What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-08 · 72 added, 71 removed, 193 unchanged (43% of the section changed)

7 unchanged sentences

References to "Notes" are notes included in our unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

The condensed consolidated financial statements as of and for the three and six months ended June 30, 2023 have been revised to correct prior period errors as discussed in Item I, "Financial Statements - Note 2, Summary of Significant Accounting Policies." Accordingly, this Item 2.

The condensed consolidated financial statements as of and for the three and nine months ended September 30, 2023 have been revised to correct prior period errors as discussed in Item I, "Financial Statements - Note 2, Summary of Significant Accounting Policies." Accordingly, this Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations reflects the impact of those revisions.

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RAMP also allows third party advertising platforms and publishers ("Network Partners") to send end-user traffic to, and monetize end-user traffic on, our owned and operated websites or through our monetization agreements.

Through RAMP, we process approximately 175 million daily advertising campaign optimizations and ingest over 13 billion rows of data daily across approximately 41 advertising vertical categories as of June 30, 2024 .

Through RAMP, we ingested over 13 billion rows of data daily across approximately 40 advertising vertical categories during the three months ended September 30, 2024 .

We are able to efficiently monetize user intent by linking data on consumer engagement, such as first party search data like traffic sources, device type and search queries, with data on monetization rates and advertising spend.

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Since launching, it has expanded to support additional advertising formats across multiple advertising platforms, and has acquired several leading websites, enabling it to control the entire flow of the user acquisition experience, by monetizing user traffic through our network of owned and operated websites.

As of June 30, 2024 , we own and operate approximately 40 websites, including leading search engines like info.com and Startpage.com , and digital media publishing websites and internet utilities, such as HowStuffWorks , MapQuest , CouponFollow and ActiveBeat .

As of September 30, 2024 , we own and operate approximately 40 websites, including leading search engines like info.com and Startpage.com , and digital media publishing websites and internet utilities, such as HowStuffWorks , MapQuest , CouponFollow and ActiveBeat .

On June 28, 2021, we entered into a Business Combination Agreement (as amended on November 30, 2021, January 10, 2022 and January 25, 2022), ("Business Combination Agreement") by and among us, S1 Holdco, LLC ("S1 Holdco") and Total Security Limited, formerly known as Protected.net Group Limited ("Protected").

On January 26, 2022 ("Closing Date"), we consummated the business combination ("Merger") pursuant to the Business Combination Agreement.

Following the consummation of the Merger, the combined company was organized via an "Up-C" structure, in which substantially all of the assets and business operations of System1 are held by S1 Holdco, and our combined business continues to operate through the domestic and foreign subsidiaries of S1 Holdco.

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, 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 (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 under the Company's Term Loan and 2022 Revolving Facility, and System1 Holdings and S1 Media are not parties thereto.

On August 1, 2024, we 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, a newly formed intermediate holding company of which we maintain the controlling interest and in which the non-controlling interest is held by our Class C common stockholders.

Following the corporate reorganization, (a) System1 Holdings now owns 100% of 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 our owned and operated products businesses, which include CouponFollow, Startpage and Mapquest, and (c) S1 Holdco holds our remaining assets and business operations associated with our digital advertising businesses, including its 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.

Our primary operations are in the United States, and we also have operations in Canada and the Netherlands.

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We earn revenue by deploying components of our RAMP to our owned and operated websites to acquire and monetize end-users via advertising offerings from our Advertising Partners.

For this revenue stream, we are the principal in the transaction and report revenue on a gross basis for the amounts received from our Advertising

Additionally, revenue is earned from revenue-sharing arrangements with our Network Partners, whereby our Network Partners acquire end-users and use RAMP to monetize those end-users via our relationships with Advertising Partners.

For this revenue stream, we are the principal in the transaction and report revenue on a gross basis for the amounts received from our Advertising Partners.

Additionally, revenue is earned from revenue-sharing arrangements with our Network Partners, whereby

our Network Partners acquire end-users and use RAMP to monetize those end-users via our relationships with Advertising Partners.

We have determined that we are the agent in these transactions and therefore report revenue on a net basis, based on the difference between amounts received by us from our Advertising Partners, less amounts remitted to our Network Partners based on the underlying revenue-sharing agreements.

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Selling, general, and administrative .

Selling, general, and administrative expenses consist of fees for professional services, occupancy costs and travel and entertainment.

Selling, general, and administrative expenses consist of fees for software services, professional services, occupancy costs and travel and entertainment.

These costs are expensed as incurred.

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Interest expense consists of interest on our debt and the amortization of deferred financing costs and debt discount.

Gain from debt extinguishment.

(Gain) loss from debt extinguishment .

Gain from the repurchase of a portion of our Term Loan indebtedness at a discount.

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The mark to market of our liability-classified Public Warrants.

Income tax benefit

As of June 30, 2024, 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.

Income tax expense (benefit)

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.

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.

Results of Operations

Comparisons of the three and six months ended June 30, 2024 and 2023

Comparisons of the three and nine months ended September 30, 2024 and 2023

The following table summarizes key components of our results of operations for the periods indicated (in thousands, except percentage information):

Three Months Ended June 30, 2024 vs.

2024 % of Total Revenue 2023 % of Total Revenue ($) (%)

Three Months Ended September 30, Year/Year Change

2024 % of Revenue 2023 % of Revenue ($) (%)*

Revenue $ 88,832 100 % $ 87,818 100 % $ 1,014 1 %

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Interest expense, net 7,957 9 % 13,053 15 % (5,096) (39) %

Gain from debt extinguishment (433) — % — — % (433) — %

(Gain) loss from debt extinguishment — — % 619 1 % (619) (100) %

Change in fair value of warrant liabilities 281 — % (7,482) (9) % 7,763 (104) %

Total other (income) expense, net 5,937 6 % 14,352 15 % (8,415) (59) %

Total other expense (income), net 8,238 9 % 6,190 7 % 2,048 33 %

Loss before income tax (30,054) (34) % (27,044) (31) % (3,010) 11 %

Income tax benefit (178) — % (6,670) (7) % 6,492 (97) %

Income tax expense (benefit) 585 1 % (1,116) (1) % 1,701 (152) %

Net loss from continuing operations (30,639) (34) % (25,928) (30) % (4,711) 18 %

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* Percentages may not sum due to rounding

Six Months Ended June 30, 2024 vs.

2024 % of Total Revenue 2023 % of Total Revenue ($) (%)

Nine Months Ended September 30, Year/Year Change

2024 % of Revenue 2023 % of Revenue ($) (%)*

Revenue $ 268,330 100 % $ 305,851 100 % $ (37,521) (12) %

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Interest expense, net 23,798 9 % 36,789 12 % (12,991) (35) %

Gain from debt extinguishment (20,109) (11) % — — % (20,109) — %

(Gain) loss from debt extinguishment (20,109) (7) % 619 — % (20,728) (3349) %

Change in fair value of warrant liabilities (1,471) (1) % (6,873) (2) % 5,402 (79) %

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Loss before income tax (78,916) (29) % (97,445) (32) % 18,529 (19) %

Income tax benefit (226) — % (10,499) (5) % 10,273 (98) %

Income tax expense (benefit) 359 — % (11,614) (4) % 11,973 (103) %

Net loss from continuing operations (79,275) (30) % (85,831) (28) % 6,556 (8) %

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The following table presents our revenue by reportable segment (in thousands):

Three Months Ended June 30, 2024 vs.

Three Months Ended September 30, Year/Year Change

2024 2023 ($) (%)

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Total revenue $ 88,832 $ 87,818 $ 1,014 1%

Six Months Ended June 30, 2024 vs.

Nine Months Ended September 30, Year/Year Change

2024 2023 ($) (%)

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Owned and Operated Advertising

Owned and Operated Advertising revenue was flat for the three months ended June 30, 2024 as compared to the prior year comparative period, and decreased for the six months ended June 30, 2024 as compared to the prior year comparative period.

For the three months ended June 30, 2024 compared to the prior year comparative period, O&O sessions increased approximately 1.2 billion to 2.0 billion from 820 million, and O&O RPS decreased by $0.05 to $0.04 from $0.09.

For the six months ended June 30, 2024 compared to the prior year comparative period, O&O sessions increased approximately 1.4 billion to 3.2 billion from 1.8 billion, and O&O RPS decreased by $0.05 to $0.05 from $0.10.

The year-over-year declines in RPS were related to a mix shift to lower RPS traffic, as well as a softening of domestic advertiser demand starting in the third quarter of 2023.

Owned and Operated Advertising revenue increased for the three months ended September 30, 2024 as compared to the prior year comparative period, and decreased for the nine months ended September 30, 2024 as compared to the prior year comparative period.

For the three months ended September 30, 2024 compared to the prior year comparative period, O&O sessions increased by approximately 1.1 billion to 2.0 billion from 920 million, and O&O RPS decreased by $0.04 to $0.03 from $0.07.

For the nine months ended September 30, 2024 compared to the prior year comparative period, O&O sessions increased approximately 2.5 billion to 5.3 billion from 2.8 billion, and O&O RPS decreased by $0.05 to $0.04 from $0.09.

The year-over-year increases in sessions were due to the integration of new traffic acquisition sources into RAMP.

The year-over-year declines in RPS were related to a mix shift to lower RPS traffic, as well as a softening of domestic advertiser demand.

Partner Network

Partner Network revenue decreased for the three and six months ended June 30, 2024 as compared to the prior year comparative periods.

For the three months ended June 30, 2024 compared to the prior year comparative period, Network sessions increased approximately 1.3 billion to 2.0 billion from 677 million, and Network RPS decreased by $0.02 to $0.01 from $0.03.

For the six months ended June 30, 2024 compared to the prior year comparative period, Network sessions increased approximately 2.5 billion (revised) to 3.6 billion from 1.1 billion, and Network RPS decreased by $0.02 to $0.01 (revised) from $0.03.

This is primarily due to a softening of domestic advertiser demand starting in the third quarter of 2023, as well as instability experienced in the Advertising Partner ecosystem generally starting in the fourth quarter of 2023.

Partner Network revenue decreased for the three and nine months ended September 30, 2024 as compared to the prior year comparative periods.

For the three months ended September 30, 2024 compared to the prior year comparative period, Network sessions increased approximately 1.4 billion to 2.3 billion from 894 million, and Network RPS decreased by $0.01 to $0.01 from $0.02.

For the nine months ended September 30, 2024 compared to the prior year comparative period, Network sessions increased approximately 3.9 billion to 5.9 billion from 2.0 billion, and Network RPS decreased by $0.02 to $0.01 from $0.03.

The year-over-year increases in sessions were due to the onboarding of new Network Partners.

The year-over-year declines in RPS are primarily due to a softening of domestic advertiser demand and instability experienced in the Advertising Partner ecosystem generally starting in the fourth quarter of 2023.

Cost of revenue (excluding depreciation and amortization)

Cost of revenue (excluding depreciation and amortization) remained relatively consistent for the three months ended June 30, 2024 and decreased for the six months ended June 30, 2024 in line with the changes in O&O revenue discussed above.

For the three and six months ended June 30, 2024, compared to prior year comparative periods, our O&O CPS decreased $0.04 to $0.02 from $0.06 and $0.04 to $0.03 from $0.07, respectively.

This is primarily due to a mix shift away to lower CPS traffic.

Cost of revenue (excluding depreciation and amortization) remained relatively consistent for the three months ended September 30, 2024 and decreased for the nine months ended September 30, 2024 in line with the changes in O&O revenue discussed above.

For the three and nine months ended September 30, 2024, compared to

prior year comparative periods, our O&O CPS decreased $0.03 to $0.02 from $0.05 and $0.03 to $0.03 from $0.06, respectively.

This is primarily due to a mix shift away to lower CPS traffic to offset the declines in RPS.

Our chief operating decision maker measures and evaluates reportable segments based on segment operating revenue as well as adjusted gross profit and other measures.

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The following table presents our Adjusted gross profit by reportable segment (in thousands):

Three Months Ended June 30, 2024 vs.

Three Months Ended September 30, Year/Year Change

2024 2023 ($) (%)

1 unchanged sentence

Partner Network 13,053 15,312 (2,259) (15) %

Six Months Ended June 30, 2024 vs.

Nine Months Ended September 30, Year/Year Change

2024 2023 ($) (%)

1 unchanged sentence

Partner Network 37,462 40,337 (2,875) (7) %

Refer to the Revenue and Cost of revenue (excluding depreciation and amortization) discussions above.

Refer to the Revenue and Cost of revenue (excluding depreciation and amortization) discussions above for explanation of the change for each period.

Salaries and benefits

Salaries and benefits increased for the three and six months ended June 30, 2024 as compared to the prior year comparative periods.

T he increase was primarily due to $10.3 million recorded in June 2024 related to CouponFollow share-based liabilities (see Item I, "Financial Statements - Note 4, Accrued Expenses and Other Current Liabilities").

The increase was partially offset by a $0.9 million and $2.7 million decrease in stock-based compensation and $2.0 million and $3.7 million decrease in payroll-related expenses due to a reduction in workforce for the three and six months ended June 30, 2024, respectively.

Salaries and benefits increased for the three and nine months ended September 30, 2024 as compared to the prior year comparative periods.

T he increase for the three and nine months was primarily related to the recognition of $5.5 million and $16.1 million related to CouponFollow share-based liabilities (see Item I, "Financial Statements - Note 4, Accrued Expenses and Other Current Liabilities"), respectively.

This was partially offset by a $1.5 million and $4.2 million decrease in stock-based compensation and $1.6 million and $5.3 million decrease in severance and payroll-related expenses due to a reduction in workforce for the three and nine months ended September 30, 2024, respectively.

Selling, general, and administrative

Selling, general, and administrative expense decreased for the three and six months ended June 30, 2024 as compared to the prior year comparative periods, primarily due to $2.5 million and $4.2 million decrease in advisory, consulting, and legal fees, and to a lesser extent insurance costs, and a decrease in bad debt expense of $1.7 million for each of the current year periods, respectively.

Selling, general, and administrative expense decreased for the three and nine months ended September 30, 2024 as compared to the prior year comparative periods.

The decrease was primarily due to a $1.3 million and $2.5 million decrease in advisory, consulting, and legal fees, and a decrease in bad debt expense of $0.7 million and $2.3 million for the three and nine months ended September 30, 2024, respectively.

Depreciation and amortization

Depreciation and amortization expense increased for the three and six months ended June 30, 2024 as compared to the prior year comparative periods, primarily related to increased amortization for our continued investment in internally developed software.

Depreciation and amortization expense increased for the three and nine months ended September 30, 2024 as compared to the prior year comparative periods, primarily related to increased amortization for our continued investment in internally developed software.

Interest expense, net

Interest expense, net decreased for the three and six months ended June 30, 2024 as compared to the prior year comparative periods, primarily due to a lower debt outstanding balance in the current year as a result of paying down a significant portion of our principal balance.

Gain from debt extinguishment

Gain from debt extinguishment increased for the three and six months ended June 30, 2024 as compared to the prior year comparative periods due to the gain recognized as a result of our repurchase of debt through the Dutch auction and direct buy back that occurred in January and April of 2024, respectively.

Interest expense, net decreased for the three and nine months ended September 30, 2024 as compared to the prior year comparative periods, primarily due to a lower debt outstanding balance in the current year as a result of paying down a significant portion of our principal balance, as well as a decline in adjusted Secured Overnight Financing Rate ("SOFR") interest rates.

(Gain) loss from debt extinguishment

(Gain) loss from debt extinguishment decreased for the three ended September 30, 2024 and increased for the nine months ended September 30, 2024 as compared to the prior year comparative periods due to the gain recognized as a result of our repurchase of debt through the Dutch auction and direct buy back that occurred in January and April of 2024, respectively.

Change in fair value of warrant liabilities

The decrease in fair value of our warrant liabilities for the three and six months ended June 30, 2024 as compared to the prior year comparative periods was due to the remeasurement of our warrant liability to its fair value at June 30, 2024 where the fluctuations are driven by the market value of our Class A common stock.

Income tax benefit

The difference between the effective tax rates for the periods presented and the federal statutory tax rate of 21% was primarily due to the exclusion of non-controlling income (loss), non-deductible expenses, valuation allowance and outside basis adjustments.

The increase in fair value of our warrant liabilities for the three months and decrease for the nine months ended September 30, 2024, as compared to the prior year comparative periods, respectively was due to the remeasurement of our warrant liability to its fair value at September 30, 2024 where the fluctuations are driven by the market value of our Class A common stock.

Income tax expense (benefit)

Net loss from discontinued operations, net of tax

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Adverse macroeconomic conditions have affected, and may in the future affect, the demand for advertising, resulting in fluctuations in the amounts our advertisers spend on advertising, which could have a negative impact on our financial condition and operating results.

As of June 30, 2024, we had unrestricted cash and cash equivalents of $75.7 million and $50.0 million available to borrow on our 2022 Revolving Facility.

For the six months ended June 30, 2024, the Company had cash outflows of $63.2 million.

The principal drivers of our cash outflows were $48.6 million of net loss, offset by non-cash items, $51.8 million repayment of our Term Loan, offset by a $5.6 million working capital changes.

Our revenue is dependent on two key Advertising Partners, which are Google and Microsoft.

Refer to our concentration with customers discussion at Item I, "Financial Statements - Note 2, Summary of Significant Accounting Policies" for additional information.

As of September 30, 2024, we had unrestricted cash and cash equivalents of $69.1 million and $50.0 million available to borrow on our 2022 Revolving Facility.

For the nine months ended September 30, 2024, we had cash outflows of $69.9 million.

The principal drivers of our cash outflows were $56.8 million repayment of our Term Loan, $11.3 million related to net change in operations and $4.9 million of software development costs, offset by a $5.2 million working capital changes.

Credit Facilities

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The following table summarizes our cash flows for the periods presented (in thousands):

Six Months Ended June 30,

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

Nine Months Ended September 30,

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

Net cash used in investing activities (4,962) (6,859)

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In addition, seasonality may impact cash flows from operating activities on a sequential quarterly basis during the year.

In the six months ended June 30, 2024, cash used in operating activities of $6.0 million resulted primarily from favorable changes in net income, excluding the impact of non-cash items offset by favorable changes in working capital balances.

In the nine months ended September 30, 2024, cash used in operating activities of $6.0 million resulted primarily from favorable changes in net income, excluding the impact of non-cash items offset by favorable changes in working capital balances.

The favorable changes in working capital balances included an increase in accrued expenses and other current liabilities offset by an increase in account receivable balances.

In the six months ended June 30, 2023, cash provided by operating activities of $1.4 million resulted primarily from depreciation and amortization expense of $57.4 million, stock-based compensation of $31.9 million, and a decrease in accounts receivable of $16.2 million.

In the nine months ended September 30, 2023, cash used in operating activities of $5.9 million resulted primarily from net loss adjusted for noncash items, including the impairment of goodwill and assets held for sale of $118.8 million, depreciation and amortization expense of $85.4 million, stock-based compensation of $44.1 million, and a decrease in accounts receivable of $17.8 million.

This was partially offset by a net loss of $249.1 million and a payment of long-term earnout liabilities of $20.0 million.

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Our primary investing activities consisted of costs capitalized for internally developed software.

In the six months ended June 30, 2024, cash used in investing activities of $3.2 million resulted primarily from costs capitalized for internally developed software.

In the six months ended June 30, 2023, cash used in investing activities of $5.1 million resulted from costs capitalized for internally developed software and purchases of property and equipment.

In the nine months ended September 30, 2024 and September 30, 2023, cash used in investing activities of $5.0 million and $6.9 million resulted primarily from costs capitalized for internally developed software, respectively.

Financing Activities

Our financing activities consisted primarily of repayments of our indebtedness under our credit facilities.

In the six months ended June 30, 2024, cash used in financing activities of $53.9 million was primarily related to the repayment of the 2022 Term Note in the amount of $51.8 million.

In the six months ended June 30, 2023, cash used in financing activities of $9.4 million resulted primarily from repayment of our related-party loan of $34.0 million, repayment of our existing term loan of $10.0 million,

taxes paid related to net settlement of stock awards of $3.1 million, and payment of acquisition holdback of $1.3 million.

This was partially offset by proceeds from related-party loan of $39.0 million.

In the nine months ended September 30, 2024, cash used in financing activities of $59.0 million was primarily related to the repayment of the 2022 Term Note in the amount of $56.8 million.

In the nine months ended September 30, 2023, cash used in financing activities of $1.1 million resulted primarily from repayment of our existing term loan of $15.0 million, taxes paid related to net settlement of stock awards of $3.1 million, and payment of acquisition holdback of $1.9 million.

This was partially offset by net proceeds from a related-party revolver of $19.0 million.

Off-Balance Sheet Arrangements

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In June 2021, we entered into a multi-year agreement with a service provider whereby we are contractually obligated to spend $5.0 million annually between July 2023 and June 2026 .

As of June 30, 2024 , we remain contractually obligated to spend a remaining $10.0 million towards this commitment.

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

Contingencies

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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 2. Management’s Discussion and Analysis