System1, Inc. 10-Q

Item 1. Financial Statements System1, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) (In thousands, except par value) June 30, 2025 December 31, 2024 ASSETS Current assets: Cash and cash equivalents $ 63,648 $ 63,607 Restricted cash, current 1,243 3,970 Accounts receivable, net 70,218 62,916 Prepaid expenses and other current assets 6,251 3,984 Total current assets 141,360 134,477 Restricted cash, non-current 378 371 Property and equipment, net 1,816 2,104 Internal-use software development costs, net 14,214 14,436 Intangible assets, net 185,340 222,341 Goodwill 82,407 82,407 Operating lease right-of-use assets 3,401 2,644 Other non-current assets 333 349 Total assets $ 429,249 $ 459,129 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 28,058 $ 10,401 Accrued expenses and other current liabilities 69,117 76,200 Operating lease liabilities, current 1,166 2,089 Current debt, net 21,544 16,405 Total current liabilities 119,885 105,095 Operating lease liabilities, non-current 2,860 1,365 Non-current debt, net 241,795 255,118 Deferred tax liability 5,225 6,199 Other non-current liabilities 6,040 6,356 Total liabilities 375,805 374,133 Commitments and contingencies (Note 7) Stockholders' equity: Class A common stock $ 0.0001 par value; 500,000 shares authorized, 8,011 and 7,365 Class A shares issued and outstanding as of June 30, 2025 and December 31, 2024, respectively 1 1 Class C common stock $ 0.0001 par value; 25,000 shares authorized, 1,869 and 1,870 Class C shares issued and outstanding as of June 30, 2025 and December 31, 2024, respectively — — Additional paid-in capital 874,008 863,041 Accumulated deficit ( 815,680 ) ( 782,335 ) Accumulated other comprehensive loss ( 133 ) ( 443 ) Total stockholders' equity attributable to System1, Inc. 58,196 80,264 Non-controlling interest ( 4,752 ) 4,732 Total stockholders' equity 53,444 84,996 Total liabilities and stockholders' equity $ 429,249 $ 459,129 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 System1, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except for per share amounts) Three Months Ended June 30, Six Months Ended June 30, 2025 2024 2025 2024 Revenue $ 78,115 $ 94,581 $ 152,628 $ 179,498 Operating expenses: Cost of revenue 50,212 68,507 96,289 134,825 Salaries and benefits 26,297 33,937 51,285 58,420 Selling, general, and administrative 17,511 21,223 34,085 41,135 Total operating expenses 94,020 123,667 181,659 234,380 Operating loss ( 15,905 ) ( 29,086 ) ( 29,031 ) ( 54,882 ) Other expense (income): Interest expense, net 7,116 7,871 14,201 15,841 Gain on extinguishment of debt — ( 433 ) — ( 20,109 ) Change in fair value of warrant liabilities 68 ( 1,501 ) 100 ( 1,752 ) Total other expense (income), net 7,184 5,937 14,301 ( 6,020 ) Loss before income tax ( 23,089 ) ( 35,023 ) ( 43,332 ) ( 48,862 ) Income tax benefit ( 1,547 ) ( 178 ) ( 1,934 ) ( 226 ) Net loss ( 21,542 ) ( 34,845 ) ( 41,398 ) ( 48,636 ) Less: Net loss attributable to non-controlling interest ( 4,079 ) ( 8,472 ) ( 8,052 ) ( 11,726 ) Net loss attributable to System1, Inc. $ ( 17,463 ) $ ( 26,373 ) $ ( 33,346 ) $ ( 36,910 ) Basic and diluted net loss per share: $ ( 2.23 ) $ ( 3.80 ) $ ( 4.37 ) $ ( 5.38 ) Weighted average number of shares outstanding - basic and diluted 7,820 6,938 7,631 6,858 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 System1, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Loss (Unaudited) (In thousands) Three Months Ended June 30, Six Months Ended June 30, 2025 2024 2025 2024 Net loss $ ( 21,542 ) $ ( 34,845 ) $ ( 41,398 ) $ ( 48,636 ) Other comprehensive income (loss): Foreign currency translation income (loss) 369 ( 96 ) 382 ( 231 ) Comprehensive loss ( 21,173 ) ( 34,941 ) ( 41,016 ) ( 48,867 ) Comprehensive loss attributable to non-controlling interest ( 4,009 ) ( 8,544 ) ( 7,980 ) ( 11,843 ) Comprehensive loss attributable to System1, Inc. $ ( 17,164 ) $ ( 26,397 ) $ ( 33,036 ) $ ( 37,024 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 System1, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) (In thousands) Class A Common Stock Class C Common Stock Shares Amount Shares Amount Additional Paid-In-Capital Accumulated Deficit Accumulated Other Comprehensive Loss Non-Controlling Interest Total Stockholders' Equity Balance at December 31, 2024 7,365 $ 1 1,870 $ — $ 863,041 $ ( 782,335 ) $ ( 443 ) $ 4,732 $ 84,996 Net loss — — — — — ( 15,883 ) — ( 3,973 ) ( 19,856 ) Issuance of restricted stock, net of forfeitures and shares withheld for taxes 120 — — — 33 — — ( 325 ) ( 292 ) Other comprehensive income — — — — — — 11 2 13 Stock-based compensation — — — — 2,766 — — 44 2,810 Distributions to members, net of contributions — — — — — — — ( 12 ) ( 12 ) Balance at March 31, 2025 7,485 1 1,870 — 865,840 ( 798,218 ) ( 432 ) 468 67,659 Net loss — — — — — ( 17,463 ) — ( 4,079 ) ( 21,542 ) Issuance of restricted stock, net of forfeitures and shares withheld for taxes 75 — — — 145 — — ( 165 ) ( 20 ) Conversion of Class C shares to Class A shares 1 — ( 1 ) — — — — — — Issuance of common stock in private placement 450 — — — 3,275 — — ( 1,025 ) 2,250 Class A common stock repurchases — — — — — 1 — — 1 Other comprehensive income — — — — — — 299 70 369 Stock-based compensation — — — — 4,748 — — — 4,748 Distributions to members, net of contributions — — — — — — — ( 21 ) ( 21 ) Balance at June 30, 2025 8,011 $ 1 1,869 $ — $ 874,008 $ ( 815,680 ) $ ( 133 ) $ ( 4,752 ) $ 53,444 4 System1, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) (In thousands) Class A Common Stock Class C Common Stock Shares Amount Shares Amount Additional Paid-In-Capital Accumulated Deficit Accumulated Other Comprehensive Loss Non-Controlling Interest Total Stockholders' Equity Balance at December 31, 2023 6,585 $ 1 2,151 $ — $ 843,120 $ ( 707,662 ) $ ( 181 ) $ 34,037 $ 169,315 Net loss — — — — — ( 10,537 ) — ( 3,254 ) ( 13,791 ) Issuance of common stock in connection with settlement of incentive plan 97 — — — 2,464 — — ( 757 ) 1,707 Conversion of Class C shares to Class A shares 31 — ( 31 ) — 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 150 — — — 178 — — ( 1,169 ) ( 991 ) Other comprehensive loss — — — — — — ( 90 ) ( 45 ) ( 135 ) Stock-based compensation — — — — 4,317 — — 88 4,405 Contributions from members, net of distributions — — — — — — — 5 5 Balance at March 31, 2024 6,863 1 2,120 — 850,210 ( 718,199 ) ( 271 ) 28,664 160,405 Net loss — — — — — ( 26,373 ) — ( 8,472 ) ( 34,845 ) Issuance of restricted stock, net of forfeitures and shares withheld for taxes 62 — — — 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 6,925 $ 1 2,120 $ — $ 854,278 $ ( 744,572 ) $ ( 295 ) $ 19,867 $ 129,279 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 System1, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Six Months Ended June 30, 2025 2024 Cash Flows from Operating Activities Net loss $ ( 41,398 ) $ ( 48,636 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 41,043 39,762 Stock-based compensation 7,193 7,412 Amortization of debt issuance costs 1,816 2,002 Noncash lease expense 971 931 Change in fair value of warrant liabilities 100 ( 1,752 ) Deferred tax benefits ( 984 ) ( 1,262 ) Gain on extinguishment of debt — ( 20,109 ) Share-based compensation liabilities 1,646 10,253 Other, net 22 ( 192 ) Changes in operating assets and liabilities: Accounts receivable ( 7,302 ) ( 5,823 ) Prepaid expenses and other current assets ( 2,234 ) 26 Accounts payable 18,048 ( 3,251 ) Accrued expenses and other current liabilities ( 9,860 ) 15,763 Other non-current liabilities ( 518 ) ( 1,146 ) Net cash provided by (used in) operating activities 8,543 ( 6,022 ) Cash Flows from Investing Activities Purchases of property and equipment ( 46 ) — Purchases of intangible asset ( 275 ) — Capitalized software development costs ( 2,786 ) ( 3,218 ) Net cash used in investing activities ( 3,107 ) ( 3,218 ) Cash Flows from Financing Activities Repayment of term loan ( 10,000 ) ( 51,786 ) Taxes paid related to net settlement of stock awards ( 311 ) ( 2,116 ) Distributions to members, net of contributions ( 33 ) ( 27 ) Proceeds from private placement of Class A common stock 2,250 — Net cash used in financing activities ( 8,094 ) ( 53,929 ) Effect of exchange rate changes in cash, cash equivalents and restricted cash ( 21 ) ( 6 ) Net decrease in cash, cash equivalents and restricted cash ( 2,679 ) ( 63,175 ) Cash and cash equivalents and restricted cash, beginning of the period 67,948 143,450 Cash and cash equivalents and restricted cash, end of the period $ 65,269 $ 80,275 Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets: Cash and cash equivalents $ 63,648 $ 75,651 Restricted cash 1,621 4,624 Total cash, cash equivalents and restricted cash $ 65,269 $ 80,275 Supplemental cash flow information: Stock-based compensation included in capitalized software development costs $ 365 $ 814 Settlement of incentive plan through issuance of common stock $ — $ 1,707 Right-of-use assets obtained in exchange for operating lease obligations $ 1,700 $ — The accompanying notes are an integral part of these condensed consolidated financial statements. 6 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Organization and Description of Business System1, Inc. and subsidiaries (the "Company", "we", "our" or "us") operate an omnichannel customer acquisition platform, delivering high-intent customers to brands, advertisers and publishers. We provide our omnichannel customer acquisition platform services through our proprietary responsive acquisition marketing platform ("RAMP"). Operating seamlessly across major advertising networks and advertising category verticals to acquire end-users, RAMP allows us to monetize such end-users through our relationships with third party advertisers and advertising networks ("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. On August 1, 2024, we undertook a corporate reorganization, the result of which was that all of the assets and business operations of the company are now held by System1 Holdings, LLC ("System1 Holdings"), a newly formed intermediate holding company of which we maintain the controlling interest and in which the non-controlling interest is owned by the holders of our Class C common stock. Following the corporate reorganization, (a) System1 Holdings now owns 100 % of S1 Holdco, LLC ("S1 Holdco"), the previous intermediate holding company with the non-controlling interests, and 100 % of S1 Media, LLC ("S1 Media"), another new subsidiary formed in connection with the corporate reorganization, (b) S1 Media holds the assets and business operations associated with our Products businesses, which include CouponFollow, Startpage and Mapquest, and (c) S1 Holdco holds our remaining assets and business operations associated with our Marketing 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. 2. Summary of Significant Accounting Policies Basis of Presentation and Principles of 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 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 and six months ended June 30, 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. To conform to the current period’s presentation, (i) warrant liability was combined with other non-current liabilities in the comparative condensed consolidated balance sheet and (ii) depreciation and amortization expense was reclassified to cost of revenue and selling, general, and administrative in the prior periods condensed consolidated statement of operations. 7 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) On June 10, 2025, we filed a certificate of amendment (the "Reverse Stock Split Amendment") to our Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware to effect a 1-for-10 reverse stock split of the Class A and Class C common stock and warrants (the "Reverse Stock Split"), which became effective at 5:01 p.m. Eastern Time on June 11, 2025. The Reverse Stock Split Amendment does not reduce the number of authorized shares of Class A and Class C common stock which remains at 500,000,000 and 25,000,000 , respectively, and does not change the par value of the common stock, which remains at $ 0.0001 per share. Additionally, our outstanding equity-based awards and other outstanding equity rights were proportionately adjusted. No fractional shares were issued in connection with the Reverse Stock Split. The Reverse Stock Split was effective for purposes of trading on the New York Stock Exchange as of the opening of business on June 12, 2025. Accordingly, all share and per share amounts of common stock for all periods presented in these unaudited condensed consolidated financial statements and related notes have been retroactively adjusted to give effect to the Reverse Stock Split. As of December 31, 2024 , the Company had outstanding warrants classified as a liability. These warrants were measured at fair value using Level 1 inputs based on quoted market prices in active markets. During the quarter ended June 30, 2025, the fair value measurement of the warrants changed from Level 1 to Level 3 due to the delisting of the warrants from an exchange and lack of observable inputs. Use of Estimates The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Management’s estimates are based on historical information available as of the date of the condensed consolidated financial statements and various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from those estimates. Significant estimates and assumptions reflected in these 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. Risks We are subject to certain business and operational risks, including competition from alternative technologies, as well as dependence on key Advertising Partners, key employees, key contracts, and growth to achieve our business and operational objectives. Concentrations As of June 30, 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) was renewed through December 31, 2026. Under certain circumstances, each of these agreements may be terminated by either us or the respective Advertising Partner immediately, or with minimal notice . 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 8 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 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. 3. Goodwill, Internal-Use Software Development Costs, Net, and Intangible Assets, Net Goodwill Goodwill was $ 82.4 million as of June 30, 2025 and December 31, 2024, all of which is attributable to the Partner Network reporting unit. In the second quarter of fiscal year 2025, as a result of organizational restructuring, the Company changed its identified segments and determined there are now two operating and reportable segments, Marketing and Products. There was no change to the Partner Network reporting unit. See Note 9, Segment Reporting, for further discussion of the Company’s operating segments. 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): June 30, 2025 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Internal-use software development costs $ 24,545 $ ( 10,331 ) $ 14,214 Intangible assets: Developed technology $ 196,403 $ ( 168,017 ) $ 28,386 Trademarks and trade names 236,053 ( 80,450 ) 155,603 Software 5,100 ( 4,253 ) 847 Customer relationships 2,900 ( 2,396 ) 504 Total $ 440,456 $ ( 255,116 ) $ 185,340 9 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) December 31, 2024 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Internal-use software development costs $ 21,393 $ ( 6,957 ) $ 14,436 Intangible assets: Developed technology $ 196,128 $ ( 143,386 ) $ 52,742 Trademarks and trade names 236,053 ( 68,650 ) 167,403 Software 5,100 ( 3,616 ) 1,484 Customer relationships 2,900 ( 2,188 ) 712 Total $ 440,181 $ ( 217,840 ) $ 222,341 The internal-use software development costs include work in progress which is not being amortized of $ 2.7 million and $ 5.0 million as of June 30, 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 June 30, Six Months Ended June 30, 2025 2024 2025 2024 Amortization expense for internal-use software development $ 1,755 $ 1,076 $ 3,374 $ 2,010 Amortization expense for intangible assets $ 18,625 $ 18,665 $ 37,276 $ 37,330 Amortization expense was presented as follows in the Statements of Operations (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2025 2024 2025 2024 Cost of revenue $ 13,091 $ 12,709 $ 26,141 $ 25,329 Selling, general, and administrative $ 7,289 $ 7,032 $ 14,509 $ 14,011 No impairment of internal-use software development cost or intangible assets was recognized for any of the periods presented. 4. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): June 30, 2025 December 31, 2024 Accrued revenue share $ 32,584 $ 27,656 Accrued payroll and related benefits 10,071 15,893 Accrued marketing expenses 9,077 9,440 Shared-based compensation liability 11,650 17,821 Other current liabilities 5,735 5,390 Accrued expenses and other current liabilities $ 69,117 $ 76,200 10 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) CouponFollow Incentive Plan 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 of 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 and six months ended June 30, 2025, we recognized $ 0.8 million and $ 1.6 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, respectively. As of June 30, 2025, the remaining share-based compensation expense to be recognized in 2025 is $ 1.8 million. 5. Debt, Net We entered into a term loan ("Term Loan") and revolving facility ("2022 Revolving Facility") with Bank of America, N.A., on January 27, 2022, providing for a 5.5 -year term loan with a principal balance of $ 400.0 million and with the net proceeds of $ 376.0 million . The 2022 Revolving Facility provided for borrowing availability of up to $ 50.0 million . As of June 30, 2025 , principal of $ 270.1 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. For every interest period, the interest rate on the Term Loan is the adjusted Secured Overnight Financing Rate ("SOFR") plus 4.75 %. The Term Loan is amortized in quarterly installments on each scheduled payment date. The Term Loan comes with a leverage covenant, which goes into effect only if the utilization on the 2022 Revolving Facility exceeds 35 % of the $ 50.0 million 2022 Revolving Facility at each quarter-end starting the second quarter 2022, such that the first lien leverage ratio (as defined in the credit agreement) should not exceed 5.40 . The facility has certain financial and nonfinancial covenants, including a leverage ratio. The facility also requires that we deliver our audited consolidated financial statements to our lender within 120 days of our fiscal year end, December 31. Should we fail to distribute the financial statements to our lender within 120 days, we are allowed an additional 30 days to cure. We were in compliance with the financial covenants under the Term Loan as of June 30, 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 June 30, 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 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. 11 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) The carrying values of our debt, net of discounts, deferred financing and debt issuance costs were as follows (in thousands): June 30, 2025 December 31, 2024 Term Loan 1, 2 $ 263,339 $ 271,523 Total debt, net $ 263,339 $ 271,523 _______________ 1 Includes unamortized discount of $ 6.4 million and $ 8.1 million and unamortized loan fees of $ 0.4 million and $ 0.4 million, as of June 30, 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 $ 139.1 million as of June 30, 2025. 6. Income Taxes 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. federal and most applicable state and local income tax purposes. As a partnership, System1 Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by System1 Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss of System1 Holdings, as well as any stand-alone income or loss generated by us. We recorded an income tax benefit of $ 1.5 million and $ 1.9 million for the three and six months ended June 30, 2025, respectively and a $ 0.2 million and $ 0.2 million income tax benefit for the three and six months ended June 30, 2024. The effective tax rate was 6.7 % and 4.5 % for the three and six months ended June 30, 2025, respectively and 0.5 % and 0.4 % three and six months ended June 30, 2024, 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, increase to the valuation allowance related to unrealizable deferred tax assets, and outside basis adjustments. As of June 30, 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 and six months ended June 30, 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 June 30, 2025 and December 31, 2024 . On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act ("OBBBA"). The OBBBA makes permanent key elements of the Tax Cuts and Jobs Act, including 100% bonus depreciation, domestic research cost expensing, and the business interest expense limitation. We are currently assessing its impact on our consolidated financial statements. 12 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 7. 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 June 30, 2025, we remain contractually obligated to spend $ 5.0 million towards this commitment. As of June 30, 2025, we had various non-cancelable operating lease commitments for office space which have been recorded as Operating lease liabilities. Litigation We are subject to various legal proceedings and claims that arise in the ordinary course of business. We believe the ultimate liability, if any, with respect to these actions will not materially affect the consolidated financial position, results of operations, or cash flows reflected in the condensed consolidated financial statements as of June 30, 2025. 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 accrue for losses when the loss is deemed probable and the liability can reasonably be estimated. Indemnifications In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions may not be subject to claims related to these indemnifications. As a result, we believe the estimated fair value of these agreements was immaterial. Accordingly, we have no liabilities recorded for these agreements as of June 30, 2025 or December 31, 2024, respectively . 8. Net Loss Per Share For the three and six months ended June 30, 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 June 30, Six Months Ended June 30, 2025 2024 2025 2024 Basic and diluted net loss per share Net loss attributable to System1, Inc. $ ( 2.23 ) $ ( 3.80 ) $ ( 4.37 ) $ ( 5.38 ) Numerator: Net loss attributable to System1, Inc. $ ( 17,463 ) $ ( 26,373 ) $ ( 33,346 ) $ ( 36,910 ) Denominator: Weighted-average common shares outstanding used in computing basic and diluted net loss per share 7,820 6,938 7,631 6,858 Shares of Class C common stock, restricted stock units, Stock Appreciation Rights ("SARs") and warrants outstanding for the three and six months ended June 30, 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 and 0.5 million vested SARs were excluded from the computation of diluted net loss per share as the impact was anti- 13 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) dilutive. In addition, for the three and six months ended June 30, 2025, we excluded 1.5 million SARs as they are contingently issuable based on performance conditions which were not achieved. See Note 10, Stock-Based Compensation for additional details. We do not consider unvested Class A common stock related to the replacement awards as outstanding for accounting purposes as they are subject to continued service requirements or contingencies. These shares are not included in the denominator of the net loss per share calculation until the employee provides the requisite service resulting in the vesting of the award or the contingency is removed, or upon termination of an employee at which point the common stock underlying 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 vesting or forfeiture. 9. Segment Reporting We previously managed our business across two operating and reportable segments: the monetization of end-users acquired directly by the Company to its websites and products ("Owned & Operated Advertising"), and the monetization of end-users acquired by our Network Partners ("Partner Network"). In the second quarter of 2025, we had an internal organizational change that resulted in a change in how we manage our businesses. We combined the management of our Partner Network business with the portion of our Owned and Operated Advertising activities related to paid traffic acquisition via advertising costs and direct agency fees ("Marketing") and separately manage our CouponFollow, Startpage and Mapquest businesses which primarily acquire end-users organically ("Products"). This resulted in a change to our operating and reportable segments. We now have two operating and reportable segments: Marketing and Products. All prior year information in the tables below have been revised retrospectively to reflect the change to our reportable segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker ("CODM"), in deciding how to allocate resources and assess performance. Our Chief Executive Officer, who is considered to be our CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. The CODM measures and evaluates operating and 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. The following table summarizes revenue, segment cost of revenue and segment adjusted gross profit by reportable segment (in thousands): 14 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Three Months Ended June 30, 2025 Three Months Ended June 30, 2024 Marketing Products Total Marketing Products Total Revenue $ 54,142 $ 23,973 $ 78,115 $ 76,654 $ 17,927 $ 94,581 Less: segment cost of revenue 34,509 1,276 35,785 53,032 681 53,713 Segment adjusted gross profit 19,633 22,697 42,330 23,622 17,246 40,868 Other cost of revenue 14,427 14,794 Salaries and benefits 26,297 33,937 Selling, general, and administrative 17,511 21,223 Interest expense, net 7,116 7,871 Gain on extinguishment of debt — ( 433 ) Change in fair value of warrant liabilities 68 ( 1,501 ) Loss before income tax $ ( 23,089 ) $ ( 35,023 ) Six Months Ended June 30, 2025 Six Months Ended June 30, 2024 Marketing Products Total Marketing Products Total Revenue $ 106,392 $ 46,236 $ 152,628 $ 146,784 $ 32,714 $ 179,498 Less: segment cost of revenue 64,972 2,584 67,556 103,506 1,743 105,249 Segment adjusted gross profit 41,420 43,652 85,072 43,278 30,971 74,249 Other cost of revenue 28,733 29,576 Salaries and benefits 51,285 58,420 Selling, general, and administrative 34,085 41,135 Interest expense, net 14,201 15,841 Gain on extinguishment of debt — ( 20,109 ) Change in fair value of warrant liabilities 100 ( 1,752 ) Loss before income tax $ ( 43,332 ) $ ( 48,862 ) The following table summarizes revenue by geographic region (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2025 2024 2025 2024 United States $ 75,207 $ 91,215 $ 146,894 $ 172,897 Other countries 2,908 3,366 5,734 6,601 Total revenue $ 78,115 $ 94,581 $ 152,628 $ 179,498 10. Stock-Based Compensation We are authorized to issue and/or grant stock options, SARs, restricted stock, restricted stock units, dividend equivalents or other stock-based and cash-based awards under our 2022 Incentive Award Plan. 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 June 30, Six Months Ended June 30, 2025 2024 2025 2024 Stock-based compensation expense $ 4,542 $ 3,442 $ 7,193 $ 7,412 15 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Stock Appreciation Rights On May 30, 2025 the SARs plan administrator certified that the trailing twelve month ("TTM") adjusted EBITDA exceeded the Tranche I performance threshold and the Tranche I awards vested ("Vested SARs"). On June 10, 2025 our stockholders approved an amendment to the System1, Inc. 2024 Stock Appreciation Rights Plan, (as amended, the "2024 SARs Plan") and the repricing ("Repricing") of certain outstanding SARs previously granted to our employees and consultants under the SARs Plan (collectively, the "SARs Plan Amendment and Repricing"). The strike price of the SARs granted changed from $ 1.44 to $ 0.44 and the adjusted EBITDA performance threshold for any TTM period concluding on or after the applicable date of grant was modified from (i) $ 60 million (“Tranche II”), (ii) $ 70 million (“Tranche III”) and (iii) $ 80 million (“Tranche IV”) to (i) $ 55 million, (ii) $ 60 million and (iii) $ 65 million, respectively ("the Modification"). There were no changes to the other terms of the SARs Plan. At the modification date, we used the Hull-White I binomial lattice option pricing model to estimate the SARs option fair value. The following table sets forth the key assumptions used to determine the modified fair value: Input Risk-free interest rate 3.87 % - 4.11 % Term (in years) 3.06 - 6.06 Volatility factor 84.27 % - 97.65 % Dividend yield 0.00 % The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term is equal to the remaining contractual term. Volatility is based on a blend of the historical volatility of our common stock and the peer-leveraged volatility. As of June 30, 2025, we recognized compensation cost for the Vested SARs and determined it is probable we would achieve the performance conditions of Tranche II before the fifth anniversary grant date of the awards. Accordingly, we recognized $ 3.2 million and $ 3.5 million of stock-based compensation expense, including $ 0.3 million of incremental expense as a result of the Modification, within equity for the three and six months ended June 30, 2025, respectively. The 2024 SARs Plan was not adopted as of June 30, 2024. As of June 30, 2025, the total unrecognized compensation cost related to unvested Tranche II SARs was $ 1.1 million. No SARs were exercised during the three and six months ended June 30, 2025 . Restricted Stock Units In July 2025, we granted 2.0 million restricted stock unit awards in accordance with the 2022 Incentive Award Plan. 11. Related Party Transaction On April 28, 2025, we entered into a Securities Purchase Agreement with one of our Founder's family foundation, pursuant to which we agreed to sell 450,000 shares of our Class A common stock at a price of $ 5.00 per share. The aggregate proceeds, which were received on May 2, 2025, was $ 2.3 million. 16