System1, Inc 10-Q for FY2022 Q3

System1, Inc. (SST)

10-Q 2022-11-14 For: 2022-09-30

Added on April 10, 2026

About this 10-Q

System1, Inc filed this 10-Q on November 14, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).

Headline figures

Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.

Revenue: $201.18M; up 17.3% from $171.45M a year earlier
Net loss: $31.64M; compared with net income of $11.37M a year earlier
Diluted EPS: -$0.35

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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)


		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 Income (Loss)	3
	Condensed Consolidated Statements of Changes in Stockholders' Equity	4
	Condensed Consolidated Statements of Changes in Members' (Deficit) Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	47
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	63
Item 4.	Controls and Procedures	63

Part II - Other Information		67

Item 1.	Legal Proceedings	67
Item 1A.	Risk Factors	67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 3.	Defaults upon Senior Securities	67
Item 4.	Mine Safety Disclosures	68
Item 5.	Other Information	68
Item 6.	Exhibits	69

Signatures		71


	Successor		Predecessor
	September 30, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	31,933	$	47,896
Restricted cash, current	7,338		—
Accounts receivable	78,846		90,203
Prepaid expenses and other current assets	8,756		7,689
Total current assets	126,873		145,788
Restricted cash, non-current	2,772		743
Property and equipment, net	4,349		830
Internal-use software development costs, net	12,599		11,213
Intangible assets, net	506,018		50,368
Goodwill	904,240		44,820
Operating lease assets	6,893		—
Other non-current assets	708		3,149
Total assets	$	1,564,452	$	256,911
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	12,242	$	72,846
Accrued expenses and other current liabilities	90,265		31,284
Protected.net incentive plan liability, current	19,266		—
Deferred revenue	68,289		1,971
Operating lease liabilities, current	2,102		—
Debt, net	14,954		170,453
Total current liabilities	207,118		276,554
Operating lease liabilities, non-current	6,406		—
Long-term debt, net	402,273		—
Warrant liability	18,158		—
Deferred tax liability	120,724		7,789
Protected.net incentive plan liability, non-current	11,517		—
Other liabilities	2,909		969
Total liabilities	769,105		285,312
Commitments and contingencies (Note 11)
EQUITY / MEMBERS' DEFICIT
Class A common stock - $0.0001 par value; 250,000 shares authorized, 91,490 Class A shares issued and outstanding as of September 30, 2022	9		—
Class C common stock - $0.0001 par value; 25,000 shares authorized, 21,747 Class C shares issued and outstanding as of September 30, 2022	2		—
Additional paid-in capital	767,169		—
Accumulated deficit	(150,016)		—
Members' deficit	—		(28,829)
Accumulated other comprehensive income	13		428
Total equity/members' deficit attributable to System1, Inc.	617,177		(28,401)
Non-controlling interest	178,170		—
Total equity/members' deficit	795,347		(28,401)
Total liabilities and equity/members' deficit	$	1,564,452	$	256,911


	Successor		Predecessor		Successor		Predecessor
	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Period from January 27, 2022 through September 30, 2022		Period from January 1, 2022 through January 26, 2022		Nine Months Ended September 30, 2021
Revenue	$	201,176	$	171,446	$	587,081	$	52,712	$	488,586
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization)	137,681		128,885		410,370		41,760		365,837
Salaries, commissions, and benefits	55,862		15,139		144,876		35,175		48,032
Selling, general, and administrative	16,520		7,936		47,668		14,817		21,163
Depreciation and amortization	33,420		3,459		90,128		1,000		10,260
Total operating costs and expenses	243,483		155,419		693,042		92,752		445,292
Operating income (loss)	(42,307)		16,027		(105,961)		(40,040)		43,294
Other expense:
Interest expense, net	10,011		4,184		22,111		1,049		12,708
Change in fair value of warrant liabilities	4,489		—		14,111		—		—
Total other expense	14,500		4,184		36,222		1,049		12,708
Income (loss) before income tax	(56,807)		11,843		(142,183)		(41,089)		30,586
Income tax (benefit) provision	(19,228)		475		(32,480)		(629)		703
Net income (loss)	$	(37,579)	$	11,368	$	(109,703)	$	(40,460)	$	29,883
Net loss attributable to non-controlling interest	(5,936)		—		(18,871)		—		—
Net income (loss) attributable to System1, Inc.	$	(31,643)	$	11,368	$	(90,832)	$	(40,460)	$	29,883

Basic and diluted net loss per share	$	(0.35)	n/a		$	(1.02)	n/a		n/a
Weighted average number of shares outstanding - basic and diluted	91,002		n/a		88,716		n/a		n/a
Basic and diluted net income (loss) per unit	n/a		$	0.55	n/a		$	(1.97)	$	1.46
Weighted average units outstanding - basic and diluted	n/a		20,488		n/a		20,488		20,488


	Successor		Predecessor		Successor		Predecessor
	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Period from January 27, 2022 through September 30, 2022		Period from January 1, 2022 through January 26, 2022		Nine Months Ended September 30, 2021
Net income (loss)	$	(37,579)	$	11,368	$	(109,703)	$	(40,460)	$	29,883
Other comprehensive income (loss)
Foreign currency translation income (loss)	(354)		101		(126)		87		566
Comprehensive income (loss)	(37,933)		11,469		(109,829)		(40,373)		30,449
Comprehensive loss attributable to non-controlling interest	(6,124)		—		(19,010)		—		—
Comprehensive income (loss) attributable to System1, Inc.	$	(31,809)	$	11,469	$	(90,819)	$	(40,373)	$	30,449


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


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


	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 Income		Non-Controlling Interest		Total Stockholders’ Equity
Successor:
For the period from January 27, 2022 to September 30, 2022
BALANCE—January 26, 2022	52,680	$	5	—	$	—	—	$	—		$	525,579		$	(59,184)		$	—	$	—	$	466,400
Effect of Merger transaction	29,017	3		22,077	2		2,900	—			157,046			—			—		198,691		355,742
BALANCE—January 27, 2022	81,697	8		22,077	2		2,900	—		—	682,625		—	(59,184)		—	—		198,691		822,142
Net loss	—	—		—	—		—	—			—			(29,991)			—		(8,068)		(38,059)
Issuance of common stock in connection with the acquisition of business	2,000	—		—	—		—	—			25,500			—			—		—		25,500
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	—	—		—	—		—	—			(6,752)			—			—		—		(6,752)
Other comprehensive income	—	—		—	—		—	—			—			—			(28)		(6)		(34)
Share-based compensation	—	—		—	—		—	—			27,167			—			—		—		27,167
Distribution to members	—	—		—	—		—	—			—			—			—		(247)		(247)
BALANCE—March 31, 2022	86,597	$	9	22,077	$	2	—	$	—		$	728,540		$	(89,175)		$	(28)	$	190,370	$	829,718
Net loss	—	—		—	—		—	—			—			(29,198)			—		(4,867)		(34,065)
Exercise of warrants	3,969	—		—	—		—	—			27,989			—			—		—		27,989
Issuance of restricted stock, net of forfeitures and shares withheld for taxes	21	—		—	—		—	—			—			—			—		—		—
Net deferred tax liability resulting from changes in outside basis difference on investment in S1 Holdco, LLC	—	—		—	—		—	—			585			—			—		—		585
Other comprehensive income	—	—		—	—		—	—			—			—			207		55		262
Share-based compensation	—	—		—	—		—	—			3,888			—			—		—		3,888
Distribution to members	—	—		—	—		—	—			—			—			—		(1,254)		(1,254)
BALANCE—June 30, 2022	90,587	$	9	22,077	$	2	—	$	—		$	761,002		$	(118,373)		$	179	$	184,304	$	827,123
Net loss	—	—		—	—		—	—			—			(31,643)			—		(5,936)		(37,579)
Issuance of restricted stock, net of forfeitures and shares withheld for taxes	573	—		—	—		—	—			(2,035)			—			—		—		(2,035)
Conversion of Class C shares to Class A shares	330	—		(330)	—		—	—			—			—			—		—		—
Net deferred tax liability resulting from changes in outside basis difference on investment in S1 Holdco, LLC	—	—		—	—		—	—			14			—			—		—		14
Other comprehensive income	—	—		—	—		—	—			—			—			(166)		(188)		(354)
Share-based compensation	—	—		—	—		—	—			8,188			—			—		—		8,188
Distribution to members	—	—		—	—		—	—			—			—			—		(10)		(10)
BALANCE—September 30, 2022	91,490	$	9	21,747	$	2	—	$	—		$	767,169		$	(150,016)		$	13	$	178,170	$	795,347


	Members’ Capital		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	(40,460)		—		(40,460)
Accumulated other comprehensive income	—		87		87
Share-based compensation expense	27,698		—		27,698
BALANCE—January 26, 2022	$	(41,591)	$	515	$	(41,076)

	Members’ Capital		Accumulated Other Comprehensive Income (Loss)		Total Members’ Deficit
Predecessor:
For the period January 1, 2021 to September 30, 2021
BALANCE—January 1, 2021	$	(47,886)	$	(343)	$	(48,229)
Net income	6,743		—		6,743
Accumulated other comprehensive income	—		441		441
Share-based compensation expense	146		—		146
Contribution from OpenMail	147		—		147
BALANCE—March 31, 2021	$	(40,850)	$	98	$	(40,752)
Net income	11,772		—		11,772
Accumulated other comprehensive income	—		24		24
Share-based compensation expense	120		—		120
Distribution to Court Square Capital Partners	(1,814)		—		(1,814)
Contribution from OpenMail	3		—		3
Distribution to OpenMail	(877)		—		(877)
BALANCE—June 30, 2021	$	(31,646)	$	122	$	(31,524)
Net income	11,368		—		11,368
Accumulated other comprehensive income	—		101		101
Share-based compensation expense	89		—		89
Distribution to Court Square Capital Partners	(4,088)		—		(4,088)
Contribution from OpenMail	109		—		109
Distribution to OpenMail	(3,014)		—		(3,014)
BALANCE—September 30, 2021	$	(27,182)	$	223	$	(26,959)


	Useful Life
	(Years)
Computer equipment	3
Office equipment	3
Software	4
Furniture, fixtures and equipment	3	-	7
Motor vehicles	4
Leasehold improvements	Shorter of the remaining lease term or estimated useful life for leasehold improvements.


	Useful Life
	(Years)
Developed technology	4
Customer relationships	3	-	5
Trademarks and trade names	10
Other intangibles	4


	Units	Ownership %
Class A units of S1 Holdco	91,490	80.8	%
Class B units of S1 Holdco	21,747	19.2	%


	Amount
Tangible assets acquired and liabilities assumed:
Cash and marketable securities	$	68,748
Accounts receivable	79,086
Prepaid expenses	10,804
Property, plant & equipment, net	1,551
Internal-use software development costs, net	11,316
Other assets	6,946
Accounts payable	(9,798)
Deferred revenue	(60,768)
Accrued expenses and other current liabilities	(99,726)
Notes payable	(172,038)
VAT tax liability	(12,280)
Deferred tax liabilities	(142,806)
Other liabilities	(8,474)
Total tangible assets acquired and liabilities assumed	(327,439)
Intangible assets	555,500
Goodwill	833,845
Net assets acquired	$	1,061,906

Consideration:
Cash	$	442,168
Equity	421,047
Total consideration	863,215
Noncontrolling interest	198,691
Total	$	1,061,906


	Amount		Weighted Average Useful Life (in Years)
Trademarks	$	243,200	10
Customer relationships	115,300		4
Technology	197,000		4
Total	$	555,500


	Three months ended		Nine months ended
	September 30, 2021		September 30, 2022		September 30, 2021
Pro forma revenue	$	218,590	$	657,186	$	630,822
Pro forma net (loss)	$	(22,362)	$	(95,189)	$	(141,058)


	Owned and Operated		Partner Network		Subscription		Total
Goodwill additions and balances at September 30, 2022 (Successor)	$	479,606	$	28,553	$	396,081	$	904,240


	Owned and Operated		Partner Network		Total
Goodwill at December 31, 2021 (Predecessor)	$	24,403	$	20,417	$	44,820


	September 30, 2022 (Successor)
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Total internal-use software development costs	$	15,591	$	(2,992)	$	12,599
Intangibles:
Developed technology	$	198,127	$	(33,399)	$	164,728
Trademarks and trade names	272,953		(18,112)		254,841
Software	3,900		(562)		3,338
Customer relationships	116,600		(33,489)		83,111
Total intangible costs	$	591,580	$	(85,562)	$	506,018



	December 31, 2021 (Predecessor)
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Total internal-use software development costs	$	21,274	$	(10,061)	$	11,213
Intangibles:
Developed technology	$	8,398	$	(7,242)	$	1,156
Trademarks and trade names	69,007		(21,375)		47,632
Professional service agreement	3,100		(2,359)		741
Customer relationships	1,500		(661)		839
Total intangible costs	$	82,005	$	(31,637)	$	50,368


	Amount
Assets acquired and liabilities assumed:
Working capital	$	32
Trademark - 10 years weighted average useful life	1,100
Goodwill	3,500
Net assets acquired	$	4,632

Total consideration:
Cash	$	4,632


	Amount
Cash and cash equivalents	$	21,232
Accounts receivable	5,860
Other current assets	446
Accounts payable	(116)
Accrued expenses and other current liabilities	(955)
Deferred tax liabilities	(8,094)
Assets acquired and liabilities assumed	18,373
Intangible assets	30,300
Goodwill	51,914
Net assets acquired	$	100,587

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


	Amount		Weighted Average Useful Life (in Years)
Trademark	$	26,400	10
Software	3,900		4
Total	$	30,300


Amortization Expense
Remainder of 2022	$	33,698
2023	109,983
2024	103,467
2025	91,807
2026	40,405
Thereafter	139,257
Total amortization expense	$	518,617


			Successor
			As of September 30, 2022
Weighted average remaining lease terms (in years):			7.1
Weighted average discount rate			5.2%


	Successor
	As of September 30, 2022
Operating leases:
Remainder of 2022	$	617
2023	2,508
2024	2,579
2025	2,235
2026	268
Thereafter	1,489
Total lease payments	$	9,696
Less: Imputed interest	(1,188)
Present value of operating lease liabilities	$	8,508


	Predecessor
	As of December 31, 2021
Year ending
2022	$	1,957
2023	$	1,950
2024	$	1,950
2025	$	1,663


	Deferred Revenue
January 1, 2021 (Predecessor)	$	1,889
Additions	5,116
Revenue recognized	(5,034)
December 31, 2021 (Predecessor)	$	1,971


	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*	187,383
Revenue recognized	(119,094)
September 30, 2022 (Successor)	$	68,289


	Successor
Remainder for 2022	$	5,000
2023	20,000
2024	20,000
2025	20,000
2026	30,000
2027	344,000
Total future minimum principal payment	$	439,000
Less: current portion	(20,000)
Long-term portion	$	419,000


	December 31, 2021 (Predecessor)
	Level 3
Former CEO equity interest	$	11,132
Contingent consideration	1,682
Total	$	12,814


	Former CEO equity profits interest*		Contingent consideration		Warrant liability
Fair value of liabilities at December 31, 2020 (Predecessor)	$	4,236	$	8,240
Settlements	—		(6,715)
Change in fair value	4,238		94
Fair value of liabilities at September 30, 2021 (Predecessor)	$	8,474	$	1,619

Fair value of liabilities at December 31, 2021 (Predecessor) and January 26, 2022 (Predecessor)	$	11,132	$	1,682

Fair value of liabilities at January 27, 2022 (Successor)			$	1,682	$	27,012
Settlements			(1,715)		(22,965)
Additions			28		—
Change in fair value			5		14,111
September 30, 2022 (Successor)			$	—	$	18,158


	Three-Month Period				Nine-Month Period
	Successor		Predecessor		Successor		Predecessor
	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Period from January 27, 2022 through September 30, 2022		Period from January 1, 2022 through January 26, 2022		Nine Months Ended September 30, 2021
United States	$	156,726	$	167,105	$	459,206	$	51,701	$	474,735
United Kingdom	44,281		107		114,924		—		276
Other countries	169		4,234		12,951		1,011		13,575
Total	$	201,176	$	171,446	$	587,081	$	52,712	$	488,586


Inputs
Risk-free interest rate			1.6%
Expected stock price volatility			50.0%
Cost of equity			23.6%
Expected term (years)			5
Fair Value of Class A common stock			$10.00


Performance Period*	Fixed Amount		Tier 1 Amount**		Tier 2 Amount**		Tier 3 Amount**		Total Maximum Payment per Performance Period
Dec. 31, 2022	$	3,333	$	3,333	$	—	$	—	$	6,666
Dec. 31, 2023	3,333		3,333		3,750		—		10,416
Dec. 31, 2024	3,334		3,334		3,750		7,500		17,918
	$	10,000	$	10,000	$	7,500	$	7,500	$	35,000

*Payments for each applicable Performance Period are paid within 60 calendar days of the end of the applicable Performance Period.

**If the Tier 1 Amount is not achieved in the first Performance Period but is achieved in the second Performance Period, the Tier 1 Amount for the first Performance Period shall be paid out at the end of the second Performance Period and if achieved in the third Performance period the full amount will be paid at the end of the third Performance Period. If the Tier 2 Amount is not achieved in the second Performance Period but is achieved in the third Performance Period, the Tier 2 Amount will be paid at the end of the third Performance Period. If the Tier 2 Amount or the Tier 3 Amount is achieved in the first Performance Period, such Tier Amounts shall be paid as noted in the table above.


	Successor		Predecessor
(in thousands)	Period from January 27, 2022 through September 30, 2022		Period from January 1, 2022 through January 26, 2022		Nine Months Ended September 30, 2021
Net cash provided by (used in) operating activities	$	521	$	(10,490)	$	39,369
Net cash used in investing activities	$	(453,425)	$	(441)	$	(4,901)
Net cash used in financing activities	$	(22,552)	$	—	$	(27,635)


*						Filed herewith.
**						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.



	System1 Inc.

Date: November 14, 2022	By:	/s/ Michael Blend
		Michael Blend
		Chief Executive Officer

Date: November 14, 2022	By:	/s/ Tridivesh Kidambi
		Tridivesh Kidambi
		Chief Financial Officer