VerticalScope Holdings Inc. — Management Reports 2025

Apr 9, 2025

verticalscope

Dear Fellow Shareholders,

I thought it would be helpful to provide an update on our business. We recently reported our Q4 and Full Year 2024 results, which I thought were terrific. Our share price reached a 52-week high on February 18th, however, it reversed course and dropped into the $8 range during the recent market volatility. The macro economic outlook has become very murky in the last few weeks. Nonetheless, the VerticalScope team is hard at work and is focused on the long-term goal of integrating AI, and building a strong foundation for our future growth.

Within that context, we have faced some uphill battles in Q1. Our first challenge has come in the way of video advertising, where we have seen some changes to the classification of programmatic video ads that we run on our forums. The result of these platform changes has been decreased bidder activity and resulted in lower costs per thousand impressions (CPMs) in Q1. This has turned video from a significant year-over-year grower in 2024, to one that will see decline in the first quarter, and possibly throughout 2025.

Our second challenge has come by way of the Google March core algorithm update. This algorithm update, as reported by Google, was rolled out from March 13th to 27th, and we saw some early negative impacts that have since lessened but not gone away. While we previously reported that traffic would be a bit challenging on a year-over-year basis in 2025 due to our very strong 2024 performance, this additional algorithm update has caused further revision to that challenge. The algorithm itself has pushed traffic lower on an overall monthly active users (MAUs) basis by about 10%. This is obviously disappointing, and we are working hard to rectify the problems we see and recover the traffic. These algorithms can often take multiple quarters to recover, and it may not always be a full recovery. We have noticed that some of the communities that benefitted most from algorithm updates in 2024, were the most impacted by the March 2025 core algorithm update.

Despite MAUs being under pressure, and advertising revenue less certain due to the macro environment and video ad changes, we are confident in our ability to adapt and find new ways to build value for our shareholders. Our business remains incredibly resilient, and performs well in both good and bad markets. For 2025, we expect Adjusted EBITDA in the range of US$21-24 million and Free Cash Flow of US$20-22 million and a Free Cash Flow conversion of 85% or above while we re-build our MAUs, and invest in AI-driven products for our future. We have not included any additional revenue in our estimates from large language model (LLM) licensing deals, as we feel that macro economic conditions add more uncertainty to the timing of any meaningful revenue contribution from content licensing in 2025.

Importantly, we are very excited about our product roadmap. On the FORA platform, we are launching new features daily, and increasingly these are backed by AI. Recently, we have been testing AI Translations, AI-driven Answers, search-engine friendly Thread Summaries, new

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Search experiences, and new Product Ownership and Commerce offerings. The team is hard at work to recover algorithm-related losses at scale, and we are confident and steadfast in our belief that forums provide the best source of authentic perspectives and curated answers to the questions that matter most to our passionate hobbyists.

As we enter this period of economic uncertainty, we are well-positioned with a strong balance sheet and low leverage. Year-to-date we have been putting capital to work closing four acquisitions for a total value of US$7.3 million. We anticipate the year ahead may be an ideal time to put capital to work as forum owners become frustrated with the US markets, and Google algorithms. However, we intend to stay disciplined in our valuations, and manage our leverage carefully, maintaining leverage levels in the 1.0 - 1.5x range throughout 2025 as interest rates continue to be elevated.

In closing, I would like to thank our shareholders for their continued support. While today's update may not be welcome news, we felt it was important to share an update and our outlook for 2025. I remain a committed long-term shareholder of the business, and am highly focused on delivering long-term value and outperforming the expectations we have set.

Rob Laidlaw
Founder & CEO

Forward-Looking Statements

This shareholder letter contains forward-looking information within the meaning of applicable securities legislation that reflects the Company's current expectations regarding future events. When used in this shareholder letter, words such as "should", "could", "intended", "expect", "plan" or "believe" and similar expressions indicate forward-looking statements. Forward-looking information, including the Company's financial outlook (including revenue, Adjusted EBITDA and MAUs), plans for organic growth, deployment of capital, leverage, investments in our platform, new platform features, the growth of revenue and MAU, information regarding our financial position, business strategy, growth strategies, addressable markets, budgets, operations, financial results, plans and objectives, is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond the Company's control. Although the Company believes that its expectations reflected in these forward-looking statements are reasonable, such statements involve risks and uncertainties and no assurances can be given that actual results will be consistent with these forward-looking statements. Such risks and uncertainties include, but are not limited to, the implementation and effectiveness of the Company's capital allocation strategy, investments in its platform, the availability of high-quality M&A opportunities, and the factors discussed under "Risk Factors" in the Company's Annual Information Form dated March 31, 2025, which is available on the Company's profile on SEDAR

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Plus at https://sedarplus.ca. Actual results could differ materially from those projected herein. VerticalScope does not undertake any obligation to update such forward-looking information, whether as a result of new information, future events or otherwise, except as expressly required under applicable securities laws.

Non-IFRS Measures

This shareholder letter references certain non-IFRS measures, including Adjusted EBITDA and Free Cash Flow, and Free Cash Flow Conversion as described below. This shareholder letter also references MAU, which is an operating metric used in our industry. These non-IFRS measures are not recognized measures under IFRS and do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of the Company's results of operations from management's perspective. Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of the Company's financial information reported under IFRS.

The Company uses non-IFRS measures including:

"EBITDA" is calculated as net income (loss) excluding interest, income tax expense (recovery), and depreciation and amortization.

"Adjusted EBITDA" is calculated as EBITDA adjusted for share-based compensation, share performance related bonuses, unrealized gains or losses from changes in fair value of derivative financial instruments, severance, adjustments to contingent consideration liabilities measured at fair value through profit and loss, gain or loss on sale of assets, gain or loss on sale of investments, foreign exchange loss (gain), impairment and other charges that include direct and incremental business acquisition related costs.

"Free Cash Flow" means Adjusted EBITDA less capital expenditures and income taxes paid during the period.

"Free Cash Flow Conversion" is equal to Free Cash Flow for the period divided by Adjusted EBITDA for the period.

"Monthly Active Users" ("MAU") is defined as the number of individuals who have visited our communities within a calendar month, based on data as measured by Google Analytics. To calculate average MAU in a given period, we sum the total MAU for each month in that period, divided by the number of months in that period.

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For Fiscal Year (FY) 2024, the Company's Adjusted EBITDA and Net Loss were US$29.8 million and US$15.9 thousand, respectively. For FY 2024, the Company's Free Cash Flow, Free Cash Flow Conversion and cash flow from operating activities were US$27.6 million, 92% and US$24.8 million, respectively. Please refer to the Company's management's discussion and analysis for the year ended December 31, 2024 at "Cautionary Note Regarding Non-IFRS Measures" for further detail on these non-IFRS financial measure and a reconciliation of historical Adjusted EBITDA and Free Cash Flow to Net Income (Loss), which disclosures are incorporated by reference into this shareholder letter.

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