System1, Inc 10-Q for FY2022 Q1

System1, Inc. (SST)

10-Q 2022-05-19 For: 2022-03-31

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Added on April 10, 2026

About this 10-Q

System1, Inc filed this 10-Q on May 19, 2022, covering the quarter ended March 31, 2022 (FY2022 Q1).

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

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


		Page

Part I. - Financial Information		1

Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive (Loss) Income	3
	Condensed Consolidated Statements of Changes in Stockholders' Equity	4
	Condensed Consolidated Statements of Changes in Members' (Deficit) Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62
Item 4.	Controls and Procedures	62

Part II - Other Information		65

Item 1.	Legal Proceedings	65
Item 1A.	Risk Factors	65
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 3.	Defaults upon Senior Securities	65
Item 4.	Mine Safety Disclosures	65
Item 5.	Other Information	65
Item 6.	Exhibits	66

Signatures		67


	Successor		Predecessor
	March 31, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	42,178	$	47,896
Restricted cash, current	4,895		—
Accounts receivable, net of allowance for doubtful accounts	99,976		90,203
Prepaid expenses and other current assets	14,468		7,689
Total current assets	161,517		145,788
Restricted cash, non-current	3,034		743
Property and equipment, net	2,855		830
Internal-use software development costs, net	10,704		11,213
Intangible assets, net	568,675		50,368
Goodwill	907,009		44,820
Due from related party	—		2,469
Operating lease right-of-use assets	6,388		—
Other non-current assets	808		680
Total assets	$	1,660,990	$	256,911
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	76,004		72,846
Accrued expenses and other current liabilities	67,635		31,284
Deferred revenue	64,810		1,971
Operating lease liabilities, current	1,895		—
Due to related party	80		—
Notes payable, current	14,822		170,453
Total current liabilities	225,246		276,554
Operating lease liabilities, non-current	5,645		—
Notes payable, non-current	409,777		—
Warrant liability	40,773		—
Deferred tax liability	144,027		7,789
Other liabilities	5,804		969
Total liabilities	831,272		285,312
Commitments and contingencies (Note 11)
EQUITY / MEMBERS' DEFICIT
Class A Common stock - $0.0001 par value; 250,000,000 shares authorized, 86,596,614 Class A shares issued and outstanding as of March 31, 2022.	9		—
Class C Common stock - $0.0001 par value; 25,000,000 shares authorized, 22,077,319 Class C shares issued and outstanding as of March 31, 2022.	2		—
Additional paid-in capital	728,540		—
Accumulated deficit	(89,175)		—
Members' deficit	—		(28,829)
Accumulated other comprehensive (loss) income	(28)		428
Total equity/members' deficit	639,348		(28,401)
Non-controlling interest	190,370		—
Total equity/members' deficit	829,718		(28,401)
Total liabilities and equity/members' deficit	$	1,660,990	$	256,911


	Successor		Predecessor		Predecessor
	Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022		Three Months Ended March 31, 2021
Revenue	$	166,108	$	52,712	$	147,561
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	120,131		41,760		110,785
Salaries, commissions, and benefits	43,459		35,175		15,195
Selling, general, and administrative	14,981		14,817		6,950
Depreciation and amortization	23,311		1,000		3,689
Total operating costs and expenses	201,882		92,752		136,619
Operating (loss) income	(35,774)		(40,040)		10,942
Interest expense	4,776		1,049		4,048
Loss on warrant fair value	13,761		—		—
(Loss) income before income tax	(54,311)		(41,089)		6,894
Income tax (benefit) expense	(16,252)		(629)		151
Net (loss) income	$	(38,059)	$	(40,460)	$	6,743
Net (loss) attributable to non-controlling interest	(8,068)		—		—
Net (loss) income attributable to System1, Inc.	$	(29,991)	$	(40,460)	$	6,743

Basic net (loss) per share	$	(0.36)	n/a		n/a
Diluted net (loss) per share	$	(0.36)	n/a		n/a
Weighted average number of shares outstanding - basic	82,210		n/a		n/a
Weighted average number of shares outstanding - diluted	82,210		n/a		n/a
Basic net (loss) income per unit	n/a		$	(1.97)	$	0.33
Diluted net (loss) income per unit	n/a		$	(1.97)	$	0.33
Weighted average units outstanding - basic	n/a		20,488		20,488
Weighted average units outstanding - diluted	n/a		20,488		20,488


	Successor		Predecessor		Predecessor
	Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022		Three Months Ended March 31, 2021
Net (loss) income	$	(38,059)	$	(40,460)	$	6,743
Other comprehensive (loss) income
Foreign currency translation income	(34)		87		441
Comprehensive (loss) income	$	(38,093)	$	(40,373)	$	7,184
Comprehensive (loss) attributable to non-controlling interest	(8,074)		—		—
Comprehensive (loss) income attributable to System1, Inc.	$	(30,019)	$	(40,373)	$	7,184


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


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


	Class A Common Stock			Class C Common Stock			Class D Common Stock
	Shares	Amount		Shares	Amount		Shares	Amount		Additional Paid-In-Capital		Accumulated Deficit		Accumulated Other Comprehensive Income			Non-Controlling Interest			Total Stockholders’ Equity
Successor:
For the period from January 27, 2022 to March 31, 2022
BALANCE—January 26, 2022	52,680	$	5	—	$	—	—	$	—	$	525,579	$	(59,184)	$	—		$	—		$	466,400
Effect of Merger transaction	29,017	3		22,077	2		2,900	—		157,046		—		—			198,691			355,742
BALANCE—January 27, 2022	81,697	8		22,077	2		2,900	—		682,625		(59,184)		—			198,691			822,142
Net (loss)	—	—		—	—		—	—		—		(29,991)		—			(8,068)			(38,059)
Issuance of common stock in connection with the acquisition of business	2,000	—		—	—		—	—		25,500		—		—			—			25,500
Conversion of Class D shares to Class A shares	2,900	1		—	—		(2,900)	—		—		—		—			—			1
Net deferred tax liability resulting from changes in outside basis difference on investment in S1 Holdco, LLC	—	—		—	—		—	—		(6,752)		—		—		0	—		—	(6,752)
Other comprehensive income	—	—		—	—		—	—		—		—		(28)			(6)			(34)
Share-based compensation	—	—		—	—		—	—		27,167		—		—			—			27,167
Distribution to members	—	—		—	—		—	—		—		—		—			(247)			(247)
BALANCE—March 31, 2022	86,597	$	9	22,077	$	2	—	$	—	$	728,540	$	(89,175)	$	(28)		$	190,370		$	829,718


	Members’ Capital		Accumulated Other Comprehensive Income (Loss)		Total Members’ Deficit
Predecessor:
For the period January 1, 2022 to January 26, 2022
BALANCE—January 1, 2022	$	(28,829)	$	428	$	(28,401)
Net loss	(40,460)		—		(40,460)
Accumulated other comprehensive income	—		87		87
Share-based compensation expense	27,698		—		27,698
BALANCE—January 26, 2022	$	(41,591)	$	515	$	(41,076)

	Members’ Capital		Accumulated Other Comprehensive Income (Loss)		Total Members’ Deficit
Predecessor:
For the period January 1, 2021 to March 31, 2021
BALANCE—January 1, 2021	$	(47,886)	$	(343)	$	(48,229)
Net income	6,743		—		6,743
Accumulated other comprehensive income	—		441		441
Share-based compensation expense	146		—		146
Contribution from OpenMail	147		—		147
BALANCE—March 31, 2021	$	(40,850)	$	98	$	(40,752)


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


	Units (in thousands)	Ownership %
Class A units of S1 Holdco	83,203	79.0	%
Class B units of S1 Holdco	22,077	21.0	%


	Amount
Tangible assets acquired and liabilities assumed:
Cash and marketable securities	$	68,746
Accounts receivable	79,087
Prepaid expenses	10,816
Property, plant & equipment, net	1,551
Internal-use software development costs, net	11,316
Other assets	8,205
Accounts payable	(9,798)
Deferred revenue	(60,768)
Accrued expenses and other current liabilities	(97,789)
Notes payable	(172,038)
VAT tax liability	(12,280)
Deferred tax liabilities	(146,322)
Other liabilities	(7,633)
Total tangible assets acquired and liabilities assumed	(326,907)
Intangible assets	555,500
Goodwill	836,093
Net assets acquired	$	1,064,686

Consideration:
Cash	$	444,948
Equity	619,738
Total consideration	$	1,064,686


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


	Three months ended
	March 31, 2022		March 31, 2021
Pro forma revenue	$	235,983	$	193,201
Pro forma net (loss)	$	(32,796)	$	88,746


	Amount
Tangible assets acquired and liabilities assumed:
Working capital	$	154
Total tangible assets acquired and liabilities assumed	154
Intangible assets	4,500
Goodwill	15,663
Net assets acquired	$	20,317

Consideration:
Cash	$	19,636
Contingent consideration	681
Total consideration	$	20,317


	Successor		Predecessor
	March 31, 2022		December 31, 2021
Computer equipment	$	236	$	415
Motor vehicles	233		—
Furniture and equipment	315		475
Leasehold improvements	2,163		976
Property and equipment—gross	2,947		1,866
Less accumulated depreciation	(92)		(1,036)
Property and equipment—net	$	2,855	$	830


	March 31, 2022 (Successor)
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Total internal-use software development costs	$	11,154	$	(450)	$	10,704
Intangibles:
Developed technology	$	197,985	$	(8,646)	$	189,339
Trademarks and trade names	271,844		(4,478)		267,366
Software	3,910		(74)		3,836
Customer relationships	116,600		(8,466)		108,134
Total intangible costs	$	590,339	$	(21,664)	$	568,675



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


Amortization Expense
Remainder of 2022	$	100,085
2023	108,552
2024	101,996
2025	90,092
2026	40,300
Thereafter	138,721
Total amortization expense	$	579,746


	Amount		Weighted Average Useful Life (in Years)
Trademark	$	2,200	10
Software	$	1,000	4
Customer relationships	$	1,300	3
Total	$	4,500


	Owned and Operated		Partner Network		Total
Goodwill at January 1, 2021 (Predecessor)	$	24,403	$	20,417	$	44,820
Additions	—		—		—
Goodwill at December 31, 2021 (Predecessor)	$	24,403	$	20,417	$	44,820


	Owned and Operated		Partner Network		Subscription		Total
Goodwill at January 27, 2022 (Successor)	$	—	$	—	$	—	$	—
Additions	606,651		32,402		267,956		907,009
Goodwill at March 31, 2022 (Successor)	$	606,651	$	32,402	$	267,956	$	907,009


	Deferred Revenue
Deferred revenue as of January 1, 2021 (Predecessor)	$	1,889
Additional amounts deferred	5,116
Deferred revenue recognized	(5,034)
Deferred revenue as of December 31, 2021 (Predecessor)	$	1,971


	Deferred Revenue
Deferred revenue as of January 1, 2022 (Predecessor)	$	1,971
Additional amounts deferred	620
Deferred revenue recognized	(309)
Deferred revenue as of January 26, 2022 (Predecessor)	$	2,282


	Deferred Revenue
Deferred revenue as of January 27, 2022 (Successor)	$	—
Additional amounts deferred*	94,254
Deferred revenue recognized	(29,444)
Deferred revenue as of March 31, 2022 (Successor)	$	64,810


	Successor
	As of March 31, 2022
Operating leases:
Operating lease right-of-use asset	$	6,388

Current operating lease liability	$	1,895
Operating lease liability - less current portion	$	5,645
Total operating lease liability	$	7,540

Weighted Average Remaining Lease Terms (in years):
Operating leases	3.4

Weighted Average Discount Rate:
Operating leases	4.8		%


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


	Level 1		Level 2		Level 3		Total
Warrant liabilities:
Public warrants	$	27,600	$	—	$	—	$	27,600
Private warrants	—		13,173		—		13,173
Total warrants liabilities	$	27,600	$	13,173	$	—	$	40,773

Contingent consideration	$	—	$	—	$	2,255	$	2,255

Grand total	$	27,600	$	13,173	$	2,255	$	43,028


	Contingent consideration		Former CEO equity profits interest*		Warrant liability
Fair value of liabilities at December 31, 2020 (Predecessor)	$	(8,240)	$	(4,236)	$	—
Settlements	5,000		—		—
Change in fair value	(63)		(1,413)		—
Fair value of liabilities at March 31, 2021 (Predecessor)	$	(3,303)	$	(5,649)	$	—

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

Fair value of liabilities at January 27, 2022 (Successor)	$	(1,682)	$	—	$	(27,012)
Additions	(573)		—		—
Change in fair value	—		—		(13,761)
Fair value of liabilities at March 31, 2022 (Successor)	$	(2,255)	$	—	$	(40,773)


	(Successor)		(Predecessor)
	March 31, 2022		December 31, 2021
Owned and Operated	$	1,153,848	$	214,968
Partner Network	57,811		41,943
Subscription	449,331		—
Total assets	$	1,660,990	$	256,911


	Three-Month Period
	Successor		Predecessor		Predecessor
	Period from January 27, 2022 through March 31, 2022		Period from January 1, 2022 through January 26, 2022		Three Months Ended March 31, 2021
Owned and Operated	$	32,791	$	9,310	$	32,128
Partner Network	7,976		2,921		8,135
Subscription	12,647		—		—
Adjusted gross margin	$	53,414	$	12,231	$	40,263
Other cost of revenues	7,437		1,279		3,487
Salaries, commissions and benefits	43,459		35,175		15,195
Selling, general and administrative	14,981		14,817		6,950
Depreciation and amortization	23,311		1,000		3,689
Interest expense	4,776		1,049		4,048
Loss on warrant fair value	13,761		—		—
Net income before income tax	$	(54,311)	$	(41,089)	$	6,894


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


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

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

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

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

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

101.SCH*						XBRL Taxonomy Extension Schema Document.

101.CAL*						XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*						XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*						XBRL Taxonomy Extension Labels Linkbase Document.

101.PRE*						XBRL Taxonomy Extension Presentation Linkbase Document.

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


*						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.



	Sysem1 Inc.

Date: May 19, 2022	By:	/s/ Michael Blend
		Michael Blend
		Chief Executive Officer

Date: May 19, 2022	By:	/s/ Tridivesh Kidambi
		Tridivesh Kidambi
		Chief Financial Officer