What changed in this filing

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Item 1. Financial Statements

2024-11-07 compared with 2024-08-08 · 225 added, 172 removed, 540 unchanged (42% of the section changed)

4 unchanged sentences

(In thousands, except par value)

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

Current assets:

26 unchanged sentences

Commitments and contingencies (Note 7)

Stockholders' equity:

Stockholder's 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

500,000 shares authorized, 70,460 and 65,855 Class A shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively

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

25,000 shares authorized, 21,204 and 21,513 Class C shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively

Additional paid-in capital 858,740 843,112

6 unchanged sentences

Total liabilities and stockholders' equity $ 479,313 $ 605,470

See notes to condensed consolidated financial statements.

The accompanying notes are an integral part of these condensed consolidated financial statements.

System1, Inc.

2 unchanged sentences

(In thousands, except for per share)

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

9 unchanged sentences

Interest expense, net 7,957 13,053 23,798 36,789

Gain from debt extinguishment ( 433 ) — ( 20,109 ) —

(Gain) loss from debt extinguishment — 619 ( 20,109 ) 619

Change in fair value of warrant liabilities 281 ( 7,482 ) ( 1,471 ) ( 6,873 )

1 unchanged sentence

Loss before income tax ( 30,054 ) ( 27,044 ) ( 78,916 ) ( 97,445 )

Income tax benefit ( 178 ) ( 6,670 ) ( 226 ) ( 10,499 )

Income tax expense (benefit) 585 ( 1,116 ) 359 ( 11,614 )

Net loss from continuing operations ( 30,639 ) ( 25,928 ) ( 79,275 ) ( 85,831 )

15 unchanged sentences

Weighted average number of shares outstanding - basic and diluted 70,045 94,359 69,073 93,649

See notes to condensed consolidated financial statements.

The accompanying notes are an integral part of these condensed consolidated financial statements

System1, Inc.

2 unchanged sentences

(In thousands)

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

1 unchanged sentence

Other comprehensive (loss) income:

Foreign currency translation (loss) income ( 96 ) 186 ( 231 ) 78

Foreign currency translation loss ( 44 ) ( 188 ) ( 275 ) ( 110 )

Comprehensive loss ( 30,683 ) ( 163,325 ) ( 79,550 ) ( 249,163 )

2 unchanged sentences

$ ( 23,569 ) $ ( 131,640 ) $ ( 60,593 ) $ ( 199,698 )

See notes to condensed consolidated financial statements.

The accompanying notes are an integral part of these condensed consolidated financial statements.

System1, Inc.

26 unchanged sentences

Balance at June 30, 2024 69,255 $ 7 21,204 $ 2 $ 854,270 $ ( 744,572 ) $ ( 295 ) $ 19,867 $ 129,279

Net loss — — — — — ( 23,602 ) — ( 7,037 ) ( 30,639 )

Issuance of restricted stock, net of forfeitures and shares withheld for taxes 1,205 — — — 288 — — ( 308 ) ( 20 )

Other comprehensive loss — — — — — — 33 ( 77 ) ( 44 )

Stock-based compensation — — — — 4,182 — — 88 4,270

Balance at September 30, 2024 70,460 $ 7 21,204 $ 2 $ 858,740 $ ( 768,174 ) $ ( 262 ) $ 12,533 $ 102,846

System1, Inc.

and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

(In thousands)

Class A Common Stock

21 unchanged sentences

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.

Net loss — — — — — ( 131,490 ) — ( 31,647 ) ( 163,137 )

Issuance of restricted stock, net of forfeitures and shares withheld for taxes 656 — — — 204 — — ( 258 ) ( 54 )

Other comprehensive loss — — — — — — ( 165 ) ( 23 ) ( 188 )

Stock-based compensation — — — — 6,493 — — 615 7,108

Balance at September 30, 2023 94,258 $ 9 21,513 $ 2 $ 850,265 $ ( 639,215 ) $ ( 279 ) $ 29,358 $ 240,140

The accompanying notes are an integral part of these condensed consolidated financial statements

System1, Inc.

2 unchanged sentences

(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash Flows from Operating Activities

Net loss $ ( 79,275 ) $ ( 249,053 )

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization 59,877 85,364

Stock-based compensation 11,194 44,112

Impairment of goodwill — 115,483

Impairment of assets held for sale — 3,276

Amortization of debt issuance costs 2,966 4,663

2 unchanged sentences

Deferred tax benefits ( 1,581 ) ( 19,385 )

Gain from debt extinguishment ( 20,109 ) —

Share-based liabilities 10,253 —

(Gain) loss from debt extinguishment ( 20,109 ) 619

Share-based compensation liabilities 15,765 —

Other, net ( 27 ) 1,750

7 unchanged sentences

Other non-current liabilities ( 1,228 ) ( 3,522 )

Net cash (used in) provided by operating activities ( 6,022 ) 1,352

Net cash used in operating activities ( 6,027 ) ( 5,908 )

Cash Flows from Investing Activities

17 unchanged sentences

Restricted cash 4,500 7,779

Cash and restricted cash included in assets held for sale from discontinued operations — 12,391

Total cash, cash equivalents and restricted cash $ 73,592 $ 25,023

3 unchanged sentences

Settlement of incentive plan through issuance of common stock 1,707 1,658

See notes to condensed consolidated financial statements.

The accompanying notes are an integral part of these condensed consolidated financial statements

System1, Inc.

10 unchanged sentences

Owned and Operated Advertising and Partner Network ( see Note 10, Segment Reporting) .

On August 1, 2024, we undertook a corporate reorganization, the result of which was that all of the assets and business operations of the Company are now held by System1 Holdings, LLC ("System1 Holdings"), a newly formed intermediate holding company of which we maintain the controlling interest and in which the non-controlling interest is owned by the holders of our Class C common stock.

Following the corporate reorganization, (a) System1 Holdings now owns 100 % of S1 Holdco, LLC ("S1 Holdco"), the previous intermediate holding company with the non-controlling interest, 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 our owned and operated products, which includes CouponFollow, Startpage and Mapquest, and (c) S1 Holdco holds our remaining assets and business operations associated with our digital advertising businesses, including our proprietary RAMP platform.

S1 Holdco and its subsidiaries remain obligors and guarantors under our Term Loan and 2022 Revolving Facility, and System1 Holdings and S1 Media are not parties thereto.

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.

The accompanying unaudited condensed consolidated financial statements and related disclosures are prepared in accordance with accounting principles generally accepted in the United States of America ("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.

1 unchanged sentence

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.

The results of operations for the three and nine months ended September 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).

System1, Inc.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 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 and six months ended June 30, 2023 as follows:

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.

During the fourth quarter of 2023, we identified certain errors related to our previously issued financial statements as of and for the three and nine months ended September 30, 2023 as follows:

Additional paid-in capital was understated by $ 0.9 million as of September 30, 2023, and salaries and benefits expense was understated by an immaterial amount for the three months ended September 30, 2023 and overstated by $ 0.6 million f or the nine months ended September 30, 2023, 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.

This 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.

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.

the carrying amount of non-controlling interest was not updated as changes in ownership events occurred during each reporting period;

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.

1 unchanged sentence

We adjusted for the tax impacts of the revisions related to such errors described above.

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):

To correct the immaterial errors, we have revised our previously issued condensed consolidated financial statements as of and for the period ended September 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 September 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 September 30, 2024 .

The following tables reflect the errors discussed in a through d above.

The following table reflects the revisions to the previously issued condensed consolidated balance sheet as of September 30, 2023 (in thousands):

System1, Inc.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements (Unaudited)

As Previously Reported Revision Adjustment As Revised Impact of Reclassification of Discontinued Operations As Currently Reported

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

As Previously Reported Revision Adjustment As Currently Reported

Liabilities and Stockholders' Equity

10 unchanged sentences

Total liabilities and stockholders' equity $ 927,544 $ — $ 927,544

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):

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

The following tables reflect the revisions to the previously issued condensed consolidated statement of operations for the three and nine months ended September 30, 2023 (in thousands):

Three Months Ended September 30, 2023

As Previously Reported Revision Adjustment As Currently Reported

Salaries and benefits $ 26,689 $ 6 $ 26,695 (a)

2 unchanged sentences

Loss before income tax $ ( 27,038 ) $ ( 6 ) $ ( 27,044 )

Income tax benefit ( 6,605 ) ( 296 ) (d) ( 6,901 ) 231 ( 6,670 )

Income tax expense (benefit) ( 920 ) ( 196 ) ( 1,116 ) (d)

Net loss from continuing operations ( 26,118 ) 190 ( 25,928 )

11 unchanged sentences

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 )

Continuing operations $ ( 0.21 ) $ — $ ( 0.21 )

Discontinued operations ( 1.19 ) 0.01 ( 1.18 ) (b)

Basic and diluted net loss per share $ ( 1.40 ) $ 0.01 $ ( 1.39 )

3 unchanged sentences

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

Nine Months Ended September 30, 2023

As Previously Reported Revision Adjustment As Currently Reported

Salaries and benefits $ 82,484 $ ( 588 ) $ 81,896 (a)

2 unchanged sentences

Loss before income tax $ ( 98,033 ) $ 588 $ ( 97,445 )

Income tax benefit ( 11,013 ) ( 792 ) (d) ( 11,805 ) 1,306 ( 10,499 )

Income tax expense (benefit) ( 10,626 ) ( 988 ) ( 11,614 ) (d)

Net loss from continuing operations ( 87,407 ) 1,576 ( 85,831 )

15 unchanged sentences

Weighted average number of shares outstanding - basic and diluted 93,281 368 93,649 (b)

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

The following tables reflect the revisions related to the previously issued condensed consolidated statement of comprehensive loss for the three and nine months ended September 30, 2023 (in thousands):

Three Months Ended September 30, 2023

As Previously Reported Revision Adjustment As Currently Reported

Net loss $ ( 163,327 ) $ 190 $ ( 163,137 ) (a) (d)

Other comprehensive income (loss)

Foreign currency translation income (loss) 187 ( 1 ) (c) 186

Other comprehensive loss:

Foreign currency translation loss ( 188 ) — ( 188 )

Comprehensive loss ( 163,515 ) 190 ( 163,325 )

5 unchanged sentences

Notes to Condensed Consolidated Financial Statements (Unaudited)

Six Months Ended June 30, 2023

Nine Months Ended September 30, 2023

As Previously Reported Revision Adjustment As Currently Reported

Net loss $ ( 250,629 ) $ 1,576 $ ( 249,053 ) (a) (d)

Other comprehensive (loss) income:

Foreign currency translation (loss) income 79 ( 1 ) (c) 78

Other comprehensive loss:

Foreign currency translation loss ( 109 ) ( 1 ) ( 110 ) (c)

Comprehensive loss ( 250,738 ) 1,575 ( 249,163 )

2 unchanged sentences

$ ( 200,719 ) $ 1,021 $ ( 199,698 )

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).

The following tables reflect the revisions to the previously issued condensed consolidated statement of changes in stockholders' equity for the nine months ended September 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 $ 1.6 million, an increase of non-controlling interest of $ 1.8 million, a reduction in accumulated deficit of $ 1.0 million and a reduction in additional paid-in-capital of $ 1.0 million.

21 unchanged sentences

Other comprehensive income (loss) — — — — — — 209 ( 22 ) 187

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

Net loss — — — — — ( 131,433 ) — ( 31,894 ) ( 163,327 )

Issuance of restricted stock, net of forfeitures and shares withheld for taxes 656 — — — ( 54 ) — — — ( 54 )

System1, Inc.

9 unchanged sentences

Total Stockholders’

Other comprehensive loss — — — — — — ( 165 ) ( 23 ) ( 188 )

Stock-based compensation — — — — 7,102 — — — 7,102

Balance at June 30, 2023 93,602 $ 9 21,513 $ 2 $ 844,229 $ ( 508,804 ) $ ( 113 ) $ 59,505 $ 394,828

Balance at September 30, 2023 94,258 $ 9 21,513 $ 2 $ 851,277 $ ( 640,237 ) $ ( 278 ) $ 27,588 $ 238,361

Revision Adjustments

10 unchanged sentences

Balance at June 30, 2023 — $ — — $ — $ ( 661 ) $ 1,079 $ ( 1 ) $ 1,166 $ 1,583

Net loss — — — — — ( 57 ) — 247 190 (a) (b) (d)

Issuance of restricted stock, net of forfeitures and shares withheld for taxes — — — — 258 — — ( 258 ) — (a) (b)

Stock-based compensation — — — — ( 609 ) — — 615 6 (a) (b)

Balance at September 30, 2023 — $ — — $ — $ ( 1,012 ) $ 1,022 $ ( 1 ) $ 1,770 $ 1,779

Net loss — $ — — $ — $ — $ ( 33,802 ) $ — $ ( 9,124 ) $ ( 42,926 )

2 unchanged sentences

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

System1, Inc.

9 unchanged sentences

Total Stockholders’

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

4 unchanged sentences

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):

Net loss — — — — — ( 131,490 ) — ( 31,647 ) ( 163,137 )

Issuance of restricted stock, net of forfeitures and shares withheld for taxes 656 — — — 204 — — ( 258 ) ( 54 )

Other comprehensive loss — — — — — — ( 165 ) ( 23 ) ( 188 )

Stock-based compensation — — — — 6,493 — — 615 7,108

Balance at September 30, 2023 94,258 $ 9 21,513 $ 2 $ 850,265 $ ( 639,215 ) $ ( 279 ) $ 29,358 $ 240,140

The following table reflects the revisions to the previously issued condensed consolidated statement of cash flows for the nine months ended September 30, 2023 (in thousands):

As Previously Reported Revision Adjustment As Currently Reported

2 unchanged sentences

Stock-based compensation 43,909 203 44,112 (a)

3,588 431 (c) 4,019

Deferred tax benefits ( 18,397 ) ( 988 ) ( 19,385 ) (d)

Changes in operating assets and liabilities:

Prepaid expenses and other current assets ( 834 ) ( 431 ) (c) ( 1,265 )

Accrued expenses and other current liabilities 1,708 ( 1,779 ) ( 71 ) (c)

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.

Other non-current liabilities ( 4,510 ) 988 ( 3,522 ) (d)

Net cash used by operating activities ( 5,908 ) — ( 5,908 )

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Use of Estimates

4 unchanged sentences

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.

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.

As of June 30, 2024 , we had two paid search advertising partnership agreements with Google and one paid search advertising partnership agreement with Microsoft.

As of September 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).

We recorded revenue of $ 6.6 million from an Advertising Partner and an estimated contra revenue liability of $ 5.8 million at September 30, 2024 , 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 our 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 such cases, would be recognized as revenue in the period in which such final determinations are made.

Goodwill, Internal-Use Software Development Costs, Net, and Intangible Assets, Net

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.

Goodwill was $ 82.4 million as of September 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 for our continuing operations.

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

September 30, 2024

Gross Carrying Amount Accumulated Amortization Net Carrying Amount

6 unchanged sentences

Total $ 440,181 $ ( 199,175 ) $ 241,006

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

December 31, 2023

7 unchanged sentences

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.

The internal-use software development costs include construction in progress (which amounts are not subject to amortization until placed in service) of $ 4.5 million and $ 3.5 million as of September 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,

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

3 unchanged sentences

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.

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

September 30, 2024 December 31, 2023

Accrued revenue share $ 26,129 $ 16,365

Accrued marketing expenses 12,744 19,737

Accrued payroll and related benefits 14,041 13,751

Accrued interest payable 5,175 311

Accrued marketing expenses 11,816 19,737

Shared-based compensation liability 9,395 —

Other current liabilities 9,691 9,461

1 unchanged sentence

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.

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.

As of September 30, 2024 , we determined that it is probable the CouponFollow business would achieve all performance conditions during the Performance Periods, and accordingly, has recognized a short-term liability within accrued expenses and other current liabilities of $ 9.4 million and a non-current liability of $ 6.7 million within other non-current liabilities in our condensed consolidated balance sheets for all Tier amounts set forth in the CouponFollow Incentive Plan.

The total amount to be earned under the CouponFollow Incentive Plan is $ 21.3 million The carrying amount of the share-based liabilities approximates its fair value.

For the nine months ended September 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 $ 3.3 million installment of the Fixed Amount.

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.

For the three and nine months ended September 30, 2024, we recognized $ 0.8 million and $ 2.5 million for the third installment of the Fixed Amount within salaries and benefits expenses on the condensed consolidated statements of operation s, respectively.

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.

As of September 30, 2024 , there was no balance outstanding on the 2022 Revolving Facility, and principal of $ 285.1 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.

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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.

We were in compliance with our financial covenants as of September 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

As of September 30, 2024, we had $ 50.0 million available on the 2022 Revolving Facility.

System1, Inc.

1 unchanged sentence

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.

During nine months ended September 30, 2024 we completed the repurchase of $ 64.9 million in principal amount of our Term Loan for an aggregate purchase price of $ 41.6 million (at an average discount of 64.12 % of its par value).

Following the repurchases on January 17, 2024 and April 30, 2024, the outstanding principal amount of the Term Loan was $ 301.3 million and $ 295.0 million, respectively.

We used available cash on hand to fund the repurchases.

Our gain on the repurchases were $ 20.1 million before fees and expenses incurred to negotiate, document and consummate the repurchase.

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

September 30, 2024 December 31, 2023

Term Loan 1, 2

2 unchanged sentences

_______________

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.

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.

1 Includes unamortized discount of $ 9.0 million and $ 14.7 million and unamortized loan fees of $ 0.5 million and $ 0.8 million, as of September 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 $ 181.0 million and $ 222.7 million as of September 30, 2024 and December 31, 2023, respectively.

We are the sole managing member of System1 Holdings and, as a result, consolidate the financial results of System1 Holdings .

System1 Holdings 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.

As a partnership, System1 Holdings 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.

Any taxable income or loss generated by System1 Holdings 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.

federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss of System1 Holdings, as well as any stand-alone income or loss generated by us.

We recorded an income tax expense of $ 0.6 million and $ 0.4 million for the three and nine months ended September 30, 2024 and a benefit from income taxes of $ 1.1 million and $ 11.6 million for the three and nine months ended September 30, 2023, respectively .

The effective tax rate was ( 2.0 )% and ( 0.5 )% for the three and nine months ended September 30, 2024, respectively and 4.1 % and 11.9 % for the three and nine months ended September 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.

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, changes to tax reserves, return to provision true-ups, increase to the valuation allowance related to unrealizable deferred tax assets, and outside basis adjustments.

As of September 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.

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.

During the three and nine months ended September 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 September 30, 2024 and December 31, 2023 , respectively.

System1, Inc.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 September 30, 2024, we remain contractually obligated to spend $ 8.0 million towards this commitment.

As of September 30, 2024, we had various non-cancelable operating lease commitments for office space which have been recorded as Operating lease liabilities.

We are subject to various legal proceedings and claims that arise in the ordinary course of business.

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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.

While we dispute the claims alleged, we reached a tentative settlement during June 2024.

During September 2024 we entered into a Settlement Agreement, that still remains subject to court approval.

The amount of such settlement has been accrued accordingly in a ccrued expenses and other current liabilities in our condensed consolidated balance sheet as of September 30, 2024.

Indemnifications

2 unchanged sentences

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 .

Accordingly, we have no liabilities recorded for these agreements as of September 30, 2024 .

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Fair Value Measurement

1 unchanged sentence

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

September 30, 2024 December 31, 2023

Public Warrants $ 1,217 $ 2,688

1 unchanged sentence

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 .

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Net Loss Per Share

1 unchanged sentence

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,

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

13 unchanged sentences

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").

In addition, for the three and nine months ended September 30, 2024, we excluded stock appreciation rights ("SARs") of 22.3 million as they are contingently issuable based on certain performance conditions, which were not achieved as of September 30, 2024 .

Refer to Note 11, Stock-Based Compensation for further details.

During 2022, we replaced certain unvested profits interests awards, value creation units and Class F units that were outstanding, 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.

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

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.

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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

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 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

3 unchanged sentences

The following table summarizes Adjusted gross profit by reportable segments (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

7 unchanged sentences

Interest expense, net 7,957 13,053 23,798 36,789

Gain from debt extinguishment ( 433 ) — ( 20,109 ) —

(Gain) loss from debt extinguishment — 619 ( 20,109 ) 619

Change in fair value of warrant liabilities 281 ( 7,482 ) ( 1,471 ) ( 6,873 )

Loss before income tax $ ( 30,054 ) $ ( 27,044 ) $ ( 78,916 ) $ ( 97,445 )

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table summarizes revenue by geographic region (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

4 unchanged sentences

We recorded the following total stock-based compensation expense (in thousands) :

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2024 2023 2024 2023

1 unchanged sentence

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.

During the quarter ended June 30, 2024, we adopted the 2024 Stock Appreciation Rights Plan (the "2024 Plan"), to enhance our ability to attract, retain, and motivate individuals who are expected to make significant contributions to our 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 2024 Plan ("Awards") is 23.8 million shares.

Financial performance in the Plan is determined by the achievement of Adjusted EBITDA.

The Plan defines Adjusted EBITDA as, with respect to any particular period, the Company’s net income (loss) before interest expense, income taxes, depreciation and amortization expense, stock-based compensation expenses, dividends or other distributions to equity holders, expense associated with revaluation of any warrants, costs associated with acquisitions or dispositions, deferred compensation, management fees, minority interest expense, restructuring charges, impairment and certain segment-specific adjustments, and such other adjustments as may be appropriate to accurately reflect performance, in each case, as determined by the Plan administrator.

In July 2024, we granted 22.4 million SARs in accordance with the Plan.

Each Award is subject to the employee's continued service through the applicable Vesting Date (as defined in the Plan) and the term of any Stock Appreciation Right shall not exceed seven years .

The SARs will vest in four equal tranches upon achieving trailing twelve month Adjusted EBITDA targets of $ 50.0 million, $ 60.0 million, $ 70.0 million, and $ 80.0 million.

Upon exercise, the SARs will be settled in shares of our Class A common stock or in cash at our election.

We will assess whether it is probable that the award will vest for each of the four tranches at the end of every reporting period.

If and when the award is deemed probable of vesting, we will recognize stock-based compensation expense for the award on a graded basis through the date of vesting.

Unvested SARs are forfeited upon termination of service.

We use the Black-Scholes option pricing model to estimate the grant date fair value of each SARs award granted under the Plan.

The expected term is estimated using the simplified method, which is the midpoint between the vesting date and the contractual term.

Volatility is based on a blend of the historical volatility of our common stock and the peer-leveraged volatility.

The risk-free rate is based on the U.S.

Treasury yield curve in effect at the time of grant.

The following table sets forth the key assumptions used to determine the fair value:

System1, Inc.

1 unchanged sentence

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.

Risk-free interest rate 4.01 % - 4.56 %

Term (in years) 2.5 - 7.0

Volatility factor 73.18 % - 89.76 %

Dividend yield 0.00 %

The weighted-average grant date fair value of SARs granted during the three months ended September 30, 2024 was $ 0.94 .

A summary of our SARs activity is as follows:

Number of Shares

(in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value (in thousands)

Outstanding at January 1, 2024 — $ — — $ —

Granted 22,446 1.44

Forfeited/canceled ( 135 ) 1.44

Outstanding at September 30, 2024

22,311 1.44 5.25

Expected to vest as of September 30, 2024

— $ 1.44 5.25 $ —

As of September 30, 2024, we determined that none of the performance conditions related to the SARs are probable of being achieved.

Accordingly, no stock-based compensation expense for the three and nine months ended September 30, 2024 was recognized.

As of September 30, 2024, the total unrecognized compensation cost related to unvested SARs was $ 21.0 million.

Discontinued Operations

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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.

(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 Just Develop It ("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.

Impairment of Protected

Upon classifying our Protected business as held for sale as of September 30, 2023, we performed a goodwill impairment test on the Subscription reporting unit, resulting in a goodwill impairment charge of $ 115.5 million.

This impairment was the result of decreases in long-term forecasts due to adverse customer trends and other macroeconomic outcomes.

We recorded a further impairment loss of $ 3.3 million upon the classification of the disposal group as held for sale, for a total impairment charge of $ 118.8 million that was recorded in the results of discontinued operations for the three and nine months ended September 30, 2023.

There was no tax benefit of this charge for the three and nine months ended September 30, 2023.

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023

Revenue $ 54,550 $ 151,610

4 unchanged sentences

Depreciation and amortization 8,385 26,729

Impairment of goodwill 115,483 115,483

Impairment of assets held for sale 3,276 3,276

Total operating expenses 195,457 319,780

Operating loss ( 140,907 ) ( 168,170 )

Other expense, net 8 57

Other (income) expense, net ( 47 ) 10

Loss from discontinued operations before income taxes ( 140,860 ) ( 168,180 )

1 unchanged sentence

Net loss from discontinued operations $ ( 137,209 ) $ ( 163,222 )

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

Nine Months Ended September 30, 2023

Impairment of goodwill $ 115,483

Impairment of assets held for sale 3,276

Depreciation and amortization 26,729

7 unchanged sentences

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.

II, 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 nine months ended September 30, 2023 of $ 4.2 million and $ 11.9 million, respectively.

System1, Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 had an agreement with JDI Property Holdings Limited, 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

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements