System1, Inc 10-Q for FY2024 Q1
System1, Inc. (SST)
10-Q
2024-05-09
For: 2024-03-31
View Original
Added on
April 10, 2026
About this 10-Q
System1, Inc filed this 10-Q on May 9, 2024, covering the quarter ended March 31, 2024 (FY2024 Q1).
Headline figures
Quarter ended March 31, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $84.92M
- down 29.9% from $121.12M a year earlier
- Net loss
- $10.54M
- compared with a net loss of $33.8M a year earlier
- Diluted EPS
- -$0.16
- compared with -$0.36 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2024
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For transition period from __________ to __________
Commission file number 001-39331
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of Principal Executive Offices) | (Zip Code) | |||||||
(310 ) 924-6037
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | ||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of May 7, 2024, there were 68,901,898 shares of Class A common stock, $0.0001 par value per share, outstanding and 21,203,676 shares issued and outstanding of Class C common stock, $0.0001 par value per share.
Table of Contents
| Page | ||||||||
Part I. - Financial Information | ||||||||
Item 1. | ||||||||
Part II - Other Information | ||||||||
Item 1. | ||||||||
Item 1A. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
Item 5. | ||||||||
Signatures | ||||||||
PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
1
System1, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except par value)
| March 31, 2024 | December 31, 2023 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash, current | |||||||||||
| Accounts receivable, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Restricted cash, non-current | |||||||||||
| Property and equipment, net | |||||||||||
| Internal-use software development costs, net | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | |||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Operating lease liabilities, current | |||||||||||
| Debt, net | |||||||||||
| Total current liabilities | |||||||||||
| Operating lease liabilities, non-current | |||||||||||
| Long-term debt, net | |||||||||||
| Warrant liability | |||||||||||
| Deferred tax liability | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | $ | $ | |||||||||
| Commitments and contingencies (Note 7) | |||||||||||
| Stockholders' equity: | |||||||||||
Class A common stock - $ | $ | $ | |||||||||
Class C common stock - $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders' equity attributable to System1, Inc. | |||||||||||
| Non-controlling interest | |||||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
See notes to condensed consolidated financial statements.
2
System1, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except for per share)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenue | $ | $ | |||||||||
| Operating expenses: | |||||||||||
| Cost of revenue (excluding depreciation and amortization) | |||||||||||
| Salaries and benefits | |||||||||||
| Selling, general, and administrative | |||||||||||
| Depreciation and amortization | |||||||||||
| Total operating expenses | |||||||||||
| Operating loss | ( | ( | |||||||||
| Other expense (income): | |||||||||||
| Interest expense, net | |||||||||||
| Gain from debt extinguishment | ( | ||||||||||
| Change in fair value of warrant liabilities | ( | ( | |||||||||
| Total other (income) expense, net | ( | ||||||||||
| Loss before income tax | ( | ( | |||||||||
| Income tax benefit | ( | ( | |||||||||
| Net loss from continuing operations | ( | ( | |||||||||
| Net loss from discontinued operations, net of tax | ( | ||||||||||
| Net loss | ( | ( | |||||||||
| Less: Net loss from continuing operations attributable to non-controlling interest | ( | ( | |||||||||
| Less: Net loss from discontinued operations attributable to non-controlling interest | ( | ||||||||||
| Net loss attributable to System1, Inc. | $ | ( | $ | ( | |||||||
| Amounts attributable to System1, Inc.: | |||||||||||
| Net loss from continuing operations | $ | ( | $ | ( | |||||||
| Net loss from discontinued operations | ( | ||||||||||
| Net loss attributable to System1, Inc. | $ | ( | $ | ( | |||||||
| Basic and diluted net loss per share: | |||||||||||
| Continuing operations | $ | ( | $ | ( | |||||||
| Discontinued operations | ( | ||||||||||
| Basic and diluted net loss per share | $ | ( | $ | ( | |||||||
| Weighted average number of shares outstanding - basic and diluted | |||||||||||
See notes to condensed consolidated financial statements.
3
System1, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(In thousands)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Other comprehensive income (loss) | |||||||||||
| Foreign currency translation income (loss) | ( | ( | |||||||||
| Comprehensive loss | ( | ( | |||||||||
| Comprehensive loss attributable to non-controlling interest | ( | ( | |||||||||
| Comprehensive loss attributable to System1, Inc. | $ | ( | $ | ( | |||||||
See notes to condensed consolidated financial statements.
4
System1, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(In thousands)
Class A Common Stock | Class C Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Additional Paid-In-Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Non-Controlling Interest | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with settlement of incentive plan | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class C shares to Class A shares | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax receivable agreement liability and deferred taxes arising from LLC interest ownership exchanges and the issuance of common stock from equity incentive plans | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures and shares withheld for taxes | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions from members, net of distributions | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
Class A Common Stock | Class C Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Additional Paid-In-Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Non-Controlling Interest | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||||||
| — | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures and shares withheld for taxes | — | — | — | ( | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with settlement of incentive plan | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Conversion of Class C shares to Class A shares | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Increase in tax receivable agreement liability | — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||
5
See notes to condensed consolidated financial statements.
6
System1, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash Flows from Operating Activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Noncash lease expense | |||||||||||
| Change in fair value of warrant liabilities | ( | ( | |||||||||
| Deferred tax benefits | ( | ( | |||||||||
| Gain from debt extinguishment | ( | ||||||||||
| Other | ( | ||||||||||
| Changes in operating assets and liabilities | |||||||||||
| Accounts receivable | |||||||||||
| Prepaids and other assets | ( | ( | |||||||||
| Accounts payable | ( | ( | |||||||||
| Accrued expenses and other liabilities | ( | ( | |||||||||
| Deferred revenue | ( | ||||||||||
| Long-term earnout liabilities | ( | ||||||||||
| Other long-term liabilities | ( | ||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash Flows from Investing Activities | |||||||||||
| Purchases of property and equipment | ( | ||||||||||
| Capitalized software development costs | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash Flows from Financing Activities | |||||||||||
| Repayment of Term Loan | ( | ( | |||||||||
| Payment of acquisition holdback | ( | ||||||||||
| Taxes paid related to net settlement of stock awards | ( | ( | |||||||||
| Contributions from (distributions to) members | ( | ||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes in cash, cash equivalent and restricted cash | ( | ||||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Cash and cash equivalents and restricted cash, beginning of the period | |||||||||||
| Cash and cash equivalents and restricted cash, end of the period | $ | $ | |||||||||
| Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Cash paid for interest | $ | $ | |||||||||
| Capitalized assets financed by accounts payable | $ | $ | |||||||||
| Stock-based compensation included in capitalized software development costs | $ | $ | |||||||||
| Settlement of incentive plan through issuance of common stock | $ | $ | |||||||||
See notes to condensed consolidated financial statements.
7
System1, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
1.Organization and Description of Business
System1, Inc. and subsidiaries (the “Company”, “we”, “our” or “us”) operates an omnichannel customer acquisition platform, delivering high-intent customers to brands, advertisers and publishers.
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 high-intent end-users, RAMP allows us to monetize these acquired end users through our relationships with third party advertisers and advertising networks (“Advertising Partners”). RAMP operates across our network of owned and operated websites, allowing us to monetize end-user traffic that we source from various acquisition marketing channels, including Google, Facebook, Zemanta, Taboola, and TikTok. RAMP also allows third party advertising platforms and publishers (“Network Partners”) to send end-user traffic to, and monetize end user traffic on, our owned and operated websites or through our monetization agreements.
We have two reportable segments: Owned and Operated Advertising and Partner Network (see Note 10, Segment Reporting).
2.Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Our condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Our fiscal year ends on December 31. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as filed with the Securities and Exchange Commission (“SEC”) in March 2024.
In our opinion, the unaudited interim condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair statement of our financial position, results of operations, and cash flows. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2024 or future operating periods.
There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 that have had a material impact on our condensed consolidated financial statements and related notes.
We completed the sale of Total Security Limited, formerly known as Protected.net Group Limited (“Protected”) on November 30, 2023. The results of operations of our Protected business prior to its sale are presented as net loss from discontinued operations in our condensed consolidated statements of operations in the periods applicable (see Note 12, Discontinued Operations).
Revision of Previously Issued Consolidated Financial Statements
During the fourth quarter of 2023, we identified certain errors related to our previously issued financial statements as of and for the three months ended March 31, 2023 as follows:
a.Accrued expenses and other current liabilities were understated by $0.9 million, additional paid-in capital was understated by $1.7 million and salaries and benefits expense was understated by $0.3 million as a result of our not accelerating expenses upon forfeiture of certain cash and equity Replacement Awards (as defined in Note 9, Net Loss Per Share) previously granted in 2022 that impacted the condensed consolidated balance sheet, condensed consolidated statements of operations, condensed consolidated statements of changes in stockholders' equity, and condensed consolidated statement of cash flows.
8
System1, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
b.We did not appropriately account for changes in equity and earnings per share, specifically:
(i) the carrying amount of non-controlling interest was not updated as changes in ownership events occurred during each reporting period,
(ii) certain equity replacement awards granted during 2022 were not properly considered in the allocation of net income (loss) to controlling and non-controlling interest and earnings per share. These errors impact the condensed consolidated balance sheets, condensed consolidated statement of operations, condensed consolidated statements of changes in stockholders' equity, and condensed consolidated statement of cash flows.
c.We made additional corrections for other immaterial errors.
d.We adjusted for the tax impacts of the corrections related to such errors described above.
We concluded that the errors were not material, either individually or in the aggregate, to our previously issued condensed consolidated financial statements for the impacted period. To correct the immaterial errors, we have revised our previously issued condensed consolidated financial statements as of and for the period ended March 31, 2023.
We have revised the condensed consolidated balance sheet, condensed consolidated statement of operations, condensed consolidated statement of comprehensive income (loss), condensed consolidated statement of changes in stockholders' equity, and condensed consolidated statement of cash flows for the period ended March 31, 2023, as well as the associated Notes to the condensed consolidated financial statements to reflect the correction of these immaterial errors in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2024.
The following table reflects the revisions and the impact of reporting Discontinued Operations related to the sale of Protected to the previously issued condensed consolidated balance sheet as of March 31, 2023 (in thousands):
| As Previously Reported | Revision Adjustment | As Revised | Impact of Reclassification of Discontinued Operations | As Currently Reported | |||||||||||||||||||||||||
Liabilities and Stockholders' Equity | |||||||||||||||||||||||||||||
Current liabilities: | |||||||||||||||||||||||||||||
| Accrued expenses and other current liabilities | (a) | ( | |||||||||||||||||||||||||||
| Total current liabilities | |||||||||||||||||||||||||||||
| Deferred tax liability | (d) | ( | |||||||||||||||||||||||||||
| Total liabilities | |||||||||||||||||||||||||||||
| Stockholders’ Equity / Members’ Deficit | |||||||||||||||||||||||||||||
| Additional paid-in capital | (a) (b) | ||||||||||||||||||||||||||||
| Accumulated deficit | ( | ( | (a) (b) (d) | ( | |||||||||||||||||||||||||
| Accumulated other comprehensive loss | ( | ( | (d) | ( | |||||||||||||||||||||||||
| Total stockholders' equity attributable to System1, Inc. | |||||||||||||||||||||||||||||
| Non-controlling interest | ( | (b) | |||||||||||||||||||||||||||
| Total stockholders' equity | ( | ||||||||||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
9
System1, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table reflects the revisions and the impact of reporting Discontinued Operations related to the sale of Protected to the previously issued condensed consolidated statement of operations, for the three months ended March 31, 2023 (in thousands):
| As Previously Reported | Revision Adjustment | As Revised | Impact of Reclassification of Discontinued Operations | As Currently Reported | |||||||||||||||||||||||||
| Salaries and benefits | (a) | ( | |||||||||||||||||||||||||||
| Total operating expenses | ( | ||||||||||||||||||||||||||||
| Operating loss | ( | ( | ( | ( | |||||||||||||||||||||||||
| Other expense (income): | |||||||||||||||||||||||||||||
| Interest expense, net | ( | ||||||||||||||||||||||||||||
| Total other (income) expense, net | ( | ||||||||||||||||||||||||||||
| Loss before income tax | ( | ( | ( | ( | |||||||||||||||||||||||||
| Income tax benefit | ( | ( | (d) | ( | ( | ||||||||||||||||||||||||
| Net loss from continuing operations | ( | ( | ( | ||||||||||||||||||||||||||
| Net loss from discontinued operations, net of tax | ( | ( | |||||||||||||||||||||||||||
| Net loss | ( | ( | ( | ||||||||||||||||||||||||||
| Less: Net loss from continuing operations attributable to non-controlling interest | ( | (b) | ( | ( | |||||||||||||||||||||||||
| Less: Net loss from discontinued operations attributable to non-controlling interest | ( | ( | |||||||||||||||||||||||||||
| Net loss attributable to System1, Inc. | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||
| Amounts attributable to System1, Inc.: | |||||||||||||||||||||||||||||
| Net loss from continuing operations | $ | ( | $ | (b) | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Net loss from discontinued operations | ( | ( | |||||||||||||||||||||||||||
| Net loss attributable to System1, Inc. | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||
| Basic and diluted net loss per share: | |||||||||||||||||||||||||||||
| Continuing operations | $ | ( | $ | (b) | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Discontinued operations | ( | ( | |||||||||||||||||||||||||||
| Basic and diluted net loss per share | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||
| Weighted average number of shares outstanding - basic and diluted | (b) | ||||||||||||||||||||||||||||
The following table reflects the revisions related to the previously issued condensed consolidated statement of comprehensive loss for the three months ended March 31, 2023 (in thousands):
| As Previously Reported | Revision Adjustment | As Currently Reported | |||||||||||||||
| Net loss | $ | ( | $ | (a) (d) | $ | ( | |||||||||||
| Other comprehensive income (loss) | |||||||||||||||||
| Foreign currency translation income (loss) | ( | ( | |||||||||||||||
| Comprehensive loss | ( | ( | |||||||||||||||
| Comprehensive loss attributable to non-controlling interest | ( | (b) | ( | ||||||||||||||
| Comprehensive loss attributable to System1, Inc. | $ | ( | $ | $ | ( | ||||||||||||
The following tables reflect the revisions to the previously issued condensed consolidated statement of changes in stockholders' equity for the quarter ended March 31, 2023. Although the impact is pervasive throughout the condensed consolidated statement of changes in stockholders' equity as a result of the errors described above, the most significant impact is a reduction of net loss of $0.2 million, an increase of non-controlling interest of
10
System1, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
$0.5 million, a reduction in accumulated deficit of $0.2 million and a reduction in additional paid-in-capital of $0.2 million.
Class A Common Stock | Class C Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Additional Paid-In-Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Non-Controlling Interest | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
| As Previously Reported | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||
| — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures and shares withheld for taxes | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with settlement of incentive plan | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class C shares to Class A shares | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Increase in tax receivable agreement liability | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||
| Revision Adjustments | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | (a) (b) (d) | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures and shares withheld for taxes | — | — | — | — | — | — | ( | (a) (b) | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with settlement of incentive plan | — | — | — | — | — | — | ( | (b) | ||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class C shares to Class A shares | — | — | — | — | — | — | ( | (b) | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | — | (c) | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ( | — | — | (a) (b) | ||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| As Revised | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||
11
System1, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
| — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures and shares withheld for taxes | — | — | — | ( | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with settlement of incentive plan | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class C shares to Class A shares | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Increase in tax receivable agreement liability | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||
The following table reflects the revisions to the previously issued condensed consolidated statement of cash flows for the three months ended March 31, 2023 (in thousands):
| As Previously Reported | Revision Adjustment | As Currently Reported | |||||||||||||||
| Cash Flows from Operating Activities | |||||||||||||||||
| Net loss | $ | ( | $ | (a) (d) | $ | ( | |||||||||||
| Stock-based compensation | (a) | ||||||||||||||||
| Deferred tax benefits | ( | ( | (d) | ( | |||||||||||||
| Changes in operating assets and liabilities | |||||||||||||||||
| Accrued expenses and other liabilities | ( | ( | (a) | ( | |||||||||||||
| Other long-term liabilities | ( | (d) | |||||||||||||||
| Net cash used in operating activities | $ | ( | $ | $ | ( | ||||||||||||
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Management’s estimates are based on historical information available as of the date of the condensed consolidated financial statements and various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from those estimates.
Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, valuation of goodwill, acquired intangible assets, assets held for sale and long-lived assets, valuation and recognition of stock-based compensation awards, income taxes, contingent consideration and determination of the fair value of the warrant liabilities. On an ongoing basis, management evaluates our estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities.
Risks and Concentrations
12
System1, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
We are subject to certain business and operational risks, including competition from alternative technologies, as well as dependence on key Advertising Partners, key employees, key contracts, and growth to achieve our business and operational objectives.
Concentrations
The concentration as a percentage of total revenue for our key advertising partner Google is 83 % and 89 %, for the three months ended March 31, 2024 and 2023, respectively.
As of March 31, 2024, we had (i) two paid search advertising partnership agreements with Google, and (ii) one paid search advertising partnership agreement with Microsoft. The Google agreements are in effect through February 28, 2025, and May 31, 2024, respectively. The agreement with Microsoft (our next largest Advertising Partner by revenue) is in effect through June 30, 2025. Under certain circumstances, each of these agreements may be terminated by either us or the respective Advertising Partner immediately, or with minimal notice.
Accounts receivable are primarily derived from Advertising Partners located within the United States. As of March 31, 2024, Google and Yahoo, represented 68 % and 5 %, respectively, of our accounts receivables balance. As of December 31, 2023, these two Advertising Partners represented 69 % and 6 %, respectively, of our accounts receivables balance.
3.Goodwill, Internal-Use Software Development Costs, Net, and Intangible Assets, Net
Goodwill
Goodwill was $82.4 million as of March 31, 2024 and December 31, 2023, all attributable to the Partner Network reportable segment. No impairment of goodwill was identified for any of the periods presented.
Internal-use software development costs, net and intangible assets, net
Internal-use software development costs and intangible assets consisted of the following (in thousands):
| March 31, 2024 | |||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||
| Internal-use software development costs | $ | $ | ( | $ | |||||||||||||
| Intangible assets: | |||||||||||||||||
| Developed technology | $ | $ | ( | $ | |||||||||||||
| Trademarks and trade names | ( | ||||||||||||||||
| Software | ( | ||||||||||||||||
| Customer relationships | ( | ||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||
13
System1, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
| December 31, 2023 | |||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||
| Internal-use software development costs | $ | $ | ( | $ | |||||||||||||
| Intangible assets: | |||||||||||||||||
| Developed technology | $ | $ | ( | $ | |||||||||||||
| Trademarks and trade names | ( | ||||||||||||||||
| Software | ( | ||||||||||||||||
| Customer relationships | ( | ||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||
The internal-use software development costs includes construction in progress which is not being amortized of $4.2 million and $3.5 million as of March 31, 2024 and December 31, 2023, respectively.
Amortization expense for internal-use software development costs and intangible assets were as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
Amortization expense for internal-use software development | $ | $ | |||||||||
| Amortization expense for intangible assets | $ | $ | |||||||||
As of March 31, 2024, the weighted average amortization period for all intangible assets was 7 years.
4.Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following items as of the periods presented (in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
| Accrued revenue share | $ | $ | |||||||||
| Accrued marketing expenses | |||||||||||
| Accrued payroll and related benefits | |||||||||||
| Accrued professional fees | |||||||||||
| Deferred revenue | |||||||||||
| Accrued tax liability | |||||||||||
| Other liabilities | |||||||||||
| Accrued expenses and other current liabilities | $ | $ | |||||||||
5.Debt, Net
We entered into a term 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 $400.0 million and with the net proceeds of $376.0 million. The 2022 Revolving Facility provided for borrowing availability of up
14
System1, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
to $50.0 million. As of March 31, 2024, there was no balance outstanding on the 2022 Revolving Facility and principal of $296.3 million was outstanding on the Term Loan. Through December 31, 2025, the outstanding Term Loan is subject to quarterly amortization payments of $5.0 million. From March 31, 2026, the Term Loan is subject to quarterly amortization payments of $7.5 million. The Term Loan matures in 2027.
For every interest period, the interest rate on the Term Loan is the adjusted Secured Overnight Financing Rate (“SOFR”) plus 4.75 %. The Term Loan is amortized in quarterly installments on each scheduled payment date. The Term Loan comes with a leverage covenant, which goes into effect only if the utilization on the 2022 Revolving Facility exceeds 35 % of the $50.0 million 2022 Revolving Facility at each quarter-end starting the second quarter 2022, 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 we deliver our audited consolidated financial statements to our lender within 120 days of our fiscal year end, December 31. Should we fail to distribute the financial statements to our lender within 120 days, we are allowed an additional 30 days to cure. We were in compliance with our financial covenants as of March 31, 2024.
On January 17, 2024, we completed the repurchase of $63.7 million in principal amount of our Term Loan for an aggregate purchase price of $40.9 million (at discount of 64.2 % of its par value) pursuant to a Dutch auction tender offer. Following the repurchase, the outstanding principal amount of the Term Loan was $301.3 million. We used available cash on hand to fund the repurchase. Our gain on the repurchase was $19.7 million before fees and expenses incurred.
The interest rate on the 2022 Revolving Facility is the adjusted SOFR plus 2.5 % with an adjusted SOFR floor of 0 %. As of March 31, 2024 we had $50.0 million available on the 2022 Revolving Facility.
The carrying values of our debt, net of discounts, deferred financing and debt issuance costs were as follows (in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
Term Loan1,2 | $ | $ | |||||||||
| Total Debt, net | $ | $ | |||||||||
| _______________ | |||||||||||
1 Includes unamortized discount of $ | |||||||||||
2 Estimated fair value of the Term Loan was $ | |||||||||||
6.Income Taxes
We are the sole managing member of S1 Holdco, LLC ("S1 Holdco") and, as a result, consolidate the financial results of S1 Holdco. S1 Holdco is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, S1 Holdco is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by S1 Holdco is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss of S1 Holdco, as well as any stand-alone income or loss generated by us.
We recorded an immaterial benefit for income taxes for the three months ended March 31, 2024 and a benefit from income taxes of $3.8 million for the three months ended March 31, 2023. The effective tax rate for the three months ended March 31, 2024 and 2023 was 0.4 % and 11.2 %, respectively. The provision for income taxes differs from the amount of income tax computed by applying the U.S. statutory federal tax rate of 21% to the loss before income taxes due to the exclusion of non-controlling loss, state taxes, foreign rate differential, non-deductible
15
System1, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
expenses, increase to the valuation allowance related to unrealizable deferred tax assets, and outside basis adjustments. As of March 31, 2024, we had a full valuation allowance on our U.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets would not be realized.
During the three months ended March 31, 2024, and 2023, inclusive of interest, no 0.9 million and $0.8 million as of March 31, 2024 and December 31, 2023, respectively.
7.Commitments and Contingencies
In June 2023, we entered into a multi-year agreement with a service provider whereby we are contractually obligated to spend $5.0 10.0 million towards this commitment.
As of March 31, 2024, we had various non-cancelable operating lease commitments for office space which have been recorded as Operating lease liabilities.
Litigation
We are subject to various legal proceedings and claims that arise in the ordinary course of business. We believe the ultimate liability, if any, with respect to these actions will not materially affect the consolidated financial position, results of operations, or cash flows reflected in the condensed consolidated financial statements. There can be no assurance, however, that the ultimate resolution of such actions will not materially or adversely affect our consolidated financial position, results of operations, or cash flows. We accrued for losses when the loss is deemed probable and the liability can reasonably be estimated.
In October 2023, a putative California class action complaint (the “Complaint”) was filed against us and our Protected business regarding alleged violations of California’s Auto Renewal Law requirements related to the marketing and sale of its subscription service offerings for anti-virus and ad-blocking software (the “Protected Software”) to consumers. The Complaint alleges claims under California’s false advertising and unfair competition laws and primarily alleges that the marketing and sales checkout flows for the Protected Software did not clearly and conspicuously disclose that the named plaintiffs set forth in the Complaint were purchasing the Protected Software for a promotional period which would auto-renew after the applicable promotional period. We dispute the claims alleged, and intend to defend ourselves vigorously in this matter.
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions may not be subject to claims related to these indemnifications. As a result, we believe the estimated fair value of these agreements was immaterial. Accordingly, we have no liabilities recorded for these agreements as of March 31, 2024.
8.Fair Value Measurement
Financial Liabilities Measured at Fair Value on a Recurring Basis
The following tables present our fair value hierarchy for liabilities measured at fair value on a recurring basis (in thousands):
16
System1, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
| March 31, 2024 | December 31, 2023 | ||||||||||
| Level 1 | |||||||||||
| Public Warrants | $ | $ | |||||||||
The fair value of the Public Warrants has been estimated using the Public Warrants’ quoted market price. There were no transfers in or out of levels during the periods presented.
Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis
For further information on the fair value assessment of goodwill refer to Note 3, Goodwill, Internal-Use Software Development Costs, Net, and Intangible Assets, Net.
9.Net Loss Per Share
Basic net loss per share was calculated by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding. Basic and diluted net loss per share was calculated as follows (in thousands, except per share):
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Basic and diluted net loss per share | |||||||||||
| Net loss from continuing operations attributable to System1, Inc. | $ | ( | $ | ( | |||||||
| Net loss from discontinued operations, net of tax attributable to System1, Inc. | ( | ||||||||||
| Basic and Diluted net loss per share | $ | ( | $ | ( | |||||||
| Numerator: | |||||||||||
| Net loss from continuing operations attributable to System1, Inc. | $ | ( | $ | ( | |||||||
| Net loss from discontinued operations, net of tax attributable to System1, Inc. | ( | ||||||||||
| Net loss attributable to System1, Inc. | $ | ( | $ | ( | |||||||
| Denominator: | |||||||||||
| Weighted-average common shares outstanding used in computing basic and diluted net loss per share | |||||||||||
For the periods presented in the table above, a total of 16.8
10.Segment Reporting
17
System1, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
We have two
The CODM measures and evaluates reportable segments based on segment operating revenue as well as adjusted gross profit. The tables below include the following operating expenses that are not allocated to the reporting segments presented to our CODM: depreciation and amortization of property, equipment and leasehold improvements, amortization of intangible assets and, at times, certain other transactions or adjustments. The CODM does not consider these expenses for the purposes of making decisions to allocate resources among segments or to assess segment performance, however these costs are included in reported condensed consolidated net loss from continuing operations before income tax and are included in the reconciliation that follows.
The following table summarizes revenue by reportable segments (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Owned and Operated Advertising | $ | $ | |||||||||
| Partner Network | |||||||||||
| Total revenue | $ | $ | |||||||||
The following table summarizes adjusted gross profit by reportable segments (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Owned and Operated Advertising | $ | $ | |||||||||
| Partner Network | |||||||||||
| Adjusted gross profit | |||||||||||
Other cost of revenue | |||||||||||
| Salaries and benefits | |||||||||||
| Selling, general, and administrative | |||||||||||
| Depreciation and amortization | |||||||||||
| Interest expense, net | |||||||||||
| Gain from debt extinguishment | ( | ||||||||||
| Change in fair value of warrant liabilities | ( | ( | |||||||||
| Loss before income tax | $ | ( | $ | ( | |||||||
The following table summarizes revenue by geographic region (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| United States | $ | $ | |||||||||
| Other countries | |||||||||||
| Total revenue | $ | $ | |||||||||
11.Stock-Based Compensation
18
System1, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
We recorded the following total stock-based compensation expense (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Stock-based compensation expense | $ | $ | |||||||||
CouponFollow Incentive Plan
As of March 31, 2024, we have determined that it was not probable that the CouponFollow business would achieve any of the contingent earnout targets during the Performance Periods, and accordingly, we did not record a liability for any of the Tier amounts set forth in the CouponFollow Incentive Plan. In the quarter ended March 31, 2024 we issued 1.0 million Class A Common Stock with an aggregate fair value of $1.7 million, net of shares withheld for taxes, on the date of the settlement to settle the second $3.3 million Fixed Amount. We recognized a gain of $0.5 million, being the difference between the fair value of the Class A common stock issued and the carrying value of the liability. During the quarter ended March 31, 2024, we recognized $0.8 million for the third Fixed Amount within salaries and benefits expenses on the condensed consolidated statements of operations. Our March 31, 2024 short-term restricted cash included $2.8 million for which the restriction was released related to the amount we paid during the quarter ended March 31, 2024 for continued services from certain individuals of CouponFollow. The amount was released from escrow in April 2024.
12.Discontinued Operations
Sale of Protected
On November 30, 2023, we completed the sale of Protected, our subscription reporting unit. Total consideration comprised of: (a) $240.0 million in cash, subject to certain adjustments, (b) the return and subsequent cancellation of approximately 29.1 million shares of our Class A common stock, par value $0.0001 per share, owned by JDI and other entities and individuals affiliated with the Purchasing Parties and (c) confirmation from JDI, Protected and the Protected CEO that the financial performance benchmarks related to the financial benchmarks included in the Protected Incentive Plan, will, as a result of the Protected sale, no longer be achievable.
The financial results of Protected are presented as a loss from discontinued operations, net of taxes in the condensed consolidated statements of operations. The following table presents the summarized discontinued operations condensed consolidated statements of operations (in thousands):
| Three Months Ended March 31, 2023 | |||||
| Revenue | $ | ||||
| Operating expenses: | |||||
| Cost of revenue (excluding depreciation and amortization) | |||||
| Salaries and benefits | |||||
| Selling, general, and administrative | |||||
| Depreciation and amortization | |||||
| Total operating expenses | |||||
| Operating loss | ( | ||||
| Other expense, net | |||||
| Loss from discontinued operations before income taxes | ( | ||||
| Income tax benefit | ( | ||||
| Net loss from discontinued operations | $ | ( | |||
19
System1, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents the significant non-cash items and capital expenditures for the discontinued operations with respect to the subscription business that are included in the condensed consolidated statements of cash flows (in thousands):
| Three Months Ended March 31, 2023 | |||||
| Depreciation and amortization | $ | ||||
| $ | |||||
| Capital expenditures | $ | ||||
Transition Service Agreement
In connection with a transition service agreement, we agreed to provide certain services for which full reimbursement of cost will be provided.
Discontinued Operations Related-Party Transactions
Payment Processing Agreement
Protected utilizes multiple credit card payment processors, including Paysafe Financial Services Limited (“Paysafe”). In March 2021, Paysafe completed a merger with Foley Trasimene Acquisition Corp. II (“Foley Trasimene”), a special purpose acquisition company sponsored by entities affiliated with a sponsor of Trebia who was also a member of our Board of Directors. We incurred credit card processing fees related to Paysafe for the three months ended March 31, 2023 of $1.1 million.
Office Facilities
Protected had an agreement with JDI Property Holdings Limited (“JDIP”), an entity controlled by one of our directors, which allowed Protected to use space at their property in exchange for GBP 0.1 million per year.
Protected Incentive Plan Installment Payments
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
SYSTEM1 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated or the context otherwise requires, references in this section to “the Company,” “System1,” “we,” “us,” “our” and other similar terms refer to System1, Inc and its subsidiaries.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ending December 31, 2023. In addition to historical information, the following discussion and analysis contains forward-looking statements. Our actual results may differ significantly from those projected in such forward-looking statements. Factors that might cause future results to differ materially from those projected in such forward-looking statements include, but are not limited to, those discussed in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”
References to “Notes” are notes included in our unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. The condensed consolidated financial statements as of and for the quarter ended March 31, 2023 have been revised to correct prior period errors as discussed in Note 2, Summary of Significant Accounting Policies. Accordingly, this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations reflects the impact of those revisions.
Company Overview
We operate an omnichannel customer acquisition platform, delivering high-intent customers to brands, advertisers and publishers.
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 high-intent end-users, RAMP allows us to monetize these acquired end users through our relationships with third party advertisers and advertising networks (“Advertising Partners”). RAMP operates across our network of owned and operated websites, allowing us to monetize end-user traffic that we source from various acquisition marketing channels, including Google, Facebook, Zemanta, Taboola, and TikTok. RAMP also allows third party advertising platforms and publishers (“Network Partners”) to send end-user traffic to, and monetize end user traffic on, our owned and operated websites or through our monetization agreements.
Through RAMP, we process approximately 244 million daily advertising campaign optimizations and ingest over 10 billion rows of data daily across approximately 40 advertising vertical categories as of March 31, 2024. We are able to efficiently monetize user intent by linking data on consumer engagement, such as first party search data like traffic sources, device type and search queries, with data on monetization rates 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 category verticals.
We focus on monetizing user traffic acquired by our Network Partners. Since launching, it has expanded to support additional advertising formats across multiple advertising platforms, and has acquired several leading websites, enabling it to control the entire flow of the user acquisition experience, by monetizing user traffic through our network of owned and operated websites. As of March 31, 2024, we own and operates approximately 40 websites, including leading search engines like info.com and Startpage.com, and digital media publishing websites and internet utilities, such as HowStuffWorks, MapQuest, CouponFollow and ActiveBeat.
On June 28, 2021, we entered into a Business Combination Agreement (as amended on November 30, 2021, January 10, 2022 and January 25, 2022), (“Business Combination Agreement”) by and among us, S1 Holdco,
21
LLC ("S1 Holdco") and Total Security Limited, formerly known as Protected.net Group Limited (“Protected”). On January 26, 2022 (“Closing Date”), we consummated the business combination (“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, and our combined business continues to operate through the domestic and foreign subsidiaries of S1 Holdco.
Our primary operations are in the United States; and we also have operations in Canada and the Netherlands. Operations outside the United States are subject to risks inherent in operating under different legal systems as well as various political and economic environments. Among the risks are changes in existing tax laws, changes in the regulatory framework in foreign jurisdictions, data privacy laws, possible limitations on foreign investment and income repatriation, government foreign exchange controls, exposure to currency exchange fluctuations and employment laws impacting foreign employees. 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 the impact of earlier supply chain disruptions, we are unable to predict the size and duration of the impact on our revenue and our results of operations.
Sale of Protected
We completed the sale of Protected on November 30, 2023. The results of operations of our Protected business prior to its sale are presented as net loss from discontinued operations in our condensed consolidated statements of operations for all periods presented. Unless otherwise noted, the information contained in this Management Discussion and Analysis relates solely to our continuing operations and does not include the operations of our Protected business (see Note 12, Discontinued Operations).
Components of Our Results of Operations
Revenue
We earn revenue by deploying components of our Responsive Acquisition Marketing Platform (RAMP) to our owned and operated websites to acquire and monetize end-users via advertising offerings from our Advertising Partners. For this revenue stream, we are the principal in the transaction and report revenue on a gross basis for the amounts received from our Advertising Partners. Additionally, revenue is earned from revenue-sharing arrangements with our Network Partners, whereby our Network Partners acquire end-users and use RAMP to monetize those end-users via our relationships with Advertising Partners. We have determined that we are the agent in these transactions and therefore report revenue on a net basis, based on the difference between amounts received by us from our Advertising Partners, less amounts remitted to our Network Partners based on the underlying revenue-sharing agreements.
We recognize revenue upon delivering user-traffic to our Advertising Partners based on a cost-per-click or cost-per-thousand impression basis. The payment terms with our Advertising Partners is typically 30 days.
Revenue may fluctuate from period to period due to a number of factors including seasonality and the shift in mix of user acquisition sources from Advertising Partners.
We have two reportable segments:
•Owned and Operated Advertising ("O&O"); and
•Partner Network.
Operating Expenses
We classify our operating expenses into the following categories:
We classify our operating expenses into the following categories:
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Cost of revenue (excluding depreciation and amortization). Cost of revenue (excluding depreciation and amortization) primarily consists of traffic acquisition costs, which are the costs to place advertisements to acquire customers to our websites and services, as well as domain name registration costs and licensing costs to provide mapping services to Mapquest.com. We do not pre-pay any traffic acquisition costs, and therefore, such costs are expensed as incurred.
Salaries and benefits. Salaries and benefits expenses include salaries, bonuses, stock-based compensation, and employee benefits costs.
Selling, general, and administrative. Selling, general, and administrative expenses consist of fees for professional services, occupancy costs and travel and entertainment. These costs are expensed as incurred.
Depreciation and amortization. Depreciation and amortization expenses are primarily attributable to our capital investment(s) and consist of property and equipment depreciation and amortization of intangible assets with finite lives.
Other Expenses
Other expenses consist of the following:
Interest expense, net. Interest expense consists of interest on our debt and the amortization of deferred financing costs and debt discount.
Gain from debt extinguishment Gain from the repurchase of a portion of our Term Loan indebtedness at a discount.
Change in fair value of warrant liabilities. The mark to market of our liability-classified Public Warrants.
Income tax benefit
We are the sole managing member of S1 Holdco and, as a result, consolidate the financial results of S1 Holdco. S1 Holdco is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, S1 Holdco is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by S1 Holdco is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss of S1 Holdco, as well as any stand-alone income or loss generated by us.
Results of Operations
Comparisons of the Three Months Ended March 31, 2024 and 2023
The following table summarizes key components of our results of operations for the periods indicated (in thousands):
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| Three Months Ended March 31, | 2024 vs. 2023 Change | ||||||||||||||||||||||
| 2024 | 2023 | ($) | (%) | ||||||||||||||||||||
| Revenue | $ | 84,917 | $ | 121,118 | $ | (36,201) | (30) | % | |||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of revenue (excluding depreciation and amortization) | 53,698 | 82,953 | (29,255) | (35) | % | ||||||||||||||||||
| Salaries and benefits | 24,483 | 28,147 | (3,664) | (13) | % | ||||||||||||||||||
| Selling, general, and administrative | 12,728 | 14,855 | (2,127) | (14) | % | ||||||||||||||||||
| Depreciation and amortization | 19,804 | 19,392 | 412 | 2 | % | ||||||||||||||||||
| Total operating expenses | 110,713 | 145,347 | (34,634) | (24) | % | ||||||||||||||||||
| Operating loss | (25,796) | (24,229) | (1,567) | 6 | % | ||||||||||||||||||
| Other expense (income): | |||||||||||||||||||||||
| Interest expense, net | 7,970 | 11,402 | (3,432) | (30) | % | ||||||||||||||||||
| Gain from debt extinguishment | (19,676) | — | (19,676) | — | % | ||||||||||||||||||
| Change in fair value of warrant liabilities | (251) | (1,409) | 1,158 | (82) | % | ||||||||||||||||||
| Total other (income) expense, net | (11,957) | 9,993 | (21,950) | (220) | % | ||||||||||||||||||
| Loss before income tax | (13,839) | (34,222) | 20,383 | (60) | % | ||||||||||||||||||
| Income tax benefit | (48) | (3,829) | 3,781 | (99) | % | ||||||||||||||||||
| Net loss from continuing operations | (13,791) | (30,393) | 16,602 | (55) | % | ||||||||||||||||||
| Net loss from discontinued operations, net of tax | — | (12,533) | 12,533 | (100) | % | ||||||||||||||||||
| Net loss | (13,791) | (42,926) | 29,135 | (68) | % | ||||||||||||||||||
| Less: Net loss from continuing operations attributable to non-controlling interest | (3,254) | (6,757) | 3,503 | (52) | % | ||||||||||||||||||
| Less: Net loss from discontinued operations attributable to non-controlling interest | — | (2,367) | 2,367 | (100) | % | ||||||||||||||||||
| Net loss attributable to System1, Inc. | $ | (10,537) | $ | (33,802) | $ | 23,265 | (69) | % | |||||||||||||||
The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of total revenue for the periods indicated:
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| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenue | 100 | % | 100 | % | |||||||
| Operating expenses: | |||||||||||
| Cost of revenue (excluding depreciation and amortization) | 63 | % | 68 | % | |||||||
| Salaries and benefits | 29 | % | 23 | % | |||||||
| Selling, general, and administrative | 15 | % | 12 | % | |||||||
| Depreciation and amortization | 23 | % | 16 | % | |||||||
| Total operating expenses | 130 | % | 120 | % | |||||||
| Operating loss | (30) | % | (20) | % | |||||||
| Other expense (income): | |||||||||||
| Interest expense, net | 9 | % | 9 | % | |||||||
| Gain from debt extinguishment | (23) | % | — | % | |||||||
| Change in fair value of warrant liabilities | — | % | (1) | % | |||||||
| Total other (income) expense, net | (14) | % | 8 | % | |||||||
| Loss before income tax | (16) | % | (28) | % | |||||||
| Income tax benefit | — | % | (3) | % | |||||||
| Net loss from continuing operations | (16) | % | (25) | % | |||||||
| Net loss from discontinued operations, net of tax | — | % | (10) | % | |||||||
| Net loss | (16) | % | (35) | % | |||||||
| Less: Net loss from continuing operations attributable to non-controlling interest | (4) | % | (6) | % | |||||||
| Less: Net loss from discontinued operations attributable to non-controlling interest | — | % | (2) | % | |||||||
| Net loss attributable to System1, Inc. | (12) | % | (28) | % | |||||||
| * Percentages may not sum due to rounding | |||||||||||
Revenue and Cost Metrics
We use total advertising spend, number of Owned & Operated Advertising sessions (“O&O sessions”), number of Partner Network sessions (“Network sessions”), Owned & Operated Advertising cost-per-session (“O&O CPS”), Owned & Operated Advertising revenue-per-session (“O&O RPS”) and Partner Network revenue-per-session (“Network RPS”) to track our operations. We define total advertising spend as the amount of advertising that is spent by us to acquire traffic to our owned and operated websites. We define O&O sessions as the total number of monetizable user visits to our Owned & Operated Advertising websites. We define Network sessions as the number of monetizable user visits delivered by our Network Partners to RAMP. Monetizable visits exclude those visits identified by our Advertising Partners as spam, bot, or other invalid traffic. We define O&O CPS as advertising spend divided by O&O sessions. We define O&O RPS as O&O Revenue divided by O&O sessions. We define Network RPS as Network Partner revenue divided by Network sessions.
Revenue
The following table presents our revenue by reportable segment (in thousands).
| Three Months Ended March 31, | 2024 vs. 2023 Change | ||||||||||||||||||||||
| 2024 | 2023 | ($) | (%) | ||||||||||||||||||||
| Owned and Operated Advertising | $ | 69,030 | $ | 106,025 | $ | (36,995) | (35)% | ||||||||||||||||
| Partner Network | 15,887 | 15,093 | 794 | 5% | |||||||||||||||||||
| Total revenue | $ | 84,917 | $ | 121,118 | $ | (36,201) | (30)% | ||||||||||||||||
Owned and Operated Advertising
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Owned and Operated Advertising revenue decreased for the three months ended March 31, 2024 as compared to the prior year comparative period, primarily due to softening domestic advertiser spend. For the quarter ended March 31, 2024 compared to the prior quarter comparative period, sessions increased 183 million to 1,209 million from 1,026 million. RPS for O&O decreased by $0.04 to $0.06 from $0.10.
Partner Network
Partner Network revenue increased for the three months ended March 31, 2024 as compared to the prior year comparative period, 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 softening advertiser spend, leading to a reduction in RPS. For the quarter ended March 31, 2024, compared to prior quarter comparative period, sessions increased 600 million to 1,048 million from 448 million, and Network RPS decreased by approximately $0.01 to $0.02 from $0.03.
Cost of revenue (excluding depreciation and amortization)
Cost of revenue (excluding depreciation and amortization) decreased in line with a decrease in O&O's revenue. For the three months ended March 31, 2024, compared to prior year comparative period, our CPS decreased $0.03 to $0.04 from $0.07.
Our chief operating decision maker measures and evaluates reportable segments based on segment operating revenue as well as adjusted gross profit and other measures. We define and calculate adjusted gross profit as revenue less advertising expense incurred to acquire users. The remaining cost of revenue consists of non-advertising expenses such as set-up costs, royalties and fees. We exclude the following items from segment adjusted gross profit: depreciation and amortization of property, equipment and leasehold improvements, amortization of intangible assets and, at times, certain other transactions or adjustments.
The following table presents our adjusted gross profit by reportable segment (in thousands).
| Three Months Ended March 31, | 2024 vs. 2023 Change | ||||||||||||||||||||||
| 2024 | 2023 | ($) | (%) | ||||||||||||||||||||
| Owned and Operated Advertising | $ | 22,462 | $ | 29,839 | $ | (7,377) | (25) | % | |||||||||||||||
| Partner Network | 10,919 | 10,217 | 702 | 7 | % | ||||||||||||||||||
| Total adjusted gross profit | $ | 33,381 | $ | 40,056 | $ | (6,675) | (17) | % | |||||||||||||||
Refer to the Revenue and Cost of revenue (excluding depreciation and amortization) discussions above.
Salaries and benefits
Salaries and benefits decreased for the three months ended March 31, 2024 as compared to the prior year comparative period, primarily due to a $1.9 million decrease in stock-based compensation and a $1.8 million reduction in salary expense due to lower headcount.
Selling, general, and administrative
Selling, general, and administrative expense decreased for the three months ended March 31, 2024 as compared to the prior year comparative period, primarily due to a $1.7 million decrease in advisory, consulting, and legal fees, and to a lesser extent insurance costs.
Depreciation and amortization
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Depreciation and amortization expense increased for the three months ended March 31, 2024 as compared to the prior year comparative period, primarily increased amortization related to our continued investment in internally developed software.
Gain from debt extinguishment
Gain from debt extinguishment increased for the three months ended March 31, 2024 as compared to the prior year comparative period, due to the gain recognized as a result of our repurchase of debt through the Dutch auction that occurred in January of 2024.
Interest expense, net
Interest expense, net decreased for the three months ended March 31, 2024 as compared to the prior year comparative period, primarily due to a lower debt outstanding balance in the current year.
Change in fair value of warrant liabilities
The increase in fair value of our warrant liability for the three months ended March 31, 2024, as compared to the prior year comparative period was due to the remeasurement of warrant liability to its fair value at March 31, 2023 where the fluctuations are driven by the market value of our Class A common stock.
Income tax benefit
The difference between the effective tax rates for the periods presented and the federal statutory tax rate of 21% was primarily due to the exclusion of non-controlling income (loss), non-deductible expenses, valuation allowance and outside basis adjustments.
Net loss from discontinued operations, net of tax
Net loss from discontinued operations, net of tax is comprised of the net 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 us on an ongoing basis.
Indirect expenses which supported our subscription business, and which remained as part of the continuing operations following the sale are not reflected in loss from discontinued operations, net of tax.
Liquidity and Capital Resources
We expect existing cash and cash equivalents, cash flows from operations and financing activities to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities for at least the next 12 months. Our main sources of liquidity have historically been, and are expected to be from cash on hand, cash flows from operations and financing activities. Our ability to fund future operating expenses and capital expenditures, and our ability to meet our future debt service obligations, will depend on our ability to execute on our operational strategy and may be affected by our profitability, as well as general economic, financial and other factors which are beyond our control.
We continue to develop and implement plans to improve our liquidity. Our main focus is executing on our operational strategy, which includes continued focus on expanding the number of advertising partners that are utilizing or integrated with RAMP by continuing to attract and monetize users with commercial intent on our owned and operated web properties and on behalf of our network partners as well as optimizing bids and driving higher returns on advertising spend. Additionally, we are focused on our current cost structure by reducing our cash operating expenses and debt service obligations. Adverse macroeconomic conditions have affected, and may in the future affect, the demand for advertising, resulting in fluctuations in the amounts our advertisers spend on advertising, which could have a negative impact on our financial condition and operating results.
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As of March 31, 2024, we had unrestricted cash and cash equivalents of $69.9 million and $50.0 million available to borrow on our 2022 Revolving Facility. For the three months ended March 31, 2024, the Company had cash outflows from operations of $16.0 million. The principal drivers of our cash outflow from operations for the three months ended March 31, 2024, were cash bonus-related payments of $7.2 million primarily related to 2023 annual employee performance bonuses, $1.8 million of audit fees, $2.4 million of consulting fees, and interest paid on our Term Loan of $8.2 million.
Our revenue is dependent on two key Advertising Partners, which are Google and Microsoft. Refer to our concentration with customers discussion at Note 2, Summary of Significant Accounting Policies for additional information.
Credit Facilities
Term Loan
We entered into a new loan (“Term Loan”) and revolving facility (“2022 Revolving Facility” and, together with the Term Loan "Credit Agreement") with Bank of America, N.A. as administrative agent, on January 27, 2022, providing for a 5.5 year Term Loan with an initial principal balance of $400.0 million and with the net proceeds of $376.0 million. The 2022 Revolving Facility provided borrowing availability of up to $50.0 million. As of March 31, 2024, there was no balance outstanding on the 2022 Revolving Facility and principal of $296.3 million was outstanding on the Term Loan. Through December 31, 2025, $5.0 million of the Term Loan is payable quarterly. From March 31, 2026, $7.5 million of the Term Loan is payable quarterly. The Term Loan matures in 2027.
For every interest period, the interest rate on the Term Loan is the adjusted Secured Overnight Financing Rate (“SOFR”) plus 4.75%. The Term Loan is amortized in quarterly installments on each scheduled payment date. The Term Loan comes with a leverage ratio covenant, which goes into effect only if the utilization on the 2022 Revolving Facility exceeds 35% of the total availability under the 2022 Revolving Facility at each quarter-end starting the second quarter 2022, such that the first lien leverage ratio (as defined in the credit agreement) should not exceed 5.40. The Credit Agreement has certain financial and nonfinancial covenants, including the "springing" leverage ratio covenant described above. The Credit Agreement also requires that we deliver our audited consolidated financial statements to our lenders within 120 days of our fiscal year end, December 31. Should we fail to distribute the financial statements to our lender within 120 days, we have an additional 30 days to cure such default.
The 2022 Revolving Facility matures in January 2027, and accordingly, when there is a balance outstanding it is classified within long-term debt, net on the condensed consolidated balance sheet. The interest rate on the 2022 Revolving Facility is the adjusted SOFR plus 2.5% with an adjusted SOFR floor of 0%. As of March 31, 2024, there was no outstanding balance.
On January 17, 2024, we completed the repurchase of $63.7 million in principal amount of our Term Loan indebtedness or an aggregate purchase price of $40.9 million (at discount of 64.2% of its par value) pursuant to a Dutch auction tender offer. Following the repurchase, the outstanding principal amount of the Term Loan was $301.3 million. We used available cash on hand to fund the repurchase (see Note 5, Debt, Net).
We have been able to and expect to be able to continue to make the required payments of principal and interest on the Credit Agreement (as and when due) on a timely basis.
Cash Flows
The following table summarizes our cash flows for the periods presented (in thousands):
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| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net cash used in operating activities | $ | (15,987) | $ | (5,801) | |||||||
| Net cash used in investing activities | $ | (1,622) | $ | (2,392) | |||||||
| Net cash used in financing activities | $ | (48,158) | $ | (9,132) | |||||||
Operating Activities
Our cash flows from operating activities are primarily impacted by growth in our operations, timing of collections from our partner 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.
In the three months ended March 31, 2024, cash used in operating activities of $16.0 million. The principal drivers of our cash outflow from operations three months ended March 31, 2024, were cash bonus payments of $7.2 million primarily related to 2023 annual employee performance bonuses, $1.8 million of audit fees, $2.4 million of consulting fees, and interest paid on our Term Loan of $8.2 million.
In the three months ended March 31, 2023, cash used in operating activities of $5.8 million resulted primarily from a net loss of $42.9 million, noncash deferred tax benefit of $7.9 million, an adjustment for the change in fair value of warrants of $1.4 million, a payment of long-term earnout liabilities of $10.0 million and a decrease in accrued expenses and other current liabilities of $5.1 million. This was partially offset by noncash items including depreciation and amortization expense of $29.4 million, stock-based compensation of $14.1 million, an increase in deferred revenue of $6.2 million, a decrease in accounts receivable of $11.3 million, and an increase in other long-term liabilities of $0.3 million.
Investing Activities
Our primary investing activities consisted of costs capitalized for internally developed software.
In the three months ended March 31, 2024, cash used in investing activities of $1.6 million resulted primarily from costs capitalized for internally developed software.
In the three months ended March 31, 2023, cash used in investing activities of $2.4 million resulted primarily from costs capitalized for internally developed software and purchases of property and equipment.
Financing Activities
Our financing activities consisted primarily of repayments of our indebtedness under our credit facilities.
In the three months ended March 31, 2024, cash used in financing activities of $48.2 million resulted primarily from repayment of the 2022 Term Note of $46.1 million.
In the three months ended March 31, 2023, cash used in financing activities of $9.1 million resulted primarily from repayment of existing term loan of $5.0 million, taxes paid related to net settlement of stock awards of $2.8 million, and payment of acquisition holdback of $1.3 million.
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
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contractually narrow or limited purposes. We did not have any other off-balance sheet arrangements during the periods presented other than the indemnification agreements.
Contractual Obligations and Known Future Cash Requirements
Service Agreements
In June 2021, we entered into a multi-year agreement with a service provider whereby we are contractually obligated to spend $5.0 million annually between July 2023 and June 2026. As of March 31, 2024, we remain contractually obligated to spend a remaining $10.0 million towards this commitment.
Contingencies
From time to time, we are subject to contingencies that arise in the ordinary course of business. We record an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We do not currently believe the resolution of any such contingencies will have a material adverse effect upon our condensed consolidated financial statements.
Critical Accounting Policies and Estimates
We prepare our financial statements in accordance with GAAP. Preparing these 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.
The critical accounting estimates, assumptions, and judgments that we believe to have the most significant impact on our condensed consolidated financial statements are stock-based compensation, business combinations and valuation of goodwill and income taxes.
There have been no material changes to our critical accounting policies and estimates as described in our Annual Report.
Recently Issued Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 2, Summary of Significant Accounting Policies.
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Item 3. Quantitative and Qualitative Disclosure about Market Risk
As a “smaller reporting company”, as defined by Rule 10(f)(1) of Regulation S-K, we are not required to provide this information.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Pursuant to Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO concluded that, as of March 31, 2024, 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.
Material weaknesses in internal control over financial reporting
We have identified material weaknesses in our internal control over financial reporting as of March 31, 2024. 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 complex, non-routine transactions, including acquisitions, dispositions, and post-combination compensation arrangements. Specifically, we did not design and maintain effective controls over the application of US GAAP to such transactions, and, as it relates to acquisitions, did not design and maintain effective controls over (i) the 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, (ii) the tax impacts of acquisitions to the financial statements, and (iii) conforming of US 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 (i) the preparation and review of business performance reviews, account reconciliations, journal entries, and 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.
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•We did not design and maintain effective controls over accounting for accrued liabilities, stock-based compensation and equity transactions, including accounting for non-controlling interest.
•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 for the successor period from January 27, 2022 to March 31, 2022; as of June 30, 2022 and 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 also resulted in the revision to the consolidated financial statements for the period from January 27, 2022 to December 31, 2022 and each of the three quarterly periods in the years ended December 31, 2022 and 2023.
These material weaknesses also resulted in an immaterial misstatement within cash flows from operating activities of System1, Inc. as of and for the three months ended March 31, 2024. These material weaknesses also resulted in immaterial misstatements within stockholders' equity of the consolidated financial statements of System1, Inc. as of September 30, 2022, December 31 2022, December 31, 2023 and all quarterly periods during 2023.
•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;
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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.
Remediation plan for the material weaknesses
We are in the process of, and we are focused on, designing and implementing effective measures to improve our internal control over financial reporting and remediate the material weaknesses. Our remediation efforts to address the identified material weaknesses are ongoing. Our efforts include a number of actions:
•Assessing the need of additional senior level accounting personnel with applicable technical accounting knowledge, training, and experience in accounting matters, and hiring the appropriately skilled resources, 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 ensuring 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 specialists to assist with the preparation of technical accounting analyses and valuations associated with business combinations, and ensuring adequate review by accounting personnel with applicable technical accounting knowledge, training, and experience in accounting for business combinations or dispositions;
•Designing and implementing controls to address the financial reporting risks over the accounting for dispositions, acquisitions and other complex, non-routine transactions, 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 with periodic reviews, 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 to address the financial reporting risks over accrued liabilities, stock-based compensation and equity transactions, including accounting for non-controlling interest;
•Designing and implementing controls to address the financial reporting risks over the accounting for complex financial instruments, including the earnings per share impacts;
•Designing and implementing controls to address the financial reporting risks over the accuracy and valuation of goodwill, including the allocation of goodwill to reporting units and the identification and measurement of goodwill impairment;
•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.
34
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 March 31, 2024.
Changes in Internal Control over Financial Reporting
There have been changes to our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the three months ended March 31, 2024 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
35
Part II
Item 1. Legal Proceedings
We are party to pending litigation and claims in connection with the ordinary course of our business. We make provisions for estimated losses to be incurred in such litigation and claims, including legal costs, and we believe such provisions are adequate. See Note 7, Commitments and Contingencies, within the notes to our unaudited condensed consolidated financial statements for a summary of material legal proceedings, in addition to Part I, Item 3, “Legal Proceedings” of our Annual Report on Form 10-K filed with the SEC on March 15, 2024.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in response to "Part I—Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchases
In August 2022, the Board authorized up to $25.0 million for the repurchase of our Class A common stock and Public Warrants. During the quarter ended, no repurchases of our equity securities were made by us or by any of our affiliated purchasers. As of March 31, 2024, we had $23.9 million available under this authorization remaining.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| Incorporated by Reference | Filed or Furnished Herewith | |||||||||||||||||||||||||||||||||||||
| Exhibit No. | Description | Form | File No. | Exhibit | Filing Date | |||||||||||||||||||||||||||||||||
| 2.1(a) | 8-K | 001-39331 | 2.1 | 6/29/2021 | ||||||||||||||||||||||||||||||||||
| 0 | ||||||||||||||||||||||||||||||||||||||
| 2.1(b) | S-4 | 333-260714 | 2.2 | 12/1/2021 | ||||||||||||||||||||||||||||||||||
| 2.1(c) | 8-K | 001-39331 | 10.1 | 1/20/2022 | ||||||||||||||||||||||||||||||||||
36
| 2.1(d) | 8-K | 001-39331 | 10.1 | 1/26/2022 | ||||||||||||||||||||||||||||||||||
| 2.2 | 8-K | 001-39331 | 2.1 | 12/4/2023 | ||||||||||||||||||||||||||||||||||
| 3.1 | 8-K | 001-39331 | 3.1 | 2/2/2022 | ||||||||||||||||||||||||||||||||||
| 3.2 | 8-K | 001-39331 | 3.1 | 3/1/2023 | ||||||||||||||||||||||||||||||||||
| 4.1 | 8-K | 001-39331 | 4.1 | 6/2/2020 | ||||||||||||||||||||||||||||||||||
| 4.2 | 10-K | 001-39331 | 4.2 | 6/6/2023 | ||||||||||||||||||||||||||||||||||
| 10.1^ | 8-K | 001-39331 | 10.2 | 2/20/2022 | ||||||||||||||||||||||||||||||||||
| 10.2# | 10-K | 001-39331 | 10.7 | 6/6/2023 | ||||||||||||||||||||||||||||||||||
| 10.9 | S-1 | 333-262608 | 10.3 | 2/9/2022 | ||||||||||||||||||||||||||||||||||
| 10.10 | 8-K | 001-39331 | 10.2 | 6/22/2020 | ||||||||||||||||||||||||||||||||||
| 10.11 | 8-K | 001-39331 | 10.4 | 3/2/2022 | ||||||||||||||||||||||||||||||||||
| 10.12^ | 8-K | 001-39331 | 10.1 | 6/22/2022 | ||||||||||||||||||||||||||||||||||
| 10.17 | S-4/A | 333-260714 | 10.3 | 12/16/2021 | ||||||||||||||||||||||||||||||||||
| 10.26 | 10-K | 001-39331 | 10.26 | 3/15/2024 | ||||||||||||||||||||||||||||||||||
| 31.1* | X | |||||||||||||||||||||||||||||||||||||
| 31.2* | X | |||||||||||||||||||||||||||||||||||||
| 32.1** | X | |||||||||||||||||||||||||||||||||||||
| 32.2** | X | |||||||||||||||||||||||||||||||||||||
| 97.1* | 10-K | 001-39331 | 97.1* | 3/15/2024 | ||||||||||||||||||||||||||||||||||
| 101.INS* | XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||||||||||||||||||||||||||
| 101.SCH* | XBRL Taxonomy Extension Schema Document. | |||||||||||||||||||||||||||||||||||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||||||||||||||||||||||||||||||||
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||||||||||||||||||||||||||||||||
| 101.LAB* | XBRL Taxonomy Extension Labels Linkbase Document. | |||||||||||||||||||||||||||||||||||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||||||||||||||||||||||||||||||||
37
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||||||||||||||||||||||||||||||||
| * | 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. | |||||||
| ^ | Indicates management contract or compensatory plan. | |||||||
| # | Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant will furnish copies of any such schedules and exhibits to the SEC upon request. | |||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| System1 Inc. | ||||||||
Date: May 9, 2024 | ||||||||
| By: | /s/ Michael Blend | |||||||
| Michael Blend | ||||||||
| Chief Executive Officer | ||||||||
Date: May 9, 2024 | By: | /s/ Tridivesh Kidambi | ||||||
| Tridivesh Kidambi | ||||||||
| Chief Financial Officer | ||||||||
38
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Michael Blend, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of System1, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
/s/ Michael Blend
Michael Blend
Chief Executive Officer
(Principal Executive Officer)
Date: May 9, 2024
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Tridivesh Kidambi, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of System1, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
/s/ Tridivesh Kidambi
Tridivesh Kidambi
Chief Financial Officer
(Principal Financial Officer)
Date: May 9, 2024
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024 of System1, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Blend, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1.The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Michael Blend
Michael Blend
Chief Executive Officer
(Principal Executive Officer)
Date: May 9, 2024
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission (the “SEC”) or its staff upon request.
This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024 of System1, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Tridivesh Kidambi, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1.The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Tridivesh Kidambi
Tridivesh Kidambi
Chief Financial Officer
(Principal Financial Officer)
Date: May 9, 2024
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission (the “SEC”) or its staff upon request.
This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.