System1, Inc. 10-Q

Item 1. Financial Statements (Unaudited) System1, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) (In thousands, except par value) June 30, 2024 December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 75,651 $ 135,343 Restricted cash, current 4,253 3,813 Accounts receivable, net 61,915 56,093 Prepaid expenses and other current assets 6,805 6,754 Total current assets 148,624 202,003 Restricted cash, non-current 371 4,294 Property and equipment, net 2,613 3,084 Internal-use software development costs, net 13,447 11,425 Intangible assets, net 259,671 297,001 Goodwill 82,407 82,407 Operating lease right-of-use assets 3,759 4,732 Other non-current assets 444 524 Total assets $ 511,336 $ 605,470 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 6,248 $ 9,499 Accrued expenses and other current liabilities 76,817 59,314 Operating lease liabilities, current 2,385 2,333 Debt, net 16,272 15,271 Total current liabilities 101,722 86,417 Operating lease liabilities, non-current 2,339 3,582 Long-term debt, net 263,338 334,232 Warrant liability 936 2,688 Deferred tax liability 7,042 8,307 Other non-current liabilities 6,680 929 Total liabilities $ 382,057 $ 436,155 Commitments and contingencies (Note 7) Stockholders' equity: Class A common stock $ 0.0001 par value; 500,000 shares authorized, 69,255 and 65,855 Class A shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively $ 7 $ 7 Class C common stock $ 0.0001 par value; 25,000 shares authorized, 21,204 and 21,513 Class C shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively 2 2 Additional paid-in capital 854,270 843,112 Accumulated deficit ( 744,572 ) ( 707,662 ) Accumulated other comprehensive loss ( 295 ) ( 181 ) Total stockholders' equity attributable to System1, Inc. 109,412 135,278 Non-controlling interest 19,867 34,037 Total stockholders' equity 129,279 169,315 Total liabilities and stockholders' equity $ 511,336 $ 605,470 See notes to condensed consolidated financial statements. 1 System1, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except for per share) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Revenue $ 94,581 $ 96,914 $ 179,498 $ 218,032 Operating expenses: Cost of revenue (excluding depreciation and amortization) 55,798 56,657 109,496 139,610 Salaries and benefits 33,937 27,054 58,420 55,201 Selling, general, and administrative 13,989 15,340 26,717 30,195 Depreciation and amortization 19,943 19,688 39,747 39,080 Total operating expenses 123,667 118,739 234,380 264,086 Operating loss ( 29,086 ) ( 21,825 ) ( 54,882 ) ( 46,054 ) Other expense (income): Interest expense, net 7,871 12,334 15,841 23,736 Gain from debt extinguishment ( 433 ) — ( 20,109 ) — Change in fair value of warrant liabilities ( 1,501 ) 2,018 ( 1,752 ) 609 Total other expense (income), net 5,937 14,352 ( 6,020 ) 24,345 Loss before income tax ( 35,023 ) ( 36,177 ) ( 48,862 ) ( 70,399 ) Income tax benefit ( 178 ) ( 6,670 ) ( 226 ) ( 10,499 ) Net loss from continuing operations ( 34,845 ) ( 29,507 ) ( 48,636 ) ( 59,900 ) Net loss from discontinued operations, net of tax — ( 13,484 ) — ( 26,017 ) Net loss ( 34,845 ) ( 42,991 ) ( 48,636 ) ( 85,917 ) Less: Net loss from continuing operations attributable to non-controlling interest ( 8,472 ) ( 6,165 ) ( 11,726 ) ( 12,922 ) Less: Net loss from discontinued operations attributable to non-controlling interest — ( 2,525 ) — ( 4,892 ) Net loss attributable to System1, Inc. $ ( 26,373 ) $ ( 34,301 ) $ ( 36,910 ) $ ( 68,103 ) Amounts attributable to System1, Inc.: Net loss from continuing operations $ ( 26,373 ) $ ( 23,342 ) $ ( 36,910 ) $ ( 46,978 ) Net loss from discontinued operations — ( 10,959 ) — ( 21,125 ) Net loss attributable to System1, Inc. $ ( 26,373 ) $ ( 34,301 ) $ ( 36,910 ) $ ( 68,103 ) Basic and diluted net loss per share: Continuing operations $ ( 0.38 ) $ ( 0.25 ) $ ( 0.54 ) $ ( 0.50 ) Discontinued operations — ( 0.12 ) — ( 0.23 ) Basic and diluted net loss per share $ ( 0.38 ) $ ( 0.37 ) $ ( 0.54 ) $ ( 0.73 ) Weighted average number of shares outstanding - basic and diluted 69,383 93,799 68,582 93,288 See notes to condensed consolidated financial statements. 2 System1, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (In thousands) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Net loss $ ( 34,845 ) $ ( 42,991 ) $ ( 48,636 ) $ ( 85,917 ) Other comprehensive (loss) income: Foreign currency translation (loss) income ( 96 ) 186 ( 231 ) 78 Comprehensive loss ( 34,941 ) ( 42,805 ) ( 48,867 ) ( 85,839 ) Comprehensive loss attributable to non-controlling interest ( 8,544 ) ( 8,640 ) ( 11,843 ) ( 17,780 ) Comprehensive loss attributable to System1, Inc. $ ( 26,397 ) $ ( 34,165 ) $ ( 37,024 ) $ ( 68,059 ) See notes to condensed consolidated financial statements. 3 System1, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) (In thousands) Class A Common Stock Class C Common Stock Shares Amount Shares Amount Additional Paid-In-Capital Accumulated Deficit Accumulated Other Comprehensive Loss Non-Controlling Interest Total Stockholders’ Equity Balance at December 31, 2023 65,855 $ 7 21,513 $ 2 $ 843,112 $ ( 707,662 ) $ ( 181 ) $ 34,037 $ 169,315 Net loss — — — — — ( 10,537 ) — ( 3,254 ) ( 13,791 ) Issuance of common stock in connection with settlement of incentive plan 970 — — — 2,464 — — ( 757 ) 1,707 Conversion of Class C shares to Class A shares 309 — ( 309 ) — 241 — — ( 241 ) — Tax receivable agreement liability and deferred taxes arising from LLC interest ownership exchanges and the issuance of common stock from equity incentive plans — — — — ( 110 ) — — — ( 110 ) Issuance of restricted stock, net of forfeitures and shares withheld for taxes 1,498 — — — 178 — — ( 1,169 ) ( 991 ) Other comprehensive loss — — — — — — ( 90 ) ( 45 ) ( 135 ) Stock-based compensation — — — — 4,317 — — 88 4,405 Contributions from members, net of distributions — — — — — — — 5 5 Balance at March 31, 2024 68,632 $ 7 21,204 $ 2 $ 850,202 $ ( 718,199 ) $ ( 271 ) $ 28,664 $ 160,405 Net loss — — — — — ( 26,373 ) — ( 8,472 ) ( 34,845 ) Issuance of restricted stock, net of forfeitures and shares withheld for taxes 623 — — — 284 — — ( 308 ) ( 24 ) Other comprehensive loss — — — — — — ( 24 ) ( 72 ) ( 96 ) Stock-based compensation — — — — 3,784 — — 87 3,871 Distributions to members — — — — — — — ( 32 ) ( 32 ) Balance at June 30, 2024 69,255 $ 7 21,204 $ 2 $ 854,270 $ ( 744,572 ) $ ( 295 ) $ 19,867 $ 129,279 4 Class A Common Stock Class C Common Stock Shares Amount Shares Amount Additional Paid-In-Capital Accumulated Deficit Accumulated Other Comprehensive Loss Non-Controlling Interest Total Stockholders’ Equity Balance at December 31, 2022 91,674 $ 9 21,747 $ 2 $ 831,566 $ ( 439,296 ) $ ( 260 ) $ 78,650 $ 470,671 Net loss — — — — — ( 33,802 ) — ( 9,124 ) ( 42,926 ) Cumulative-effect of adoption of ASU 2016-13 — — — — — ( 326 ) — — ( 326 ) Issuance of restricted stock, net of forfeitures and shares withheld for taxes 832 — — — ( 1,449 ) — — ( 281 ) ( 1,730 ) Issuance of common stock in connection with settlement of incentive plan 407 — — — 1,819 — — ( 160 ) 1,659 Conversion of Class C shares to Class A shares 234 — ( 234 ) — 1,047 — — ( 1,047 ) — Increase in tax receivable agreement liability — — — — ( 441 ) — — — ( 441 ) Other comprehensive loss — — — — — — ( 62 ) ( 47 ) ( 109 ) Stock-based compensation — — — — 6,203 — — 958 7,161 Balance at March 31, 2023 93,147 $ 9 21,513 $ 2 $ 838,745 $ ( 473,424 ) $ ( 322 ) $ 68,949 $ 433,959 Net loss — — — — — ( 34,301 ) — ( 8,690 ) ( 42,991 ) Issuance of restricted stock, net of forfeitures and shares withheld for taxes 455 — — — ( 133 ) — — ( 181 ) ( 314 ) Other comprehensive income (loss) — — — — — — 208 ( 22 ) 186 Stock-based compensation — — — — 4,956 — — 615 5,571 Balance at June 30, 2023 93,602 $ 9 21,513 $ 2 $ 843,568 $ ( 507,725 ) $ ( 114 ) $ 60,671 $ 396,411 See notes to condensed consolidated financial statements. 5 System1, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Six Months Ended June 30, 2024 2023 Cash Flows from Operating Activities Net loss $ ( 48,636 ) $ ( 85,917 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 39,762 57,426 Stock-based compensation 7,412 31,852 Amortization of debt issuance costs 2,002 2,933 Noncash lease expense 931 878 Change in fair value of warrant liabilities ( 1,752 ) 608 Deferred tax benefits ( 1,262 ) ( 14,285 ) Gain from debt extinguishment ( 20,109 ) — Share-based liabilities 10,253 — Other, net ( 192 ) 1,086 Changes in operating assets and liabilities: Accounts receivable ( 5,823 ) 16,158 Prepaid expenses and other current assets 26 ( 1,265 ) Accounts payable ( 3,251 ) 7,818 Accrued expenses and other current liabilities 15,747 ( 12,545 ) Deferred revenue 16 10,297 Long-term earnout liabilities — ( 15,000 ) Other non-current liabilities ( 1,146 ) 1,308 Net cash (used in) provided by operating activities ( 6,022 ) 1,352 Cash Flows from Investing Activities Purchases of property and equipment — ( 1,581 ) Capitalized software development costs ( 3,218 ) ( 3,487 ) Net cash used in investing activities ( 3,218 ) ( 5,068 ) Cash Flows from Financing Activities Proceeds from related-party loan, net of lender fees — 39,000 Repayments of related party loan, inclusive of lender fees — ( 34,000 ) Repayment of Term Loan ( 51,786 ) ( 10,000 ) Payment of acquisition holdback — ( 1,250 ) Taxes paid related to net settlement of stock awards ( 2,116 ) ( 3,052 ) Distributions to members, net of contributions ( 27 ) ( 66 ) Net cash used in financing activities ( 53,929 ) ( 9,368 ) Effect of exchange rate changes in cash, cash equivalents and restricted cash ( 6 ) 199 Net decrease in cash, cash equivalents and restricted cash ( 63,175 ) ( 12,885 ) Cash and cash equivalents and restricted cash, beginning of the period 143,450 39,075 Cash and cash equivalents and restricted cash, end of the period $ 80,275 $ 26,190 Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets: Cash and cash equivalents $ 75,651 $ 15,451 Restricted cash 4,624 10,739 Total cash, cash equivalents and restricted cash $ 80,275 $ 26,190 Supplemental cash flow information: Capitalized assets financed by accounts payable $ — $ 53 Stock-based compensation included in capitalized software development costs $ 814 $ 1,124 Settlement of incentive plan through issuance of common stock $ 1,707 $ 1,658 See notes to condensed consolidated financial statements. 6 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, Outbrain, 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 United States of America generally accepted accounting principles ("GAAP") applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. 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, 2024. 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") on March 15, 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. Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform with the current period presentation. These reclassifications had no effect on the results of operations, financial position or cash flows for any period presented. The results of operations for the three and six months ended June 30, 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). 7 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 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 and six months ended June 30, 2023 as follows: a. Additional paid-in capital was understated by $ 1.2 million as of June 30, 2023, and salaries and benefits expense was overstated by $ 0.9 million and $ 0.6 million f or the three and six months ended June 30, 2023, respectively, as a result of not accelerating expenses upon the 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. 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 impacted 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 revisions related to such errors described above. e. We adjusted for a $ 6.8 million mis classification of cash held in a treasury deposit account from restricted cash, current to cash and cash equivalents, as there were no legal restrictions on the balance. 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 June 30, 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 June 30, 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 June 30, 2024 . The following tables reflect the errors discussed in a through e above. The following table reflects the revisions and the impact of reporting Discontinued Operations related to the sale of our Protected business to the previously issued condensed consolidated balance sheet as of June 30, 2023 (in thousands): 8 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) As Previously Reported Revision Adjustment As Revised Impact of Reclassification of Discontinued Operations As Currently Reported Assets Current assets: Cash and cash equivalents $ 8,603 $ 6,848 $ 15,451 (e) $ ( 11,149 ) $ 4,302 Restricted cash, current 11,762 ( 6,848 ) 4,914 (e) ( 1,649 ) 3,265 Total current assets 95,130 — 95,130 — 95,130 Liabilities and Stockholders' Equity Deferred tax liability $ 29,851 $ 534 $ 30,385 (d) $ ( 11,956 ) $ 18,429 Total liabilities 681,268 534 681,802 — 681,802 Stockholders’ Equity / Members’ Deficit Additional paid-in capital $ 842,350 $ 1,218 $ 843,568 (a) (b) $ — $ 843,568 Accumulated deficit ( 514,809 ) 7,084 ( 507,725 ) (a) (b) (d) — ( 507,725 ) Accumulated other comprehensive loss ( 270 ) 156 ( 114 ) (d) — ( 114 ) Total stockholders' equity attributable to System1, Inc. $ 327,282 $ 8,458 $ 335,740 $ — $ 335,740 Non-controlling interest 69,663 ( 8,992 ) 60,671 (b) — 60,671 Total stockholders' equity $ 396,945 $ ( 534 ) $ 396,411 $ — $ 396,411 Total liabilities and stockholders' equity $ 1,078,213 $ — $ 1,078,213 $ — $ 1,078,213 The following tables reflect the revisions and the impact of reporting Discontinued Operations related to the sale of our Protected business to the previously issued condensed consolidated statement of operations, for the three and six months ended June 30, 2023 (in thousands): 9 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Three Months Ended June 30, 2023 As Previously Reported Revision Adjustment As Revised Impact of Reclassification of Discontinued Operations As Currently Reported Salaries and benefits $ 43,991 $ ( 890 ) (a) $ 43,101 $ ( 16,047 ) $ 27,054 Total operating expenses 183,660 ( 890 ) 182,770 ( 64,031 ) 118,739 Operating loss ( 36,422 ) 890 ( 35,532 ) 13,707 ( 21,825 ) Loss before income tax $ ( 50,782 ) $ 890 $ ( 49,892 ) $ 13,715 $ ( 36,177 ) Income tax benefit ( 6,605 ) ( 296 ) (d) ( 6,901 ) 231 ( 6,670 ) Net loss from continuing operations ( 44,177 ) 1,186 ( 42,991 ) 13,484 ( 29,507 ) Net loss from discontinued operations, net of tax — — — ( 13,484 ) ( 13,484 ) Net loss ( 44,177 ) 1,186 ( 42,991 ) — ( 42,991 ) Less: Net loss from continuing operations attributable to non-controlling interest ( 8,947 ) 257 (b) ( 8,690 ) 2,525 ( 6,165 ) Less: Net loss from discontinued operations attributable to non-controlling interest — — — ( 2,525 ) ( 2,525 ) Net loss attributable to System1, Inc. $ ( 35,230 ) $ 929 $ ( 34,301 ) $ — $ ( 34,301 ) Amounts attributable to System1, Inc.: Net loss from continuing operations $ ( 35,230 ) $ 929 (a) (b) (d) $ ( 34,301 ) $ 10,959 $ ( 23,342 ) Net loss from discontinued operations — — — ( 10,959 ) ( 10,959 ) Net loss attributable to System1, Inc. $ ( 35,230 ) $ 929 $ ( 34,301 ) $ — $ ( 34,301 ) Basic and diluted net loss per share: Continuing operations $ ( 0.38 ) $ 0.01 (b) $ ( 0.37 ) $ 0.12 $ ( 0.25 ) Discontinued operations — — — ( 0.12 ) ( 0.12 ) Basic and diluted net loss per share $ ( 0.38 ) $ 0.01 $ ( 0.37 ) $ — $ ( 0.37 ) Weighted average number of shares outstanding - basic and diluted 93,425 374 (b) 93,799 93,799 10 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Six Months Ended June 30, 2023 As Previously Reported Revision Adjustment As Revised Impact of Reclassification of Discontinued Operations As Currently Reported Salaries and benefits $ 82,389 $ ( 594 ) (a) $ 81,795 $ ( 26,594 ) $ 55,201 Total operating expenses 389,006 ( 594 ) 388,412 ( 124,326 ) 264,086 Operating loss ( 73,914 ) 594 ( 73,320 ) 27,266 ( 46,054 ) Loss before income tax $ ( 98,316 ) $ 594 $ ( 97,722 ) $ 27,323 $ ( 70,399 ) Income tax benefit ( 11,013 ) ( 792 ) (d) ( 11,805 ) 1,306 ( 10,499 ) Net loss from continuing operations ( 87,303 ) 1,386 ( 85,917 ) 26,017 ( 59,900 ) Net loss from discontinued operations, net of tax — — — ( 26,017 ) ( 26,017 ) Net loss ( 87,303 ) 1,386 ( 85,917 ) — ( 85,917 ) Less: Net loss from continuing operations attributable to non-controlling interest ( 18,121 ) 307 (b) ( 17,814 ) 4,892 ( 12,922 ) Less: Net loss from discontinued operations attributable to non-controlling interest — — — ( 4,892 ) ( 4,892 ) Net loss attributable to System1, Inc. $ ( 69,182 ) $ 1,079 $ ( 68,103 ) $ — $ ( 68,103 ) Amounts attributable to System1, Inc.: Net loss from continuing operations $ ( 69,182 ) $ 1,079 (a) (b) (d) $ ( 68,103 ) $ 21,125 $ ( 46,978 ) Net loss from discontinued operations — — — ( 21,125 ) ( 21,125 ) Net loss attributable to System1, Inc. $ ( 69,182 ) $ 1,079 $ ( 68,103 ) $ — $ ( 68,103 ) Basic and diluted net loss per share: Continuing operations $ ( 0.74 ) $ 0.01 (b) $ ( 0.73 ) $ 0.23 $ ( 0.50 ) Discontinued operations — — — ( 0.23 ) ( 0.23 ) Basic and diluted net loss per share $ ( 0.74 ) $ 0.01 $ ( 0.73 ) $ — $ ( 0.73 ) Weighted average number of shares outstanding - basic and diluted 92,945 343 (b) 93,288 93,288 The following tables reflect the revisions related to the previously issued condensed consolidated statement of comprehensive loss for the three and six months ended June 30, 2023 (in thousands): Three Months Ended June 30, 2023 As Previously Reported Revision Adjustment As Currently Reported Net loss $ ( 44,177 ) $ 1,186 (a) (d) $ ( 42,991 ) Other comprehensive income (loss) Foreign currency translation income (loss) 187 ( 1 ) (c) 186 Comprehensive loss ( 43,990 ) 1,185 ( 42,805 ) Comprehensive loss attributable to non-controlling interest ( 8,897 ) 257 (b) ( 8,640 ) Comprehensive loss attributable to System1, Inc. $ ( 35,093 ) $ 928 $ ( 34,165 ) 11 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Six Months Ended June 30, 2023 As Previously Reported Revision Adjustment As Currently Reported Net loss $ ( 87,303 ) $ 1,386 (a) (d) $ ( 85,917 ) Other comprehensive (loss) income: Foreign currency translation (loss) income 79 ( 1 ) (c) 78 Comprehensive loss ( 87,224 ) 1,385 ( 85,839 ) Comprehensive loss attributable to non-controlling interest ( 18,087 ) 307 (b) ( 17,780 ) Comprehensive loss attributable to System1, Inc. $ ( 69,137 ) $ 1,078 $ ( 68,059 ) The following tables reflect the revisions to the previously issued condensed consolidated statement of changes in stockholders' equity for the six months ended June 30, 2023 (in thousands). Although the impact of such revisions is pervasive throughout the condensed consolidated statement of changes in stockholders' equity as a result of the errors described above, the most significant revisions include a reduction of net loss of $ 1.4 million, an increase of non-controlling interest of $ 1.2 million, a reduction in accumulated deficit of $ 1.1 million and a reduction in additional paid-in-capital of $ 0.7 million. Class A Common Stock Class C Common Stock Shares Amount Shares Amount Additional Paid-In-Capital Accumulated Deficit Accumulated Other Comprehensive Loss Non-Controlling Interest Total Stockholders’ Equity As Previously Reported Balance at December 31, 2022 91,674 $ 9 21,747 $ 2 $ 831,566 $ ( 439,296 ) $ ( 260 ) $ 78,650 $ 470,671 Net loss — — — — — ( 33,952 ) — ( 9,174 ) ( 43,126 ) Cumulative-effect of adoption of ASU 2016-13 — — — — — ( 326 ) — — ( 326 ) Issuance of restricted stock, net of forfeitures and shares withheld for taxes 832 — — — ( 1,730 ) — — — ( 1,730 ) Issuance of common stock in connection with settlement of incentive plan 407 — — — 1,659 — — — 1,659 Conversion of Class C shares to Class A shares 234 — ( 234 ) — 955 — — ( 955 ) — Increase in tax receivable agreement liability — — — — ( 441 ) — — — ( 441 ) Other comprehensive loss — — — — — — ( 62 ) ( 47 ) ( 109 ) Stock-based compensation — — — — 6,963 — — — 6,963 Balance at March 31, 2023 93,147 $ 9 21,513 $ 2 $ 838,972 $ ( 473,574 ) $ ( 322 ) $ 68,474 $ 433,561 Net loss — — — — — ( 35,230 ) — ( 8,947 ) ( 44,177 ) Issuance of restricted stock, net of forfeitures and shares withheld for taxes 455 — — — ( 314 ) — — — ( 314 ) Other comprehensive income (loss) — — — — — — 209 ( 22 ) 187 12 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Class A Common Stock Class C Common Stock Shares Amount Shares Amount Additional Paid-In-Capital Accumulated Deficit Accumulated Other Comprehensive Loss Non-Controlling Interest Total Stockholders’ Equity Stock-based compensation — — — — 5,571 — — — 5,571 Balance at June 30, 2023 93,602 $ 9 21,513 $ 2 $ 844,229 $ ( 508,804 ) $ ( 113 ) $ 59,505 $ 394,828 Revision Adjustments Net loss — $ — — $ — $ — $ 150 $ — $ 50 $ 200 (a) (b) (d) Issuance of restricted stock, net of forfeitures and shares withheld for taxes — — — — 281 — — ( 281 ) — (a) (b) Issuance of common stock in connection with settlement of incentive plan — — — — 160 — — ( 160 ) — (b) Conversion of Class C shares to Class A shares — — — — 92 — — ( 92 ) — (b) Stock-based compensation — — — — ( 760 ) — — 958 198 (a) (b) Balance at March 31, 2023 — $ — — $ — $ ( 227 ) $ 150 $ — $ 475 $ 398 Net loss — — — — — 929 — 257 1,186 (a) (b) (d) Issuance of restricted stock, net of forfeitures and shares withheld for taxes — — — — 181 — — ( 181 ) — (a) (b) Other comprehensive loss — — — — — — ( 1 ) — ( 1 ) (c) Stock-based compensation — — — — ( 615 ) — — 615 — (a) (b) Balance at June 30, 2023 — $ — — $ — $ ( 661 ) $ 1,079 $ ( 1 ) $ 1,166 $ 1,583 As Revised Net loss — $ — — $ — — $ ( 33,802 ) $ — $ ( 9,124 ) $ ( 42,926 ) Cumulative-effect of adoption of ASU 2016-13 — — — — — ( 326 ) — — ( 326 ) Issuance of restricted stock, net of forfeitures and shares withheld for taxes 832 — — — ( 1,449 ) — — ( 281 ) ( 1,730 ) Issuance of common stock in connection with settlement of incentive plan 407 — — — 1,819 — — ( 160 ) 1,659 Conversion of Class C shares to Class A shares 234 — ( 234 ) — 1,047 — — ( 1,047 ) — Increase in tax receivable agreement liability — — — — ( 441 ) — — — ( 441 ) Other comprehensive loss — — — — — — ( 62 ) ( 47 ) ( 109 ) Stock-based compensation — — — — 6,203 — — 958 7,161 13 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Class A Common Stock Class C Common Stock Shares Amount Shares Amount Additional Paid-In-Capital Accumulated Deficit Accumulated Other Comprehensive Loss Non-Controlling Interest Total Stockholders’ Equity Balance at March 31, 2023 93,147 $ 9 21,513 $ 2 $ 838,745 $ ( 473,424 ) $ ( 322 ) $ 68,949 $ 433,959 Net loss — — — — — ( 34,301 ) — ( 8,690 ) ( 42,991 ) Issuance of restricted stock, net of forfeitures and shares withheld for taxes 455 — — — ( 133 ) — — ( 181 ) ( 314 ) Other comprehensive income (loss) — — — — — — 208 ( 22 ) 186 Stock-based compensation — — — — 4,956 — — 615 5,571 Balance at June 30, 2023 93,602 $ 9 21,513 $ 2 $ 843,568 $ ( 507,725 ) $ ( 114 ) $ 60,671 $ 396,411 The following table reflects the revisions to the previously issued condensed consolidated statement of cash flows for the six months ended June 30, 2023 (in thousands): As Previously Reported Revision Adjustment As Currently Reported Cash Flows from Operating Activities Net loss $ ( 87,303 ) $ 1,386 (a) (d) $ ( 85,917 ) Stock-based compensation 31,656 196 (a) 31,852 Other, net 1 3,588 431 (c) 4,019 Deferred tax benefits ( 13,493 ) ( 792 ) (d) ( 14,285 ) Changes in operating assets and liabilities: Prepaid expenses and other current assets ( 834 ) ( 431 ) (c) ( 1,265 ) Accrued expenses and other current liabilities ( 10,963 ) ( 1,582 ) (c) ( 12,545 ) Other non-current liabilities 516 792 (c) 1,308 Net cash provided by operating activities 1,352 — 1,352 _______________ 1 To conform to current period presentation, the amount related to amortization of debt issuance costs included in other, net has been reclassified to amortization of debt issuance costs in the condensed consolidated statement of cash flows. 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. 14 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Risks 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. As of June 30, 2024 , we had two paid search advertising partnership agreements with Google and one paid search advertising partnership agreement with Microsoft. One of the Google agreements expires on February 28, 2025. Under certain circumstances, each of these agreements may be terminated by either us or the respective Advertising Partner immediately or with minimal notice. During the three months ended June 30, 2024, we recorded revenue of $ 6.6 million from an Advertising Partner and a contra revenue liability of $ 5.9 million due to certain Network Partners related to traffic sent to our platform by those Network Partners that generated search advertising revenue. We have currently withheld payment to the impacted Network Partners pending a comprehensive ongoing review of whether such traffic generating the search advertising revenue was valid or otherwise complied with the terms of our commercial arrangements with such Network Partners. For any traffic determined to be either invalid or not in compliance with such commercial arrangements, the corresponding amounts may be withheld from our Network Partners as a result of such violations and in that case, would be recognized as revenue in the period in which such final determination is made (currently expected to be in 2024). 3. Goodwill, Internal-Use Software Development Costs, Net, and Intangible Assets, Net Goodwill Goodwill was $ 82.4 million as of June 30, 2024 and December 31, 2023, all of which is attributable to the Partner Network reporting unit. No impairment of goodwill was recognized in 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): June 30, 2024 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Internal-use software development costs $ 17,820 $ ( 4,373 ) $ 13,447 Intangible assets: Developed technology $ 196,128 $ ( 118,870 ) $ 77,258 Trademarks and trade names 236,053 ( 56,850 ) 179,203 Software 5,100 ( 2,978 ) 2,122 Customer relationships 2,900 ( 1,812 ) 1,088 Total $ 440,181 $ ( 180,510 ) $ 259,671 15 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 $ 13,788 $ ( 2,363 ) $ 11,425 Intangible assets: Developed technology $ 196,128 $ ( 94,354 ) $ 101,774 Trademarks and trade names 236,053 ( 45,050 ) 191,003 Software 5,100 ( 2,341 ) 2,759 Customer relationships 2,900 ( 1,435 ) 1,465 Total $ 440,181 $ ( 143,180 ) $ 297,001 The internal-use software development costs include construction in progress (which amounts are not subject to amortization until placed in service) of $ 4.2 million and $ 3.5 million as of June 30, 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 June 30, Six Months Ended June 30, 2024 2023 2024 2023 Amortization expense for internal-use software development $ 1,076 $ 839 $ 2,010 $ 1,396 Amortization expense for intangible assets $ 18,665 $ 18,665 $ 37,330 $ 37,330 No impairment of internal-use software development cost or intangible assets was recognized for any of the periods presented. As of June 30, 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): June 30, 2024 December 31, 2023 Accrued revenue share $ 29,066 $ 16,365 Accrued marketing expenses 12,744 19,737 Accrued payroll and related benefits 11,420 13,751 Accrued interest payable 5,175 311 Other current liabilities 18,412 9,150 Accrued expenses and other current liabilities $ 76,817 $ 59,314 CouponFollow Incentive Plan As of June 30, 2024 , the Company determined it is probable that the CouponFollow business would achieve certain performance conditions during the Performance Periods, and accordingly, recognized a short-term liability within accrued expenses and other current liabilities of $ 4.7 million and a non-current liability of $ 5.6 million within other non-current liabilities in our condensed consolidated balance sheets for the Tier 1 and Tier 2 amounts set forth in the CouponFollow Incentive Plan. The carrying amount of the share-based liabilities approximates its fair value. 16 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) For the six months ended June 30, 2024, we issued 1.0 million shares of 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 installment of the Fixed Amount in the amount of $ 3.3 million. We recognized a gain of $ 0.5 million for the difference between the fair value of the Class A common stock issued and the carrying value of the liability. For the six months ended June 30, 2024 , we recognized $ 0.8 million for the third installment of the Fixed Amount within salaries and benefits expenses on the condensed consolidated statements of operation s. 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 to $ 50.0 million . As of June 30, 2024 , there was no balance outstanding on the 2022 Revolving Facility, and principal of $ 290.1 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 June 30, 2024. The interest rate on the 2022 Revolving Facility is the adjusted SOFR plus 2.5 % with an adjusted SOFR floor of 0 %. As of June 30, 2024, we had $ 50.0 million available on the 2022 Revolving Facility. 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 to negotiate, document and consummate the repurchase. On April 30, 2024, we completed the repurchase of an additional $ 1.2 million in principal amount of our Term Loan for an aggregate purchase price of $ 0.7 million (at discount of 60.0 % of its par value) pursuant to a privately negotiated repurchase transaction. Following the repurchase, the outstanding principal amount of the Term Loan was $ 295.0 million. We used available cash on hand to fund the repurchase. Our gain on the repurchase was $ 0.4 million before fees and expenses incurred to negotiate, document and consummate the additional repurchase. On August 1, 2024, the Company undertook a corporate reorganization, the result of which was that all of the assets and business operations of System1 are now held by System1 Holdings, LLC ("System1 Holdings"), a newly formed intermediate holding company of which the Company maintains the controlling interest and where the non-controlling interest is held by the Company's Class C common stockholders. Following the corporate reorganization, (a) System1 Holdings now owns 100 % of S1 Holdco, LLC ("S1 Holdco"), the previous intermediate holding company, and 100 % of S1 Media, LLC ("S1 Media"), another new subsidiary formed in connection with the corporate reorganization, (b) S1 Media holds the assets and business operations associated with the Company’s owned & operated products businesses, which includes CouponFollow, Startpage and Mapquest, and (c) S1 Holdco holds the Company’s remaining assets and business operations associated with the Company's digital advertising businesses, including its proprietary RAMP platform. S1 Holdco and its subsidiaries remain obligors and guarantors 17 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) under the Company's Term Loan and 2022 Revolving Facility, and System1 Holdings and S1 Media are not parties thereto. The carrying values of our debt, net of discounts, deferred financing and debt issuance costs were as follows (in thousands): June 30, 2024 December 31, 2023 Term Loan 1, 2 $ 279,610 $ 349,503 Total Debt, net $ 279,610 $ 349,503 _______________ 1 Includes unamortized discount of $ 9.9 million and $ 14.7 million and unamortized loan fees of $ 0.5 million and $ 0.8 million, as of June 30, 2024 and December 31, 2023, respectively, recorded as a reduction of the carrying amount of the debt and amortized to interest expense using the effective interest method. 2 Estimated fair value of the Term Loan was $ 177.0 million and $ 222.7 million as of June 30, 2024 and December 31, 2023, respectively. 6. Income Taxes 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. We recorded a benefit for income taxes of $ 0.2 million and $ 0.2 million for the three and six months ended June 30, 2024 and a benefit from income taxes of $ 6.7 million and $ 10.5 million for the three and six months ended June 30, 2023, respectively . The effective tax rate was 0.5 % and 0.4 % for the three and six months ended June 30, 2024, respectively and 18.4 % and 14.9 % for the three and six months ended June 30, 2023, 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 expenses, increase to the valuation allowance related to unrealizable deferred tax assets, and outside basis adjustments. As of June 30, 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 and six months ended June 30, 2024 and 2023 , inclusive of interest, no payments were made to the parties to the Tax Receivable Agreement. The total amount of Tax Receivable Agreement Payments due under the Tax Receivable Agreement was $ 0.9 million and $ 0.8 million as of June 30, 2024 and December 31, 2023 , respectively. As discussed in Note 5, Debt, Net, on August 1, 2024, the Company undertook a corporate reorganization. 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 million in each annual period between July 2023 and June 2026. As of June 30, 2024, we remain contractually obligated to spend $ 10.0 million towards this commitment. As of June 30, 2024, we had various non-cancelable operating lease commitments for office space which have been recorded as Operating lease liabilities. 18 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 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. While we dispute the claims alleged, we have reached a tentative settlement during June 2024, which would include a release of such claims by the relevant class, which tentative settlement is still subject to court approval and finalizing other terms and conditions. The amount of such tentative settlement has been accrued accordingly in a ccrued expenses and other current liabilities in our condensed consolidated balance sheets as of June 30, 2024. 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 June 30, 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): June 30, 2024 December 31, 2023 Level 1 Public Warrants $ 936 $ 2,688 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 . 19 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 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 June 30, Six Months Ended June 30, 2024 2023 2024 2023 Basic and diluted net loss per share Net loss from continuing operations attributable to System1, Inc. $ ( 0.38 ) $ ( 0.25 ) $ ( 0.54 ) $ ( 0.50 ) Net loss from discontinued operations, net of tax attributable to System1, Inc. — ( 0.12 ) — ( 0.23 ) Basic and diluted net loss per share $ ( 0.38 ) $ ( 0.37 ) $ ( 0.54 ) $ ( 0.73 ) Numerator: Net loss from continuing operations attributable to System1, Inc. $ ( 26,373 ) $ ( 23,342 ) $ ( 36,910 ) $ ( 46,978 ) Net loss from discontinued operations, net of tax attributable to System1, Inc. — ( 10,959 ) — ( 21,125 ) Net loss attributable to System1, Inc. $ ( 26,373 ) $ ( 34,301 ) $ ( 36,910 ) $ ( 68,103 ) Denominator: Weighted-average common shares outstanding used in computing basic and diluted net loss per share 69,383 93,799 68,582 93,288 For the periods presented in the table above, a total of 16.8 million Public Warrants were excluded from the computation of net loss per share as the impact was anti-dilutive. Pursuant to the Merger, we were required to replace certain unvested profits interests awards, value creation units and Class F units that were outstanding as of the closing of the Business Combination, with a combination of a restricted stock unit and cash awards (collectively, "Replacement Awards"). We do not consider unvested Class A common stock related to the Replacement Awards as outstanding for accounting purposes as they are subject to continued service requirements or contingencies. These shares are not included in the denominator of the net loss per share calculation until the employee provides the requisite service resulting in the vesting of the award or the contingency is removed, or upon termination of an employee at which point the common stock underlying the award becomes issuable to the previous investors. Shares associated with the vested or forfeited Replacement Awards are deemed to be issued and outstanding for accounting purposes on the day of vest or forfeiture. 10. Segment Reporting We have two operating and reportable segments: Owned and Operated Advertising and Partner Network. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker ("CODM"), in deciding how to allocate resources and assess performance. Our Chief Executive Officer, who is considered to be our CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. 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 20 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 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 June 30, Six Months Ended June 30, 2024 2023 2024 2023 Owned and Operated Advertising $ 77,396 $ 77,300 $ 146,426 $ 183,325 Partner Network 17,185 19,614 33,072 34,707 Total revenue $ 94,581 $ 96,914 $ 179,498 $ 218,032 The following table summarizes Adjusted gross profit by reportable segments (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Owned and Operated Advertising $ 27,378 $ 27,589 $ 49,840 $ 57,428 Partner Network 13,490 14,808 24,409 25,025 Adjusted gross profit 40,868 42,397 74,249 82,453 Other cost of revenue 2,085 2,140 4,247 4,031 Salaries and benefits 33,937 27,054 58,420 55,201 Selling, general, and administrative 13,989 15,340 26,717 30,195 Depreciation and amortization 19,943 19,688 39,747 39,080 Interest expense, net 7,871 12,334 15,841 23,736 Gain from debt extinguishment ( 433 ) — ( 20,109 ) — Change in fair value of warrant liabilities ( 1,501 ) 2,018 ( 1,752 ) 609 Loss before income tax $ ( 35,023 ) $ ( 36,177 ) $ ( 48,862 ) $ ( 70,399 ) The following table summarizes revenue by geographic region (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 United States $ 91,215 $ 93,410 $ 172,897 $ 210,609 Other countries 3,366 3,504 6,601 7,423 Total revenue $ 94,581 $ 96,914 $ 179,498 $ 218,032 11. Stock-Based Compensation We recorded the following total stock-based compensation expense (in thousands) : Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Stock-based compensation expense $ 3,442 $ 4,294 $ 7,412 $ 10,126 Stock Appreciation Rights Plan During the quarter ended June 30, 2024, the Company adopted the 2024 Stock Appreciation Rights Plan (the "Plan"), to enhance its ability to attract, retain, and motivate individuals who are expected to make significant contributions to the Company's future financial and operating performance. The maximum number of Class A common stock that may be issued pursuant to awards of Stock Appreciation Rights ("SARs") granted under the Plan ("Awards") is 23.8 million shares. 21 System1, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) In July 2024, we granted 22.4 million SARs in accordance with the Plan. Each Award of SARs shall vest and become exercisable as follows, subject to the employee's continued status as a service provider through the applicable Vesting Date (as defined in the Plan), and the term of any Stock Appreciation Right shall not exceed seven years : (1) twenty-five percent ( 25 %) of the SARs subject to the Award (the “Tranche I SARs”) shall vest if the Company’s Adjusted EBITDA for any trailing twelve-month period concluding on or after the applicable date of grant equals or exceeds $ 50.0 million; (2) twenty-five percent ( 25 %) of the SARs subject to the Award (the “Tranche II SARs”) shall vest if the Company’s Adjusted EBITDA for any trailing twelve-month period concluding on or after the applicable date of grant equals or exceeds $ 60.0 million; (3) twenty-five percent ( 25 %) of the SARs subject to the Award (the “Tranche III SARs”) shall vest if the Company’s Adjusted EBITDA for any trailing twelve-month period concluding on or after the applicable date of grant equals or exceeds $ 70.0 million; and (4) the remaining twenty-five percent ( 25 %) of the SARs subject to the Award (the “Tranche IV SARs”) shall vest if the Company’s Adjusted EBITDA for any trailing twelve-month period concluding on or after the applicable date of grant equals or exceeds $ 80.0 million. In July 2024, we granted 3.1 million restricted stock unit awards in accordance with the 2022 Incentive Award Plan. 12. Discontinued Operations Sale of Protected On November 30, 2023, we completed the sale of our Protected business , 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 (as defined below), 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 June 30, 2023 Six Months Ended June 30, 2023 Revenue $ 50,324 $ 97,060 Operating expenses: Cost of revenue (excluding depreciation and amortization) 37,225 74,674 Salaries and benefits 16,047 26,594 Selling, general, and administrative 2,395 4,712 Depreciation and amortization 8,364 18,346 Total operating expenses 64,031 124,326 Operating loss ( 13,707 ) ( 27,266 ) Other expense, net 8 57 Loss from discontinued operations before income taxes ( 13,715 ) ( 27,323 ) Income tax benefit ( 231 ) ( 1,306 ) Net loss from discontinued operations $ ( 13,484 ) $ ( 26,017 ) 22 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): Six Months Ended June 30, 2023 Depreciation and amortization $ 18,346 Stock-based compensation 21,726 Capital expenditures 1,053 Transition Service Agreement In connection with a transition service agreement entered into with the sale of our Protected business, we agreed to provide certain services for which full reimbursement of cost will be provided through the earlier of November 20, 2024 or the date Protected is able to independently participate in Google's advertising purchasing programs. 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 and six months ended June 30, 2023 of $ 1.0 million and $ 2.1 million, respectively. 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 In 2022, in connection with the acquisition of Protected, we effected an incentive plan for eligible recipients (the "Protected Incentive Plan"), providing up to $ 100.0 million payable in fully-vested shares of our Class A common stock contingent upon the achievement of the future performance of Protected’s business. The Protected Incentive Plan originally was to be paid out in two tranches based on performance of the business for 2023 and 2024. The first award (2023), consisting of $ 50.0 million of Class A common stock payable in January 2024, was modified to a cash award resulting in $ 20.0 million of payments in 2022 and 2023 with an additional final $ 10.0 million, payable upon the achievement of certain performance thresholds around marketing spend and operating contribution of Protected on or before December 31, 2024. On November 30, 2023, none of the performance thresholds were met, and therefore, none of the additional cash bonus payments have been paid. 23