System1, Inc. 10-K

Item 7. 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 the financial condition and results of operations of System1 should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The following discussion and analysis should also be read together with the section entitled "Organization and description of business" in Part II as of December 31, 2025. 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." in Part I of this Annual Report on Form 10-K. Company Overview We operate several flagship brands across multiple consumer verticals, including shopping, travel and search, and a best-in-class customer acquisition and marketing platform powered by Artificial Intelligence ("AI") and machine learning. Our platform is omnichannel and omnivertical, delivering high-intent customers to our advertising partners to maximize their reach and effectiveness. Our platform operates across our network of flagship owned and operated websites ("Products"), allowing us to monetize user traffic that we source from various acquisition marketing channels. Our marketing platform allows us to operate seamlessly across major advertising networks and advertising category verticals to acquire and monetize end-users through our relationships with third party advertisers and advertising networks ("Advertising Partners"). The platform also allows third party advertising platforms and publishers ("Network Partners") to send user traffic to, and monetize user traffic on, our Products or through our monetization agreements. We monetize user traffic we acquire directly from various marketing channels, across multiple advertising platforms, and have acquired several leading websites, enabling us to control user acquisition and experience, and monetize user traffic on our behalf via our network of products. Today, we own and operate approximately 40 websites, including leading search engines like Startpage.com and info.com , and digital media publishing websites and internet utilities, such as CouponFollow , MapQuest , HowStuffWorks and ActiveBeat . Our primary operations are in the United States, and we also have operations in Canada and the Netherlands. Reorganization 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 assets related to our Marketing businesses. System1 Holdings holds our remaining assets and business operations. S1 Holdco and its subsidiaries remain obligors and guarantors under our Term Loan and Revolving Facility, and System1 Holdings and S1 Media are not parties thereto. How We Assess the Performance of Our Business 50 In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of the business is Gross profit. To help assess performance with this key indicator, revenue metrics we use are return on traffic acquisition cost ("RTAC"), Products sessions and Products revenue-per-session ("Products RPS"), In addition we also use Adjusted Gross Profit and Adjusted EBITDA as non-GAAP financial measures. We believe these non-GAAP measures provide useful supplemental information to investors to be able to better evaluate ongoing business performance. This measure is not, and should not be viewed as, a substitute for accounting principles generally accepted in the United States of America ("GAAP") financial measures. Refer to the "Revenue Metrics", "Adjusted Gross Profit" and "Adjusted EBITDA" sections below. Components of Our Results of Operations Revenue We earn revenue by directly acquiring traffic to our owned and operated websites and utilizing our 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 a 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 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. We have two reportable segments: • Marketing; and • Products 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 consolidated statements of operations. We classify our operating expenses into the following categories: 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 platform. We do not pre-pay any traffic acquisition costs, and therefore, such costs are expensed as incurred. Amortization related to our platform is recognized over the estimated useful life of the intangible asset. 51 Salaries and benefits . Salaries and benefits expenses include salaries, bonuses, stock-based compensation, and employee benefits costs. Selling, general, and administrative . Selling, general, and administrative expenses consist of depreciation, general intangibles amortization, fees for software services, professional services, occupancy costs and travel and entertainment. Depreciation and general intangibles 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. Interest income consists of interest earned on our cash deposits. Gain on extinguishment of tax receivable agreement liability . The recognition of the reversal of amounts recognized under the tax receivable agreement. 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 8, "Financial Statements and Supplementary Data —Note 9, Debt, Net" for additional information. Change in fair value of warrant liabilities . The mark to market of our liability-classified Warrants. Income tax benefit During 2024 and through July 31, 2024, we were the sole managing member of S1 Holdco and, as a result, consolidate the financial results of S1 Holdco. S1 Holdco is 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. 52 Results of Operations 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). December 31, 2025 Percentage of Revenue December 31, 2024 Percentage of Revenue Revenue $ 266,129 100% $ 343,925 100% Operating expenses: Cost of revenue 165,734 62% 242,602 71% Salaries and benefits 92,747 35% 113,512 33% Selling, general, and administrative 69,688 26% 76,412 22% Total operating expenses 328,169 123% 432,526 126% Operating loss (62,040) -23% (88,601) -26% Other expense (income): Interest expense, net 27,556 10% 31,562 9% Gain on extinguishment of tax receivable agreement liability (5,253) -2% — —% Gain on extinguishment of debt — —% (20,109) -6% Change in fair value of warrant liabilities (275) —% (2,386) -1% Total other expense, net 22,028 8% 9,067 3% Loss before income tax (84,068) -32% (97,668) -28% Income tax benefit (2,875) -1% (370) —% Net loss (81,193) -31% (97,298) -28% Less: Net loss attributable to non-controlling interest (15,848) -6% (22,625) -7% Net loss attributable to System1, Inc. $ (65,345) -25% $ (74,673) -22% Percentages may not sum due to rounding Revenue Metrics The key non-financial performance metrics we use to evaluate our business, track the effectiveness of our operations and measure our performance are return on traffic acquisition cost ("RTAC"), the number of Products sessions and Products revenue-per-session ("Products RPS"). Marketing We define RTAC as platform revenue divided by traffic acquisition cost. Platform revenue is Revenue plus Network Partner revenue share. Traffic Acquisition Cost ("TAC") is defined as the sum of total advertising spend, agency fees and Network Partner revenue share. Advertising spend is the amount of advertising that is spent to acquire traffic. Agency fees are the amount of costs for agencies acquiring traffic to Owned and Operated websites. We believe RTAC is a relevant measure to evaluate our effectiveness and efficiency in deploying capital to acquire monetizable traffic to our Marketing segment. 53 Products We define Products sessions as the total number of monetizable user visits to our Products websites. Monetizable visits exclude those visits identified as spam, bot, or other invalid traffic. We define Products RPS as Products revenue divided by Products sessions. We believe Product sessions and RPS are relevant measures to evaluate our effectiveness and efficiency in converting monetizable traffic into revenue, which are key drivers of our Products reportable segment. Revenue The following table presents our revenue by reportable segment (in thousands): For The Year Ended December 31, Change 2025 2024 ($) (%) Marketing $ 172,889 $ 263,388 $ (90,499) -34 % Products 93,240 80,537 12,703 16 % Total revenue $ 266,129 $ 343,925 $ (77,796) -23 % Marketing Marketing revenue decreased by $90.5 million, or -34% for the year ended December 31, 2025 as compared to 2024, primarily due to a decrease in TAC. For the year ended December 31, 2025, compared to 2024, TAC decreased by approximately $85.8 million to $351.5 million from $437.3 million, primarily due to a decrease in advertising spend. The decrease in advertising spend was due to constrained availability of consumer traffic at cost-effective pricing. RTAC increased by approximately 1% to 120% from 119%. Products Products revenue increased $12.7 million, or 16%, for the year ended December 31, 2025 as compared to 2024, primarily due to an increase in product sessions. For the year ended December 31, 2025, compared to 2024, Products sessions increased by approximately 278.9 million to 2.2 billion from 1.9 billion while Products RPS remained flat at $0.04. Cost of revenue Cost of revenue decreased $76.9 million, or -32% , for the year ended December 31, 2025 as compared to 2024 pri marily due to a decrease in advertising spend and agency fees which is correlated with the decrease in revenue. Amortization expense for our platform recorded in cost of revenue increased $2.0 million or 4% for the year ended December 31, 2025 compared to 2024 primarily due to increased am ortization for our continued investment in developed technology and internally developed software. Our chief operating decision maker measures and evaluates reportable segments based on segment operating revenue and segment adjusted gross profit. We define and calculate segment adjusted gross profit as revenue less traffic acquisition costs incurred to acquire users. The remaining cost of revenue consists of non-advertising expenses such as set-up costs, royalties, fees and amortization related to our platform. We exclude the following items from segment adjusted gross profit: other cost of revenue (total cost of revenue excluding traffic acquisition cost), salaries and benefits, selling, general and administrative expenses and, at times, certain other transactions or adjustments. 54 The following table presents our segment adjusted gross profit by reportable segment (in thousands): For The Year Ended December 31, Change 2025 2024 ($) (%) Marketing $ 71,486 $ 83,470 $ (11,984) -14% Products 87,703 76,598 11,105 14% Total adjusted gross profit $ 159,189 $ 160,068 $ (879) —% See the Revenue and Cost of revenue discussions above for the changes to adjusted gross profit. Salaries and benefits Salaries and benefits expense decreased $20.8 million, or -18% compared to 2024. The decrease was primarily driven by the accelerated recognition of $19.8 million in CouponFollow share-based liability expense in the comparative period, when all tier targets were determined to be probable of achievement, and a $7.7 million reduction in stock-based compensation related to reduced restricted stock units issuances during the year. This was offset by an increase of $2.7 million in stock-based compensation related to the vesting of Tranche I stock appreciation rights, a $2.7 million increase in retention bonus expense, and a $1.5 million increase in severance expense. Selling, general, and administrative Selling, general, and administrative expense decreased $6.7 million, or -9% compared to 2024. The decrease was primarily driven by a $4.7 million reduction in professional and consulting fees, and a $3.8 million reduction in legal settlement expenses compared to the comparative period which recognized a $2.5 million class action complaint settlement. This was offset by an increase of $1.3 million in software and subscription expense. See Item 8, "Financial Statements and Supplementary Data — Note 8, Commitments and Contingencies" for additional information regarding the class action complaint settlement. Other expense (income): Interest expense, net Interest expense, net decreased $4.0 million, or -13% , compared to 2024 primarily due to lower average interest rates in 2025 as compared to 2024. Gain on extinguishment of tax receivable agreement liability Gain on extinguishment of tax receivable agreement liability increased $5.3 million compared to 2024 due to the reversal of the non-current tax receivable agreement liability. See Item 8, "Financial Statements and Supplementary Data — Note 7, Income Taxes" for additional information. Gain on extinguishment of debt Gain on extinguishment of debt decreased $20.1 million compared to 2024 due to the repurchase of our principal debt balances via a Dutch auction and direct buy backs in 2024. There were no repurchases of our debt in 2025. 55 Change in fair value of warrant liabilities Change in fair value of warrant liabilities decreased $2.1 million, or -88% compared to 2024 due to the fair value remeasurement of our Warrants which have been delisted from the NYSE. Income tax 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), effects of predecessor flow through income allocations, changes in unrecognized tax benefits, valuation allowance and outside basis adjustments. On July 4, 2025, Public Law 119-21 was signed into law. Public Law 119-21 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 do not expect these tax law changes to have a material impact on our financial statements however, we will continue to evaluate their impact as further information becomes available. Non-GAAP Financial Measures In addition to our results being determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operational performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors in assessing our operating performance. Adjusted Gross Profit Adjusted Gross Profit is defined as gross profit plus depreciation and amortization recorded in cost of revenues. The following table reconciles Revenue to Gross Profit and Adjusted Gross Profit for the periods presented (in millions): For The Three Months Ended December 31, For The Year Ended December 31, 2025 2024 2025 2024 Revenue $ 51.9 $ 75.6 $ 266.1 $ 343.9 Less: Cost of revenue (30.6) (43.8) (165.7) (242.6) Gross profit 21.3 31.8 100.4 101.3 Add: amortization related to cost of revenue 13.6 12.9 53.0 51.0 Adjusted Gross Profit $ 34.9 $ 44.7 $ 153.4 $ 152.3 The decrease in adjusted gross profit for the three months ended December 31, 2025 is primarily related to our decrease in revenue. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations, — Revenue Metrics" for additional information for explanations of our changes in revenue. Adjusted EBITDA Adjusted EBITDA is defined as net income (loss) before interest expense, income taxes, depreciation and amortization expense, stock-based compensation expense, and other cash and non-cash based income or expenses that we do not consider indicative of our core operating performance, including, but not limited to deferred compensation, gain (loss) on extinguishment of debt, non-cash revaluation of warrant liability and acquisition and restructuring costs. We believe that the use of Adjusted Gross Profit and Adjusted EBITDA provides an additional 56 tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. However, investors should be aware that when evaluating Adjusted Gross Profit and Adjusted EBITDA, we may incur future expenses similar to those excluded when calculating these measures. In addition, our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because not all companies may calculate Adjusted EBITDA in the same fashion. We adjust for nonoperating expenses and income, such as nonrecurring special projects, including for related consultant expenses, nonrecurring gain on the sale of assets, expenses associated with financing activities, and reorganization and severance expenses that result from the elimination or rightsizing of specific business activities or operations. Because of the limitations described above, Adjusted Gross Profit and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted Gross Profit and Adjusted EBITDA on a supplemental basis. Investors should review the reconciliation of Gross profit to Adjusted Gross Profit and net income (loss) to Adjusted EBITDA below and not rely on any single financial measure to evaluate our business. The following table reconciles net loss to Adjusted EBITDA for the periods presented (in millions): For The Three Months Ended December 31, For The Year Ended December 31, 2025 2024 2025 2024 Net loss $ (17.8) $ (18.0) $ (81.2) $ (97.3) Adjustments: Income tax benefit (0.4) (0.7) (2.9) (0.4) Interest expense 6.3 7.8 27.6 31.6 Depreciation and amortization 21.0 20.2 82.9 80.1 Other expense 0.2 (0.1) 0.2 (0.1) Stock-based compensation and distributions to members 1.3 4.6 11.3 15.8 Gain on extinguishment of debt — — — (20.1) Non-cash revaluation of warrant liability (0.3) (0.9) (0.3) (2.4) Acquisition and restructuring costs 3.2 5.0 9.6 31.4 Realized tax benefit (5.3) — (5.3) — Adjusted EBITDA $ 8.2 $ 17.9 $ 41.9 $ 38.6 Liquidity and Capital Resources To date, our principal sources of liquidity have historically been 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. We have experienced declining cash flows and financial performance primarily as a result of reductions in Advertising Partner and overall consumer demand for our marketing services. As of December 31, 2025, we had unrestricted cash and cash equivalents of $86.9 million, total net working capital, which we define as current assets less current liabilities, of $3.0 million. We had an aggregate principal amount outstanding of $50.0 million under our revolving facility with a maturity date of January 27, 2027, and $260.1 million of term debt outstanding on our term loan which matures in July 2027. For the year ended December 31, 2025, we had cash inflows of $20.6 million, 57 attributable to the draw down of our revolver facility. Without the draw down of our revolver facility, we would have had cash outflows for the year ended December 31, 2025. Management determined, as a result of this evaluation, that our current cash and cash equivalents, net working capital position, and the upcoming maturity date of our revolving facility raise substantial doubt about our ability to continue as a going concern for the twelve-month period following the date of this filing. Our plan is to continue exploring options of refinancing all of our debt obligations. Management cannot conclude as of the date of this filing that its plans are probable of being successfully implemented. There can be no assurance that we will be able to obtain financing that will provide us with sufficient liquidity to satisfy our revolving facility in January 2027. Our principal sources of liquidity are expected to be from cash on hand and cash flows from 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. Our revenue is dependent on two key Advertising Partners, which are Google and Microsoft. See our concentration with customers discussion at Item 8, "Financial Statements and Supplementary Data — Note 11, Segment Reporting" for additional information. Our main focus is executing on our operational strategy, which includes continued focus on expanding the number of advertising partners that are utilizing or integrated with our platform by continuing to attract and monetize users with commercial intent on our owned and operated web properties and on behalf of our Network Partners as well as optimizing bids and driving higher returns on advertising spend. Additionally, we are focused on our current cost structure by reducing our cash operating expenses and debt service obligations. 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. Credit Facilities Term Loan We entered into a term loan ("Term Loan") and revolving facility ("Revolving Facility" and, together with the Term Loan "Credit Agreement") with Bank of America, N.A. as administrative agent, on January 27, 2022, providing for a 5.5 year Term Loan with an initial principal balance of $400.0 million and with net proceeds of $376.0 million. The Term loan expires in July 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 ratio covenant, which goes into effect only if the utilization on the Revolving Facility exceeds 35% of the total availability under the Revolving Facility at each quarter-end, such that the first lien leverage ratio (as defined in the credit agreement) should not exceed 5.40. The Credit Agreement has certain financial and nonfinancial covenants, including the "springing" leverage ratio covenant described above. The Credit Agreement also requires that we deliver our audited consolidated financial statements to our lenders 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 have an additional 30 days to cure such default. We were in compliance with the financial covenants under the Term Loan as of December 31, 2025. During 2024, we completed the repurchase of $64.9 million in principal amount of our Term Loan for an aggregate purchase price of $41.6 million (at discount of 64.1% of its par value). We used available cash on hand to fund the repurchase. 58 As of December 31, 2025, there was principal of $260.1 million outstanding. 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. Revolving Facility The Revolving Facility provides borrowing availability of up to $50.0 million and expires in January 2027. The interest rate on the Revolving Facility is the adjusted SOFR plus 2.5% with an adjusted SOFR floor of 0%. During 2024 we did not have any borrowings from the Revolving Facility. During the fourth quarter of 2025 we borrowed $50.0 million from the Revolving Facility and the balance outstanding at December 31, 2025 was $50.0 million. We were in compliance with the financial covenants under the Term Loan as of December 31, 2025. We have been able to and expect to be able to continue to make the required payments of principal and interest on the Credit Agreement (as and when due) on a timely basis. Reorganization 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 our acquisition marketing platform and (c) S1 Holdco holds our assets related to our Marketing businesses. System1 Holdings holds our remaining assets and business operations. S1 Holdco and its subsidiaries remain obligors and guarantors under our Term Loan and Revolving Facility, and System1 Holdings and S1 Media are not parties thereto. Cash Flows The following table summarizes our cash flows for the periods presented (in thousands): December 31, 2025 December 31, 2024 Net cash used in operating activities $ (4,147) $ (5,255) Net cash used in investing activities $ (6,723) $ (6,255) Net cash provided by (used in) financing activities $ 31,305 $ (63,961) Operating Activities Our cash flows from operating activities are primarily impacted by growth in our operations, timing of payments to our suppliers for advertising inventory and data and related collections from our partners. Payment and collection cycles can vary from period to period. In addition, seasonality may impact cash flows from operating activities on a sequential quarterly basis during the year. In the year ended December 31, 2025, cash used in operating activities of $4.1 million resulted primarily from a net loss of $81.2 million, offset by $96.0 million of non-cash items, comprised of $82.9 million depreciation and amortization expense, $11.3 million stock based compensation expense and $3.4 million shared based compensation liability. Net cash used for working capital was $19.0 million. 59 In the year ended December 31, 2024, cash used in operating activities of $5.3 million resulted primarily from a net loss of $97.3 million, offset by $95.0 million of non-cash items, comprised of $80.1 million depreciation and amortization expense, $15.8 million of stock-based compensation expense, $17.9 million shared-based compensation liability expense and $20.1 million gain on extinguishment of debt. Net cash used for working capital was $2.9 million. Investing Activities In the year ended December 31, 2025, cash used in investing activities of $6.7 million resulted primarily from capitalization of software development costs. In the year ended December 31, 2024, cash used in investing activities of $6.3 million resulted primarily from capitalization of software development costs. Financing Activities Our financing activities consisted primarily of borrowings and repayments of our indebtedness under our credit facilities. In the year ended December 31, 2025, cash provided by financing activities of $31.3 million resulted primarily from $50.0 million drawn on our revolver facility and proceeds of $2.3 million from the sale of unregistered securities , offset by $20.0 million repayment of principal and interest on our Term Loan and $0.6 million of share repurchases. In the year ended December 31, 2024, cash used in financing activities of $64.0 million resulted primarily from repayment of principal and interest on our Term Loan. Off-Balance Sheet Arrangements We do not have any relationships with entities often referred to as structured finance or special purpose entities that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We did not have any other off-balance sheet arrangements during the periods presented other than the indemnification agreements. Contractual Obligations and Known Future Cash Requirements Service Agreements In June 2023, we entered into a multi-year agreement with a data cloud platform service provider whereby we are contractually obligated to spend $5.0 million annually between July 2023 and June 2026. As of December 31, 2025, we remain contractually obligated to spend a remaining $1.2 million towards this commitment. Contingencies From time to time, we are subject to contingencies that arise in the ordinary course of business. We record an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We do not currently believe the resolution of any such contingencies will have a material adverse effect upon our consolidated financial statements. See Item 8, "Financial Statements and Supplementary Data —Note 8, Commitments and Contingencies" for additional information. 60 Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. We believe that the accounting estimates below are most critical to understanding our financial condition and historical and future results of operations. Significant estimates affecting the consolidated financial statements have been prepared on the basis of the most current and best available information, including historical experience, known trends and other market-specific or other relevant factors that we believe to be reasonable. On an ongoing basis, management evaluates its estimates, as there are changes in circumstances, facts and experience. Changes in estimates are recorded in periods when they become known. However, actual results from the resolution of such estimates and assumptions may vary from those used in the preparation of the consolidated financial statements. Goodwill We perform annual impairment testing on goodwill in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying amount. We have the option (i) to assess goodwill for possible impairment by performing a qualitative analysis to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount or (ii) to perform the quantitative impairment test. The quantitative impairment test involves comparing the estimated fair value of a reporting unit with its respective carrying amount, including goodwill. If the estimated fair value exceeds the carrying amount, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than the carrying amount, an impairment loss is recognized in an amount equal to the excess, not to exceed the carrying amount of goodwill The fair values of our reporting units are determined by weighting a discounted cash flow model and a reference transaction model which include inputs developed using both internal and market-based data. The key assumptions in a discounted cash flow model include, but are not limited to, the weighted average cost of capital, revenue growth rates (including long-term growth rates), and operating margins. The weighted average cost of capital reflects the increases in market interest rates. The reference transaction model derives indications of value based on mergers and acquisition transactions in the digital advertising industry. Key assumptions in these models include, but are not limited to, the selection of comparable transactions, revenue and "EBITDA" is defined as net income or loss, interest, income tax expense or benefit, and depreciation and amortization multiples and EBITDA margins from those transactions. Unanticipated events or circumstances may occur that could affect the accuracy or validity of such assumptions, estimates or actual results. In conjunction with our fourth quarter assessment of goodwill, our valuation techniques did not indicate any impairment as of December 31, 2025. All reporting units with goodwill passed the first step of the goodwill evaluation, with the fair value of our Partner Network reporting unit exceeding its respective carrying values by 11.9% and, accordingly, we were not required to perform the second step of the goodwill evaluation. There is $82.4 million of goodwill residing in our Partner Network reporting unit. In applying the income and market approaches to determining the fair value of the Partner Network reporting unit, we rely on a number of significant assumptions and estimates including revenue growth rates and gross profit margins, discount rates and future market conditions, among others. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. Changes in one or more of these significant estimates or assumptions, could affect the results of these impairment assessments. If revenue and gross profit performance deteriorate further, it is possible that there could be impairment of Goodwill at our Partner Network reporting unit in future periods. As part of our fourth quarter review for impairment, we assessed the total fair values of the reporting units and compared total fair value to our market capitalization at December 31, 2025, including the implied control 61 premium, to determine if the fair values are reasonable compared to external market indicators. When comparing our market capitalization to the discounted cash flow models for each reporting unit summed together, the implied control premium was approximately 10% as of December 31, 2025. We believe several factors are contributing to our low market capitalization, including the lack of trading volume in our stock and the low market analyst coverage. Given continuing economic uncertainties and related risks to our business, there can be no assurance that our estimates and assumptions made for purposes of our goodwill impairment testing as of December 31, 2025 will prove to be accurate predictions of the future. We may be required to record additional goodwill impairment charges in future periods, whether in connection with our next annual impairment testing as of October 1, 2026 or prior to that, if any change constitutes a triggering event outside of the quarter from when the annual goodwill impairment test is performed. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material. See Note 4, Goodwill, Internal-Use Software Development Costs, Net, and Intangible Assets, Net . Stock-Based Compensation Compensation cost related to stock-based payments is measured based on the fair value of the units issued and recognized in salaries and benefits expenses on our consolidated statement of operations. We have elected to treat stock-based payment awards with time-based service condition(s) only as a single award, with the related compensation expense recognized on a straight-line basis. The assumptions used in the Hull-White I binomial lattice option pricing model to value equity are based upon the following; (i) the expected term is equal to the estimated remaining contractual term, (ii) the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant and (iii) the volatility is based on a blend of the historical volatility of our common stock and the peer-leveraged volatility. Income Taxes During 2024 and through July 31, 2024, we were the sole managing member of S1 Holdco and, as a result, consolidate the financial results of S1 Holdco. S1 Holdco is 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 our 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 our allocable share of any taxable income or loss of System1 Holdings, as well as any stand-alone income or loss generated by us. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities ("DTAs" and "DTLs", as applicable) for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine DTAs and DTLs on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on DTAs and DTLs is recognized in income in the period that includes the enactment date. We recognize DTAs to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential 62 if permitted under the tax law, and results of operations. If we determine that we would not be able to realize our DTAs in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance, which would increase the provision for income taxes. We record uncertain tax positions on the basis of a two-step process in which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of our technical merits and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We recognize both accrued interest and penalties, when appropriate, in the provision for income taxes on the accompanying consolidated statements of operations. Recently Issued Accounting Pronouncements For information regarding recent accounting pronouncements, see Item 8, "Financial Statements and Supplementary Data — Note 2, Summary of Significant Accounting Policies" . Item 7A. Quantitative and Qualitative Disclosure about Market Risk. As a smaller reporting company, we are not required to provide the information required by this Item. 63