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Item 7. Management’s Discussion and Analysis

2023-06-06 compared with 2022-03-31 · 426 added, 102 removed, 3 unchanged (99% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our audited financial statements and the notes related thereto which are included in “Item 8.

Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

Certain information contained in the discussion and analysis set forth below includes forward-looking statements.

Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Special Note Regarding Forward-Looking Statements,” “Item 1A.

Risk Factors” and elsewhere in this Annual Report on Form 10-K.

As of December 31, 2021, we were a blank check company incorporated as a Cayman Islands exempted company and formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses.

We reviewed a number of opportunities to enter into a business combination with an operating business.

On June 16, 2020, we consummated an initial public offering (the “Initial Public Offering”) of 51,750,000 units (consisting of one share of Class A common stock, $0.0001 par value, and one warrant to purchase one share of Class A common stock, collectively, a “Unit”), including 6,750,000 Units issued pursuant to the exercise in full of the underwriters’ over-allotment option, at $10.00 per Unit, generating gross proceeds of $517,500,000, and incurring offering costs of $29,241,089 inclusive of $10,350,000 of underwriting fees, $18,112,500 of deferred underwriting fees, and $778,589 of other costs.

Simultaneously with the closing of the Initial Public Offering, we consummated the private placement (the “Private Placement”) of 8,233,334 Private Placement Warrants at a price of $1.50 per Private Placement Warrant in a private placement to Trasimene Trebia, LP, an affiliate of Trasimene Capital Management, LLC, and BGPT Trebia LP, an affiliate of Bridgeport Partners LLC (collectively the “Sponsors”), generating gross proceeds of $12,350,000.

At December 31, 2021 and December 31, 2020, cash of $53,147 and $843,643, respectively, was held outside of the Trust Account (as defined below) and was available for working capital purposes.

Following the closing of the Initial Public Offering on June 19, 2020,

an amount of $517,500,000 ($10.00 per Unit) from the net proceeds of the sale of the Units in the Initial Public Offering and the sale of the Private Placement Warrants was placed in a trust account (the “Trust Account”) located in the United States and invested in U.S.

government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act, with a maturity of 185 days or less, or in any open-ended investment company that holds itself out as a money market fund meeting certain conditions of Rule 2a-7 of the Investment Company Act of 1940, as amended (the “Investment Company Act”), as determined by the Company, until the earlier of:

(i) the completion of a Business Combination and (ii) the distribution of the funds in the Trust Account to the Company’s shareholders, as described below.

The Company’s management had broad discretion with respect to the specific application of the net proceeds of the Initial Public Offering and the sale of the Private Placement Warrants, although substantially all of the net proceeds applied generally toward completing a Business Combination.

On June 28, 2021, we entered into a business combination agreement by and among Trebia, S1 Holdco, Trebia Merger Sub I, Trebia Merger Sub II, Protected and the other parties thereto.

On January 27, 2022, the Company consummated the Business Combination.

SYSTEM1 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise indicated or the context otherwise requires, references in this section to “the Company,” “System1,” “we,” “us,” “our” and other similar terms refer to System1, Inc and its subsidiaries and references to “Trebia” refer to the Company, formerly known as Trebia Acquisition Corp., prior to the Merger (as defined below).

The following discussion and analysis of the financial condition and results of operations of System1 should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K, as well as our prospectus, dated April 13, 2022, filed with the Securities and Exchange Commission, or SEC.

The following discussion and analysis should also be read together with the section entitled “Organization and description of business” as of December 31, 2022 (Successor) and for the period from January 1, 2022 through January 26, 2022 (Predecessor), the period from January 27, 2022 through December 31, 2022 (Successor) and for the year ended December 31, 2021 (Predecessor).

In addition to historical information, the following discussion and analysis contains forward-looking statements.

Our actual results may differ significantly from those projected in such forward-looking statements.

Factors that might cause future results to differ materially from those projected in such forward-looking statements include, but are not limited to, those discussed in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” All figures are presented in thousands, except percentages, rates and unless otherwise noted.

References to “Notes” are notes included in our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Company Overview

We operate an omnichannel customer acquisition platform, delivering high-intent customers to advertisers and selling antivirus software packages to end user customers.

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 users, RAMP allows us to monetize these acquired users through our relationships with third party advertisers and advertising networks (“Advertising Partners”).

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

RAMP operates across our network of owned and operated websites, allowing us to monetize user traffic that we source from various acquisition marketing channels, including Google, Facebook, Taboola and Zemanta.

Through RAMP, we process approximately 28 million daily advertising campaign optimizations and ingest approximately 5 billion rows of data daily across more than 40 advertising categories as of December 31, 2022.

We are able to efficiently monetize user intent by linking data on consumer engagement, such as first party search data, with data on monetization and advertising spend.

This context-enriched data, combined with our proprietary and data science driven algorithms, creates a closed-loop system that is not reliant on personally identifiable information or information obtained through third-party cookies, but which allows RAMP to efficiently match consumer demand with the appropriate advertiser or advertising experience across advertising verticals.

S1 Holdco was founded in 2013 with a focus on monetizing user traffic acquired by its Network Partners.

Since launching, it has expanded to support additional advertising formats across numerous advertising platforms, and has acquired several leading websites, enabling it to control user acquisition and experience, and monetize user traffic on its behalf via its network of owned and operated websites.

As of December 31, 2022, S1 Holdco owns and operates approximately 40 websites, including leading search engines like info.com and Startpage.com, and publishing digital media sites and utilities, such as HowStuffWorks, MapQuest, CouponFollow and ActiveBeat.

We, through Protected.net, also provide antivirus and consumer privacy software solutions, offering our customers a single packaged solution that provides protection and reporting to the end user.

We deliver our antivirus software solutions directly to end-user customers across the world.

The antivirus software solutions product offering comprises a core security package with varying levels of extra protection based on customers' specific needs.

These products include unlimited devices, Adblock, and ID Protect and are managed to ensure they provide a value-added service to the customer base.

The software is sold in either a monthly or annual subscription predominantly through the flagship brand TotalAV.

As of December 31, 2022, Protected.net had over 2.4 million active subscribers for its products.

Our primary operations are in the United States;

and we also have operations in Canada, the United Kingdom and the Netherlands.

Operations outside the United States are subject to risks inherent in operating under different legal systems and various political and economic environments.

Among the risks are changes in existing tax laws, possible limitations on foreign investment and income repatriation, government foreign exchange controls, and exposure to currency exchange fluctuations.

We do not engage in hedging activities to mitigate our exposure to fluctuations in foreign currency exchange rates.

On June 28, 2021, we entered into a Business Combination Agreement (as amended on November 30, 2021, January 10, 2022 and January 25, 2022), (the “Business Combination Agreement”) by and among us, S1 Holdco and Protected.

On January 26, 2022 (the “Closing Date”), the Company consummated the business combination (the “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.

Our combined business continues to operate through the subsidiaries of S1 Holdco and Protected.

Additionally, Trebia’s ordinary shares and public warrants ceased trading on the New York Stock Exchange (“NYSE”), and System1 Inc.s Class A common stock and the Public Warrants began trading on the NYSE on January 28, 2022 under the symbols “SST” and “SST.WS,” respectively.

The Company was deemed the accounting acquirer in the Merger, and S1 Holdco was deemed to be the predecessor entity.

Accordingly, the historical financial statements of S1 Holdco became the historical financial statements of the Company, upon the consummation of the Merger.

As a result, the financial statements included in this report reflect (i) the historical operating results of S1 Holdco prior to the Merger;

and (ii) the consolidated results of the Company, including S1 Holdco and Protected following the closing of the Merger.

The accompanying financial information include a Predecessor period, which include the periods through January 26, 2022 concurrent with the Merger, and a Successor period from January 27, 2022 through December 31, 2022.

A black-line between the Successor and Predecessor periods has been placed in the consolidated financial statements and in the tables within the notes to the consolidated financial statements to highlight the lack of comparability between these two periods as the Merger resulted in a new basis of accounting for S1 Holdco.

Refer to Note 3—MERGER and Note 6 — GOODWILL , INTERNAL-USE SOFTWARE DEVELOPMENT COSTS, AND INTANGIBLE ASSETS, NET — for additional information.

Components of Our Results of Operations

Revenue is earned from revenue-sharing arrangements with our Network Partners for the use of our RAMP platform and related services provided to them to direct advertising by the Advertising Partners to their advertising space.

We have determined it is the agent in these transactions and reports revenue on a net basis, because (a) we do not control the underlying advertising space, (b) we do not acquire the traffic and do not have risk of loss in connection therewith, and (c) the pricing is in the form of a substantively fixed-percentage revenue-sharing arrangement.

We report this revenue on a net basis with respect to the amount retained under our revenue-sharing arrangements, which represents the difference between amounts received by us from the Advertising Partners, less amounts remitted to the Network Partners based on underlying contracts.

We also earn revenue by directly acquiring traffic to its owned and operated websites and utilizing its RAMP platform and related services to connect its Advertising Partners to its owned and operated websites.

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

For this revenue, we have determined that it is the principal since it has a risk of loss on the traffic that it is acquiring for monetization with our Advertising Partners, and, in the case of our owned and operated websites, we maintain the website, provide the content and bear the cost and risk of loss associated with our websites’ advertising space.

We recognize revenue upon delivering traffic to our Advertising Partners based on a cost-per-click or cost-per-thousand impression basis.

The payment term with our Advertising Partners is typically 30 days.

We, through Protected.net, are also engaged in selling security software solutions to customers.

The subscription business provides real-time antivirus protection, a safe-browsing feature, adblocking, identity-theft protection, blocking of malicious websites and data breach monitoring.

Subscription revenue is primarily derived from the (i) delivery of the antivirus software and (ii) delivery of the additional add-on service(s), which all are provided on a fixed-price basis.

The performance obligations related to subscription, maintenance and support are satisfied over the length of the relevant customer contract, and the associated subscription revenue is recognized over the contract term on a ratable basis, which is consistent with transfer of control.

Our services rendered to customers are generally paid for in advance with cash receipts recorded as deferred revenue, which represents a liability under a noncancelable contract.

Revenue may fluctuate from period to period due to a number of factors including seasonality and the shift in mix of user acquisition sources from Advertising Partners, and renewal rates of customers for subscription services.

We have three reportable segments:

• Owned and Operated Advertising ("O&O");

• Partner Network;

• Subscription.

Refer to Note 16—SEGMENT REPORTING for additional information.

Operating Expenses

We classify our operating expenses into the following categories:

Cost of Revenues (excluding depreciation and amortization) .

Cost of revenues primarily consists of traffic acquisition costs, which are the costs to place advertisements to acquire customers to the Company’s websites and services, as well as content, publishing, domain name registration costs, licensing costs to provide mapping services to Mapquest.com, and costs related to the utilization of antivirus engine licensing related to APIs for the antivirus product.

The Company does not pre-pay any traffic acquisition costs, and therefore, expenses such costs as incurred.

Salaries and Benefits.

Salaries and benefits expenses include salaries, bonuses, stock-based compensation, non-capitalized personnel costs incurred in the capitalized internal use software development, and employee benefits costs.

We expect to continue to invest in corporate infrastructure to support our growth.

We expect salaries and benefits to increase in absolute dollars in future periods.

Selling, General, and Administrative .

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

These costs are expensed as incurred.

We expect to continue to invest in corporate infrastructure to support our growth.

We expect selling, general and administrative expenses to increase in absolute dollars in future periods.

Depreciation and Amortization .

Depreciation and amortization expenses are primarily attributable to the Company’s capital investment(s) and consist of fixed asset depreciation and amortization of intangible assets with finite lives.

Impairment of Goodwill .

We test for goodwill annually or if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

We record impairment of goodwill when the carrying amount of a reporting unit exceeds its fair value.

Refer to the discussion below and Note 6 — GOODWILL , INTERNAL-USE SOFTWARE DEVELOPMENT COSTS, AND INTANGIBLE ASSETS, NET — Goodwill Impairment for additional information.

Other Expenses

Other expenses consist of the following:

Interest Expense.

Interest expense is primarily related to our debt, which carries a variable interest rate.

Change in Fair Value of Warrant Liabilities.

Change in fair value of warrant liabilities relates to the mark to market of our liability-classified public and private warrants.

Income tax (benefit) provision

The Company is the managing member of S1 Holdco and, as a result, consolidates the financial results of S1 Holdco in its consolidated financial statements.

S1 Holdco is a pass-through entity for U.S.

federal and most applicable state and local income tax purposes.

As an entity classified as a partnership for tax purposes, 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 its members, including the Company.

The Company is taxed as a corporation and pays corporate federal, state and local taxes with respect to income allocated from S1 Holdco based on the Company's economic interest in S1 Holdco.

Various subsidiaries are subject to income tax in the United States and in other countries.

Results of Operations

We neither engaged in any operations nor generated any operating revenues prior to the Business Combination.

Our only activities from inception through December 31, 2021 were organizational activities, those necessary to prepare for the Initial Public Offering, described below, and, subsequent to the Initial Public Offering, identifying a target company for a Business Combination.

We do not expect to generate any operating revenues until after the completion of our initial Business Combination.

We incurred expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses in connection with searching for, and completing, a Business Combination.

Additionally, we recognized non-cash gains and losses with other income (expense) related to changes in recurring fair value measurement of our warrant and FPA liabilities at each reporting period.

For the year ended December 31, 2021, we had net income of $21,026,763, consisting of $23,699,501 of gain on change in fair value of warrant liability, $7,494,372 of gain on change in fair value of FPA liability and $3,160,168 of gain on termination of the FPA offset by formation and operating costs of $13,327,278.

For the period from February 11, 2020 (inception) through December 31, 2020, we had a net loss of $29,914,748, which consisted of formation and operating costs of $806,028, transaction costs allocated to warrant and FPA liabilities of $1,381,051, loss on change in fair value of warrant liability of $17,328,667, and loss on change in fair value of FPA liability of 10,399,002.

The following tables set forth our consolidated results of operations and our consolidated results of operations as a percentage of revenue for the periods presented.

Successor Predecessor

Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 Year Ended December 31, 2021

(in thousands)

$ 773,940 $ 52,712 $ 688,389

Operating costs and expenses:

Cost of revenues (excluding depreciation and amortization) 538,779 41,507 521,113

Salaries and benefits 194,976 31,181 66,747

Selling, general, and administrative 63,478 15,665 35,813

Depreciation and amortization 118,652 1,000 13,885

Impairment of goodwill 366,309 — —

Total operating costs and expenses

1,282,194 89,353 637,558

Operating income (loss) (508,254) (36,641) 50,831

Other expense:

Interest expense 32,050 1,049 16,870

Change in fair value of warrant liabilities 3,751 — —

Total other expense 35,801 1,049 16,870

Income (loss) before income tax (544,055) (37,690) 33,961

Income tax (benefit) provision (101,976) (629) 965

Net income (loss) $ (442,079) $ (37,061) $ 32,996

Net loss attributable to non-controlling interest (105,682) — —

Net income (loss) attributable to System1, Inc.

$ (336,397) $ (37,061) $ 32,996

Successor Predecessor

Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 Year Ended December 31, 2021

100 % 100 % 100 %

Operating expenses:

Cost of revenues (excluding depreciation and amortization) 70 % 79 % 76 %

Salaries and benefits 25 % 59 % 10 %

Selling, general, and administrative 8 % 30 % 5 %

Depreciation and amortization 15 % 2 % 2 %

Impairment of goodwill 47 % — % — %

Total operating expenses

166 % 170 % 93 %

Operating income (loss) (66) % (70) % 7 %

Other expense:

Interest expense 4 % 2 % 2 %

Change in fair value of warrant liabilities — % — % — %

Total other expense, net 5 % 2 % 2 %

Income (loss) before income tax (70) % (72) % 5 %

Income tax (benefit) provision (13) % (1) % — %

Net income (loss) (57) % (70) % 5 %

Net loss attributable to non-controlling interest (14) % — % — %

Net income (loss) attributable to System1, Inc.

(43) % (70) % 5 %

* Percentages may not sum due to rounding

The comparability of our operating results for the year ended December 31, 2022 compared to the year ended December 31, 2021 was impacted by the Merger, as discussed above, and the acquisitions discussed in Note 4—ACQUISITIONS .

Expense contributions from our recent acquisitions for each of the respective period comparisons generally were not separately identifiable due to the integration of these businesses into our existing operations.

Comparisons of Results of Operations for the period from January 1, 2022 through January 26, 2022 (Predecessor) and for the period from January 27, 2022 through December 31, 2022 (Successor) and the year ended December 31, 2021 (Predecessor)

The following tables set forth our revenue by reportable segment.

Successor Predecessor

Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 Year Ended December 31, 2021 2022 vs.

2021 change (%)

Owned and Operated Advertising $ 556,303 $ 49,249 $ 652,884 (7)%

Partner Network

55,926 3,463 35,505 67%

Subscription 161,711 — — 100%

Total Revenue $ 773,940 $ 52,712 $ 688,389 20%

Owned and Operated Advertising

The decrease in Owned and Operated Advertising revenues for the year ended December 31, 2022, compared to the same prior year period, was primarily due to deteriorating macroeconomic conditions and reductions in both advertiser and overall consumer demand , partially offset by an increase due to acquisitions.

Compared to the same prior period Revenue Per Session ("RPS") decreased $0.05.

Partner Network

The increase in Partner Network revenue for the year ended December 31, 2022, compared to the same prior year period, was due to our continued investment in this business and growth from partners signed in prior years.

For the year ended December 31, 2022, compared to the same prior year period, the number of sessions increased by approximately 163 million.

In connection with the Merger, we acquired Protected and began recognizing subscription revenue.

We had no end-consumer subscription revenues for the year ended December 31, 2021.

Revenue and Cost Metrics

We use total advertising spend, number of Owned & Operated Advertising sessions (“O&O sessions”), number of Partner Network sessions (“Network sessions”), Owned & Operated Advertising cost-per-session (“O&O CPS”), Owned & Operated Advertising revenue-per-session (“O&O RPS”) and Partner Network revenue-per-session (“Network RPS”) to track our operations.

We define total advertising spend as the amount of advertising that is spent by us to acquire traffic to our websites.

We define O&O sessions as the total number of monetizable user visits to our Owned & Operated Advertising websites.

We define Network sessions as the number of monetizable user visits delivered by our network partners to RAMP.

Monetizable visits exclude those visits identified by our advertising partners as spam, bot, or other invalid traffic.

We define CPS as advertising spend divided by O&O sessions.

We define O&O RPS as O&O Revenue divided by O&O sessions.

We define Network RPS as Partner Network revenue divided by Network sessions.

Cost of revenues

Successor Predecessor

Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 Year Ended December 31, 2021 2022 vs.

2021 change (%)

Cost of revenues

$ 538,779 $ 41,507 $ 521,113 11%

Percent of revenue

70 % 79 % 76 %

The increase in cost of revenues dollars for the year ended December 31, 2022, compared to the same prior year period, was due to the acquisition of Protected, which contributed $99 million of the increase, partially offset by an adjusted Gross Profit decrease in user acquisition costs in the O&O segment.

O&O user acquisition costs for the year ended December 31, 2022, decreased $40 million primarily due to deteriorating macroeconomic conditions and reductions in both advertiser and overall consumer demand, and a discontinuation in certain business lines, which resulted in a $0.04 decrease in Cost Per Session (“CPS”).

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

We define and calculate adjusted gross profit as revenue less advertising expense to acquire users.

The remaining cost of revenues consist of non-advertising expenses such as set-up costs, royalties and fees.

We exclude the following items from segment adjusted gross

depreciation and amortization of property, equipment and leasehold improvements, amortization of intangible assets and, at times, certain other transactions or adjustments.

The following supplemental tables set forth our adjusted gross profit by reportable segment.

Successor Predecessor

Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 Year Ended December 31, 2021 2022 vs.

2021 change (%)

Segment Adjusted Gross Profit:

Owned and Operated Advertising

$ 138,560 $ 8,768 $ 143,284 3%

Partner Network

42,291 3,012 35,505 28%

Subscription 78,220 — — 100%

Total Adjusted Gross Profit $ 259,071 $ 11,780 $ 178,789 51%

Refer to the Revenue and Cost of revenues discussions above.

Additionally, refer to Note 16—SEGMENT REPORTING for additional information.

Salaries and benefits

Successor Predecessor

Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 Year Ended December 31, 2021 2022 vs.

2021 change (%)

Salaries and benefits

$ 194,976 $ 31,181 $ 66,747 >100%

Percent of revenue 25 % 59 % 10 %

The increase in salaries and benefits dollars for the year ended December 31, 2022, compared to the same prior year period, was primarily due to $131 million in stock-based compensation, which included $51 million related to the Protected.net Incentive Plan (as defined below), and $24 million recognized upon the close of the Merger, and $21 million in salaries and related expenses due to increased headcount from the Merger and our recent acquisitions.

For additional information on our stock-based compensation, refer to Note 3—MERGER and Note 19—STOCK-BASED COMPENSATION .

Selling, general, and administrative

Successor Predecessor

Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 Year Ended December 31, 2021 2022 vs.

2021 change (%)

Selling, general, and administrative

$ 63,478 $ 15,665 $ 35,813 >100%

Percent of revenue

The increase in selling, general, and administrative expense for the year ended December 31, 2022, compared to the same prior year period, was primarily due to additional costs associated with becoming and operating as a public company of $16 million, costs associated with our 2022 acquisitions of $12 million and an increase in costs associated with the Merger of $10 million.

Depreciation and amortization

Successor Predecessor

Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 Year Ended December 31, 2021 2022 vs.

2021 change (%)

Depreciation and amortization

$ 118,652 $ 1,000 $ 13,885 >100%

The increase in depreciation and amortization expense for the year ended December 31, 2022, compared to the same prior year period, was primarily due to additions of intangible assets as a result of the Merger, along with subsequent acquisitions.

Impairment of goodwill

Successor Predecessor

Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 Year Ended December 31, 2021 2022 vs.

2021 change (%)

Impairment of goodwill $ 366,309 $ — $ — 100%

We have experienced adverse macroeconomic impacts as a result of changes in market conditions and increases in interest rates, which contributed to reduced forecasted revenues and reduced expectations for future cash flows.

In response to these ongoing macroeconomic conditions and a broad weakening of consumer demand during the third quarter of 2022, we reduced our earnings forecasts for the Owned and Operated Advertising & Partner Network reportable segments.

Given these adverse impacts, we performed an interim quantitative goodwill impairment analysis for all our reporting units as of September 30, 2022.

We further performed our annual impairment test as of December 31, 2022.

As a result of these impairment tests, we recorded impairments of goodwill in the amount of $366.3 million associated with certain of our reporting units as the fair value of these reporting units had declined below their fair value.

Refer to Note 6 — GOODWILL , INTERNAL-USE SOFTWARE DEVELOPMENT COSTS, AND INTANGIBLE ASSETS, NET — Goodwill Impairment for additional information.

Interest expense

Successor Predecessor

Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 Year Ended December 31, 2021 2022 vs.

2021 change (%)

Interest expense $ 32,050 $ 1,049 $ 16,870 96%

The increase in interest expense for the year ended December 31, 2022, compared to the same prior year period, was due to an increase in our outstanding loan balances as a result of the Term Loan and Revolving Facility, which we entered into as part of the Merger, partially offset by a decrease in the weighted average interest rate.

Refer to N ote 12 — DEBT, NET , for additional information.

Change in fair value of warrant liabilities

The changes in fair value of warrant liabilities of $3,751 in 2022 was driven by the fluctuations in the market value of our Class A common stock since the Merger.

Income tax (benefit) provision

Successor Predecessor

Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 Year Ended December 31, 2021 2022 vs.

2021 change (%)

Income tax (benefit) provision

$ (101,976) $ (629) $ 965 <100%

Effective tax rate 19 % 2 % 3 %

The difference between the effective tax rates for the periods presented above and the federal statutory tax rate of 21% was primarily due to the exclusion of non-controlling income (loss), effects of predecessor flow through income allocations, changes in unrecognized tax benefits and outside basis adjustments.

Liquidity and Capital Resources

Until the consummation of the Initial Public Offering, our only source of liquidity was an initial purchase of common stock by the Sponsors and loans from our Sponsors.

On June 19, 2020, we consummated the Initial Public Offering of 51,750,000 Units, inclusive of the underwriters’ election to fully exercise their option to purchase an additional 6,750,000 Units, at a price of $10.00 per Unit, generating gross proceeds of $517,500,000.

Simultaneously with the closing of the Initial Public Offering, we consummated the sale of 8,233,334 Private Placement Warrants to the Sponsor at a price of $1.50 per Private Placement Warrant generating gross proceeds of $12,350,000.

Following the Initial Public Offering, the exercise of the over-allotment option in full and the sale of the Private Placement Warrants, a total of $517,500,000 was placed in the Trust Account, and we had $1,994,558 of cash held outside of the Trust Account, after payment of costs related to the Initial Public Offering, and available for working capital purposes.

We incurred $29,241,089 in transaction costs, including $10,350,000 of underwriting fees, $18,112,500 of deferred underwriting fees and $778,589 of other costs.

For the year ended December 31, 2021, cash used in operating activities was $1,240,496.

Net income of $21,026,763 was affected by the change in the fair value of warrants of $23,699,501, change in the value of FPA liability of $7,494,372 and gain on termination of the FPA of $3,160,168.

Changes in operating assets and liabilities which provided $12,086,782 of cash from operating activities.

For the period from February 11, 2020 (inception) through ended December 31, 2020, cash used in operating activities was $402,768.

Net loss of $29,914,748 was affected by the transaction costs allocated to warrant and FPA liabilities of $1,381,051, change in fair value of warrant liability of $17,328,667, and change in fair value of FPA liability of 10,399,002.

Changes in operating assets and liabilities, which provided $403,260 of cash.

As of December 31, 2021, we had cash held in the Trust Account of $517,500,000.

We used substantially all of the funds held in the Trust Account, including any amounts representing interest earned on the Trust Account, less taxes payable and deferred underwriting commissions, to complete our Business Combination.

To the extent that our share capital or debt is used, in whole or in part, as consideration to complete a Business Combination, the remaining proceeds held in the Trust Account will be used as working capital to finance the operations of the target business or businesses, make other acquisitions and pursue our growth strategies.

As of December 31, 2021, we had cash of $53,147 held outside the Trust Account.

We used the funds held outside the Trust Account towards completing our Business Combination.

In order to fund working capital deficiencies or finance transaction costs in connection with a Business Combination, our Sponsors or an affiliate of our Sponsors or certain of our officers and directors may, but are not obligated to, loan us funds as may be required.

Alongside completing a Business Combination, we may repay such loaned amounts out of the proceeds of the Trust Account released to us.

In the event that a Business Combination does not close, we may use a portion of the working capital held outside the Trust Account to repay such loaned amounts, but no proceeds from our Trust Account would be used for such repayment.

Up to $1,500,000 of such loans may be convertible into warrants, at a price of $1.50 per warrant, at the option of the lender.

The warrants would be identical to the Private Placement Warrants.

No such loans were made as of December 31, 2021 and 2020.

On July 13, 2021, Trasimene Trebia, LP (the “Trasimene Sponsor”) and BGPT Trebia, LP (the “BGPT Sponsor” and, together with the Trasimene Sponsor, the “Sponsors”) made available to the Company a loan of up to $500,000 pursuant to two promissory notes issued to the Company from the BGPT Sponsor in the amount of $212,500 and to Trasimene Sponsor $287,500.

We are entitled to submit drawdown requests to the Sponsor from time to time and the proceeds from any amounts borrowed under the note will be used for on-going operational expenses and certain other expenses.

The notes are unsecured, non-interest bearing and mature on the earlier of:

(i) May 31, 2022, or (ii) the date on which the Company consummates a Business Combination.

On July 13, 2021, we drew-down $106,250 under the BGPT Note and $143,750 under the Trasimene Note.

On August 9, 2021, the Company drew-down an additional $75,000 under the BGPT Note.

As of December 31, 2021, the outstanding balance under the promissory notes was $450,000.

This amount was repaid upon closing of our Business Combination.

In March 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

The full impact of the COVID-19 outbreak continues to evolve.

The impact of the COVID-19 outbreak on our results of operations, financial position and cash flows will depend on future developments, including the duration and spread of the outbreak, related advisories and restrictions, and the availability of a vaccine.

These developments and the impact of the COVID-19 outbreak on the financial markets and the overall economy are highly uncertain and cannot be predicted.

If the financial markets and/or the overall economy continue to be impacted for an extended period, our ability to complete our initial Business Combination may be materially adversely affected due to significant governmental measures being implemented to contain the COVID-19 outbreak or treat its impact, including travel restrictions, and the shutdown of businesses and quarantines, among others, which may limit our ability to have meetings with potential investors or affect the ability of a potential target company’s personnel, vendors and service providers to negotiate and consummate our initial Business Combination in a timely manner.

Off-Balance Sheet Financing Arrangements

We have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of December 31, 2021.

We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.

Contractual Obligations

As of December 31, 2021, we did not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities, other than an agreement to pay BGPT Trebia LP up to $10,000 per month for office space and administrative support services, provided to the Company.

We began incurring these fees on June 16, 2020 and will continue to incur these fees monthly until the earlier of the completion of a Business Combination and the Company’s liquidation.

This agreement was terminated upon the consummation of our Business Combination.

The underwriters are entitled to a deferred fee of $0.35 per Unit, or $18,112,500 in the aggregate.

The deferred fee became payable to the underwriters from the amounts held in the Trust Account upon the consummation of the Business Combination, subject to the terms of the underwriting agreement.

Forward Purchase Agreement

On June 5, 2020, the Company entered into a forward purchase agreement with Cannae Holdings, a diversified holding company which is externally managed by Trasimene Capital Management, LLC but is not an affiliate of the Company or the Sponsors, pursuant to which Cannae Holdings agreed to purchase Class A ordinary shares in an aggregate share amount equal to 7,500,000 Class A ordinary shares, plus an aggregate of 2,500,000 redeemable warrants to purchase one Class A ordinary share at $11.50 per share, for an aggregate purchase price of $75,000,000, or $10.00 per Class A ordinary share, in a private placement to occur concurrently with the closing of the Business Combination.

The warrants to be issued as part of the forward purchase agreement were identical to the warrants sold as part of the units in the Company’s initial public offering.

In connection with the forward purchase securities sold to Cannae Holdings, the Sponsors received (by way of an adjustment to their existing Class B ordinary shares) an aggregate number of additional Class B ordinary shares so that the initial shareholders, in the aggregate, on an as-converted basis, will hold 20% of the Company’s Class A ordinary shares at the time of the closing of the Business Combination.

The obligations under the forward purchase agreement did not depend on whether any Class A ordinary shares are redeemed by the public shareholders.

In connection with the signing of the Business Combination Agreement and Backstop Agreement, Trebia and Cannae entered into FPA Termination Agreement to terminate the June 5, 2020 Forward Purchase Agreement.

Critical Accounting Policies

The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements, and income and expenses during the periods reported.

Actual results could materially differ from those estimates.

We have identified the following critical accounting policies:

Warrant and FPA Liabilities

The Company accounts for the Warrants and FPA as either equity-classified or liability-classified instruments based on an assessment of the specific terms of the Warrants and the FPA and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”).

The assessment considers whether the Warrants and FPA are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and meet all of the requirements for equity classification under ASC 815, including whether the Warrants and FPA are indexed to the Company’s own ordinary shares and whether the holders of the Warrants could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification.

This assessment, which requires the use of professional judgment, is conducted at the time of issuance of the Warrants and execution of the FPA and as of each subsequent quarterly period end date while the Warrants and FPA are outstanding.

For issued or modified warrants that meet all of the criteria for equity classification, such warrants are required to be recorded as a component of additional paid-in capital at the time of issuance.

For issued or modified warrants that do not meet all the criteria for equity classification, liability-classified warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheets date thereafter.

Changes in the estimated fair value of such warrants are recognized as a non-cash gain or loss on the statements of operations.

We account for the Warrants and FPAs in accordance with ASC 815-40 under which the Warrants and FPAs do not meet the criteria for equity classification and must be recorded as liabilities.

The fair value of the Public Warrants has been estimated using the Public Warrants’ quoted market price.

The fair value of the Private Placement Warrants is estimated using the value of the Public Warrants’ quoted market price.

The fair value of the FPAs was estimated using a probability-weighted discounted cash flow approach.

Class A Ordinary Shares Subject to Redemption

We account for our ordinary shares subject to possible conversion in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Class A ordinary shares subject to mandatory redemption are classified as a liability instrument and are measured at fair value.

Conditionally redeemable ordinary shares (including ordinary shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control) are classified as temporary equity.

At all other times, ordinary shares are classified as shareholders’ equity.

Our Class A ordinary shares feature certain redemption rights that are considered to be outside of our control and subject to occurrence of uncertain future events.

Accordingly, Class A ordinary shares subject to possible redemption are presented at redemption value as temporary equity, outside of the shareholders’ equity section of our balance sheets.

Net Income (loss) Per Ordinary Share

Net loss per ordinary share is computed by dividing net income (loss) by the weighted average number of ordinary shares outstanding during the period.

We apply the two-class method in calculating earnings per share.

Accretion of interest associated with the redeemable shares of Class A ordinary shares is excluded from earnings per share as the redemption value approximates fair value.

Recent Accounting Standards

Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our consolidated financial statements.

As of December 31, 2022, we had cash and cash equivalents of $24,606.

To date, our available liquidity and operations have been financed through cash from the Merger, credit facilities, and cash flows from operations.

We are subject to certain business risks, including dependence on key employees, dependence on key contracts, competition from alternative technologies, and dependence on growth to achieve our business and operational objectives.

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

Refer to our concentration with customers discussion at Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Risk and Concentrations for additional information.

Going Concern

As of June 1, 2023, the Company had not delivered audited financial statements for the fiscal year ended December 31, 2022 to Bank of America as required by the covenants of the Term Loan (refer to Note 12 – DEBT, NET).

The failure to timely deliver the audited financial statements is an event of default under the Term Loan and provides Bank of America the ability to immediately call the outstanding principal balances of the Term Loan and Revolving Facility of $430,000, as of the date of this filing, at the request of, or with the consent of, the required majority of lenders until such time that the audited financial statements are delivered to Bank of America.

The Company does not have sufficient liquidity to settle the outstanding principal balances should they be called, nor has the Company identified sufficient alternative sources of capital.

As a result, this matter raises substantial doubt about the Company’s ability to continue as a going concern.

Upon delivery of the audited financial statements by the Company, the event of default will be remediated and, once remediated, Bank of America will no longer have the ability to call the outstanding principal balances on the Term Loan and Revolving Facility.

Separate from the default under the Term Loan and Revolving Facility , in the third and fourth quarters of 2022, the Company experienced declining cash flows and financial performance as a result of deteriorating macroeconomic conditions, resulting in reductions in both advertiser and overall consumer demand for our marketing services.

As of December 31, 2022, the Company had cash on hand of $24,606.

The declining cash flows and financial performance also raised substantial doubt regarding the Company's ability to continue as a going concern for a period of one year following the date that the consolidated financial statements are issued.

In response to the declining cash flows, the Company implemented a plan to raise additional financing.

On April 10, 2023, the Company entered into an incremental revolver note (“2023 Revolving Note”) with related parties for $20,000 (refer

to Note 12—DEBT for additional information regarding the 2023 Revolving Note).

As of the date of this filing, the available balance under the 2023 Revolving Note was $15,000.

The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Accordingly, the consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.

Credit Facilities

In connection with the Merger discussed above, Orchid Merger Sub II LLC (a subsidiary of S1 Holdco) entered into a new loan (“Term Loan”) and revolving facility (“Revolving Facility”) on January 27, 2022, providing for a 5.5 year Term Loan with a principal balance of $400,000 and with the net proceeds of $376,000, of which a portion of the proceeds were used by S1 Holdco, to settle the outstanding debt of $172,038 with Cerberus Business Finance, LLC.

The Revolving Facility was for $50,000.

As of December 31, 2022, $50,000 was outstanding on the Revolving Facility and principal of $385,000 was outstanding on the Term Loan.

Through December 31, 2025, $5,000 of the Term Loan is payable quarterly.

From March 31, 2026, $7,500 of the Term Loan is payable quarterly.

The Term Loan matures in 2027.

For every interest period, the interest rate on the Term Loan is the adjusted Term Secured Overnight Financing Rate (“Term 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 Revolving Facility exceeds 35% of the $50,000 Revolving Facility at each quarter-end starting from the first full quarter after the effective date of the Merger, 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.

The Revolving Facility matures in January 2027, and accordingly, it is classified within long-term debt, net on the consolidated balance sheet as of December 31, 2022.

The interest rate on the Revolving Facility is the adjusted Term SOFR plus 2.5% with an adjusted Term SOFR floor of 0%.

In March 2022, we borrowed $49,000 under our Revolving Facility, to fund a portion of the purchase price related to our CouponFollow acquisition.

We have been able to and expect to be able to continue to make payments on the principal and interest of the above debt agreements on a timely basis.

As of December 31, 2022, future minimum principal payments on long-term debt were as follows:

2023 $ 20,000

Total future minimum principal payment $ 435,000

current portion (20,000)

Long-term portion $ 415,000

On May 1, 2023, the Company did not deliver audited financials as required under the terms of its credit agreement.

On May 1, 2023, the Company received a notice of default, which started a 30 day cure period, ending

on May 31, 2023, within which the Company could remedy the default.

On June 1, 2023, as a result of not delivering its audited financial statements for the fiscal year ended December 31, 2022, the default constitutes an event of default.

As a result, the outstanding principal balances of the Term Loan and Revolving Facility of $430,000 as of the date of this report may be callable by Bank of America at the request of, or with the consent of, the required majority of lenders thereunder.

Upon delivery of the audited financial statements, the event of default is no longer continuing and the Company is in compliance with the credit agreement, which eliminates the ability of the lenders to exercise remedies with respect thereto.

2023 Revolving Note

On April 10, 2023, Orchid Merger Sub II, LLC (“Orchid Sub”), a wholly-owned subsidiary of System1, Inc., entered into a $20,000 Revolving Note (the “2023 Revolving Note”) with Lone Star Friends Trust (acting by and through its trustee, Stanley Blend, “Lone Star”) and CEE Holding Trust (acting by and through its trustee, Jackson Hole Trust Company, “CEE”, and together with Lone Star, collectively, the “Lenders” and each, a “Lender”), which are trusts established for the benefit of Michael Blend (Chief Executive Officer, co-founder and stockholder) and Charles Ursini (co-founder and stockholder), respectively, in a private transaction approved by the independent and non-interested members of our Board of Directors.

Each Lender provided a $10,000 commitment for an aggregate principal of $20,000 under the Revolving Note to Orchid Sub on a several but not joint basis (each, a “Commitment” and, collectively, the “Commitments”).

Any borrowed loan amounts outstanding under the 2023 Revolving Note accrue interest at the rate per annum equal to the Secured Overnight Financing Rate (“SOFR”) as administered by the Federal Reserve Bank of New York plus 3.15%.

Orchid Sub may borrow amounts under the 2023 Revolving Note in increments of $100, and may prepay any amounts borrowed at any time without penalty or interest (other than applicable breakage costs, if any).

We may borrow up to our commitment amount, and may reuse the loan again after the balance has been paid down.

The final maturity date under the 2023 Revolving Note is July 10, 2024.

The Lenders are also entitled to (i) an unused commitment fee equal to 1.0% per annum of the actual daily amount of total unfunded Commitments under the 2023 Revolving Note during the period from the closing date to the maturity date, payable quarterly in arrears and (ii) a closing fee equal to 12.0% of each Lender’s Commitment under the 2023 Revolving Note, payable within 180 days of April 10, 2023.

In addition, Orchid Sub agreed to reimburse the Lenders for their reasonable and documented costs expenses incurred in connection with the negotiation, documentation and execution of the 2023 Revolving Note.

As of the date of this filing, the available balance under the 2023 Revolving Note was $15,000.

The following table summarizes our cash flows for the periods presented:

Successor Predecessor

(in thousands) Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 Year Ended December 31, 2021

Net cash provided by (used in) operating activities $ 3,317 $ (10,603) $ 60,705

Net cash used in investing activities $ (454,009) $ (441) $ (6,535)

Net cash used in financing activities $ (27,729) $ — $ (34,585)

Operating Activities

Our cash flows from operating activities are primarily influenced by growth in our operations, timing of collections from our clients and related payments to our suppliers for advertising inventory and data.

We typically pay suppliers in advance of collections from our clients.

Our collection and payment cycles can vary from period to

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

In the period from January 1, 2022 to January 26, 2022 (Predecessor), cash used in operating activities of $10,603 resulted primarily from a decrease in accounts payable of $67,600 due to the Merger and a net loss of $37,061.

This was partially offset by an increase in accrued expenses of $57,488, non-cash stock-based compensation of $23,705 and a decrease in accounts receivable of $11,118 due to the Merger.

In the period from January 27, 2022 to December 31, 2022 (Successor), cash provided by operating activities of $3,317 resulted primarily from non-cash impairment of goodwill of $366,309, non-cash depreciation and amortization expense of $118,652 non-cash stock-based compensation of $106,943, and an increase in deferred revenue of $9,008.

This was partially offset by a net loss of $442,079, non-cash tax benefit of $107,798, a decrease in other long-term liabilities of $28,395, a decrease in Protected.net incentive plan liability of $20,000, and a decrease in accrued expenses and other current liabilities of $13,478.

During the year ended December 31, 2021, cash provided by operating activities of $60,705 resulted primarily from Owned and Operated Advertising revenue, offset by user acquisition costs incurred to drive the growth and salaries and benefits costs, non-cash expenses of $22,632, and change in operating assets and liabilities of $5,077 primarily due to an increase in accounts payable of $20,756 due to increased user acquisition costs, and an increase in accrued expenses of $12,113 primarily related to the Merger.

This was partially offset by an increase in accounts receivable of $19,064 as a result of increased collections, an increase in prepaid assets of $4,968 due to an increase in vendor services to support the growth of the Company, and a decrease in long term liabilities of $3,842 primarily due to reclassification of the former CEO’s profit interest to short term liabilities.

Investing Activities

Our primary investing activities consist of acquisitions of businesses, such as the acquisition of S1 Holdco, Protected, RoadWarrior, CouponFollow and Answers in 2022 as well as costs capitalized for internally developed software.

In the period from January 1, 2022 to January 26, 2022 (Predecessor), cash used in investing activities of $441 resulted from costs capitalized for internally developed software.

In the period from January 27, 2022 to December 31, 2022 (Successor), cash used in investing activities of $454,009 resulted primarily from the acquisitions of S1 Holdco, Protected, RoadWarrior, CouponFollow and Answers of $444,074.

In the year ended December 31, 2021 (Predecessor), cash used in investing activities of $6,535 resulted primarily from costs capitalized for internally developed software.

Financing Activities

Our financing activities consisted primarily of borrowings and repayments of our debt, distributions to members related to tax obligations, acquisition related contingent consideration and proceeds from the sale of assets.

In the period from January 1, 2022 to January 26, 2022 (Predecessor), there was no cash provided or used in financing activities.

In the period from January 27, 2022 to December 31, 2022 (Successor), cash used in financing activities of $27,729 resulted primarily from redemptions of Trebia Class A ordinary shares of $510,469, repayment of existing term loan of $187,488, and payment of debt financing costs related to the Term Loan of $24,845, partially offset by proceeds from the Term Loan and Revolving Facility of $450,000 and the Cannae Backstop of $246,484.

In the year ended December 31, 2021 (Predecessor), cash used in financing activities of $34,585 resulted primarily from tax distributions to members of $14,579, repayments of debt of $11,636, payment of acquisition related contingent consideration of $5,000 related to the acquisition of Startpage, $1,715 related to the acquisition of Concourse, and related party loan of $1,500.

In August 2022, our Board of Directors authorized up to $25,000 for the repurchase of our Class A common stock and Public Warrants ("2022 Repurchase Program").

During the year ended December 31, 2022 we repurchased 190 shares for an aggregate purchase price of $1,122 under the 2022 Repurchase Program.

Off-Balance Sheet Arrangements

We do not have any relationships with entities often referred to as structured finance or special purpose entities that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

We did not have any other off-balance sheet arrangements during the periods presented other than the indemnification agreements.

Contractual Obligations and Known Future Cash Requirements

Service Agreements

In June 2021, we entered into a multi-year agreement with a service provider whereby we are contractually obligated to spend $8,000 between July 2022 and June 2023.

As of December 31, 2022 (Successor), we remain contractually obligated to spend $4,115 towards this commitment.

For potential commitments associated with our acquisitions refer to Note 3—MERGER and Note 4—ACQUISITIONS .

Contingencies

From time to time, we are subject to contingencies that arise in the ordinary course of business.

We record an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

We do not currently believe the resolution of any such contingencies will have a material adverse effect upon our consolidated financial statements.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S.

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenues and expenses during the reporting period.

Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to:

(1) valuation of goodwill, acquired intangible assets and long-lived assets for impairment, (2) valuation and recognition of our stock-based compensation awards, (3) income taxes, and (4) variable and contingent consideration.

Significant estimates affecting the consolidated financial statements have been prepared on the basis of the most current and best available information, including historical experience, known trends and other market-specific or other relevant factors that we believe to be reasonable.

On an ongoing basis, management evaluates its estimates, as there are changes in circumstances, facts and experience.

Changes in estimates are recorded in periods

which they become known.

However, actual results from the resolution of such estimates and assumptions may vary from those used in the preparation of the consolidated financial statements.

Business combinations

The results of a business acquired in a business combination are included in our consolidated financial statements from the date of acquisition.

We allocate the purchase price, which is the sum of the consideration provided which may consist of cash, equity, or a combination of the two, paid in a business combination for the identifiable assets and liabilities of the acquired business at their acquisition-date fair values.

Any excess amount paid over the identifiable net assets is recorded as goodwill.

The process for estimating the fair values of the acquired business involves the use of significant estimates and assumptions, including estimating average industry multiples, customer and service attrition rate, forecasted revenue and revenue growth rates, discount rates, technology migration rates, royalty rates and estimating future cash flows.

We estimate the fair value based on assumptions which we believe to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

During the measurement period, not to exceed one year from the date of acquisition, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill.

At the conclusion of the measurement period, any subsequent adjustments are reflected our consolidated statements of operations.

Transaction costs associated with business combinations are expensed as incurred and are included in Selling, general and administrative expenses on our consolidated statements of operations.

When purchase consideration includes contingent consideration, we record the fair value of the contingent consideration as of the date of acquisition, and subsequently remeasure the contingent consideration at fair value each reporting period through our consolidated statements of operations.

Goodwill represents the excess of the purchase price over the fair value of net assets acquired and identifiable intangibles in a business combination.

We account for goodwill in accordance with Accounting Standards Codification ("ASC") 350, Intangibles—Goodwill and Other , which requires us to test goodwill at the reporting unit level for impairment at least annually, or if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

We perform our annual goodwill impairment test on December 31.

We have the option (i) to assess goodwill for possible impairment by performing a qualitative analysis to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount or (ii) to perform the quantitative impairment test.

The quantitative impairment test involves comparing the estimated fair value of a reporting unit with its respective carrying amount, including goodwill.

If the estimated fair value exceeds the carrying amount, goodwill is considered not to be impaired.

If, however, the fair value of the reporting unit is less than carrying amount, an impairment loss is recognized in an amount equal to the excess.

The fair values of our reporting units were computed by weighting a discounted cash flow model and a reference transaction model which included inputs developed using both internal and market-based data.

The key assumptions in the discounted cash flow model included, but were not limited to, the weighted average cost of capital, revenue growth rates (including long-term growth rates), and operating margins.

The weighted average cost of capital reflected the increases in market interest rates.

The reference transaction model derives indications of value based on mergers and acquisition transactions in the digital advertising industry.

Key assumptions in this model included, but were not limited to, the selection of comparable transactions, revenue and EBITDA multiples and EBITDA margins from those transactions.

Unanticipated events or circumstances may occur that could affect the accuracy or validity of such assumptions, estimates or actual results.

As a result of adverse macroeconomic impacts as a result of changes in market conditions, increases in interest rates, and weakening of consumer demand during the third quarter of 2022, which contributed to reduced forecasted

revenues and reduced expectations for future cash flows, we performed quantitative goodwill impairments tests of our four reporting units as of September 30, 2022.

As a result, we fully impaired goodwill of $329,133 in our Publishing and Lead Generation reporting unit and partially impaired goodwill of $10,976 in our Partner Network reporting unit.

The fair value of our Subscription reporting unit and our Search and Applications reporting unit exceeded their carrying amounts by 13% and 2%, respectively.

During the quarter ended December 31, 2022, we realigned our reporting structure due to changes in management such that our Search and Applications reporting unit became part of the Publishing and Lead Generation reporting unit and the new reporting unit was renamed Owned and Operating Advertising.

Based on our annual impairment assessment as of December 31, 2022, we determined that the goodwill attributable to Owned and Operating Advertising of $26,200 was fully impaired.

The fair value of our Partner Network reporting unit and our Subscription reporting unit exceeded their carrying amounts by 9% and 18%, respectively, as of December 31, 2022.

Refer to Note 6 — GOODWILL, INTERNAL-USE SOFTWARE DEVELOPMENT COSTS, NET, AND INTANGIBLE ASSETS, NET for additional information.

As of December 31, 2022, all our goodwill relates to our Partner Network and Subscription reporting units.

Goodwill associated with the Partner Network and Subscription reporting units were $82,407 and $433,184 respectively, as of December 31, 2022 .

Any further deterioration in key assumptions or changes in the macroeconomic environment, including further interest rate increases, could adversely impact the fair value of these reporting units and could result in an impairment charge in the future.

The Company applied a hypothetical sensitivity analysis by increasing the discount rate used in the valuation of the Partner Network and Subscription reporting units by 100 basis points as of December 31, 2022 .

An increase in the discount rate would result in the estimated fair values of the Partner Network and Subscription reporting units decreasing by approximately 7% and 13%, respectively.

The fair values of each of these reporting units would continue to exceed their carrying amounts, though the excess of the fair value over the carrying amount would be reduced to approximately 1% and 5% for the Partner Networks and Subscription reporting units, respectively.

Stock-based compensation

Compensation cost related to stock-based payments is measured based on the fair value of the units issued and recognized within salaries and benefits expenses in our consolidated statements of operations.

We have elected to treat stock-based payment awards with time-based service condition(s) only as a single award and recognizes stock-based compensation expense on a straight-line basis over the vesting period, which is generally four years.

The assumptions used in the Black-Scholes model to value equity in the Predecessor period are based upon the following:

• Fair Value of Common Stock:

S1 Holdco’s equity was not publicly traded, therefore the fair value was determined by S1 Holdco’s Board of Directors, with input from management and contemporaneous valuation reports prepared by a third-party valuation specialist.

• Expected Term:

The expected life of the option is estimated by considering the contractual term of the option, the vesting period of the option, the employees’ expected exercise behavior and the post-vesting employee turnover rate.

For non-employees, the expected life equals the contractual term of the option.

• Risk-free Interest Rate:

The risk-free interest rate is based on published U.S.

Treasury Department interest rates for the expected terms of the underlying options.

• Volatility:

The volatility was based on the expected unit price volatility of the underlying units over the expected term of the option which is based upon historical share price data of an index of comparable publicly traded companies.

Subsequent to the Merger, the fair value of our RSUs is derived from the market price of our Class A common stock, which is traded on the NYSE.

We recognize compensation on a straight-line basis over the requisite service period for each award and recognize forfeitures as they occur.

In connection with the Merger and acquisition of Protected.net, we effected an incentive plan for eligible recipients (the “Protected.net Incentive Plan”).

If the Protected.net business achieves certain financial metrics on or prior to December 31, 2023, recipients will be eligible to receive a pool of $50,000 payable in fully-vested shares of our Class A common stock (the “2023 Award”).

On August 30, 2022, the Company modified the 2023 Award to remove the operational targets and reduce this award to $40,000 settled in four equal quarterly cash installments beginning upon the modification of this award.

Further, if the Protected.net business achieves certain financial metrics on or prior to December 31, 2024, recipients will be eligible to receive a separate pool of $50,000 payable in fully-vested shares of our Class A common stock (the “2024 Award”).

Shares under the 2024 Award will be issued to recipients within 30 days of December 31, 2024.

We account for each of these awards as liability-classified until the awards are settled in cash or stock, respectively, and accordingly, when the 2024 Award is probable of achievement, we record stock-based compensation for that liability award.

Refer to Note 19—STOCK-BASED COMPENSATION for additional information regarding liability-classified awards.

Stock-based compensation expense is included in the salaries and benefits expenses on the consolidated statements of operations.

Recently Issued Accounting Pronouncements

For information regarding recent accounting pronouncements, refer to Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

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-K

Item 7. Management’s Discussion and Analysis