projected in such forward-looking statements.

Factors that might cause future results to differ materially from those projected in such forward-looking statements include, but are not limited to, those discussed in the sections entitled "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements."

References to "Notes" are notes included in our unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

The condensed consolidated financial statements as of and for the three and nine months ended September 30, 2023 have been revised to correct prior period errors as discussed in Item I, "Financial Statements - Note 2, Summary of Significant Accounting Policies." Accordingly, this Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations reflects the impact of those revisions.

Company Overview

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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.

Through RAMP, we ingested over 13 billion rows of data daily across approximately 40 advertising vertical categories during the three months ended September 30, 2024 .

Operating seamlessly across major advertising networks and advertising category verticals to acquire 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 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.

Through RAMP, we process daily advertising campaign optimizations across approximately 40 advertising vertical categories as of March 31, 2025 .

We are able to efficiently monetize user intent by linking data on consumer engagement, such as first party search data like traffic sources, device type and search queries, with data on monetization rates and advertising spend.

This context-enriched data, combined with our proprietary and data science driven algorithms, creates a closed-loop system that is not reliant on personally identifiable information or information obtained through third-party cookies, but which allows RAMP to efficiently match consumer demand with the appropriate advertiser or advertising experience across advertising category verticals.

We focus on monetizing user traffic acquired by our Network Partners.

Since launching, it has expanded to support additional advertising formats across multiple advertising platforms, and has acquired several leading websites, enabling it to control the entire flow of the user acquisition experience, by monetizing user traffic through our network of owned and operated websites.

As of September 30, 2024 , we own and operate approximately 40 websites, including leading search engines like info.com and Startpage.com , and digital media publishing websites and internet utilities, such as HowStuffWorks , MapQuest , CouponFollow and ActiveBeat .

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.

Following the consummation of the Merger, the combined company was organized via an "Up-C" structure, in which substantially all of the assets and business operations of System1 are held by S1 Holdco.

On August 1, 2024, we undertook a corporate reorganization, the result of which was that all of the assets and business operations of System1 are now held by System1 Holdings, a newly formed intermediate holding company of which we maintain the controlling interest and in which the non-controlling interest is held by our Class C common stockholders.

Following the corporate reorganization, (a) System1 Holdings now owns 100% of S1 Holdco (the previous intermediate holding company) 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 its 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 monetize user traffic acquired by our Network Partners.

Since launching, this business has expanded to support additional advertising formats across multiple advertising platforms, and has acquired several leading websites, enabling it to control the entire flow of the user acquisition experience, while monetizing user traffic through our network of owned and operated websites.

As of March 31, 2025 , we own and operate approximately 40 websites, including leading search engines like info.com and Startpage.com , and digital media publishing websites and internet utilities, such as HowStuffWorks , MapQuest , CouponFollow and ActiveBeat .

Our primary operations are in the United States, and we also have operations in Canada and the Netherlands.

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We do not engage in hedging activities to mitigate our exposure to fluctuations in foreign currency exchange rates.

As a result of the current uncertainty in economic activity, including geopolitical developments and other macroeconomic factors such as rising interest rates, inflation and the impact of earlier supply chain disruptions, we are unable to predict the size and duration of the impact on our revenue and our results of operations.

Sale of Protected

We completed the sale of our Protected business on November 30, 2023.

The results of operations of our Protected business prior to its sale are presented as net loss from discontinued operations in our condensed consolidated statements of operations for all periods presented.

Unless otherwise noted, the information contained in this Management Discussion and Analysis relates solely to our continuing operations and does not include the operations of our Protected business (see Item I, "Financial Statements - Note 12, 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, 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 NextGen Shopping, Inc.

("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.

Components of Our Results of Operations

We earn revenue by deploying components of our RAMP to our owned and operated websites to acquire and monetize end-users via advertising offerings from our Advertising Partners.

For this revenue stream, we are the principal in the transaction and report revenue on a gross basis for the amounts received from our Advertising Partners.

Additionally, revenue is earned from revenue-sharing arrangements with our Network Partners, whereby

our Network Partners acquire end-users and use RAMP to monetize those end-users via our relationships with Advertising Partners.

We have determined that we are the agent in these transactions and therefore report revenue on a net basis, based on the difference between amounts received by us from our Advertising Partners, less amounts remitted to our Network Partners based on the underlying revenue-sharing agreements.

We recognize revenue upon delivering user-traffic to our Advertising Partners based on a cost-per-click or cost-per-thousand impression basis.

The payment terms with our Advertising Partners is typically 30 days.

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 are the principal in the transaction and report revenue on a gross basis for the amounts received from Advertising Partners.

We have determined that we are the principal since we direct the use of our owned and operating websites, and as such have risk of loss on the user-traffic that we are acquiring 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 provided to them in order to direct advertising by our Advertising Partners to their digital online inventory.

We have determined that we are the agent in these transactions and therefore report revenue 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.

We recognize revenue as we deliver user-traffic to our Advertising Partners based on a cost-per-click, cost-per-action or cost-per-thousand impression basis.

The payment terms with our Advertising Partners are typically 30 days.

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.

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Operating Expenses

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 statements of operations.

We classify our operating expenses into the following categories:

Cost of revenue (excluding depreciation and amortization) .

Cost of revenue (excluding depreciation and amortization) primarily consists of traffic acquisition costs, which are the costs to place advertisements to acquire customers to our websites and services, as well as domain name registration costs and licensing costs to provide mapping services to Mapquest.com .

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 and services, domain name registration costs, licensing costs to provide mapping services to Mapquest.com and amortization related to our RAMP platform.

We do not pre-pay any traffic acquisition costs, and therefore, such costs are expensed as incurred.

Amortization related to our RAMP platform is recognized over the estimated useful life of the intangible asset.

Salaries and benefits .

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Selling, general, and administrative .

Selling, general, and administrative expenses consist of fees for software services, professional services, occupancy costs and travel and entertainment.

These costs are expensed as incurred.

Depreciation and amortization .

Depreciation and amortization expenses are primarily attributable to our capital investment(s) and consist of property and equipment depreciation and amortization of intangible assets with finite lives.

Other Expenses

Other expenses consist of the following:

Selling, general, and administrative expenses consist of depreciation and non-internally developed software platform amortization, fees for software services, professional services, occupancy costs and travel and entertainment.

Depreciation and non-internally developed software platform amortization expense are primarily attributable to our capital investment(s) and consist of property and equipment depreciation and amortization of intangible assets with finite lives.

Other Expenses or Incomes:

Other expenses or incomes consist of the following:

Interest expense, net .

Interest expense consists of interest on our debt and the amortization of deferred financing costs and debt discount.

(Gain) loss from debt extinguishment .

Gain from the repurchase of a portion of our Term Loan indebtedness at a discount.

Gain on extinguishment of debt .

The recognition of the gain from the repurchase of a portion of our Term Loan at a discount.

See Item 1, "Financial Statements —Note 5, Debt, Net" for additional information.

Change in fair value of warrant liabilities .

The mark to market of our liability-classified Public Warrants.

Income tax expense (benefit)

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

The mark to market of our liability-classified Warrants.

Income tax benefit

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.

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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.

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.

Results of Operations

Comparisons of the three and nine months ended September 30, 2024 and 2023

The following table summarizes key components of our results of operations for the periods indicated (in thousands, except percentage information):

Three Months Ended September 30, Year/Year Change

2024 % of Revenue 2023 % of Revenue ($) (%)*

Revenue $ 88,832 100 % $ 87,818 100 % $ 1,014 1 %

Operating expenses:

Cost of revenue (excluding depreciation and amortization) 51,171 58 % 50,585 58 % 586 1 %

Salaries and benefits 29,177 33 % 26,695 30 % 2,482 9 %

Selling, general, and administrative 10,172 11 % 11,808 13 % (1,636) (14) %

Depreciation and amortization 20,128 23 % 19,584 22 % 544 3 %

Total operating expenses 110,648 125 % 108,672 124 % 1,976 2 %

Operating loss (21,816) (25) % (20,854) (24) % (962) 5 %

Other expense (income):

Interest expense, net 7,957 9 % 13,053 15 % (5,096) (39) %

(Gain) loss from debt extinguishment — — % 619 1 % (619) (100) %

Change in fair value of warrant liabilities 281 — % (7,482) (9) % 7,763 (104) %

Total other expense (income), net 8,238 9 % 6,190 7 % 2,048 33 %

Loss before income tax (30,054) (34) % (27,044) (31) % (3,010) 11 %

Income tax expense (benefit) 585 1 % (1,116) (1) % 1,701 (152) %

Net loss from continuing operations (30,639) (34) % (25,928) (30) % (4,711) 18 %

Net loss from discontinued operations, net of tax — — % (137,209) (156) % 137,209 (100) %

Net loss (30,639) (34) % (163,137) (186) % 132,498 (81) %

Net loss from continuing operations attributable to non-controlling interest (7,037) (8) % (6,081) (7) % (956) 16 %

Net loss from discontinued operations attributable to non-controlling interest — — % (25,566) (29) % 25,566 (100) %

Net loss attributable to System1, Inc.

$ (23,602) (27) % $ (131,490) (150) % $ 107,888 (82) %

* Percentages may not sum due to rounding

Nine Months Ended September 30, Year/Year Change

The following table sets forth our consolidated results of operations and our consolidated results of operations as a percentage of revenue for the periods presented (in thousands).

Three Months Ended March 31, Change

2025 % of Revenue 2024 % of Revenue ($) (%)*

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Operating expenses:

Cost of revenue (excluding depreciation and amortization) 160,667 60 % 190,195 62 % (29,528) (16) %

Cost of revenue 46,077 62 % 66,318 78 % (20,241) (31) %

Salaries and benefits 24,988 34 % 24,483 29 % 505 2 %

Selling, general, and administrative 16,574 22 % 19,912 23 % (3,338) (17) %

Depreciation and amortization 59,875 22 % 58,666 19 % 1,209 2 %

Total operating expenses 87,639 118 % 110,713 130 % (23,074) (21) %

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Interest expense, net 7,085 10 % 7,970 9 % (885) (11) %

(Gain) loss from debt extinguishment (20,109) (7) % 619 — % (20,728) (3349) %

Gain on extinguishment of debt — — % (19,676) (23) % 19,676 (100) %

Change in fair value of warrant liabilities 32 — % (251) — % 283 (113) %

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Loss before income tax (20,243) (27) % (13,839) (16) % (6,404) 46 %

Income tax expense (benefit) 359 — % (11,614) (4) % 11,973 (103) %

Net loss from continuing operations (79,275) (30) % (85,831) (28) % 6,556 (8) %

Net loss from discontinued operations, net of tax — — % (163,222) (53) % 163,222 (100) %

Income tax benefit (387) (1) % (48) — % (339) 706 %

Net loss (19,856) (27) % (13,791) (16) % (6,065) 44 %

Net loss from continuing operations attributable to non-controlling interest (18,763) (7) % (18,989) (6) % 226 (1) %

Net loss from discontinued operations attributable to non-controlling interest — — % (30,472) (10) % 30,472 (100) %

Net loss attributable to non-controlling interest (3,973) (5) % (3,254) (4) % (719) 22 %

Net loss attributable to System1, Inc.

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Revenue and Cost Metrics

The key non-financial performance metrics we use to evaluate our business, track the effectiveness of our operations and measure our performance are total advertising spend, number of Owned & Operated Advertising sessions (“O&O sessions”), number of Partner Network sessions (“Network sessions”), Owned & Operated Advertising cost-per-session (“O&O CPS”), Owned & Operated Advertising revenue-per-session (“O&O RPS”) and Partner Network revenue-per-session (“Network RPS”).

The key non-financial performance metrics we use to evaluate our business, track the effectiveness of our operations and measure our performance are total advertising spend, number of Owned & Operated Advertising sessions ("O&O sessions"), number of Partner Network sessions ("Network sessions"), Owned & Operated Advertising revenue-per-session ("O&O RPS"), Owned & Operated Advertising cost-per-session ("O&O CPS") and Partner Network revenue-per-session ("Network RPS") to track our operations.

We define total advertising spend as the amount of advertising that is spent by us to acquire traffic to our owned and operated websites.

We believe total advertising spend is a relevant measure to gauge the effectiveness of our Company to deploy capital to acquire monetizable traffic to our Owned & Operated websites, which is a key driver of our Owned & Operated reporting segments.

We define O&O sessions as the total number of monetizable user visits to our Owned & Operated Advertising websites.

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Monetizable visits exclude those visits identified by our Advertising Partners as spam, bot, or other invalid traffic.

We define O&O CPS as advertising spend divided by O&O sessions.

We believe O&O CPS is a relevant measure to gauge the efficiency of operations and processes in deploying advertising spend, especially when evaluated in combination with total advertising spend.

We define O&O RPS as O&O revenue divided by O&O sessions.

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We believe both O&O RPS and Network RPS are key measures to evaluate our effectiveness in converting monetizable traffic into revenue.

We define O&O CPS as advertising spend divided by O&O sessions.

We believe O&O CPS is a relevant measure to gauge the efficiency of operations and processes in deploying advertising spend, especially when evaluated in combination with total advertising spend.

The following table presents our revenue by reportable segment (in thousands):

Three Months Ended September 30, Year/Year Change

2024 2023 ($) (%)

Owned and Operated Advertising $ 70,798 $ 66,187 $ 4,611 7%

Partner Network 18,034 21,631 (3,597) (17)%

Total revenue $ 88,832 $ 87,818 $ 1,014 1%

Nine Months Ended September 30, Year/Year Change

Three Months Ended March 31, Change

2025 2024 ($) (%)

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Owned and Operated Advertising

Owned and Operated Advertising revenue increased for the three months ended September 30, 2024 as compared to the prior year comparative period, and decreased for the nine months ended September 30, 2024 as compared to the prior year comparative period.

For the three months ended September 30, 2024 compared to the prior year comparative period, O&O sessions increased by approximately 1.1 billion to 2.0 billion from 920 million, and O&O RPS decreased by $0.04 to $0.03 from $0.07.

For the nine months ended September 30, 2024 compared to the prior year comparative period, O&O sessions increased approximately 2.5 billion to 5.3 billion from 2.8 billion, and O&O RPS decreased by $0.05 to $0.04 from $0.09.

The year-over-year increases in sessions were due to the integration of new traffic acquisition sources into RAMP.

The year-over-year declines in RPS were related to a mix shift to lower RPS traffic, as well as a softening of domestic advertiser demand.

Owned and Operated Advertising revenue decreased by $11.1 million, or 16%, compared to the prior comparative period, primarily due to a mix shift towards traffic with a lower RPS, slightly offset by an increase in the number of acquired sessions.

For the three months ended March 31, 2025, compared to the prior year comparative period, O&O sessions increased by approximately 0.1 billion to 1.3 billion from 1.2 billion and O&O RPS decreased by approximately $0.01 to $0.05 from $0.06.

Partner Network

Partner Network revenue decreased for the three and nine months ended September 30, 2024 as compared to the prior year comparative periods.

For the three months ended September 30, 2024 compared to the prior year comparative period, Network sessions increased approximately 1.4 billion to 2.3 billion from 894 million, and Network RPS decreased by $0.01 to $0.01 from $0.02.

For the nine months ended September 30, 2024 compared to the prior year comparative period, Network sessions increased approximately 3.9 billion to 5.9 billion from 2.0 billion, and Network RPS decreased by $0.02 to $0.01 from $0.03.

The year-over-year increases in sessions were due to the onboarding of new Network Partners.

The year-over-year declines in RPS are primarily due to a softening of domestic advertiser demand and instability experienced in the Advertising Partner ecosystem generally starting in the fourth quarter of 2023.

Cost of revenue (excluding depreciation and amortization)

Cost of revenue (excluding depreciation and amortization) remained relatively consistent for the three months ended September 30, 2024 and decreased for the nine months ended September 30, 2024 in line with the changes in O&O revenue discussed above.

For the three and nine months ended September 30, 2024, compared to

prior year comparative periods, our O&O CPS decreased $0.03 to $0.02 from $0.05 and $0.03 to $0.03 from $0.06, respectively.

This is primarily due to a mix shift away to lower CPS traffic to offset the declines in RPS.

Our chief operating decision maker measures and evaluates reportable segments based on segment operating revenue as well as adjusted gross profit and other measures.

We define and calculate adjusted gross profit as revenue less advertising expense incurred to acquire users.

The remaining cost of revenue consists of non-advertising expenses such as set-up costs, royalties and fees.

Partner Network revenue increased $0.7 million, or 4%, compared to the prior comparative period, primarily due to the reversal of the majority of a contra revenue liability related to previously withheld payments to certain Network Partners related to validity of traffic those partners had sent to the Company’s platform last year.

It was determined that at least a portion of this traffic was invalid.

A comprehensive review of the remaining traffic remains ongoing.

For the three months ended March 31, 2025, compared to prior year comparative period, sessions increased by approximately 0.2 billion to 1.7 billion from 1.5 billion, and Network RPS was $0.01, a decline of 6% compared to the prior year comparative period.

Cost of revenue

Cost of revenue decreased $20.2 million, or 31%, pri marily due to our Owned & Operated advertising spend decreasing $16.4 million and our Partner Network agency fees decreasing $3.3 million, which was directionally consistent with the decrease in revenue.

For the three months ended March 31, 2025, compared to prior year, our O&O CPS decreased $0.02 to $0.02 from $0.04, due to a mix shift towards lower CPS traffic, which corresponds to the lower RPS realized in our revenue.

Amortization expense for our RAMP platform increased $0.4 million, or 3% compared to the prior comparative period primarily due to increased am ortization for our continued investment in developed technology and internally developed software.

Our chief operating decision maker measures and evaluates reportable segments based on segment operating revenue and segment adjusted gross profit.

We define and calculate segment adjusted gross profit as revenue less traffic acquisition costs incurred to acquire users.

The remaining cost of revenue consists of non-advertising expenses such as set-up costs, royalties, fees and amortization related to our RAMP platform.

We exclude the following items from segment adjusted gross profit:

depreciation and amortization of property, equipment and leasehold improvements, amortization of intangible assets and, at times, certain other transactions or adjustments.

The following table presents our Adjusted gross profit by reportable segment (in thousands):

Three Months Ended September 30, Year/Year Change

2024 2023 ($) (%)

Owned and Operated Advertising $ 26,406 $ 23,886 $ 2,520 11 %

Partner Network 13,053 15,312 (2,259) (15) %

Nine Months Ended September 30, Year/Year Change

other cost of revenue (total cost of revenue excluding traffic acquisition cost), salaries and benefits, selling, general and administrative expenses and, at times, certain other transactions or adjustments.

The following table presents our segment adjusted gross profit by reportable segment (in thousands):

Three Months Ended March 31, Change

2025 2024 ($) (%)

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Partner Network 14,963 10,919 4,044 37 %

Refer to the Revenue and Cost of revenue (excluding depreciation and amortization) discussions above for explanation of the change for each period.

See the Revenue and Cost of revenue discussions above.

Salaries and benefits

Salaries and benefits increased for the three and nine months ended September 30, 2024 as compared to the prior year comparative periods.

T he increase for the three and nine months was primarily related to the recognition of $5.5 million and $16.1 million related to CouponFollow share-based liabilities (see Item I, "Financial Statements - Note 4, Accrued Expenses and Other Current Liabilities"), respectively.

This was partially offset by a $1.5 million and $4.2 million decrease in stock-based compensation and $1.6 million and $5.3 million decrease in severance and payroll-related expenses due to a reduction in workforce for the three and nine months ended September 30, 2024, respectively.

Salaries and benefits expense increased $0.5 million, or 2.0% compared to the prior comparative period.

The increase was primarily due to $0.8 million in severance related expenses due to a reduction in workforce in the period and $0.6 million in bonus incentive related expenses.

This was partially offset by a $1.3 million decrease in stock-based compensation primarily due to Replacement Award vesting between the comparative periods.

Selling, general, and administrative

Selling, general, and administrative expense decreased for the three and nine months ended September 30, 2024 as compared to the prior year comparative periods.

The decrease was primarily due to a $1.3 million and $2.5 million decrease in advisory, consulting, and legal fees, and a decrease in bad debt expense of $0.7 million and $2.3 million for the three and nine months ended September 30, 2024, respectively.

Depreciation and amortization

Depreciation and amortization expense increased for the three and nine months ended September 30, 2024 as compared to the prior year comparative periods, primarily related to increased amortization for our continued investment in internally developed software.

Selling, general, and administrative expense decreased $3.3 million, or 17.0% compared to the prior comparative period.

The decrease was primarily due to a $2.7 million decrease in professional and consulting fees and receipt of a $0.5 million legal settlement.

Other expense (income):

Interest expense, net

Interest expense, net decreased for the three and nine months ended September 30, 2024 as compared to the prior year comparative periods, primarily due to a lower debt outstanding balance in the current year as a result of paying down a significant portion of our principal balance, as well as a decline in adjusted Secured Overnight Financing Rate ("SOFR") interest rates.

(Gain) loss from debt extinguishment

(Gain) loss from debt extinguishment decreased for the three ended September 30, 2024 and increased for the nine months ended September 30, 2024 as compared to the prior year comparative periods due to the gain recognized as a result of our repurchase of debt through the Dutch auction and direct buy back that occurred in January and April of 2024, respectively.

Interest expense, net decreased $0.9 million, or 11.0% compared to the prior comparative period primarily due to a lower outstanding debt balance.

Gain on extinguishment of debt

Gain on extinguishment of debt decreased $19.7 million compared to the prior comparative period due to the repurchase of our principal debt balances via a Dutch auction in the first quarter of 2024.

There was no repurchase in the first quarter of 2025.

Change in fair value of warrant liabilities

The increase in fair value of our warrant liabilities for the three months and decrease for the nine months ended September 30, 2024, as compared to the prior year comparative periods, respectively was due to the remeasurement of our warrant liability to its fair value at September 30, 2024 where the fluctuations are driven by the market value of our Class A common stock.

Income tax expense (benefit)

The difference between the effective tax rates for the periods presented and the federal statutory tax rate of 21% was primarily due to the exclusion of non-controlling income (loss), non-deductible expenses, changes to reserves, return to provision true-ups, valuation allowance and outside basis adjustments.

Net loss from discontinued operations, net of tax

Net loss from discontinued operations, net of tax is comprised of the net loss from discontinued operations, net of tax and only includes direct operating expenses incurred that:

(1) are clearly identifiable as costs being disposed of upon completion of the sale, and (2) will not be continued by us on an ongoing basis.

Indirect expenses which supported our subscription business, and which remained as part of the continuing operations following the sale are not reflected in loss from discontinued operations, net of tax.

Change in fair value of warrant liabilities decreased $0.3 million compared to the prior comparative period.

Income tax benefit

The difference between the effective tax rates for the periods presented above and the federal statutory tax rate of 21% was primarily due to the exclusion of non-controlling income (loss), nondeductible expenses, valuation allowance and outside basis adjustments.

Liquidity and Capital Resources

We expect existing cash and cash equivalents, cash flows from operations and financing activities to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities for at least the next 12 months.

Our main sources of liquidity have historically been, and are expected to be from cash on hand, cash flows from operations and financing activities.

We expect existing cash and cash equivalents and cash flows from operating and financing activities to continue to be sufficient to fund our operating and cash commitments for investing and financing activities for at least the next twelve months.

Our principal sources of liquidity have historically been from cash received from the sale of Total Security Limited (formerly known as Protected.

net Group Limited), indebtedness available under our credit facilities, other indebtedness and cash flows from operations.

Our principal sources of liquidity are expected to be from cash on hand and cash flows from operating and financing activities.

Our ability to fund future operating expenses and capital expenditures, and our ability to meet our future debt service obligations, will depend on our ability to execute on our operational strategy and may be affected by our profitability, as well as general economic, financial and other factors which are beyond our control.

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Adverse macroeconomic conditions have affected, and may in the future affect, the demand for advertising, resulting in fluctuations in the amounts our advertisers spend on advertising, which could have a negative impact on our financial condition and operating results.

As of September 30, 2024, we had unrestricted cash and cash equivalents of $69.1 million and $50.0 million available to borrow on our 2022 Revolving Facility.

For the nine months ended September 30, 2024, we had cash outflows of $69.9 million.

The principal drivers of our cash outflows were $56.8 million repayment of our Term Loan, $11.3 million related to net change in operations and $4.9 million of software development costs, offset by a $5.2 million working capital changes.

As of March 31, 2025, we had unrestricted cash and cash equivalents of $43.9 million and $50.0 million available to borrow on our 2022 Revolving Facility.

For the three months ended March 31, 2025, we had cash outflows of $22.8 million.

The principal drivers of our cash outflows were $15.9 million related to net change in operations, which included $13.2 million in outflows related to the payment of an earnout obligation for the CouponFollow acquisition, $5.0 million principal repayment of our Term Loan, $1.2 million of capitalized software development costs, and $0.3 million of other items.

Our revenue is dependent on two key Advertising Partners, Google and Microsoft.

See our concentration with customers discussion at Item 1 "Financi al Statements — Note 2, Summary of Significant Accounting Policies " for additional information.

Credit Facilities

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The following table summarizes our cash flows for the periods presented (in thousands):

Nine Months Ended September 30,

Three Months Ended March 31,

Net cash used in operating activities $ (15,949) $ (15,987)

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Operating Activities

Our cash flows from operating activities are primarily impacted by growth in our operations, timing of collections from our partner and related payments to our suppliers for advertising inventory and data.

We typically pay suppliers in advance of collections from our clients and our collection and payment cycles can vary from period to period.

Our cash flows from operating activities are primarily impacted by growth in our operations, timing of collections from our partners and related payments to our suppliers for advertising inventory and data.

We typically pay suppliers in advance of collections from our clients and our collection and payment cycles can vary from period

In addition, seasonality may impact cash flows from operating activities on a sequential quarterly basis during the year.

In the nine months ended September 30, 2024, cash used in operating activities of $6.0 million resulted primarily from favorable changes in net income, excluding the impact of non-cash items offset by favorable changes in working capital balances.

The favorable changes in working capital balances included an increase in accrued expenses and other current liabilities offset by an increase in account receivable balances.

In the nine months ended September 30, 2023, cash used in operating activities of $5.9 million resulted primarily from net loss adjusted for noncash items, including the impairment of goodwill and assets held for sale of $118.8 million, depreciation and amortization expense of $85.4 million, stock-based compensation of $44.1 million, and a decrease in accounts receivable of $17.8 million.

This was partially offset by a net loss of $249.1 million and a payment of long-term earnout liabilities of $20.0 million.

In the three months ended March 31, 2025, cash used in operating activities of $15.9 million.

The principal drivers of our cash outflow from operations were $13.2 million in outflows related to the payment of earnout obligations for the CouponFollow acquisition, and $4.3 million in net interest paid on our Term Loan.

In the three months ended March 31, 2024, cash used in operating activities were $16.0 million.

The principal driv ers of our cash outflow from operations were cash bonus payments of $7.2 million primarily related to 2023 annual employee performance bonuses, $1.8 million of audit fees, $2.4 million of consulting fees, and interest paid on our Term Loan of $8.2 million.

Investing Activities

Our primary investing activities consisted of costs capitalized for internally developed software.

In the nine months ended September 30, 2024 and September 30, 2023, cash used in investing activities of $5.0 million and $6.9 million resulted primarily from costs capitalized for internally developed software, respectively.

In the three months ended March 31, 2025 and 2024, cash used in investing activities of $1.5 million and $1.6 million resulted primarily from costs capitalized for internally developed software, respectively.

Financing Activities

Our financing activities consisted primarily of repayments of our indebtedness under our credit facilities.

In the nine months ended September 30, 2024, cash used in financing activities of $59.0 million was primarily related to the repayment of the 2022 Term Note in the amount of $56.8 million.

In the nine months ended September 30, 2023, cash used in financing activities of $1.1 million resulted primarily from repayment of our existing term loan of $15.0 million, taxes paid related to net settlement of stock awards of $3.1 million, and payment of acquisition holdback of $1.9 million.

This was partially offset by net proceeds from a related-party revolver of $19.0 million.

Our financing activities consisted primarily of borrowings and repayments of our indebtedness under our credit facilities.

In the three months ended March 31, 2025, cash used in financing activities of $5.3 million was primarily related to the repayment of the 2022 Term Loan.

In the three months ended March 31, 2024, cash used in financing activities of $48.2 million was primarily related to the repurchase of the 2022 Term Note via a Dutch auction in the amount of $46.1 million.

Off-Balance Sheet Arrangements

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In June 2021, we entered into a multi-year agreement with a service provider whereby we are contractually obligated to spend $5.0 million annually between July 2023 and June 2026 .

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

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

Contingencies

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Our actual results could differ from these estimates.

The critical accounting estimates, assumptions, and judgments that we believe to have the most significant impact on our condensed consolidated financial statements are stock-based compensation, business combinations and valuation of goodwill and income taxes.

There have been no material changes to our critical accounting policies and estimates as described in our Annual Report.

The critical accounting estimates, assumptions, and judgments that we believe to have the most significant impact on our condensed consolidated financial statements are valuation of goodwill, stock-based compensation and income taxes.

There have been no material changes to our critical accounting policies and estimates as described in our Annual Report on Form 10-K filed with the SEC on March 10, 2025.

Recently Issued Accounting Pronouncements

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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 2. Management’s Discussion and Analysis