sst-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from __________ to __________

Commission file number 001-39331

System1, Inc.

(Exact name of registrant as specified in its charter)


Delaware						98-1531250
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

4235 Redwood Avenue Marina Del Rey, CA						90066
(Address of Principal Executive Offices)						(Zip Code)

(310) 924-6037

(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A common stock, par value $0.0001 per share

SST

The New York Stock Exchange

Redeemable warrants, each whole warrant exercisable for one Class A common stock at an exercise price of $11.50 per share

SST.WS

The New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☒

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of June 23, 2023, there were 93,602,763 shares of Class A common stock, $0.0001 par value per share, outstanding and 21,512,757 shares issued and outstanding of Class C common stock, $0.0001 par value per share.

Table of Contents


		Page

Part I. - Financial Information		1

Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive (Loss)	3
	Condensed Consolidated Statements of Changes in Stockholders' Equity	4
	Condensed Consolidated Statements of Changes in Members' Deficit	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36

Part II - Other Information		39

Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults upon Senior Securities	39
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	41

Signatures		44

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

System1, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except for par values)


	Successor
	March 31, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	8,267	$	24,606
Restricted cash, current	7,862		9,074
Accounts receivable, net of allowance for credit losses	69,319		80,927
Prepaid expenses and other current assets	12,061		11,901
Total current assets	97,509		126,508
Restricted cash, non-current	5,577		5,395
Property and equipment, net	4,469		4,022
Internal-use software development costs, net	8,630		6,948
Intangible assets, net	464,145		492,686
Goodwill	515,591		515,591
Operating lease right-of-use assets	6,050		6,484
Other non-current assets	2,826		2,822
Total assets	$	1,104,797	$	1,160,456
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,258	$	12,068
Accrued expenses and other current liabilities	85,727		95,447
Protected.net incentive plan liability, current	8,755		15,436
Deferred revenue	76,346		70,164
Operating lease liabilities, current	2,195		2,149
Debt, net	15,073		15,021
Total current liabilities	199,354		210,285
Operating lease liabilities, non-current	5,314		5,875
Long-term debt, net	395,704		399,504
Warrant liability	6,389		7,798
Deferred tax liability	35,995		43,355
Protected.net incentive plan liability, non-current	20,037		15,824
Other liabilities	6,326		5,027
Total liabilities	669,119		687,668
Commitments and contingencies (Note 9)
STOCKHOLDERS’ EQUITY
Class A common stock - $0.0001 par value; 500,000 shares authorized, 93,147 and 91,674 Class A shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively	9		9
Class C common stock - $0.0001 par value; 25,000 shares authorized, 21,513 and 21,747 Class C shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively	2		2
Additional paid-in capital	837,093		829,687
Accumulated deficit	(479,579)		(445,301)
Accumulated other comprehensive loss	(479)		(417)
Total stockholders’ equity attributable to System1, Inc.	357,046		383,980
Non-controlling interest	78,632		88,808
Total stockholders’ equity	435,678		472,788
Total liabilities and stockholders’ equity	$	1,104,797	$	1,160,456

See notes to unaudited condensed consolidated financial statements.

System1, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except for per share and per unit data)


	Successor				Predecessor
	Three Months Ended March 31, 2023		Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022
Revenue	$	167,854	$	166,108	$	52,712
Operating expenses:
Cost of revenue (excluding depreciation and amortization)	120,402		120,384		41,507
Salaries and benefits	38,398		48,198		31,181
Selling, general, and administrative	17,172		15,088		15,665
Depreciation and amortization	29,374		21,928		1,000
Total operating expenses	205,346		205,598		89,353
Operating loss	(37,492)		(39,490)		(36,641)
Other expense:
Interest expense, net	11,451		4,776		1,049
Change in fair value of warrant liabilities	(1,409)		13,761		—
Total other expense	10,042		18,537		1,049
Loss before income tax	(47,534)		(58,027)		(37,690)
Income tax benefit	(4,408)		(14,649)		(629)
Net loss	$	(43,126)	$	(43,378)	$	(37,061)
Net loss attributable to non-controlling interest	(9,174)		(7,309)		—
Net loss attributable to System1, Inc.	$	(33,952)	$	(36,069)	$	(37,061)

Basic and diluted net loss per share	$	(0.37)	$	(0.44)	n/a
Weighted average number of shares outstanding - basic and diluted	92,460		82,708		n/a
Basic and diluted net loss per unit	n/a		n/a		$	(1.81)
Weighted average units outstanding - basic and diluted	n/a		n/a		20,488

See notes to unaudited condensed consolidated financial statements.

System1, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

(In thousands)


	Successor				Predecessor
	Three Months Ended March 31, 2023		Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022
Net loss	$	(43,126)	$	(43,378)	$	(37,061)
Other comprehensive income (loss)
Foreign currency translation income (loss)	(108)		103		87
Comprehensive loss	(43,234)		(43,275)		$	(36,974)
Comprehensive loss attributable to non-controlling interest	(9,220)		(7,233)		—
Comprehensive loss attributable to System1, Inc.	$	(34,014)	$	(36,042)	$	(36,974)

See notes to unaudited condensed consolidated financial statements.

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
Successor:
For the period from January 1, 2023 to March 31, 2023
BALANCE—December 31, 2022	91,674	$	9	21,747	$	2	$	829,687	$	(445,301)	$	(417)	$	88,808	$	472,788
Net loss	—	—		—	—		—		(33,952)		—		(9,174)		(43,126)
Cumulative-effect of adoption of ASU 2016-13	—	—		—	—		—		(326)		—		—		(326)

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

Issuance of common stock in connection with settlement of incentive plan	407	—		—	—		1,658		—		—		—		1,658


Conversion of Class C shares to Class A shares	234	—		(234)	—		956		—		—		(956)		—
Increase in tax receivable agreement liability	—	—		—	—		(441)		—		—		—		(441)
Other comprehensive loss	—	—		—	—		—		—		(62)		(46)		(108)
Stock-based compensation	—	—		—	—		6,963		—		—		—		6,963



BALANCE—March 31, 2023	93,147	$	9	21,513	$	2	$	837,093	$	(479,579)	$	(479)	$	78,632	$	435,678

See notes to unaudited condensed consolidated financial statements.

System1, Inc. and Subsidiaries

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

(In thousands)


	Class A Common Stock			Class C Common Stock			Class D Common Stock
	Shares	Amount		Shares	Amount		Shares	Amount		Additional Paid-In-Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Non-Controlling Interest		Total Stockholders’ Equity

Successor:
For the period from January 27, 2022 to March 31, 2022
BALANCE—January 26, 2022	51,750	$	5	—	$	—	—	$	—	$	574,003	$	(107,797)	$	—	$	—	$	466,211
Effect of the Merger	29,017	3		22,077	2		1,450	—		148,359		—		—		198,691		347,055
BALANCE—January 27, 2022	80,767	8		22,077	2		1,450	—		722,362		(107,797)		—		198,691		813,266
Net loss	—	—		—	—		—	—		—		(36,069)		—		(7,309)		(43,378)
Issuance of common stock in connection with the Merger, net of offering costs, underwriting discounts and commissions	930	—		—	—		—	—		661		—		—		—		661
Issuance of common stock in connection with the acquisition of business	2,000	—		—	—		—	—		25,500		—		—		—		25,500
Issuance of market-based restricted stock units upon vesting	—	—		—	—		1,450	—		—		—		—		—		—
Conversion of Class D shares to Class A shares	2,900	1		—	—		(2,900)	—		—		—		—		—		1
Net deferred tax liability resulting from changes in outside basis difference on investment in S1 Holdco, LLC	—	—		—	—		—	—		(2,596)		—		—		—		(2,596)
Other comprehensive income / (loss)	—	—		—	—		—	—		—		—		103		(184)		(81)
Stock-based compensation	—	—		—	—		—	—		31,398		—		—		—		31,398
Distribution to members	—	—		—	—		—	—		—		—		—		(247)		(247)
BALANCE—March 31, 2022	86,597	$	9	22,077	$	2	—	$	—	$	777,325	$	(143,866)	$	103	$	190,951	$	824,524

See notes to unaudited condensed consolidated financial statements.

System1, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Members' Deficit (Unaudited)

(In thousands)


	Members’ Deficit		Accumulated Other Comprehensive Income (Loss)		Total Members’ Deficit
Predecessor:
For the period January 1, 2022 to January 26, 2022
BALANCE—January 1, 2022	$	(28,829)	$	428	$	(28,401)
Net loss	(37,061)		—		(37,061)
Accumulated other comprehensive income	—		87		87
Stock-based compensation expense	23,705		—		23,705
BALANCE—January 26, 2022	$	(42,185)	$	515	$	(41,670)

See notes to unaudited condensed consolidated financial statements.

System1, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	Successor				Predecessor
	Three Months Ended March 31, 2023		Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022
Cash flows from Operating Activities:
Net loss	$	(43,126)	$	(43,378)	$	(37,061)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	29,374		21,928		1,000
Stock-based compensation	13,925		32,302		23,705
Noncash lease expense	436		283		115
Change in fair value of warrants	(1,409)		13,761		—
Deferred tax benefits	(7,373)		(15,540)		(816)
Other	686		1,572		(9)
Changes in operating assets and liabilities:
Accounts receivable	11,282		(14,816)		11,118
Prepaids and other assets	(159)		(3,695)		1,069
Accounts payable	(810)		66,091		(67,600)
Accrued expenses and other liabilities	(4,660)		(67,637)		57,488
Long-term earnout liabilities	(10,000)		5,595		—
Deferred revenue	6,182		3,654		311
Other long-term liabilities	(149)		(30,980)		77
Net cash used in operating activities	(5,801)		(30,860)		(10,603)
Cash flows from Investing Activities:
Purchases of property and equipment	(714)		(1,427)		—
Capitalized software development costs	(1,678)		(1,389)		(441)
Acquisition of businesses, net of cash acquired	—		(422,974)		—
Net cash used in investing activities	(2,392)		(425,790)		(441)
Cash flows from Financing Activities:
Proceeds from term loan and line of credit	—		449,000		—
Repayment of term loan	(5,000)		(172,488)		—
Payments for financing costs	—		(24,845)		—
Payment of acquisition holdback	(1,250)		—		—
Taxes paid related to net settlement of stock awards	(2,837)		—		—
Redemptions of Class A common stock	—		(510,469)		—
Cash received from the Backstop	—		246,484		—
Distributions to members	(45)		(463)		—
Net cash used in financing activities	(9,132)		(12,781)		—
Effect of exchange rate changes in cash, cash equivalent and restricted cash	(44)		1,697		(19)
Net decrease in cash, cash equivalents and restricted cash	(17,369)		(467,734)		(11,063)
Cash and cash equivalents and restricted cash, beginning of the period	39,075		517,553		48,639
Cash and cash equivalents and restricted cash, end of the period	$	21,706	$	49,819	$	37,576
Reconciliation of cash, cash equivalents and restricted cash to the Condensed Consolidated Balance Sheets:
Cash and cash equivalents	$	8,267	$	42,182	$	36,833
Restricted cash	13,439		7,637		743
Total cash, cash equivalents and restricted cash	$	21,706	$	49,819	$	37,576

Supplemental cash flow information:
Cash paid for operating lease liabilities	$	—	$	388	$	175
ROU assets obtained in exchange for operating lease liabilities	$	—	$	—	$	7,987
Capitalized assets financed by accounts payable	$	702	$	—	$	—
Stock-based compensation included in capitalized software development costs	$	561	$	—	$	—
Settlement of incentive plan through issuance of common stock	$	1,658	$	—	$	—
Equity issuance to settle intercompany loan	$	—	$	—	$	941
Deferred consideration for acquisition	$	—	$	23,500	$	—

See notes to unaudited condensed consolidated financial statements.

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)

1.ORGANIZATION AND DESCRIPTION OF BUSINESS

System1, Inc. and subsidiaries (“System1” or the “Company”) operates an omnichannel customer acquisition platform, delivering high-intent customers to advertisers and selling antivirus software packages to end user customers.

The Company provides its omnichannel customer acquisition platform services through its proprietary responsive acquisition marketing platform (“RAMP”). Operating seamlessly across major advertising networks and advertising category verticals to acquire users, RAMP allows the Company to monetize such users through its relationships with third party advertisers and advertising networks (“Advertising Partners”). Through RAMP, third party advertising platforms and publishers (“Network Partners”) send user traffic to, and monetize user traffic on, the Company’s owned and operated websites. RAMP operates across the Company’s network of owned and operated websites and related products, allowing it to monetize user traffic that it sources from various acquisition marketing channels, including Google, Facebook, Taboola and Zemanta.

The Company, through Protected.net, also provides antivirus software solutions, offering customers a single packaged solution that provides protection and reporting to the end user. The Company delivers its antivirus software solutions directly to end-user customers around the world. The antivirus software solutions product offering comprises a core security package with varying levels of extra protection based on a customer's specific needs. The software is sold in either a monthly or annual subscription predominantly through the flagship brand TotalAV.

Going Concern

Starting in the third quarter of 2022, the Company experienced declining cash flows and financial performance as a result of deteriorating macroeconomic conditions, resulting in reductions in both advertiser and overall consumer demand for the Company's marketing services. As of March 31, 2023, the Company had cash on hand of $8,267. The declining cash flows and financial performance raise substantial doubt regarding the Company's ability to continue as a going concern for a period of one year following the date that these condensed consolidated financial statements are issued. In response to the declining cash flows, the Company implemented a plan to raise additional financing. On April 10, 2023, the Company entered into an incremental revolver note (“2023 Revolving Note”) with related parties for $20,000. The Company believes that the proceeds from the 2023 Revolving Note, along with available cash on hand and other cash flows from operations, will be sufficient to maintain liquidity and operations in the ordinary course for the next 12 months following the date of this filing. The Company believes these mitigation plans alleviate the substantial doubt about its ability to continue as a going concern. The available balance under the 2023 Revolving Note was $15,000 as of the date that these condensed consolidated financial statements are issued.

The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. Accordingly, the condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation, Principles of Consolidation and Summary of Significant Accounting Policies

The Company was a special purpose acquisition company originally incorporated as a Cayman Islands exempted company on February 11, 2020 under the name Trebia Acquisition Corp. (“Trebia”). The Company was formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. On January 27, 2022, the Company consummated a business combination (the "Merger"), which resulted in the acquisition of S1 Holdco and System1 SS Protect Holdings, Inc. (“Protected”). As a result of the Merger, the results of operations, financial position and cash flows of the Predecessor and Successor may not be directly comparable.

The Company was deemed the accounting acquirer in the Merger based on an analysis of the criteria outlined in Accounting Standards Codification (“ASC”) 805, Business Combinations and S1 Holdco was deemed to be the predecessor entity. Accordingly, the historical financial statements of S1 Holdco became the historical financial statements of the Company, upon the consummation of the Merger. As a result, the financial statements included in this report reflect (i) the historical operating results of S1 Holdco prior to the Merger ("Predecessor") and (ii) the combined results of the Company, including S1 Holdco and Protected following the closing of the Merger ("Successor"). The accompanying financial statements include a Predecessor period, which was the period January 1, 2022 through January 26, 2022, concurrent with the Merger and Successor periods from January 27, 2022 through March 31, 2022, and thereafter. A black-line between the Successor and Predecessor periods has been placed in the condensed consolidated financial statements and in the tables to the notes to the condensed consolidated financial statements to highlight the lack of comparability between these two periods as the Merger resulted in a new basis of accounting for the Company.

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying condensed consolidated financial statements include the accounts of System1, Inc. and its subsidiaries for the Successor periods, and S1 Holdco for the Predecessor period. All intercompany accounts and transactions have been eliminated in the consolidation of the financial statements. The condensed consolidated financial statements have been prepared by the Company and are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations. The interim condensed consolidated financial statements included herein reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. The condensed consolidated statements of operations for the three months ended March 31, 2023 (Successor), the period from January 1, 2022 through January 26, 2022 (Predecessor) and for the period from January 27, 2022 through March 31, 2022 (Successor) are not necessarily indicative of the results to be anticipated for the entire year ending December 31, 2023 or thereafter.

Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform with the current period presentation. These reclassifications had no effect on the results of operations or financial position for any period presented.

Adoption of Recent Accounting Pronouncements

On January 1, 2023, the Company adopted ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Loss on Financial Instruments". Accordingly, upon adoption of this new standard, the Company recorded an allowance for credit losses of $327, with a corresponding cumulative adjustment to the beginning balance of accumulated deficit in the first quarter of fiscal 2023.

Risks and Concentrations

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)

The Company is 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 its business and operational objectives.

The following table illustrates the level of concentration as a percentage of total revenue for the Company's key Advertising Partners:


	Successor				Predecessor
	Three Months Ended March 31, 2023		Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022
Google	64	%	73	%	88	%
Microsoft	2	%	3	%	4	%

Accounts receivable are primarily derived from Advertising Partners located within the United States. As of March 31, 2023, two of the Company’s largest Advertising Partners, Google and Yahoo, represented 74% and 9%, respectively, of the Company’s accounts receivables balance. As of December 31, 2022, these two Advertising Partners represented 68% and 11%, respectively, of the Company’s accounts receivable balance.

Use of Estimates

The preparation of these condensed consolidated financial statements in conformity with U.S. 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.

Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to: (1) valuation of goodwill, acquired intangible assets and long-lived assets, (2) valuation and recognition of the Company's stock-based compensation awards, and (3) income taxes. Significant estimates affecting the condensed 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 the Company believes to be reasonable. Management evaluates its estimates, as there are changes in circumstances, facts and experience. Changes in estimates are recorded in periods which they become known. However, actual results from the resolution of such estimates and assumptions may vary from those used in the preparation of the condensed consolidated financial statements.

Concentration of Credit Risk

Cash is deposited with high-credit-quality financial institutions and, at times, such balances with any one financial institution may exceed the insurance limits of the prevailing regulatory body. Historically, the Company has not experienced any losses related to these cash balances and believes that there is minimal risk of expected future losses. However, there can be no assurance that there will not be losses on these deposits.

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)

3.MERGER

On June 28, 2021, the Company entered into a Business Combination Agreement (as amended on November 30, 2021, January 10, 2022 and January 25, 2022) (the “Business Combination Agreement” or "BCA"), by and among S1 Holdco, Trebia, and Protected (collectively, the “Companies”). On January 26, 2022 (the “Closing Date”), the Company consummated the business combination (the "Merger") pursuant to the Business Combination Agreement. Following the consummation of the Merger, the combined company is organized via an “Up-C” structure, in which substantially all of the assets and business operations of System1 are held by S1 Holdco. The combined Companies’ business continues to operate through the subsidiaries of S1 Holdco and Protected. Additionally, Trebia’s ordinary shares and public warrants ceased trading on the New York Stock Exchange ("NYSE"), and System1 Inc.'s Class A common stock and the Public Warrants began trading on the NYSE on January 28, 2022 under the symbols “SST” and “SST.WS,” respectively.

The consideration paid to the existing equity holders of S1 Holdco and Protected in connection with the Merger consisted of the following:

•Cash;

•Class A common stock;

•Class C common stock;

•Replacement Awards.

The aggregate cash consideration was $440,155.

The aggregate equity consideration paid and/or retained for S1 Holdco Class B Units was $610,144, consisting of (a) the aggregate equity consideration payable under the Business Combination Agreement, consisting of shares of Class A common stock and Replacement Awards, and (b) the aggregate Class B Units in S1 Holdco retained by S1 Holdco equity holders at the Closing.

The fair value of the Class A common stock was determined by utilizing the transaction closing price per share per the BCA of $10.00 and a discount of 10%, as the shares were not immediately available for sale upon issuance and this restriction is viewed to be a function of the security characteristics.

Additionally, the aggregate Class B units in S1 Holdco retained by S1 Holdco equity holders at the Closing Date resulted in a non-controlling interest. The 22,077 Class B units in S1 Holdco and the corresponding Class C common stock in the Company were determined to have an estimated value of $198,691. As the Class B units in S1 Holdco together with the corresponding shares of the Company's Class C common stock are exchangeable for shares of Class A common stock on a one-for-one basis, the fair value was determined using the same method as for the shares of Class A common stock, utilizing the transaction closing price of $10.00 and a discount of 10% (as the units and the corresponding shares of Class C common stock were not immediately available for sale upon issuance and this restriction is viewed to be a function of the security characteristics). The fair value of $198,691 was included in non-controlling interest on the accompanying condensed consolidated balance sheet and condensed consolidated statements of changes in stockholders' equity.

In connection with the Merger, System1 and Cannae Holdings, Inc. (“Cannae”), an investor in the Sponsor of Trebia, entered into a backstop agreement (the “Backstop Agreement”) on June 28, 2021, as amended on January 10, 2022, whereby Cannae agreed, to subscribe for up to 25,000 shares of Trebia Class A common stock in order to fund up to $250,000 of redemptions by shareholders of Trebia. See discussion below regarding the Amended and Restated Sponsor Agreement, which was amended in conjunction with the Backstop Agreement. As a result of shareholder redemptions, Cannae provided $246,484 of the cash used to fund the Closing Cash Consideration pursuant to its obligations under the Backstop Agreement and in exchange received 24,648 shares of Class A common stock ("Backstop shares").

Additionally, pursuant to the Backstop Agreement, the Selling Shareholders (i.e., certain shareholders of S1 Holdco and Protected prior to the Merger) agreed that, in the event shareholders of Trebia requested redemption of Trebia

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)

outstanding equity immediately prior to the Merger in excess of a certain dollar value threshold, certain equity holders of S1 Holdco and Protected would reduce their cash consideration and proportionally increase their equity consideration for the Merger, which is referred to as the “Seller Backstop Election”. In the event that the Seller Backstop Election was made, the Sponsors would forfeit their shares to allow the Company to then issue shares to the Selling Shareholders. The Seller Backstop Election was triggered and, as a result, the Sponsors forfeited 930 shares of Trebia Class B ordinary shares which were converted at time of Merger, at a one-to-one ratio, into shares of Class A common stock of System1 and delivered to the various selling shareholders of S1 Holdco, collectively referred to as the “Sponsor Promote Shares”. The total consideration amount, in a combination of cash and equity consideration, did not change from the amount agreed in the Business Combination Agreement due to this Seller Backstop Election. The Company recorded $7,706 in Salaries and benefits expense and $661 in Selling, general and administrative expense for Sponsor Promote Shares during the period January 27, 2022 through March 31, 2022 (Successor).

In connection with the execution of the Business Combination Agreement and the Backstop Agreement, on June 28, 2021, as amended on January 10, 2022, the sponsors of Trebia entered into the Amended and Restated Sponsor Agreement whereby the sponsors agreed to forfeit up to 2,600 shares of Trebia Class B common stock in order for the Company to then issue the shares to Cannae (“Backstop forfeiture shares”), in exchange for Cannae entering into the Backstop Agreement. On January 27, 2022, based upon the final backstop funding provided by Cannae, the sponsors forfeited 2,533 shares of Trebia Class B shares, after which the Company then issued 2,533 shares of Class A common stock to Cannae. Trebia recorded a forward purchase liability of $25,336 immediately prior to the Merger, representing the fair value of the Backstop shares and the Backstop forfeiture shares.

In accordance with the Amended and Restated Sponsor Agreement entered into concurrently with the Business Combination Agreement, the Company issued 1,450 Class D shares to the Trebia sponsors in exchange for 1,450 Trebia Class B shares ("Sponsor RSA's"). The difference in the fair value of the two was treated as a capital contribution. The founders of S1 Holdco and Protected were also issued 1,450 Class D shares ("Seller RSUs"). Further, in connection with the Merger, the Company also effected an incentive plan for Protected business.

Concurrently with the consummation of the Merger, System1 entered into a tax receivable agreement with the minority holders of S1 Holdco, (the “Tax Receivable Agreement” or "TRA"), pursuant to which, among other things, the parties to the Tax Receivable Agreement have agreed to the allocation and payment of 85% of the actual savings, if any, in U.S. federal, state and local income tax that System1 may realize as a result of certain tax benefits (if any) related to the transactions contemplated by the Business Combination Agreement and future exchanges of Class B Units in S1 Holdco (together with the corresponding shares of the Company’s shares of Class C common stock) in exchange for shares of the Company’s Class A common stock. As of the Closing Date, the fair value of obligations under the TRA were determined to be zero as any tax savings were uncertain. The TRA is contingent consideration and subsequent changes in fair value of the contingent liability are recognized in earnings.

The Company adopted ASU No. 2021-08, Business Combinations: Contract Assets & Liabilities on January 1, 2022 and accordingly, has recorded contract assets and contract liabilities acquired as part of the Merger based on what the Company would have recorded under ASC 606, Revenue from Contracts with Customers, as of the acquisition date, as if the Company had entered into the original contract at the same date and on the same terms as S1 Holdco and Protected.

The Merger has been accounted for as a business combination using the acquisition method of accounting. The total purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values on the acquisition date.

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)

The purchase consideration was allocated to the following assets and liabilities:


	Amount
Tangible assets acquired and liabilities assumed:
Cash and marketable securities	$	68,748
Accounts receivable	79,086
Prepaid expenses	7,807
Income tax receivable	4,566
Property, plant & equipment, net	1,551
Other assets	6,950
Accounts payable	(9,798)
Deferred revenue	(60,768)
Accrued expenses and other current liabilities	(110,004)
Income tax payable	(2,091)
Notes payable	(172,038)
Deferred tax liabilities	(138,613)
Other liabilities	(8,474)
Total tangible assets acquired and liabilities assumed	(333,078)
Intangible assets	562,100
Goodwill	821,277
Net assets acquired	$	1,050,299

Consideration:
Cash	$	440,155
Equity	411,453
Total consideration attributable to System1	851,608
Total consideration attributable to non-controlling interest	198,691
Total consideration	$	1,050,299

The intangible assets as of the closing date of the acquisition included:


	Amount		Weighted Average Useful Life (in Years)
Trademarks	$	246,400	10
Customer relationships	119,700		4
Technology	196,000		4
Total	$	562,100

The fair value of the intangible assets acquired was determined using income-based approach methodologies. Intangible assets are amortized over their estimated economic useful lives using a straight-line method, which approximates the pattern in which the economic benefits are consumed. Customer relationships are amortized on an accelerated basis. To determine the amortization period for each of the customer relationships assets and to evaluate the pattern of usage of economic benefits, the Company performed a customer attrition analysis of the Company's customer relationships to estimate the attrition rate and consequently the life expectancy for the existing customer relationships.

Key assumptions used in the valuation of intangible assets are below:

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)

Trademarks – The Company valued trademarks using the relief-from-royalty method under the income-based approach. Key assumptions include forecasted revenue, an estimated royalty rate applicable to the trademarks, and a discount rate.

Customer relationships – The Company valued customer relationships using an excess-earnings method utilizing distributor inputs. Key assumptions include customer attrition rate, revenue growth rate, existing customer revenue, deferred revenue, and a discount rate.

Technology – The Company valued technology using the excess-earnings method utilizing company-specific inputs. Key assumptions include forecasted revenue, technology migration rate and a discount rate.

The goodwill arising from the acquisition consists largely of the expected synergies from combining operations as well as the value of the workforce. Goodwill is not deductible for tax purposes.

Unaudited Pro Forma Information

The following table provides unaudited pro forma information as if the Merger and other 2022 acquisitions occurred as of January 1, 2021. The unaudited pro forma information reflects adjustments for additional amortization resulting from the fair value adjustments to assets acquired and liabilities assumed, adjustments for alignment of accounting policies, adjustments for transaction expenses, adjustments for certain stock-based compensation and equity related expenses incurred as a result of the transaction and the resulting tax effects, as if the Merger and acquisitions of Answers, CouponFollow and RoadWarrior occurred January 1, 2021. The pro forma results do not include any anticipated cost synergies or other effects of the merged companies. Accordingly, pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisitions been completed on the dates indicated, nor is it indicative of the future operating results of the combined company.


	Three months ended
	March 31, 2022
Pro forma revenue	$	235,811
Pro forma net (loss)	$	(4,880)

4.ACQUISITIONS

NextGen Shopping, Inc.

On March 4, 2022, the Company acquired NextGen Shopping, Inc. (d/b/a “CouponFollow”) for total cash consideration of $75,087, of which $16,446 was deferred, $5,600 was held-back, and $25,500 related to the fair value of 2,000 shares of Class A common stock issued. The fair value of the shares of Class A common stock was determined by utilizing the closing price per share of the Company's Class A common stock listed on the NYSE as of March 3, 2022, and a discount rate of 7.5%, as the shares were not immediately available for sale upon issuance, and this restriction was deemed to be a function of the security characteristics. The deferred consideration of $16,446 was paid subsequent to the acquisition. The held-back consideration amount will become payable eighteen months subsequent to the acquisition date, subject to the Company's satisfaction of any potential post-closing purchase price adjustments and indemnification claims. The cash payment included the transaction costs of $3,129 that the Company paid on behalf of CouponFollow in connection with the closing of the transaction. The acquisition of CouponFollow constitutes a business combination under ASC 805.

In conjunction with this acquisition, the Company also committed to pay postcombination compensation of $8,500, which is payable in cash and subject to continued services from certain individuals of CouponFollow. Separately, in conjunction with the acquisition, the Company entered into the CouponFollow Incentive Plan, providing up to $10,000 of postcombination compensation which is payable in stock or cash at the option of the Company, and subject to continued service from certain individuals, and up to $25,000 which is payable in stock or cash at the

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)

option of the Company contingent upon achieving certain financial thresholds and the continued employment of certain key individuals of CouponFollow.

This acquisition leverages CouponFollow’s reputation, software and large organic traffic to vertically integrate with the Company’s RAMP platform and generate paid traffic for shopping-related products. The results of CouponFollow’s operations from the date of acquisition have been included in the Company’s condensed consolidated financial statements. The operating results of CouponFollow are reported within the Owned and Operated Advertising segment.

The total purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values on the acquisition date.

The purchase consideration was allocated to the following assets and liabilities:


	Amount
Cash and cash equivalents	$	21,232
Accounts receivable	5,860
Other current assets	446
Accounts payable	(116)
Accrued expenses and other current liabilities	(118)
Income tax payable	(197)
Deferred tax liabilities	(10,895)
Trademark - 10 years weighted average useful life	38,100
Software - 4 years weighted average useful life	4,100
Goodwill	42,175
Net assets acquired	$	100,587

Consideration:
Cash	$	75,087
Equity	25,500
Total consideration	$	100,587

The goodwill arising from the acquisition consists largely of the expected synergies from combining operations as well as the value of the workforce. The goodwill is not deductible for tax purposes. The Company incurred $813 in transaction costs related to the acquisition.

Trademark – The Company valued the trademark using the relief-from-royalty method under the income approach. Key assumptions include forecasted revenue, an estimated royalty rate applicable to the trademarks and a discount rate.

Software – Acquired software technology was valued using the excess-earnings method utilizing company-specific inputs. Key assumptions include forecasted revenue, an estimated royalty rate applicable to the software and a discount rate.

RoadWarrior, LLC

On February 9, 2022, the Company acquired the assets of RoadWarrior, LLC (“RoadWarrior”) for total cash consideration of $19,636. The acquisition of RoadWarrior constitutes a business combination under ASC 805. The acquisition expands the Company’s Mapquest.com website technology, and provides additional functionality for customers centered around route planning for delivery drivers and teams. The results of RoadWarrior’s operations as of and after the date of acquisition have been included in the Company’s condensed consolidated financial

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)

statements. The operating results of RoadWarrior are reported within the Owned and Operated Advertising segment prospectively from the date of acquisition.

The total purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values on the acquisition date.

The purchase consideration was allocated to the following assets and liabilities:


	Amount
Working capital	$	155
Trademark - 10 years weighted average useful life	2,200
Software - 4 years weighted average useful life	1,000
Customer relationships - 3 years weighted average useful life	1,300
Goodwill	14,981
Net assets acquired	$	19,636

Total consideration
Cash	$	19,636

The goodwill arising from the acquisition consists largely of the expected synergies from combining operations as well as the value of the workforce. The goodwill is deductible for tax purposes over 15 years. The Company incurred $308 in transaction costs related to the acquisition.

5.GOODWILL, INTERNAL-USE SOFTWARE DEVELOPMENT COSTS, NET, AND INTANGIBLE ASSETS, NET

Goodwill

Goodwill by reportable segments was as follows:


	Partner Network		Subscription		Total
Goodwill at December 31, 2022 and March 31, 2023	$	82,407	$	433,184	$	515,591

During the three months ended March 31, 2023, the Company determined there were no triggering events. As such, no quantitative assessment for impairment was required, and accordingly, the Company did not record any goodwill impairment charges during the three months ended March 31, 2023.

Internal-use software development costs and intangible assets

Internal-use software development costs and intangible assets, net consisted of the following:

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)


	March 31, 2023 (Successor)
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Total internal-use software development costs	$	9,246	$	(616)	$	8,630
Intangible assets, net:
Trademarks and trade names	$	287,853	$	(33,436)	$	254,417
Developed technology	196,149		(57,581)		138,568
Customer relationships	121,000		(53,556)		67,444
Software	5,100		(1,384)		3,716
Total intangible assets, net	$	610,102	$	(145,957)	$	464,145


	December 31, 2022 (Successor)
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Total internal-use software development costs	$	7,206	$	(258)	$	6,948
Intangibles:
Trademarks and trade names	$	287,857	$	(26,241)	$	261,616
Developed technology	196,128		(45,322)		150,806
Customer relationships	121,000		(44,770)		76,230
Software	5,100		(1,066)		4,034
Total intangible costs	$	610,085	$	(117,399)	$	492,686

The internal-use software development costs include capitalized costs not ready for its internal use of $4,176 and $4,955 as of March 31, 2023 (Successor) and December 31, 2022 (Successor), respectively.

Amortization expense associated with the Company’s intangible assets and internal-use software development costs was as follows:


	Successor				Predecessor
	Three Months Ended March 31, 2023		Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022
Amortization expense for internal-use software development	$	557	$	65	$	355
Amortization expense for intangible assets	$	28,558	$	21,744	$	629

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

6.ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)


	Successor
	March 31, 2023		December 31, 2022
Accrued payroll and related benefits	$	9,704	$	12,890
Accrued marketing expenses	30,331		38,911
Accrued professional fees	2,577		2,706
VAT tax liability	3,941		4,343
Accrued tax liability	2,608		1,176
Holdback liability	5,708		6,885
Accrued revenue share	19,636		16,921
Other liabilities	11,222		11,615
Accrued expenses and other current liabilities	$	85,727	$	95,447

7.DEFERRED REVENUE

Deferred revenue activities were as follows:


	Deferred Revenue
January 1, 2022 (Predecessor)	$	1,971
Additions	620
Revenue recognized	(309)
January 26, 2022 (Predecessor)	$	2,282


	Deferred Revenue
January 27, 2022 (Successor)	$	—
Additions*	94,254
Revenue recognized	(29,444)
March 31, 2022 (Successor)	$	64,810


	Deferred Revenue
January 1, 2023 (Successor)	$	70,164
Additions	56,390
Revenue recognized	(50,208)
March 31, 2023 (Successor)	$	76,346

* Includes $61,156 from the 2022 acquisitions.

During the periods January 1, 2022 through January 26, 2022 (Predecessor) and January 27, 2022 through March 31, 2022 (Successor), and the three months ended March 31, 2023 (Successor), $309, $0 and $31,807, respectively, of the deferred revenue recognized existed at the beginning of each respective period.

We expect to recognize revenue related to the remaining performance obligations within the next twelve months.

8.INCOME TAXES

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)

The Company is the sole managing member of S1 Holdco and, as a result, consolidates 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 is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by S1 Holdco is passed through to and included in the taxable income or loss of its members, including the Company, on a pro rata basis. The Company is 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 the Company.

The following table presents the Company’s Income tax benefit and the effective income tax rate:


	Successor						Predecessor
	Three Months Ended March 31, 2023			Period from January 27, 2022 through March 31, 2022			Period from January 1, 2022 through January 26, 2022
Income tax benefit	$	(4,408)		$	(14,649)		$	(629)
Effective tax rate	9		%	25		%	2		%

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, effects of predecessor flow through income allocations, state taxes, foreign rate differential, non-deductible expenses, increase to the valuation allowance related to unrealizable deferred tax assets, outside basis adjustments, and Global Intangible Low-taxed Income. As of March 31, 2023, the Company had established a full valuation allowance on its U.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets would not be realized.

During the three months ended March 31, 2023, and the periods from January 1, 2022 through January 26, 2022, and from January 27, 2022 through March 31, 2022, 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 $1,477 and $1,036 as of March 31, 2023 and December 31, 2022, respectively.

9.COMMITMENTS AND CONTINGENCIES

In June 2021, S1 Holdco entered into a multi-year agreement with a service provider whereby the Company is contractually obligated to spend $8,000 between July 2022 and June 2023. As of March 31, 2023 (Successor), the Company remains contractually obligated to spend $2,165 towards this commitment.

As of March 31, 2023, the Company had various non-cancelable operating lease commitments for office space which have been recorded as Operating lease liabilities.

Litigation

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company believes the ultimate liability, if any, with respect to these actions will not materially affect the consolidated financial position, results of operations, or cash flows reflected in the condensed consolidated financial statements. There can be no assurance, however, that the ultimate resolution of such actions will not materially or adversely affect the Company’s condensed consolidated financial position, results of operations, or cash flows. The Company accrues for losses when the loss is deemed probable and the liability can reasonably be estimated.

In July 2021, System1 OpCo (f/k/a System1, LLC) received initial correspondence from counsel for a United Kingdom-based marketing research company and its United States subsidiary (collectively, the “Demanding Group”) alleging trademark infringement (i) based on its use of the “SYSTEM1” trade name and mark in the United States, and (ii) subsequently based on its use of the “SYSTEM1” trade name and mark in the United Kingdom. The

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)

correspondence demanded that System1 OpCo cease and desist from using the “SYSTEM1” name and mark, and even though the Company received similar correspondence from the Demanding Group regarding its alleged infringing use of the SYSTEM1 trade name and mark in the United Kingdom, no lawsuit was ever filed in the United Kingdom. In September 2021, the Demanding Group filed a lawsuit in the United States District Court for the Southern District of New York (the “Infringement Suit”), alleging (i) trademark infringement, (ii) false designation of origin, (iii) unfair competition and (iv) certain violations of New York business laws, seeking, among other things, an injunction, disgorgement of profits, actual damages and attorneys’ fees and costs. The Company believes that the Demanding Group’s infringement and other allegations and claims set forth in the Infringement Suit would have been subject to a laches defense, among other defenses. The parties entered into a Co-Existence and Settlement Agreement in June 2023 in which the parties have agreed to co-exist with their current usage of the “System1” mark in their respective business operations with certain requirements and other conditions, and includes the payment of a fixed amount to the Demanding Party over the course of seventeen (17) months (the “Settlement Agreement”). The amounts accrued as of March 31, 2023 for the potential loss are consistent with the terms of the Settlement Agreement, and have been immaterial to-date.

In March 2023, the Company received a demand letter from counsel for Alta Partners, LLC (“Alta”), which purports to be a holder of certain Public Warrants of the Company (“Demand Letter”). The Demand Letter alleges, among other claims, that the Company breached the terms of the Warrant Agreement, and that Alta is entitled to approximately $5,700 in damages, plus prejudgment interest, as a result. On April 20, 2023, counsel for the Company responded to the Demand Letter, denying that any breach occurred or that Alta is entitled to any damages. In June 2023, counsel for Alta sent the Company a draft complaint (the “Complaint”) alleging substantially the same claims as those set forth in Alta’s Demand Letter. The Complaint has not been filed as of June 30, 2023. The Company continues to deny liability with respect to the claims set forth in the Demand Letter and the Complaint, and will defend itself vigorously against any such claims. The Company has not accrued a loss for this matter as a loss, or range of losses, is not reasonably estimable as of March 31, 2023.

10.DEBT, NET

The carrying values of the Company's debt, net of discounts, deferred financing and debt issuance costs were as follows:


	Successor
	March 31, 2023		December 31, 2022
Term Loan1,2	$	360,777	$	364,525
Revolving Facility	50,000		50,000
Total Debt, net	$	410,777	$	414,525

1 Includes loan fees of $996 and $1,061, 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 $317,300 as of March 31, 2023.

On April 10, 2023, Orchid Sub, a wholly-owned subsidiary of the Company, entered into a $20,000 Revolving Note (the “2023 Revolving Note”) with Lone Star Friends Trust (acting by and through its trustee, Stanley Blend, “Lone Star”) and CEE Holding Trust (acting by and through its trustee, Jackson Hole Trust Company, “CEE”, and together with Lone Star, collectively, the “Lenders” and each, a “Lender”), which are trusts established for the benefit of Michael Blend (Chief Executive Officer, co-founder and stockholder) and Charles Ursini (co-founder and stockholder), respectively, in a private transaction approved by the independent and noninterested members of the Company’s Board of Directors (the “Board”). Each Lender provided a $10,000 commitment for an aggregate principal of $20,000 under the 2023 Revolving Note to Orchid Sub on a several but not joint basis (each, a

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)

“Commitment” and, collectively, the “Commitments”). The available balance on the 2023 Revolving Note was $15,000 as of the date of this filing.

As of the date of this filing, the Company is in compliance with all debt covenants.

11.FAIR VALUE MEASUREMENT

The following tables present the Company’s fair value hierarchy for liabilities measured at fair value on a recurring basis:


	Successor
	March 31, 2023		December 31, 2022
	Level 1		Level 1
Public warrants	$	6,389	$	7,798

The fair value of the Private Placement Warrants was estimated using the Public Warrants’ quoted market price.

Changes in estimated fair value of Levels 1, 2 and 3 financial liabilities were as follows:


	Former CEO equity profits interest		Contingent consideration
	Level 3		Level 3
Fair value of liabilities at December 31, 2021 (Predecessor) and January 26, 2022 (Predecessor)	$	11,132	$	1,682


	Private Warrant liability		Public Warrant liability		Contingent consideration
	Level 2		Level 1		Level 3
Fair value of liabilities at January 27, 2022 (Successor)	$	8,727	$	18,285	$	1,682
Additions	—		—		573
Change in fair value	4,446		9,315		—
Fair value of liabilities at March 31, 2022 (Successor)	$	13,173	$	27,600	$	2,255


	Public Warrant liability
	Level 1
Fair value of liabilities at December 31, 2022 (Successor)	$	7,798
Change in fair value	(1,409)
Fair value of liabilities at March 31, 2023 (Successor)	$	6,389

There were no transfers in or out of levels during the three months ended March 31, 2023 (Successor), the period January 1, 2022 through January 26, 2022 (Predecessor), and the period January 27, 2022 through March 31, 2022 (Successor).

12.NET LOSS PER SHARE OR UNIT

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)

For the three months ended March 31, 2023 (Successor) and the period from January 27, 2022 through March 31, 2022 (Successor), the 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. For the period from January 1, 2022 through January 26, 2022 (Predecessor), the basic net loss per unit attributable to members was calculated by dividing the net loss attributable to common equity holders by the weighted-average number of membership units outstanding. Basic and diluted net loss per share was calculated as follows:

Successor

Predecessor

Three Months Ended
March 31, 2023

Period from January 27, 2022 through March 31, 2022

Period from January 1, 2022 through January 26, 2022

Basic and diluted net loss per share

(0.37)

(0.44)

n/a

Numerator:

Net loss attributable to System1, Inc.

(33,952)

(36,069)

n/a

Denominator:

Weighted-average common shares outstanding used in computing basic net loss per share (shares in thousands)

92,460

82,708

n/a

Basic and diluted net loss per unit

n/a

(1.81)

Numerator:

Net loss

n/a

(37,061)

Denominator:

Weighted-average membership units outstanding - basic
and diluted (units in thousands)

n/a

20,488

Shares of Class C common stock outstanding for the period January 27, 2022 through March 31, 2023 (Successor) are considered potentially dilutive of the shares of Class A common stock under the application of the if-converted method, and are included in the computation of diluted loss per share, except when the effect would be anti-dilutive. For the three months ended March 31, 2023 (Successor) and the period from January 27, 2022 through March 31, 2022 (Successor), 21,513 and 22,077 shares of Class C common stock were excluded from the computation of net loss per share, respectively. Loss per share excludes Public Warrants as their effect was anti-dilutive.

13.SEGMENT REPORTING

We have three reportable segments:

•Owned and Operated Advertising — revenue earned by directly acquiring traffic to the Company's owned and operated websites and utilizing the RAMP platform and related services to connect Advertising Partners to the Company's owned and operated websites;

•Partner Network — revenue earned from revenue-sharing arrangements with Network Partners for the use of the RAMP platform, and related services provided to them to direct advertising by the Advertising Partners to their advertising space; and

•Subscription — revenue primarily derived from the (i) delivery of the antivirus software and (ii) delivery of the additional add-on service(s).

The following table summarizes revenue by the Company's three reportable segments:

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)


	Successor				Predecessor
	Three Months Ended March 31, 2023		Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022
Owned and Operated Advertising	$	106,025	$	126,884	$	49,249
Partner Network	15,093		11,350		3,463
Subscription	46,736		27,874		—
Total revenue	$	167,854	$	166,108	$	52,712

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)

The following table summarizes adjusted gross profit by the Company's three reportable segments:


	Successor				Predecessor
	Three Months Ended March 31, 2023		Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022
Owned and Operated Advertising	$	29,839	$	29,418	$	8,768
Partner Network	10,217		8,413		3,012
Subscription	14,155		12,647		—
Adjusted gross profit	$	54,211	$	50,478	$	11,780
Other cost of revenue	6,759		4,754		575
Salaries and benefits	38,398		48,198		31,181
Selling, general and administrative	17,172		15,088		15,665
Depreciation and amortization	29,374		21,928		1,000
Interest expense, net	11,451		4,776		1,049
Change in fair value of warrant liabilities	(1,409)		13,761		—
Net loss before income tax	$	(47,534)	$	(58,027)	$	(37,690)

The following table summarizes revenue by geographic region:


	Successor				Predecessor
Geographic Region	Three Months Ended March 31, 2023		Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022
United States	$	117,199	$	134,608	$	51,701
United Kingdom	46,853		27,719		—
Other countries	3,802		3,781		1,011
Total revenue	$	167,854	$	166,108	$	52,712

The following table summarizes property and equipment, net and operating leases by reportable segments:


	Successor
	March 31, 2023		December 31, 2022
Owned and Operated Advertising	$	9,269	$	9,646
Subscription	1,250		860
Total	$	10,519	$	10,506

14.RELATED-PARTY TRANSACTIONS

Protected.net utilizes multiple payment processors in order to process credit card payments from its subscription customers, including Paysafe Financial Services Limited (“Paysafe”). In March 2021 Paysafe completed a merger with Foley Trasimene Acquisition Corp. II (“Foley Trasimene”), a special purpose acquisition company sponsored by entities affiliated with William Foley, who was also a sponsor of Trebia Acquisition Corp. and was a member of

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)

the Company’s Board of Directors. Protected.net’s payment processing agreement with Paysafe was negotiated before the announcements of both (i) the Merger as well as (ii) the business combination between Paysafe and Foley Trasimene. The Company incurred credit card processing fees related to Paysafe for the three months ended March 31, 2023, the period from January 27, 2022 through March 31, 2022 (Successor) and the period January 1, 2022 through January 26, 2022 (Predecessor) of $1,123, $539 and $0, respectively. The amount receivable from Paysafe was $458 and $2,447 as of March 31, 2023 (Successor) and December 31, 2022 (Successor), respectively.

The Company has agreements with JDI Property Holdings Limited (“JDI”), an entity controlled by a director of the Company, which allows for the Company to occupy desks at JDI’s property in such a place as JDI specifies from time to time in exchange for GBP 52 per month. The agreements with JDI expire on October 31, 2026. Additionally, the Company utilizes a JDI credit card and the Company reimburses JDI monthly. The amount owed to JDI was immaterial as of March 31, 2023 (Successor) and December 31, 2022 (Successor).

On August 30, 2022, the Company, Protected.net and Just Develop It Limited (“JDIL”), an entity controlled by a director of the Company, entered into a Conditional Consent, Waiver and Acknowledgement (the “Waiver”) pursuant to which JDIL agreed to waive its right to the Year 3 Stock Bonus Pool (as such term is defined in the BCA), consisting of $50,000 of Class A common stock payable in January 2024 and as set forth in Section 12.11(a) of the BCA dated June 28, 2021 (as amended), by and among S1 Holdco, Protected and the other parties signatory thereto in exchange for $40,000 in cash payable in four (4) quarterly installments of $10,000 each, commencing on August 30, 2022 and on each three (3) month anniversary thereafter. On June 1, 2023, the Company further modified the 2023 Award, deferring the last quarterly cash installment of $10,000 such that $5,000 was due on May 30, 2023, $5,000 is due on July 1, 2023, and providing additional cash bonus payments of up to $10,000, $6,000 due on October 1, 2023 (the "October Payment") and $1,000 due on the first of each month of November 2023 through February 2024 (together the "Remaining Payments").

Orchid Merger Sub II, LLC ("Orchid Sub"), a wholly-owned subsidiary of the Company, entered into a $20,000 Revolving Note, dated as of April 10, 2023, as amended and restated on May 16, 2023 (the "2023 Revolving Note"), with certain trusts that were established for the benefit of the Company's co-founders. Any borrowed loan amounts outstanding under the 2023 Revolving Note accrue interest at the rate per annum equal to the Secured Overnight Financing Rate as administered by the Federal Reserve Bank of New York plus 3.15%. Orchid Sub may borrow amounts under the 2023 Revolving Note in increments of $100, and may prepay any amounts borrowed at any time without penalty or interest (other than applicable breakage costs, if any). The Company may borrow up to its commitment amount, and may reuse the loan again after the balance has been paid down. The final maturity date under the 2023 Revolving Note is July 10, 2024. The lenders are also entitled to (i) an unused commitment fee equal to 1.0% per annum of the actual daily amount of total unfunded commitments under the 2023 Revolving Note during the period from the closing date to the maturity date, payable quarterly in arrears and (ii) a closing fee equal to 12.0% of each lender's commitment under the 2023 Revolving Note, payable within 180 days of April 10, 2023.

On June 20, 2023, the Company engaged Cannae Holdings, LLC (a wholly owned subsidiary of Cannae Holdings, Inc.), a greater than 5% holder of the Company's Class A Common Stock, to provide certain observations and recommendations relating to the accounting and finance functions of the Company, including:

a.the Company’s compliance with the Sarbanes Oxley Act of 2002;

b.the Company's accounting and finance talent;

c.financial planning and analysis; and

d.cash flow management.

Fees for the services include an initial retainer of $100 and $25 monthly during the term of the engagement. Either party may terminate the agreement with or without cause provided adequate written notice.

System1, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars, number of shares and number of units in thousands, except for per share or per unit amounts)

15.STOCK-BASED COMPENSATION

The Company recorded the following stock-based compensation expense for the periods presented:


	Successor				Predecessor
	Three Months Ended March 31, 2023		Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022
Stock-based compensation expense	$	13,925	$	32,302	$	23,705

Protected.net Incentive Plan

During the three months ended March 31, 2023, the Company recognized $7,533 for both the 2023 Award and 2024 Award of the Protected.net Incentive Plan within Salaries and benefits on the condensed consolidated statements of operations. Although the last twelve months cash EBITDA target for the 2024 Award of the Protected.net Incentive Plan has not yet been met, the Company determined that it was probable of achievement. Refer to Note 14—RELATED-PARTY TRANSACTIONS.

CouponFollow Incentive Plan

As of March 31, 2023, the Company has determined that it was not probable that the CouponFollow business would achieve any of the contingent earnout targets during the Performance Periods, and accordingly, it did not record a liability for any of the tier amounts set forth in the CouponFollow Incentive Plan. During the three months ended March 31, 2023, the Company recognized $268 for the Fixed Amount of the CouponFollow Incentive Plan within Salaries and benefits expenses on the accompanying condensed consolidated statements of operations, which is net of a $566 difference between the fair value of the Class A common stock issued to settle the earnout liability for the First Performance Period for fiscal 2022 and the carrying value of the earnout liability.

On March 1, 2023, the Company settled the first Fixed Earn-Out Amount of $3,333 for the performance period ending December 31, 2022, in shares. The Company issued 407 shares of Class A Common stock, with an aggregate fair value of $1,658, net of shares withheld for taxes, on the date of settlement.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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

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

The following discussion and analysis of the financial condition and results of operations of System1 should be read together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis should also be read together with the section entitled “Organization and description of business” as of March 31, 2023 (Successor) and for the period from January 1, 2022 through January 26, 2022 (Predecessor), and the period from January 27, 2022 through March 31, 2023 (Successor) as well as information contained in our Annual Report on Form 10-K for the year ended December 31, 2022 (Successor). 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.” Dollars, number of shares and number of units are presented in thousands, except percentages, per share and per unit information, unless otherwise noted.

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

Company Overview

We operate an omnichannel customer acquisition platform, delivering high-intent customers to advertisers and selling antivirus software packages to end user customers.

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 users on our behalf, RAMP allows us to monetize these acquired users through our relationships with third party advertisers and advertising networks (“Advertising Partners”). RAMP also allows third party advertising platforms and publishers (“Network Partners”), to send user traffic to, and monetize user traffic on, our owned and operated websites. 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, Facebook, Taboola and Zemanta.

Through RAMP, we process approximately 33 million daily advertising campaign optimizations and ingest over 5 billion rows of data daily across more than 40 advertising verticals as of March 31, 2023. We are able to efficiently monetize user intent by linking data on consumer engagement, such as first party search data, with data on monetization and advertising spend. This context-enriched data, combined with our proprietary and data science driven algorithms, creates a closed-loop system that is not reliant on personally identifiable information or information obtained through third-party cookies, but which allows RAMP to efficiently match consumer demand with the appropriate advertiser or advertising experience across advertising verticals.

The business of S1 Holdco, LLC (“S1 Holdco”), one of the entities acquired in the Merger described below, was founded in 2013 with a focus on monetizing user traffic acquired by its network. Since launching, it has expanded to support additional advertising formats across numerous advertising platforms, and has acquired several leading websites, enabling it to control user acquisition and experience, and monetize user traffic. Today S1 Holdco owns and operates over 40 websites, including leading search engines like info.com and Startpage.com, and publishing digital media sites and utilities, such as HowStuffWorks, Mapquest and ActiveBeat.

We, through Protected.net, also provide antivirus software solutions, offering our customers a single packaged solution that provides protection and reporting to the end user. We deliver our antivirus software solutions directly to end-user customers around the world. The antivirus software solutions product offering comprises a core security package with varying levels of extra protection based on a customer's specific needs. These products include antivirus software available on an unlimited number of devices, Adblock, ID Protect and are managed to ensure they provide a value-added service to the customer base. The software is sold in either a monthly or annual subscription predominantly through the flagship brand TotalAV. As of March 31, 2023, Protected.net had over 2.6 million active subscribers for its products.

Our primary operations are in the United States; and we also have operations in Canada, the United Kingdom and the Netherlands. Operations outside the United States are subject to risks inherent in operating under different legal systems and various political and economic environments. Among the risks are changes in existing tax laws, possible limitations on foreign investment and income repatriation, government foreign exchange controls, and exposure to currency exchange fluctuations. We do not engage in hedging activities to mitigate our exposure to fluctuations in foreign currency exchange rates.

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

The Merger

On June 28, 2021, we entered into a Business Combination Agreement (as amended on November 30, 2021, January 10, 2022 and January 25, 2022), (the “Business Combination Agreement”) by and among us, S1 Holdco and Protected. On January 26, 2022 (the “Closing Date”), the Company consummated the business combination (the “Merger”) pursuant to the Business Combination Agreement. Following the consummation of the Merger, the combined company was organized via an “Up-C” structure, in which substantially all of the assets and business operations of System1 are held by S1 Holdco. Our combined business continues to operate through the subsidiaries of S1 Holdco and Protected. Additionally, Trebia’s ordinary shares and public warrants ceased trading on the New York Stock Exchange (“NYSE”), and System1 Inc.s Class A common stock and the Public Warrants began trading on the NYSE on January 28, 2022 under the symbols “SST” and “SST.WS,” respectively.

The Company was deemed the accounting acquirer in the Merger, and S1 Holdco was deemed to be the predecessor entity. Accordingly, the historical financial statements of S1 Holdco became the historical financial statements of the Company, upon the consummation of the Merger. As a result, the financial statements included in this report reflect (i) the historical operating results of S1 Holdco prior to the Merger; and (ii) the consolidated results of the Company, including S1 Holdco and Protected following the closing of the Merger. The accompanying financial information include a Predecessor period, which include the periods through January 26, 2022 concurrent with the Merger, and a Successor period from January 27, 2022 through March 31, 2022. A black-line between the Successor and Predecessor periods has been placed in the consolidated financial statements and in the tables within the notes to the consolidated financial statements to highlight the lack of comparability between these two periods as the Merger resulted in a new basis of accounting for S1 Holdco.

Refer to Note 3—MERGER and Note 5 — GOODWILL , INTERNAL-USE SOFTWARE DEVELOPMENT COSTS, NET, AND INTANGIBLE ASSETS, NET — for additional information.

Results of Operations

The following tables set forth our consolidated results of operations and our consolidated results of operations as a percentage of revenue for the periods presented.


	Successor				Predecessor
	Three Months Ended March 31, 2023		Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022
(in thousands)
Revenue	$	167,854	$	166,108	$	52,712
Operating expenses:
Cost of revenue (excluding depreciation and amortization)	120,402		120,384		41,507
Salaries and benefits	38,398		48,198		31,181
Selling, general, and administrative	17,172		15,088		15,665
Depreciation and amortization	29,374		21,928		1,000
Total operating expenses	205,346		205,598		89,353
Operating loss	(37,492)		(39,490)		(36,641)
Other expense:
Interest expense, net	11,451		4,776		1,049
Change in fair value of warrant liabilities	(1,409)		13,761		—
Total other expense	10,042		18,537		1,049
Loss before income tax	(47,534)		(58,027)		(37,690)
Income tax benefit	(4,408)		(14,649)		(629)
Net loss	$	(43,126)	$	(43,378)	$	(37,061)
Net loss attributable to non-controlling interest	(9,174)		(7,309)		—
Net loss attributable to System1, Inc.	$	(33,952)	$	(36,069)	$	(37,061)


	Successor				Predecessor
	Three Months Ended March 31, 2023		Period from January 27, 2022 to March 31, 2022		Period from January 1, 2022 through January 26, 2022
Revenue	100	%	100	%	100	%
Operating expenses:
Cost of revenue (excluding depreciation and amortization)	72	%	72	%	79	%
Salaries and benefits	23	%	29	%	59	%
Selling, general, and administrative	10	%	9	%	30	%
Depreciation and amortization	17	%	13	%	2	%
Total operating expenses	122	%	124	%	170	%
Operating loss	(22)	%	(24)	%	(70)	%
Other expense:
Interest expense, net	7	%	3	%	2	%
Change in fair value of warrant liabilities	(1)	%	8	%	—	%
Total other expense	6	%	11	%	2	%
Loss before income tax	(28)	%	(35)	%	(72)	%
Income tax benefit	(3)	%	(9)	%	(1)	%
Net loss	(26)	%	(26)	%	(70)	%
Net loss attributable to non-controlling interest	(5)	%	(4)	%	—	%
Net loss attributable to System1, Inc.	(20)	%	(22)	%	(70)	%

* Percentages may not sum due to rounding

The comparability of our operating results for the three months ended March 31, 2023 (Successor) compared to the period from January 1, 2022 through January 26, 2022 (Predecessor) and period from January 27, 2022 through March 31, 2022 (Successor) was impacted by the Merger, as discussed above, and acquisitions.

Comparisons of Results of Operations for the three months ended March 31, 2023 (Successor), against the combined period from January 1, 2022 through January 26, 2022 (Predecessor) and the period from January 27, 2022 through March 31, 2022 (Successor).

Revenue

The following tables set forth our revenue by reportable segment.


	Successor				Predecessor
	Three Months Ended March 31, 2023		Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022		2023 vs. 2022 change (%)
Revenue:
Owned and Operated Advertising	$	106,025	$	126,884	$	49,249	(40)%
Partner Network	15,093		11,350		3,463		2%
Subscription	46,736		27,874		—		68%
Total revenue	$	167,854	$	166,108	$	52,712	(23)%

Refer to the Revenue discussions below.

Owned and Operated Advertising ("O&O")

The decrease in O&O revenue for the three months ended March 31, 2023, compared to the same prior year period was primarily due to deteriorating macroeconomic conditions and reductions in both advertiser and overall consumer demand. For the three months ended March 31, 2023, compared to the same prior year period, sessions increased 51 million from 975 million to 1,026 million, which was more than offset by a decrease in Revenue per Session ("RPS") of approximately $.08 from $0.18 to $0.10.

Partner Network

The increase in Partner Network revenue for the three months ended March 31, 2023, compared to the same prior year period, was due to our continued investment in this business and growth from partners signed in prior years. For the three months ended March 31, 2023, compared to the same prior year period, sessions increased 139 million from 309 million to 448 million, and RPS decreased by approximately $0.02 from $0.05 to $0.03.

Subscription

The increase in Subscription revenue for the three months ended March 31, 2023, compared to the same prior year period, was primarily due to an increase in our subscriber base, an increase in the number of subscription renewals and increased subscription prices, which resulted in a higher revenue per subscription. Additionally, the three months ended March 31, 2023 included a full quarter of revenue, as compared to the prior year period, which included approximately two months of revenue.

Cost of revenue


	Successor						Predecessor
	Three Months Ended March 31, 2023			Period from January 27, 2022 through March 31, 2022			Period from January 1, 2022 through January 26, 2022			2023 vs. 2022 change (%)
Cost of revenue	$	120,402		$	120,384		$	41,507		(26)%
Percent of revenue	72		%	72		%	79		%

The dollar decrease in cost of revenue for the three months ended March 31, 2023, compared to the same prior year period, was primarily due to a $62 million decrease in our O&O reportable segment, which was directionally consistent with the decrease in revenue. Additionally, our Cost per Session ("CPS") decreased $0.07 compared to the same prior year period, from $0.14 to $0.07. This decrease was partially offset by a $17 million increase in our Subscription reportable segment, which was directionally consistent with the increase in revenue.

The following supplemental tables set forth our adjusted gross profit by reportable segment.


	Successor				Predecessor
	Three Months Ended March 31, 2023		Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022		2023 vs. 2022 change (%)
Segment Adjusted Gross Profit:
Owned and Operated Advertising	$	29,839	$	29,418	$	8,768	(22)%
Partner Network	10,217		8,413		3,012		(11)%
Subscription	14,155		12,647		—		12%
Total Adjusted Gross Profit	$	54,211	$	50,478	$	11,780	(13)%

Refer to the Revenue and Cost of revenue discussions above.

Salaries and benefits


	Successor						Predecessor
	Three Months Ended March 31, 2023			Period from January 27, 2022 through March 31, 2022			Period from January 1, 2022 through January 26, 2022			2023 vs. 2022 change (%)
Salaries and benefits	$	38,398		$	48,198		$	31,181		(52)%
Percent of revenue	23		%	29		%	59		%

The decrease in salaries and benefits for the three months ended March 31, 2023, compared to the same prior year period, was primarily due to a $42 million decrease in stock-based compensation, which included $49 million related to the first quarter 2022 Merger, partially offset by $8 million related to the Protected.net Incentive Plan for the three months ended March 31, 2023. For additional information on our stock-based compensation, refer to Note 15—STOCK-BASED COMPENSATION.

Selling, general, and administrative


	Successor						Predecessor
	Three Months Ended March 31, 2023			Period from January 27, 2022 through March 31, 2022			Period from January 1, 2022 through January 26, 2022			2023 vs. 2022 change (%)
Selling, general, and administrative	$	17,172		$	15,088		$	15,665		(44)%
Percent of revenue	10		%	9		%	30		%

The decrease in selling, general, and administrative expense for the three months ended March 31, 2023, compared to the same prior year period, was primarily due to additional costs associated with the Merger in the prior year.

Depreciation and amortization


	Successor				Predecessor
	Three Months Ended March 31, 2023		Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022		2023 vs. 2022 change (%)
Depreciation and amortization	$	29,374	$	21,928	$	1,000	28%

The increase in depreciation and amortization expense for the three months ended March 31, 2023, compared to the same prior year period, was primarily due to additions of intangible assets as a result of the first quarter 2022 Merger, along with other 2022 acquisitions.

Interest expense, net


	Successor				Predecessor
	Three Months Ended March 31, 2023		Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022		2023 vs. 2022 change (%)
Interest expense, net	$	11,451	$	4,776	$	1,049	97%

The increase in interest expense for the three months ended March 31, 2023, compared to the same prior year period, was primarily due to higher interest rates experienced during the three months ended March 31, 2023, as compared to the same prior year period.

Change in fair value of warrant liabilities

The change in fair value of warrant liabilities for the three months ended March 31, 2023, compared to the same prior year period, was driven by the fluctuations in the market value of our Class A common stock since the Merger.

Income tax (benefit) provision


	Successor				Predecessor
	Three Months Ended March 31, 2023		Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022		2023 vs. 2022 change (%)
Income tax (benefit) provision	$	(4,408)	$	(14,649)	$	(629)	(71)%
Effective tax rate	9%		25%		2%

The difference between the effective tax rates for the periods presented above and the federal statutory tax rate of 21% was primarily due to the exclusion of non-controlling income (loss), effects of predecessor flow through income allocations, state taxes, foreign rate differential, non-deductible expenses, increase to the valuation allowance related to unrealizable deferred tax assets, outside basis adjustments, and Global Intangible Low-taxed Income.

Liquidity and Capital Resources

As of March 31, 2023 (Successor), we had available cash and cash equivalents of $8,267.

To date, our available liquidity and operations have been financed through the initial public offering of Trebia, the Merger, credit facilities, and cash flows from operations. We are subject to certain business risks, including dependence on key employees, dependence on key contracts, competition from alternative technologies, and dependence on growth to achieve our business and operational objectives.

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

Going Concern

Starting in the third and fourth quarters of 2022, the Company experienced declining cash flows and financial performance as a result of deteriorating macroeconomic conditions, resulting in reductions in both advertiser and overall consumer demand for the Company's marketing services. As of March 31, 2023, the Company had cash on hand of $8,267. The declining cash flows and financial performance raise substantial doubt regarding the Company's ability to continue as a going concern for a period of one year following the date that these condensed consolidated financial statements are issued. In response to the declining cash flows, the Company implemented a plan to raise additional financing. On April 10, 2023, the Company entered into an incremental revolver note (“2023 Revolving Note”) with related parties for $20,000. The Company believes that the proceeds from the 2023 Revolving Note, along with available cash on hand and other cash flows from operations, will be sufficient to maintain liquidity and operations in the ordinary course for the next 12 months following the date of this filing. The Company believes these mitigation plans alleviate the substantial doubt about its ability to continue as a going concern. The available balance under the 2023 Revolving Note was $15,000 as of the date that these condensed consolidated financial statements are issued.

Credit Facilities

In connection with the Merger discussed above, Orchid Merger Sub II LLC (a subsidiary of S1 Holdco) entered into a term loan (“Term Loan”) and revolving facility (“Revolving Facility”) on January 27, 2022, providing for a 5.5 year Term Loan with a principal balance of $400,000 and with the net proceeds of $376,000.

We have been able, and expect to continue to be able, to make payments on the principal and interest on a timely basis. We are currently in compliance with our borrowing covenants.

“Commitment” and, collectively, the “Commitments”). The available balance under the 2023 Revolving Note was $15,000 as of the date of this filing.

For additional information regarding our credit facilities, refer to Note 10—DEBT, NET.

Cash Flows

The following table summarizes our cash flows for the periods presented:


	Successor				Predecessor
(in thousands)	Three Months Ended March 31, 2023		Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022
Net cash used in operating activities	$	(5,801)	$	(30,860)	$	(10,603)
Net cash used in investing activities	$	(2,392)	$	(425,790)	$	(441)
Net cash used in financing activities	$	(9,132)	$	(12,781)	$	—

Operating Activities

Our cash flows used in operating activities are primarily influenced by growth in our operations, timing of collections from our clients and related payments to our suppliers for advertising inventory and data. We typically pay suppliers in advance of collections from our clients. Our collection and payment 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.

During the three months ended March 31, 2023 (Successor), cash used in operating activities of $5,801 resulted primarily from a net loss of $43,126 and a payment for the Protected.net incentive plan of $10,000. This was partially offset by depreciation and amortization expense of $29,374, stock-based compensation of $13,925 and a decrease in accounts receivable of $11,282.

In the period from January 1, 2022 through January 26, 2022 (Predecessor), cash used in operating activities of $10,603 resulted primarily from a net loss of $37,061, and a decrease in accounts payable of $67,600 due to the Merger. This was partially offset by an increase in accrued expenses of $57,488, stock-based compensation of $23,705 and a decrease in accounts receivable of $11,118 due to the Merger.

In the period from January 27, 2022 through March 31, 2022 (Successor), cash used in operating activities of $30,860 resulted primarily from a net loss of $43,378, a decrease in accrued expenses of $67,637, non-cash tax benefit of $15,540, increase in long term liabilities of $30,980, and an increase in accounts receivable of $14,816 due to the Merger. This was partially offset by a change in fair value of warrants of $13,761, stock-based compensation of $32,302, depreciation and amortization expense of $21,928, an increase in accounts payable of $66,091, and an increase in deferred revenue of $3,654 due to the Merger.

Investing Activities

Our primary investing activities consist of acquisitions of businesses, which included the first quarter 2022 acquisitions of S1 Holdco, Protected.net, CouponFollow and RoadWarrior, as well as costs capitalized for internally developed software.

During the three months ended March 31, 2023 (Successor), cash used in investing activities of $2,392 resulted from purchases of property and equipment of $714, and expenditures related to internal-use software development costs of $1,678.

In the period from January 1, 2022 through January 26, 2022 (Predecessor), cash used in investing activities of $441 resulted from expenditures related to internal-use software development costs.

In the period from January 27, 2022 through March 31, 2022 (Successor), cash used in investing activities of $425,790 resulted primarily from the acquisitions of S1 Holdco, Protected, RoadWarrior and CouponFollow of $422,974, purchases of property and equipment of $1,427 and expenditures related to internal-use software development costs of $1,389.

Financing Activities

In the three months ended March 31, 2023 (Successor), cash used in financing activities of $9,132 resulted primarily from repayment of term loan of $5,000, taxes paid related to net settlement of stock awards of $2,837, and payment of acquisition holdback of $1,250.

In the period from January 1, 2022 to January 26, 2022 (Predecessor), there was no cash provided or used in financing activities.

In the period from January 27, 2022 to March 31, 2022 (Successor), cash used in financing activities of $12,781 resulted primarily from redemptions of Trebia Class A ordinary shares of $510,469, repayment of term loan of $172,488, and payment of debt financing costs related to the New Facility of $24,845, partially offset by proceeds from the new facility of $449,000 and the Cannae backstop of $246,484.

Share Repurchases

In August 2022, our Board of Directors authorized up to $25,000 for the repurchase of our Class A common stock and Public Warrants ("2022 Repurchase Program"). During the quarter ended March 31, 2023, no repurchases of our equity securities were made by us or by any of our affiliated purchasers. As of March 31, 2023, we had $23,878 available under this authorization remaining.

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 2021, we entered into a multi-year agreement with a service provider whereby we are contractually obligated to spend $8,000 between July 2022 and June 2023. As of March 31, 2023 (Successor), we remain contractually obligated to spend $2,165 towards this commitment.

Incentive Plans

Refer to Note 15—STOCK-BASED COMPENSATION.

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 condensed consolidated financial statements.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

There have been no changes to our critical accounting policies and estimates since the filing of our Annual Report on Form 10-K for the year ended December 31, 2022.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired and identifiable intangibles in a business combination. We account for goodwill in accordance with Accounting Standards Codification ("ASC") 350, Intangibles—Goodwill and Other, which requires us to test goodwill at the reporting unit level for impairment at least annually, or if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We perform our annual goodwill impairment test on December 31.

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 carrying amount, an impairment loss is recognized in an amount equal to the excess.

The fair values of our reporting units were computed by weighting a discounted cash flow model and a reference transaction model which included inputs developed using both internal and market-based data. The key assumptions in the discounted cash flow model included, but were 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 reflected 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 this model included, but were not limited to, the selection of comparable transactions, revenue and EBITDA 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.

As a result of adverse macroeconomic impacts as a result of changes in market conditions, increases in interest rates, and weakening of consumer demand during the third quarter of 2022, which contributed to reduced forecasted revenues and reduced expectations for future cash flows, we performed quantitative goodwill impairments tests of our four reporting units as of September 30, 2022. As a result, we fully impaired goodwill of $329,133 in our Publishing and Lead Generation reporting unit and partially impaired goodwill of $10,976 in our Partner Network reporting unit. The fair value of our Subscription reporting unit and our Search and Applications reporting unit exceeded their carrying amounts by 13% and 2%, respectively.

During the quarter ended December 31, 2022, we realigned our reporting structure due to changes in management such that our Search and Applications reporting unit became part of the Publishing and Lead Generation reporting unit and the new reporting unit was renamed Owned and Operating Advertising. Based on our annual impairment assessment as of December 31, 2022, we determined that the goodwill attributable to Owned and Operating Advertising of $26,200 was fully impaired. The fair value of our Partner Network reporting unit and our Subscription reporting unit exceeded their carrying amounts by 9% and 18%, respectively, as of December 31, 2022.

As of December 31, 2022, all our goodwill relates to our Partner Network and Subscription reporting units. Goodwill associated with the Partner Network and Subscription reporting units were $82,407 and $433,184 respectively, as of December 31, 2022. Any further deterioration in key assumptions or changes in the macroeconomic environment, including further interest rate increases, could adversely impact the fair value of these reporting units and could result in an impairment charge in the future. The Company applied a hypothetical sensitivity analysis by increasing the discount rate used in the valuation of the Partner Network and Subscription reporting units by 100 basis points as of December 31, 2022. An increase in the discount rate would result in the estimated fair values of the Partner Network and Subscription reporting units decreasing by approximately 7% and 13%, respectively. The fair values of each of these reporting units would continue to exceed their carrying amounts, though the excess of the fair value over the carrying amount would be reduced to approximately 1% and 5% for the Partner Networks and Subscription reporting units, respectively.

During the three months ended March 31, 2023, management determined there was no triggering event. As such, no quantitative assessment for impairment was required during the first quarter of 2023. No goodwill impairment charges were recorded during the three months ended March 31, 2023. Refer to Note 5 — GOODWILL, INTERNAL-USE SOFTWARE DEVELOPMENT COSTS, NET, AND INTANGIBLE ASSETS, NET for additional information.

Recently Issued Accounting Pronouncements

See Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Recent Accounting Pronouncement for a discussion of recently issued accounting pronouncements not yet adopted.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

As a “smaller reporting company”, as defined by Rule 10(f)(1) of Regulation S-K, we are not required to provide this information.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Pursuant to Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO concluded that, as of March 31, 2023, due to the material weaknesses in our internal control over financial reporting described below, our disclosure controls and procedures were not effective to ensure that the information required to be disclosed in the reports required to be filed or submitted under the Securities Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

(b) Material weaknesses in internal control over financial reporting

We have identified material weaknesses in our internal control over financial reporting as of March 31, 2023. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

The material weaknesses identified were as follows:

•We did not design and maintain an effective control environment commensurate with our financial reporting requirements. Specifically, we lacked a sufficient number of professionals with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately. Additionally, the limited personnel resulted in an inability to consistently establish appropriate authorities and responsibilities in pursuit of financial reporting objectives, as demonstrated by, among other things, insufficient segregation of duties in our finance and accounting functions.

•We did not design and maintain effective controls in response to the risks of material misstatement. Specifically, changes to existing controls or the implementation of new controls have not been sufficient to respond to changes to the risks of material misstatement to financial reporting.

These material weaknesses contributed to the following additional material weaknesses:

•We did not design and maintain effective controls to timely analyze and record the financial statement effects from acquisitions. Specifically, we did not design and maintain effective controls over the (i) application of U.S. GAAP to such transactions, including accounting for post-combination compensation arrangements, (ii) review of the inputs and assumptions used in the measurement of assets acquired and liabilities assumed, including discounted cash flow analysis to value acquired intangible assets at an appropriate level of precision, (iii) the tax impacts of acquisitions to the financial statements, and (iv) conforming of U.S. GAAP and accounting policies of acquired entities to that of the Company. In addition, we did not design and maintain effective controls relating to the oversight and ongoing recording of the financial statement results of the acquired businesses.

•We did not design and maintain formal accounting policies, procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over the preparation and review of business performance reviews, account reconciliations and journal entries, and (ii) maintaining appropriate segregation of duties. Additionally, we did not design and maintain controls over the classification and presentation of accounts and disclosures in the condensed consolidated financial statements, including the statement of cash flows.

•We did not design and maintain effective controls over the completeness and accuracy of accrued liabilities, stock-based compensation and equity transactions.

•We did not design and maintain effective controls over the accuracy and valuation of goodwill, including the allocation of goodwill to reporting units and the identification and measurement of goodwill impairment.

These material weaknesses resulted in the restatement of the Company's condensed consolidated financial statements as of March 31, 2022 and for the predecessor period from January 1, 2022 to January 26, 2022 and the successor period from January 27, 2022 to March 31, 2022; as of June 30, 2022 and for the predecessor period from January 1, 2022 to January 26, 2022 and the successor periods for the three months ended June 30, 2022 and from January 27, 2022 to June 30, 2022; and as of September 30, 2022 and for the predecessor period from January 1, 2022 to January 26, 2022 and the successor periods for the three months ended September 30, 2022 and from January 27, 2022 to September 30, 2022. These material weaknesses also resulted in immaterial misstatements to substantially all of the S1 Holdco, LLC accounts, which were recorded prior to the issuance of the consolidated financial statements as of December 31, 2021, 2020, 2019 and 2018 and for the years then ended; as of March 31, 2021 and 2020 and for the three-month periods then ended; as of June 30, 2021 and 2020 and for the six-month periods then ended; and as of September 30, 2021 and 2020 and for the nine-month periods then ended.

•We did not design and maintain effective controls over the accounting for complex financial instruments, including the impact of these instruments on earnings per share.

This material weakness also resulted in a material misstatement of the Trebia warrant liabilities, change in the fair value of the Trebia warrant liabilities, forward purchase agreement liabilities, change in the fair value of the forward purchase agreement liabilities, classification of redeemable shares of Class A common stock issued in connection with Trebia’s initial public offering, additional paid-in-capital, accumulated deficit, Earnings Per Share, and related financial disclosures of Trebia Acquisition Corp. as of December 31, 2020 and for the period from

February 11, 2020 (inception) through December 31, 2020, as of September 30, 2020 and for three month period ended September 30, 2020 and for the period from February 11, 2020 (inception) through September 30, 2020, as of June 30, 2020 and for three month period ended June 30, 2020 and for the period from February 11, 2020 (inception) through June 30, 2020, as of March 31, 2021 and for three month period ended March 31, 2021. This material weakness also resulted in material adjustments relating to the Trebia forward purchase agreement liabilities and repurchases of common stock impacting the accumulated deficit and additional paid-in capital in the opening balance sheet as of January 27, 2022 and the earnings per share computations for the quarter ended June 30, 2022 of the Company.

Additionally, these material weaknesses could result in a misstatement of substantially all of our accounts or disclosures that would result in a material misstatement to the annual or interim condensed consolidated financial statements that would not be prevented or detected.

•We did not design and maintain effective controls over information technology (“IT”) general controls for information systems that are relevant to the preparation of our financial statements. Specifically, we did not design and maintain: (i) program change management controls to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized, and implemented appropriately; (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs, and data to appropriate Company personnel; (iii) computer operations controls to ensure that critical batch jobs are monitored and data backups are authorized and monitored; and (iv) testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements.

These IT deficiencies did not result in a material misstatement to the financial statements; however, the deficiencies, when aggregated, could impact the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected. Accordingly, we have determined these IT deficiencies in the aggregate constitute a material weakness.

Our remediation plan consists of the following:

•Hiring additional senior level accounting personnel with applicable technical accounting knowledge, training and experience in accounting matters, supplemented by third party resources;

•Designing and implementing controls to formalize roles and review responsibilities to align with our team’s skills and experience and designing and implementing controls over segregation of duties;

•Engaging an accounting advisory firm to assist with the documentation, evaluation, remediation and testing of our internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission;

•Engaging third-party experts to assist with the preparation of technical accounting analyses and valuations associated with business combinations;

•Designing and implementing controls related to accounting for acquisitions and other technical accounting and financial reporting matters, including controls over the preparation and review of accounting memoranda addressing these matters, valuations and key assumptions utilized in the valuations, tax impacts, and ongoing recording of the financial statement results of the acquired businesses;

•Designing and implementing formal accounting policies, procedures and controls supporting our period-end financial reporting process, including controls over the preparation and review of account reconciliations and journal entries, business performance reviews, foreign exchange gains/losses for intercompany transactions, and classification and presentation of accounts and disclosures, including the statement of cash flows;

•Designing and implementing controls over the completeness and accuracy of accrued liabilities, stock-based compensation and equity transactions;

•Designing and implementing controls related to accounting for complex financial instruments, including the earnings per share impacts;

•Designing and implementing controls over the accuracy and valuation of goodwill, including the allocation of goodwill to reporting units and the identification and measurement of goodwill impairment;

•Implementing an enhanced enterprise resource planning software for automation and enforcing segregation of duties across the organization; and

•Designing and implementing IT general controls, including controls over change management, the review and update of user access rights and privileges, controls over batch jobs and data backups, and program development approvals and testing.

While we believe that these efforts will improve our internal control over financial reporting, remediation of the material weaknesses will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles. Therefore, these material weaknesses have not been remediated as of March 31, 2023.

(d) Changes in Internal Control over Financial Reporting.

There have been no changes in our internal control over financial reporting during the three months ended March 31, 2023, as defined under Rule 13a-15(f) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II

Item 1. Legal Proceedings

Information in response to this Item is included in “Part I — Item 1. — Note 9—COMMITMENTS AND CONTINGENCIES” and is incorporated by reference into Part II of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors.

Other than with respect to the material weakness described herein, which could further amplify our previously disclosed risks, particularly with respect to the consequences of a material weakness in internal control over financial reporting, there are no material changes had occurred in our risk factors, there have been no material changes from the risk factors previously disclosed in response to "Part I—Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Share Repurchases

In August 2022, our Board of Directors authorized up to $25,000 for the repurchase of our Class A common stock and Public Warrants. During the quarter ended March 31, 2023, no repurchases of our equity securities were made by us or by any of our affiliated purchasers. As of March 31, 2023, we had $23,878 available under this authorization remaining.

Item 3. Defaults Upon Senior Securities

On May 1, 2023, the Company did not deliver audited financial statements as required under the terms of its credit agreement. On May 1, 2023, the Company received a notice of default, which started a 30 day cure period, ending on May 31, 2023, within which the Company could remedy the default. On June 1, 2023, as a result of not delivering audited financial statements for the fiscal year ended December 31, 2022, the default constitutes an event

of default. As a result, the outstanding principal balances of $430,000 for the Term Loan and Revolving Facility were callable by Bank of America at the request of, or with the consent of, the required majority of lenders thereunder. The Company delivered audited financial statements on June 5, 2023, which cured the continuing event of default, thus Bank of America no longer has the ability to exercise remedies with respect thereto.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits


			Incorporated by Reference				Filed or Furnished Herewith
Exhibit No.		Description	Form	File No.	Exhibit	Filing Date
2.1(a)		Business Combination Agreement, dated as of June 28, 2021, by and among Trebia Acquisition Corp., S1 Holdco, LLC, System1 SS Protect Holdings, Inc., and the other parties that are signatory thereto.	8-K	001-39331	2.1	6/29/2021
	0
2.1(b)		Amendment No. 1 to the Business Combination Agreement, dated as of November 30, 2021, by and among Trebia Acquisition Corp., S1 Holdco, LLC, System1 SS Protect Holdings, Inc., and the other parties that are signatory thereto.	S-4	333-260714	2.2	12/1/2021

2.1(c)		Amendment No. 2 to the Business Combination Agreement, dated January 10, 2022, by and among S1 Holdco, LLC, a Delaware limited liability company, System1 SS Protect Holdings, Inc., a Delaware corporation and the other parties signatory thereto.	8-K	001-39331	10.1	1/20/2022

2.1(d)		Amendment No. 3 to the Business Combination Agreement, dated January 25, 2022, by and among S1 Holdco, LLC, a Delaware limited liability company, System1 SS Protect Holdings, Inc., a Delaware corporation and the other parties signatory thereto.	8-K	001-39331	10.1	1/26/2022

3.1		Certificate of Incorporation of System1, Inc.	8-K	001-39331	3.1	2/2/2022

3.2		Second Amended and Restated Bylaws of System1, Inc.	8-K	001-39331	3.1	3/1/2023

4.1		Warrant Agreement, dated June 19, 2020, by and between Trebia Acquisition Corp. and Continental Stock Transfer & Trust Company, as warrant agent.	8-K	001-39331	4.1	6/2/2020

10.1^		System1, Inc. 2022 Incentive Award Plan.	8-K	001-39331	10.2	2/20/2022

10.2		Amended and Restated Backstop Facility Agreement, dated January 10, 2022, by and between Trebia Acquisition Corp. and Cannae Holdings, Inc.	8-K	001-39331	10.3	1/10/2022

10.3		Conditional Consent, Waiver and Acknowledgement, dated as of August 30, 2022, by and among System1, Inc., Protected.net Group Limited and Just Develop It Limited.	8-K	001-39331	10.1	8/30/2022

10.4		Lock-Up Agreement, dated as of August 30, 2022, by and between System1, Inc. and Christopher Phillips.	8-K	001-39331	10.2	8/30/2022

10.5		Lock-Up Agreement, dated as of August 30, 2022, by and between System1, Inc. and Nicholas Baker.	8-K	001-39331	10.3	8/30/2022

10.6		Transition and Advisory Services Agreement, dated as of November 2, 2022, by and among System1, Inc. and Paul Filsinger.	8-K	001-39331	10.4	11/2/2022

10.7#		Credit and Guaranty Agreement, dated as of January 27, 2022, among Orchid Finco LLC, System1 Midco, LLC, Orchid Merger Sub II, LLC and the subsidiaries from time to time party thereto, S1 Holdco, LLC, Bank of America, N.A. and the lenders from time to time party thereto.	10-K	001-39331	10.7	6/6/2023

10.8		Amended and Restated Revolving Note, dated May 16, 2023, by and among Orchid Merger Sub II, LLC, Lone Star Friends Trust and CEE Holding Trust.	10-K	001-39331	10.8	6/6/2023

10.9		Registration Rights Agreement, dated January 27, 2022, by and among System1, Inc. and the other parties that are signatory thereto.	S-1	333-262608	10.3	2/9/2022

Incorporated by Reference

Filed or Furnished Herewith

Exhibit No.

Description

Form

File No.

Exhibit

Filing Date

10.10

Registration Rights Agreement, dated June 19, 2020, among the Company, the Sponsors and certain other security holders named therein.

8-K

001-39331

10.2

06/22/2020

10.11

Form of Indemnification Agreement

8-K

001-39331

10.4

3/2/2022

10.12^

Employment Agreement, dated as of June 15, 2023, by and between Mr. Kidambi and the Company.

8-K

001-39331

10.1

6/22/2023

10.13^

Employment Agreement, dated as of August 28, 2016, between Elizabeth Sestanovich and OpenMail LLC.

10-K

001-39331

10.13

6/6/2023

10.14^

Employment Agreement, dated as of September 15, 2015, between Brian Coppola and OpenMail LLC.

10-K

001-39331

10.14

6/6/2023

10.15^

Employment Agreement, dated as of February 8, 2018, between Daniel Weinrot and OpenMail LLC.

10-K

001-39331

10.15

6/6/2023

10.16^

Employment Agreement, dated as of May 2, 2021, between Jennifer Robinson and System1, LLC.

10-K

001-39331

10.16

6/6/2023

10.17

Form of Stockholders Agreement

S-4/A

333-260714

10.3

12/16/2021

10.18

First Amendment to Conditional Consent, Waiver and Acknowledgement, dated as of June 1, 2023, by and among System1, Inc., Protected.net Group Limited and Just Develop It Limited., dated as of June 1, 2023, by and among System1, Inc., Protected.net Group Limited and Just Develop It Limited.

10-K

001-39331

10.18

6/6/2023

31.1

Certification of principal executive officer pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of principal financial and accounting officer pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

Certification of principal financial and accounting officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


#						Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant will furnish copies of any such schedules and exhibits to the SEC upon request.
*						This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
^						Indicates management contract or compensatory plan.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	System1 Inc.

Date: June 30, 2023	By:	/s/ Michael Blend
		Michael Blend
		Chief Executive Officer

Date: June 30, 2023	By:	/s/ Tridivesh Kidambi
		Tridivesh Kidambi
		Chief Financial Officer