# System1, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [System1, Inc.](/companies/sst.md) (CIK 1805833)
- Form: 10-Q
- Filed: 2023-11-09
- Accepted by EDGAR: Nov 9, 2023, 16:51 ET
- Period: 2023-09-30
- Accession: 0001805833-23-000174
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1805833/000180583323000174/sst-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1805833/000180583323000174/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $87.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $305.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $11.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $42.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$20.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$67.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $13.1m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $36.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | −$920.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | −$10.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$131.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$200.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$1.40 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$2.15 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$1.40 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$2.15 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 93,941,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 93,281,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$5.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $2.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $4.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $90.5m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $927.5m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $237.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $687.1m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $403.3m | us-gaap:LongTermDebt |
| Current portion of debt | at 2023-09-30 | $15.2m | us-gaap:DebtCurrent |
| Shareholders' equity | at 2023-09-30 | $202.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 57,289 characters.

### 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 (this "Quarterly Report"). The following discussion and analysis should also be read together with the section entitled “Organization and description of business” as of September 30, 2023 (Successor) and for the period from January 1, 2022 through January 26, 2022 (Predecessor), and the period from January 27, 2022 through September 30, 2022 (Successor), as well as information contained in our Annual Report on Form 10-K for the year ended December 31, 2022 (Successor) (our "Form 10-K"). 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” in this Quarterly Report and our Form 10-K. 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 "Note" or “Notes” are to the notes included in our unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report.*

### Company Overview

We operate an omnichannel customer acquisition platform, delivering high-intent customers to advertisers.

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 155 million daily advertising campaign optimizations and ingest over 8 billion rows of data daily across nearly 40 advertising verticals as of September 30, 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.

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 includes a Predecessor period, which include the periods through January 26, 2022 concurrent with the Merger, and a Successor period from January 27, 2022 through September 30, 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.

### Sale of Protected Business

On September 6, 2023, the Company announced that it had received a non-binding indication of intent ("IOI") from JDI, a significant shareholder of the Company which is principally owned and managed by certain members of the Protected management team, related to the potential acquisition of Protected, which operates the Company's subscription business. The offer consists of $240,000 in cash, the assumption of certain potential earnout payments in respect of Protected and the delivery of approximately 29,138 System1 shares held by JDI and related persons. A special committee of the Company's Board of Directors was formed to evaluate JDI’s IOI and other strategic alternatives.

As a result, we committed to a plan to sell the Protected business and began performing customary actions required to execute the sale. The Protected business met the criteria to be reported as assets held for sale and discontinued operations as of September 30, 2023, and accordingly, all prior comparable periods have been recast to conform to the current period presentation. Unless otherwise noted, this MD&A relates solely to our continuing operations and does not include the operations of our Protected business.

Refer to *Note 15—DISCONTINUED OPERATIONS —* 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.

*(in thousands)*

|  | Successor Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2023 | Period from January 27, 2022 through September 30, 2022 | Predecessor Period from January 1, 2022 through January 26, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Revenue | $87,818 | $156,895 | $305,851 | $472,158 | $52,712 |
| Operating expenses: |  |  |  |  |  |
| Cost of revenue (excluding depreciation and amortization) | 50,585 | 111,217 | 190,195 | 341,693 | 41,507 |
| Salaries and benefits | 26,689 | 30,270 | 82,484 | 106,340 | 31,181 |
| Selling, general, and administrative | 11,808 | 11,572 | 42,004 | 36,962 | 15,665 |
| Depreciation and amortization | 19,584 | 18,923 | 58,666 | 50,369 | 1,000 |
| Impairment of goodwill | — | 340,109 | — | 340,109 | — |
| Total operating expenses | 108,666 | 512,091 | 373,349 | 875,473 | 89,353 |
| Operating loss | (20,848) | (355,196) | (67,498) | (403,315) | (36,641) |
| Other expense: |  |  |  |  |  |
| Interest expense, net | 13,053 | 9,733 | 36,789 | 21,987 | 1,049 |
| Loss on restructure of related-party debt | 619 | — | 619 | — | — |
| Change in fair value of warrant liabilities | (7,482) | 4,489 | (6,873) | 14,111 | — |
| Total other expense | 6,190 | 14,222 | 30,535 | 36,098 | 1,049 |
| Loss before income tax | (27,038) | (369,418) | (98,033) | (439,413) | (37,690) |
| Income tax benefit | (920) | (69,796) | (10,626) | (84,341) | (629) |
| Net loss from continuing operations | $(26,118) | $(299,622) | $(87,407) | $(355,072) | $(37,061) |
| Net loss from discontinued operations, net of tax | (137,209) | (14,077) | (163,222) | (35,849) | — |
| Net loss | (163,327) | (313,699) | (250,629) | (390,921) | (37,061) |
| Less: Income from continuing operations attributable to noncontrolling interest | (6,328) | (69,269) | (19,543) | (80,336) | — |
| Less: Income from discontinued operations attributable to noncontrolling interest | $(25,566) | $(2,733) | $(30,472) | $(7,082) | $— |
| Net loss attributable to System1, Inc. | $(131,433) | $(241,697) | $(200,614) | $(303,503) | $(37,061) |

#### 35

|  | Successor Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2023 | Period from January 27, 2022 through September 30, 2022 | Predecessor Period from January 1, 2022 through January 26, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Revenue | 100% | 100% | 100% | 100% | 100% |
| Operating expenses: |  |  |  |  |  |
| Cost of revenue (excluding depreciation and amortization) | 58% | 71% | 62% | 72% | 79% |
| Salaries and benefits | 30% | 19% | 27% | 23% | 59% |
| Selling, general, and administrative | 13% | 7% | 14% | 8% | 30% |
| Depreciation and amortization | 22% | 12% | 19% | 11% | 2% |
| Impairment of goodwill | —% | 217% | —% | 72% | —% |
| Total operating expenses | 124% | 326% | 122% | 185% | 170% |
| Operating loss | (24)% | (226)% | (22)% | (85)% | (70)% |
| Other expense: |  |  |  |  |  |
| Interest expense, net | 15% | 6% | 12% | 5% | 2% |
| Loss on restructure of related-party debt | 1% | —% | —% | —% | —% |
| Change in fair value of warrant liabilities | (9)% | 3% | (2)% | 3% | —% |
| Total other expense | 7% | 9% | 10% | 8% | 2% |
| Loss before income tax | (31)% | (235)% | (32)% | (93)% | (72)% |
| Income tax benefit | (1)% | (44)% | (3)% | (18)% | (1)% |
| Net loss from continuing operations | (30)% | (191)% | (29)% | (75)% | (70)% |
| Net loss from discontinued operations, net of tax | (156)% | (9)% | (53)% | (8)% | —% |
| Net loss | (186)% | (200)% | (82)% | (83)% | (70)% |
| Less: Income from continuing operations attributable to noncontrolling interest | (7)% | (44)% | (6)% | (17)% | —% |
| Less: Income from discontinued operations attributable to noncontrolling interest | (29)% | (2)% | (10)% | (1)% | —% |
| Net loss attributable to System1, Inc. | (150)% | (154)% | (66)% | (64)% | (70)% |

\* Percentages may not sum due to rounding

The comparability of our operating results for the nine months ended September 30, 2023 (Successor) compared to the period from January 1, 2022 through January 26, 2022 (Predecessor) and the period from January 27, 2022 through September 30, 2022 (Successor) was impacted by the Merger, as discussed above, and other acquisitions.

**Comparisons of Results of Operations for the three and nine months ended September 30, 2023 (Successor), against the three months ended September 30, 2022 and the combined period from January 1, 2022 through January 26, 2022 (Predecessor) and the period from January 27, 2022 through September 30, 2022 (Successor).**

### Revenue

The following tables set forth our revenue by reportable segment.

| Revenue: | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: |
| Owned and Operated Advertising | $66,187 | $143,600 | (54)% |
| Partner Network | 21,631 | 13,295 | 63% |
| Total revenue | $87,818 | $156,895 | (44)% |

| Revenue: | Successor Nine Months Ended September 30, 2023 | Period from January 27, 2022 through September 30, 2022 | Predecessor Period from January 1, 2022 through January 26, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: | ---: |
| Owned and Operated Advertising | $249,512 | $428,436 | $49,249 | (48)% |
| Partner Network | 56,339 | 43,722 | 3,463 | 19% |
| Total revenue | $305,851 | $472,158 | $52,712 | (42)% |

Refer to the Revenue discussions below.

### Owned and Operated Advertising ("O&O")

The decrease in O&O revenue for the three months ended September 30, 2023, and nine months ended September 30, 2023, compared to the same prior year periods, respectively, was primarily due to deteriorating macroeconomic conditions, such as reductions in both advertiser and overall consumer demand, which led to a decreased supply of consumer sessions available to be acquired. For the three months ended September 30, 2023, compared to the same prior year period, sessions decreased 156 million to 922 million from 1,078 million, with a corresponding decrease in Revenue per Session ("RPS") of approximately $0.06 to $0.07 from $0.13. For the nine months ended September 30, 2023, compared to the same prior year period, sessions decreased 298 million to 2,768 million from 3,066 million, with a corresponding decrease in RPS of approximately $0.07 to $0.09 from $0.16.

### Partner Network

The increase in Partner Network revenue for the three months ended September 30, 2023, and nine months ended September 30, 2023, compared to the same prior year periods, respectively, was due to our continued investment in this business and growth from newer partners that continue to generate more traffic to our platform. This was partially offset by deteriorating macroeconomic conditions, such as reductions to both advertiser and overall consumer demand, leading to a reduction in RPS. For the three months ended September 30, 2023, compared to the same prior year period, sessions increased 494 million to 858 million from 364 million, and RPS decreased by approximately $0.01 to $0.03 from $0.04. For the nine months ended September 30, 2023, compared to the same prior year period, sessions increased 949 million to 1,984 million from 1,034 million, and RPS decreased by approximately $0.02 to $0.03 from $0.05.

### Cost of revenue

|  | Successor Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: |
| Cost of revenue | $50,585 | $111,217 | (55)% |
| Percent of revenue | 58% | 71% |  |

#### 37

|  | Successor Nine Months Ended September 30, 2023 | Period from January 27, 2022 through September 30, 2022 | Predecessor Period from January 1, 2022 through January 26, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: | ---: |
| Cost of revenue | $190,195 | $341,693 | $41,507 | (50)% |
| Percent of revenue | 62% | 72% | 79% |  |

The dollar decrease in cost of revenue for the three months ended September 30, 2023, and nine months ended September 30, 2023, compared to the same prior year periods, was primarily due to a $64 million and $198 million decrease, respectively, in our O&O reportable segment, which was directionally consistent with the decrease in revenue. For the three months ended September 30, 2023, compared to the same prior year period, our Cost per Session ("CPS") decreased $0.05 to $0.05 from $0.10. For the nine months ended September 30, 2023, compared to the same prior year period, our CPS decreased $0.06 to $0.06 from $0.12.

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

| Segment Adjusted Gross Profit: | Successor Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: |
| Owned and Operated Advertising | $23,886 | $37,261 | (36)% |
| Partner Network | 15,312 | 10,301 | 49% |
| Total Adjusted Gross Profit | $39,198 | $47,562 | (18)% |

| Segment Adjusted Gross Profit: | Successor Nine Months Ended September 30, 2023 | Period from January 27, 2022 through September 30, 2022 | Predecessor Period from January 1, 2022 through January 26, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: | ---: |
| Owned and Operated Advertising | $81,314 | $103,478 | $8,768 | (28)% |
| Partner Network | 40,337 | 32,622 | 3,012 | 13% |
| Total Adjusted Gross Profit | $121,651 | $136,100 | $11,780 | (18)% |

Refer to the Revenue and Cost of revenue discussions above.

### Salaries and benefits

|  | Successor Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: |
| Salaries and benefits | 26,689 | 30,270 | (12)% |
| Percent of revenue | 30% | 19% |  |

#### 38

|  | Successor Nine Months Ended September 30, 2023 | Period from January 27, 2022 through September 30, 2022 | Predecessor Period from January 1, 2022 through January 26, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: | ---: |
| Salaries and benefits | $82,484 | $106,340 | $31,181 | (40)% |
| Percent of revenue | 27% | 23% | 59% |  |

The decrease in salaries and benefits for the three months ended September 30, 2023 compared to the same prior year period, was primarily due to a $3 million decrease in stock-based compensation resulting from declines in headcount and stock price. For additional information on our stock-based compensation, refer to Note 14—*STOCK-BASED COMPENSATION.*

The decrease in salaries and benefits for the nine months ended September 30, 2023 compared to the same prior year period, was primarily due to a $55 million decrease in stock-based compensation related to the first quarter 2022 Merger.

### Selling, general, and administrative

|  | Successor Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: |
| Selling, general, and administrative | 11,808 | 11,572 | 2% |
| Percent of revenue | 13% | 7% |  |

|  | Successor Nine Months Ended September 30, 2023 | Period from January 27, 2022 through September 30, 2022 | Predecessor Period from January 1, 2022 through January 26, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: | ---: |
| Selling, general, and administrative | $42,004 | $36,962 | $15,665 | (20)% |
| Percent of revenue | 14% | 8% | 30% |  |

The increase is selling, general, and administrative expense for the three months ended September 30, 2023 compared to the same prior year period was primarily due to a slight increase in our reserve for bad debts.

The decrease in selling, general, and administrative expense for the nine months ended September 30, 2023 compared to the same prior year period, was primarily due to additional costs associated with the Merger and the prior year acquisitions, partially offset by the increase in our reserve for bad debts.

### Depreciation and amortization

|  | Successor Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: |
| Depreciation and amortization | 19,584 | 18,923 | 3% |

#### 39

|  | Successor Nine Months Ended September 30, 2023 | Period from January 27, 2022 through September 30, 2022 | Predecessor Period from January 1, 2022 through January 26, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: | ---: |
| Depreciation and amortization | $58,666 | $50,369 | $1,000 | 14% |

Depreciation and amortization expense for the three months ended September 30, 2023, remained relatively consistent as compared to the same prior year period.

The increase in depreciation and amortization expense for the nine months ended September 30, 2023, compared to the same prior year period, was primarily due to additions of intangible assets as a result of the Merger and the prior year acquisitions.

### Interest expense, net

|  | Successor Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: |
| Interest expense, net | 13,053 | 9,733 | 34% |

|  | Successor Nine Months Ended September 30, 2023 | Period from January 27, 2022 through September 30, 2022 | Predecessor Period from January 1, 2022 through January 26, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: | ---: |
| Interest expense, net | $36,789 | $21,987 | $1,049 | 60% |

The increase in interest expense, net for the three and nine months ended September 30, 2023, compared to the same prior year periods, was primarily due to higher interest rates experienced during the current periods.

### Loss on restructure of related-party debt

|  | Successor Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | --- |
| Loss on restructure of related-party debt | 619 | — | \>100% |

|  | Successor Nine Months Ended September 30, 2023 | Period from January 27, 2022 through September 30, 2022 | Predecessor Period from January 1, 2022 through January 26, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: | --- |
| Loss on restructure of related-party debt | $619 | $— | $— | \>100% |

#### 40

The increase in loss on restructure of related-party debt for the three months ended September 30, 2023, and the nine months ended September 30, 2023, compared to the same prior year periods, was due to restructuring a portion of the Holdback Amount related to the 2022 CouponFollow acquisition into a promissory note. Refer to Note 4—*ACQUISITIONS* and Note 13—*RELATED-PARTY TRANSACTIONS.*

### Change in fair value of warrant liabilities

The change in fair value of warrant liabilities for the three months ended September 30, 2023, and the nine months ended September 30, 2023, compared to the same prior year periods, respectively, was driven by the fluctuations in the market value of our Class A common stock.

### Income tax benefit

|  | Successor Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: |
| Income tax benefit | $(920) | $(69,796) | (99)% |
| Effective tax rate | 3% | 19% |  |

|  | Successor Nine Months Ended September 30, 2023 | Period from January 27, 2022 through September 30, 2022 | Predecessor Period from January 1, 2022 through January 26, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: | ---: |
| Income tax benefit | $(10,626) | $(84,341) | $(629) | (87)% |
| Effective tax rate | 11% | 19% | 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.

### Net loss from discontinued operations, net of tax

|  | Successor Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | --- |
| Net loss from discontinued operations, net of tax | $(137,209) | $(14,077) | \>100% |

#### 41

|  | Successor Nine Months Ended September 30, 2023 | Period from January 27, 2022 through September 30, 2022 | Predecessor Period from January 1, 2022 through January 26, 2022 | 2023 vs. 2022 change (%) |
| --- | ---: | ---: | ---: | --- |
| Net loss from discontinued operations, net of tax | $(163,222) | $(35,849) | $— | \>100% |

Net loss from discontinued operations, net of tax is comprised of the results of operations of our subscription business. The loss from discontinued operations, net of tax only includes direct operating expenses incurred that (1) are clearly identifiable as costs being disposed of upon completion of the sale and (2) will not be continued by our company on an ongoing basis. Indirect expenses which supported our subscription business, and which remained as part of the continuing operations, are not reflected in loss from discontinued operations, net of tax.

### Liquidity and Capital Resources

As of September 30, 2023 (Successor), we had available cash and cash equivalents of $4,853.

To date, our available liquidity and operations have been financed through the initial public offering of Trebia, the Merger, credit facilities, various affiliate loans, 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.

The discussion of our cash flows and liquidity that follows does not include the impact of any adjustments to remove discontinued operations, unless otherwise noted, and is stated on a total company consolidated basis.

### Going Concern

Starting in the third quarter of 2022 and continuing into 2023, we 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 our marketing services. In response to these conditions, we obtained additional financing in the second quarter of 2023 (as previously disclosed) which was expected to provide us sufficient liquidity to manage through the current business environment. However, subsequent to the quarter ended June 30, 2023, we have experienced increased customer acquisition costs in addition to the loss of a significant Network Partner, both of which have further negatively impacted our future cash forecasts, and may negatively impact our forecasted compliance with the maximum leverage ratio covenant of the Term Loan (defined in Note 9—*DEBT*). As of September 30, 2023, we had cash on hand of $4,853, an accumulated deficit of $646,242, and had cash outflows from operations of $5,908 for the nine months ended September 30, 2023. We have principal and interest payments due of approximately $15,000 per quarter, and as of the date of this filing, we had no remaining available capacity under the 2023 Revolving Note (defined in Note 13—*RELATED-PARTY TRANSACTIONS).*

The declining cash flows and financial performance raise substantial doubt regarding our ability to continue as a going concern for a period of one year following the date that these condensed consolidated financial statements are issued. We have both developed and implemented plans to improve our liquidity. Our implemented plans include the restructuring of the CouponFollow Holdback Amount in September 2023 through the issuance of a $5,156 note and obtaining the Onyx and OpenMail2 debt financings for $10,000 and $2,500, respectively (refer to Note 13—*RELATED-PARTY TRANSACTIONS*) in October 2023, entering into a factoring agreement in November 2023 for an initial $5,000 (refer to Note 16 – *SUBSEQUENT EVENTS*) as well as implementing a significant reduction in headcount in both the second quarter of 2023 and in early September 2023, resulting in approximately $14,500 of annualized savings. Our developed plans include the sale of Total Security Limited ("Protected"; formerly Protected.net Group Limited) (refer to Note 15—*DISCONTINUED OPERATIONS*), which we anticipate will result in significant cash inflows. As announced in our press release on September 6, 2023, we received a non-binding indication of intent from JDI to acquire Protected for $240,000 in cash as part of the consideration. However, until we have executed a definitive sale agreement, we cannot provide assurances that the sale will be finalized on acceptable terms or at all. To the extent our financial performance does not improve or our plans are not successful or finalized, we may have insufficient available cash balances to fund our operations for the remainder of the calendar year. Additionally, if we are unable to satisfy certain covenants under the Credit Agreement (refer to Note 9—*Debt, net*), this could constitute an event of default and provide the administrative agent on behalf of the lenders the ability to immediately call the outstanding principal balances of the Term Loan and 2022 Revolving Facility, with cross default provisions with the 2023 Revolving Note, Promissory Note, Term Note and Secured Facility (refer to Note 13 – *RELATED PARTY TRANSACTIONS*) and the Receivables Purchase Agreement (refer to Note 16 – *SUBSEQUENT EVENTS)*. In the event of a default, including the aforementioned cross defaults, there can be no assurance that we will be able to continue as a going concern, which will force us to delay, reduce or discontinue certain aspects of our business strategy. Accordingly, we believe that there is substantial doubt about our ability to continue as a going concern for the twelve-month period following the date of this filing.

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 we 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.

### Credit Facilities

#### Term Loan

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 (“2022 Revolving Facility”) on January 27, 2022, providing for a 5.5 year facility 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 timely payments on the principal and interest. We are currently in compliance with our borrowing covenants.

#### 2023 Revolving Note

On April 10, 2023, Orchid Merger Sub II, LLC (“Orchid Sub”), our wholly-owned subsidiary, 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 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 “Commitment” and, collectively, the “Commitments”). The 2023 Revolving Note is available through July 2024, with automatic three-month extensions, unless we or any Lender provides written notice. As of the date these condensed consolidated financial statements were issued, the Company had no remaining available capacity under the 2023 Revolving Note.

For additional information regarding our credit facilities, refer to Note 9—*DEBT, NET* and Note 13—*RELATED-PARTY TRANSACTIONS.*

### Cash Flows

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

*(in thousands)*

|  | Successor Nine Months Ended September 30, 2023 | Period from January 27, 2022 through September 30, 2022 | Predecessor Period from January 1, 2022 through January 26, 2022 |
| --- | ---: | ---: | ---: |
| Net cash used in operating activities | $(5,908) | $(742) | $(10,603) |
| Net cash used in investing activities | $(6,859) | $(452,429) | $(441) |
| Net cash used in financing activities | $(1,054) | $(22,552) | $— |

### 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, and 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 nine months ended September 30, 2023 (Successor), cash used in operating activities of $5,908 resulted primarily from net loss adjusted for noncash items, including the impairment of goodwill and assets held for sale of $118,759, depreciation and amortization expense of $85,364, stock-based compensation of $43,909, and a decrease in accounts receivable of $17,786. This was partially offset by a net loss of $250,629 and a payment for the Protected incentive plan of $20,000.

During the period from January 27, 2022 to September 30, 2022 (Successor), cash used in operating activities of $742 resulted primarily from net loss adjusted for noncash items, including impairment of goodwill of $340,109, depreciation and amortization expense of $86,236, stock-based compensation of $88,847, change in fair value of warrants of $14,111, an increase in deferred revenue of $7,133, and a decrease in accounts receivable of $6,670. This was partially offset by a net loss of $390,921, deferred tax benefit of $101,100, a decrease in other long-term liabilities of $31,467, a decrease in accrued expenses and other liabilities of $17,369 due to the Merger, and a decrease in the Protected.net Incentive Plan liability of $10,000 for a quarterly payment.

During 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, including 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.

### Investing Activities

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

During the nine months ended September 30, 2023 (Successor), cash used in investing activities of $6,859 resulted from purchases of property and equipment of $2,015, and capitalized expenditures related to internal-use software development costs of $4,844.

During the period from January 27, 2022 to September 30, 2022 (Successor), cash used in investing activities of $452,429 resulted primarily from the acquisitions of S1 Holdco, Protected.net, Answers, CouponFollow and RoadWarrior.

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

### Financing Activities

In the nine months ended September 30, 2023 (Successor), cash used in financing activities of $1,054 resulted primarily from the repayment of related-party loan of $44,000, and the repayment of term loan of $15,000. This was partially offset by proceeds from related-party loan of $63,000.

During the period from January 27, 2022 to September 30, 2022 (Successor), cash used in financing activities of $22,552 resulted primarily from redemptions of Trebia Class A ordinary shares of $510,469, repayment of existing term loan of $182,488, and payment of debt financing costs related to the Term Loan of $24,845, partially offset by proceeds from the Term Loan and Revolving Facility of $449,000 and the Cannae Backstop of $246,484. In October 2022, the Company borrowed an additional $1,000 under its Revolving Facility.

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

### Share Repurchases

In August 2022, the Board authorized up to $25,000 for the repurchase of our Class A common stock and Public Warrants ("2022 Repurchase Program"). During the nine months ended September 30, 2023, no repurchases of our equity securities were made by us or by any of our affiliated purchasers. As of September 30, 2023, we had $23,878 available under this authorization remaining.

### Receivables Purchase Agreement

On November 8, 2023, we entered into an agreement with OAREX Funding, LLC (the “Factor”) for the purchase and sale of accounts receivable related to its advertising business (the “Receivables Purchase Agreement”). Based on the terms of the agreement, the Factor advances up to 80% of transferred customer receivables and holds the remaining as a reserve until the customer pays the Factor. The initial maximum advance amount is $5,000 with the potential to increase the maximum amount to $20,000 (upon approval from the Factor’s lender). These reserves are remitted to us upon customer payment, less applicable discount fees. We are initially charged 1.3% of the advance amount for each invoice purchased for the first 30 days after the purchase date of the receivable and 0.43% on the face value for every subsequent 10-day period or portion thereof until the transferred receivable is collected. As collateral securing the amounts owed to the Factor, we grant the Factor a continuing first priority security interest in all purchased accounts receivable and any related payments. This factoring agreement is effective for an initial 12-month period and continues for additional 12-month periods until terminated through release from us after repayment of all amounts owed to the Factor or earlier under occurrence of certain events of default, including default of the Term Loan and 2022 Revolving Facility. As of the date of issuance of these financial statements, $5,000 is the maximum advance amount with no amounts advanced. We are currently evaluating the accounting impact of this arrangement.

### 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 Agreement

In June 2023, we entered into a multi-year agreement with a web services provider whereby we are contractually obligated to spend $5,000 in each annual period between July 2023 and June 2026. As of September 30, 2023 (Successor), we remain contractually obligated to spend $13,118 towards this commitment.

### Debt Obligations

In connection with the Merger, Orchid Merger Sub II LLC (a subsidiary of S1 Holdco) entered into a new loan (“Term Loan”) and revolving facility (“2022 Revolving Facility”) with Bank of America, N.A., on January 27, 2022, providing for a 5.5 year term loan with a principal balance of $400,000 and with the net proceeds of $376,000, of which a portion of the proceeds were used by S1 Holdco, to settle the outstanding debt of $172,038 with Cerberus Business Finance, LLC. The 2022 Revolving Facility provided for borrowing availability of up to $50,000. As of September 30, 2023, $50,000 was outstanding on the 2022 Revolving Facility and principal of $370,000 was outstanding on the Term Loan. Through December 31, 2025, $5,000 of the Term Loan is payable quarterly. From March 31, 2026, $7,500 of the Term Loan is payable quarterly. The Term Loan matures in 2027.

For every interest period, the interest rate on the Term Loan is the adjusted Term Secured Overnight Financing Rate (“Term SOFR”) plus 4.75%. The Term Loan is amortized in quarterly installments on each scheduled payment date. The Term Loan comes with a leverage covenant, which goes into effect only if the utilization on the 2022 Revolving Facility exceeds 35% of the $50,000 2022 Revolving Facility at each quarter-end starting from the first full quarter after the effective date of the Merger, such that the first lien leverage ratio (as defined in the credit agreement) should not exceed 5.40. The facility has certain financial and nonfinancial covenants, including a leverage ratio. The facility also requires that the Company delivers its audited consolidated financial statements to its lender within 120 days of its fiscal year end, December 31. Should the Company fail to distribute the financial statements to its lender within 120 days, it is allowed an additional 30 days to cure.

The 2022 Revolving Facility matures in January 2027, and accordingly, it is classified within long-term debt, net on the consolidated balance sheet as of June 30, 2023. The interest rate on the 2022 Revolving Facility is the adjusted Term SOFR plus 2.5% with an adjusted Term SOFR floor of 0%. In March 2022, the Company borrowed $49,000 under its 2022 Revolving Facility, to fund a portion of the purchase price related to its CouponFollow acquisition. In October 2022, the Company borrowed the remaining $1,000 available.

The carrying values of our debt, net of discounts, deferred financing and debt issuance costs were as follows:

|  | Successor September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Term Loan1,2 | $353,273 | $364,525 |
| 2022 Revolving Facility | 50,000 | 50,000 |
| Total Debt, net | $403,273 | $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 $308,950 as of September 30, 2023. |  |  |

We have principal and interest payments due of approximately $15,000 per quarter.

### Related-Party Loans

#### 2023 Revolving Note

On April 10, 2023, Orchid Sub entered into the $20,000 2023 Revolving Note with Lone Star and CEE 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 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 “Commitment” and, collectively, the “Commitments”).

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). We may borrow up to our commitment amount, and may reuse the loan again after the balance has been paid down. The maturity date under the 2023 Revolving Note is July 10, 2024 (the "Maturity Date") with automatic three-month extensions, unless we or any Lender provides written notice, unless there is an event of default, including a continuing event of default on the Credit Agreement, at which point the holder may declare all amounts due immediately. 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 loan fee equal to 12.0% of each Lender's commitment under the 2023 Revolving Note, or $2,400 in total, payable within 180 days of April 10, 2023. Further, this loan fee was capitalized in Prepaid and other current assets and will be amortized on a straight-line basis through the Maturity Date. As of the date these condensed consolidated financial statements were issued, the Company had no remaining available capacity under the 2023 Revolving Note.

#### Promissory Note

On September 6, 2023, System1 OpCo entered into a $5,156 Promissory Note with the Lender in order to convert the Holdback Amount described in Note 4—*ACQUISITIONS* into the Loan. The amount of the Promissory Note was equal to the amount of the Holdback liability of $5,156 owed to the Lender.

The Loan outstanding under the Promissory Note accrues 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%. The Company (i) must prepay the Loan under certain circumstances, which include consummation of a Strategic Transaction, the refinancing of the Existing Credit Agreement, the incurrence by us of any indebtedness exceeding $2,500, or the sale of any of our assets in excess of $2,500; (ii) may prepay the Loan at any time without penalty or interest; and (iii) must make four (4) substantially equal amortization payments on April 1, 2024, May 1, 2024, June 1, 2024, and July 1, 2024, unless there is an event of default, including a continuing event of default on the Credit Agreement, at which point the holder may declare all amounts due immediately. We are currently in the process of selling our Protected business. Upon the closing of any sale of this business, the Promissory Note and accrued interest will become due and payable immediately. The Lender under the Promissory Note is also entitled to a closing fee equal to 12.0% of the initial principal amount outstanding under the Promissory Note which is due 50% on October 15, 2023 and 50% on December 15, 2023. As of September 30, 2023, principal of $5,156 was outstanding on the Loan. We recorded an expense of approximately $619 within Loss on restructure of related-party holdback which related to a 12% fee payable to the Lender.

#### Term Note

On October 6, 2023, Orchid Sub, entered into the $2,500 Term Note with OM2, which is principally owned and managed by trusts established for the benefit of the Company’s co-founders, Michael Blend and Charles Ursini, in a private transaction approved by the independent and non-interested members of the Board. Pursuant to the Term Note, the Term Lender provided a fixed $2,500 term loan to Orchid Sub.

The amounts outstanding under the Term Note accrue interest at the rate per annum equal to the SOFR as administered by the Federal Reserve Bank of New York plus 5.75%. The maturity date under the Term Note is December 31, 2024, unless there is an event of default including default on the Credit Agreement, at which point the holder may declare all amounts due immediately. The Company must prepay the Loan under certain circumstances, which include (i) the consummation of a strategic transaction or (ii) upon the full refinancing and termination of the Existing Credit Agreement. The Lender is also entitled to a closing fee equal to 10.0% the principal amount of the Term Note, payable within 180 days of October 6, 2023. In addition, Orchid Sub agreed to reimburse the Lender for its reasonable and documented costs expenses incurred in connection with the negotiation, documentation and execution of the Term Note.

#### Secured Facility

On October 6, 2023, Protected, an indirect wholly-owned subsidiary of the Company, entered into the $10,000 Secured Facility with the Secured Lender and a subsidiary of JDI in a private transaction approved by the independent and non-interested members of the Company’s Board. Pursuant to the Secured Facility, the Secured Lender provided the $10,000 Secured Commitment, which amount was (i) drawn down in full on the closing date and (ii) secured by the assets of Protected pursuant to a deed granted in favor of the Secured Lender pursuant to a Debenture between Total Security and the Secured Lender, dated October 6, 2023.

The amounts outstanding under the Secured Facility accrue interest at the rate of 8.5% per annum. The amounts outstanding under the Secured Facility are due upon the earlier of (i) October 6, 2024 or (ii) the date on which Protected undergoes a Change of Control (as such term is defined in the Secured Facility), unless there is an event of default including default on the Credit Agreement, at which point the holder may declare all amounts due immediately. The Secured Lender was also entitled to a closing fee equal to 12.0% the principal amount of the borrowings under the Secured Facility, which was paid in full on the closing date. In addition, Protected agreed to reimburse the Secured Lender for its reasonable and documented costs expenses incurred in connection with the negotiation, documentation and execution of the Secured Facility.

### Incentive Plans

Refer to Note 14—*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 its 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 revenue 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.

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 exceeded its carrying amounts by 9% as of December 31, 2022.

As of December 31, 2022, all our goodwill relates to our Partner Network unit. Goodwill associated with the Partner Network was $82,407 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 reporting unit by 100 basis points as of December 31, 2022. An increase in the discount rate would result in the estimated fair value of the Partner Network reporting unit decreasing by approximately 7%. The fair values of the reporting unit would continue to exceed its carrying amount, though the excess of the fair value over the carrying amount would be reduced to approximately 1%.

During the nine months ended September 30, 2023, we performed a quantitative assessment for impairment on our Subscription Reporting Unit which qualified as held for sale as of September 30, 2023. As a result, an impairment charge of $115,483 was recorded in discontinued operations during the three months ended September 30, 2023. Refer to Note 15 — *DISCONTINUED OPERATIONS* for additional information. Management determined no triggering events in the Partner Network reporting unit as of September 30, 2023 were present, and accordingly, no quantitative assessment for impairment was required.

### Recently Issued Accounting Pronouncements

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

## Market risk

As filed, 129 characters.

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

## Controls and procedures

As filed, 14,782 characters.

(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 September 30, 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 September 30, 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, journal entries, and the identification of asset groups 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 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.

These material weaknesses resulted in immaterial adjustments to stock-based compensation expense and accrued expenses and other current liabilities accounts of the financial statements of System1, Inc. as of March 31, 2022 and for the successor period from January 27, 2022 to March 31, 2022; as of June 30, 2022 and for 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 successor periods for the three months ended September 30, 2022 and from January 27, 2022 to September 30, 2022; as of December 31, 2022 and for the successor periods for the three months ended December 31, 2022 and from January 27, 2022 to December 31, 2022; as of and for the three months ended March 31, 2023; as of and for the three months ended June 30, 2023, and as of and for the three months ended September 30, 2023; all of which were recorded prior to the issuance of these condensed consolidated financial statements.

Further, these material weaknesses resulted in immaterial adjustments to related party loan fee payable, related party loan, cash and cash equivalents and restricted cash as of June 30, 2023 as well as cash flows from operating and financing activities of System1, Inc. as of March 31, 2023 and for the three months ended March 31, 2023, as of June 30, 2023 and for the six months ended June 30, 2023, and as of September 30, 2023 and for the nine months ended September 30, 2023, and to intercompany interest expense as of September 30, 2023, all of which were recorded prior to the issuance of these condensed consolidated financial statements.

- 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 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.

(c) Remediation plan for the material weaknesses

We continue to execute our remediation plan, consisting 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;
- Engaged 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;
- Engaged third-party experts to assist with the preparation of technical accounting analyses and valuations associated with business combinations and divestitures;
- 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, appropriate determination of asset groups for impairment consideration 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; 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.

We believe the measures described above will facilitate the remediation of the material weaknesses we have identified and will strengthen our internal control over financial reporting. We are committed to continuing to improve our internal control over financial reporting and will continue to review, optimize and enhance our processes, procedures and controls. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies, or we may modify, or in appropriate circumstances not complete, certain of the remediation measures described above. These material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Therefore, these material weaknesses have not been remediated as of September 30, 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 September 30, 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.

## Risk factors

As filed, 6,237 characters.

Other than as set forth below and with respect to the material weaknesses 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 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.

***We may have difficulty successfully completing divestitures or exiting businesses.***

As previously reported, we announced that we had received a non-binding indication of intent from Just Develop It Limited regarding a potential acquisition of Protected, the Company’s subscription business, consisting of $240 million in cash, the redemption or repurchase of approximately 29.1 million shares of Class A Common Stock and certain other assumptions or cancellations of earnout payments in respect of Protected. A divestiture of Protected could result in difficulties in the separation of operations, services, products and personnel, the diversion of management’s attention, the disruption of our business and the potential loss of key employees and customers. A divestiture of Protected may be subject to the satisfaction of pre-closing conditions as well as to obtaining necessary regulatory approvals, which, if not satisfied or obtained, may prevent us from completing the disposition, whether or not the disposition has been publicly announced. A divestiture of Protected may also involve continued financial involvement in the divested assets and businesses, such as indemnities or other financial obligations, including continuing obligations to employees, in which the performance of the divested assets or businesses could impact our financial position and results of operations. Further, such divestiture may result in proceeds to us in an amount less than we expect or less than our assessment of the value of those assets. Any sale of our assets could result in a loss on divestiture. Any of the foregoing could adversely affect our financial condition and results of operations.

***We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern.***

As previously reported, starting in the third quarter of 2022 and continuing into 2023, we have 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 our marketing services. In response to these conditions, we entered into the 2023 Revolving Note with related parties for $20,000, which was expected to provide us with sufficient liquidity to manage through the current business environment. However, subsequent to the quarter ended June 30, 2023, we experienced increased customer acquisition costs in addition to the loss of a significant Network Partner, both of which have further negatively impacted our future cash forecasts, and could negatively impact our compliance with certain covenants in our Credit Agreement providing for the Term Loan and the 2022 Revolving Facility. As of September 30, 2023, we had cash on hand of $4,853, an accumulated deficit of $646,242 and cash outflows from operations of $5,908 for the nine months ended September 30, 2023. We have principal and interest payments due of approximately $15,000 per quarter. As of the date of this filing, we have no remaining available capacity under the 2023 Revolving Note.

The declining cash flows and financial performance raise substantial doubt regarding our ability to continue as a going concern for a period of one year following the date that these condensed consolidated financial statements are issued. We have both developed and implemented plans to improve our liquidity. Our implemented plans include the restructuring of the CouponFollow Holdback Amount in September 2023 through the issuance of a $5,156 note and obtaining the Onyx and OpenMail2 debt financings for $10,000 and $2,500, respectively (refer to Note 13—*RELATED-PARTY TRANSACTIONS*) in October 2023, entering into a factoring agreement in November 2023 for an initial $5,000 (refer to Note 16 – *SUBSEQUENT EVENTS*) as well as implementing a significant reduction in headcount in both the second quarter of 2023 and in early September 2023, resulting in approximately $14,500 of annualized savings. Our developed plans include the sale of Total Security Limited ("Protected"; formerly Protected.net Group Limited) (refer to Note 15—*DISCONTINUED OPERATIONS*), which we anticipate will result in significant cash inflows. As announced in our press release on September 6, 2023, we received a non-binding indication of intent from JDI to acquire Protected for $240,000 in cash as part of the consideration. However, until we have executed a definitive sale agreement, we cannot provide assurances that the sale will be finalized on acceptable terms or at all. To the extent our financial performance does not improve or our plans are not successful or finalized, we may have insufficient available cash balances to fund our operations for the remainder of the calendar year. Additionally, if we are unable to satisfy certain covenants under the Credit Agreement (refer to Note 9—*Debt, net*), this could constitute an event of default and provide the administrative agent on behalf of the lenders the ability to immediately call the outstanding principal balances of the Term Loan and 2022 Revolving Facility, with cross default provisions with the 2023 Revolving Note, Promissory Note, Term Note and Secured Facility (refer to Note 13 – *RELATED PARTY TRANSACTIONS*) and the Receivables Purchase Agreement (refer to Note 16 – *SUBSEQUENT EVENTS*. In the event of a default, including the aforementioned cross defaults, there can be no assurance that we will be able to continue as a going concern, which will force us to delay, reduce or discontinue certain aspects of our business strategy. Accordingly, we believe that there is substantial doubt about our ability to continue as a going concern for the twelve-month period following the date of this filing.

Filed Nov 9, 2023.
Source: SEC EDGAR, the filing index for accession 0001805833-23-000174. Last ingested by Listed: Oct 30, 2026, 16:08 ET. No prices; not investment advice.