System1, Inc. 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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, 2023 (Successor), and for the periods from January 1, 2022 through January 26, 2022 (Predecessor) and from January 27, 2022 through December 31, 2022 (Successor). 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.” References to “Notes” are notes included in our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. The consolidated financial statements as of and for the period ended December 31, 2022 have been revised to correct prior period errors as discussed in Note 2, Summary of Significant Accounting Policies. Accordingly, this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations reflects the impact of those revisions. Company Overview We operate an omnichannel customer acquisition platform, delivering high-intent customers to brands, advertisers and publishers . We provide our omnichannel customer acquisition platform services through our proprietary responsive acquisition marketing platform (“RAMP”). Operating seamlessly across major advertising networks and advertising category verticals to acquire end-users, RAMP allows us to monetize these acquired end 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 end user traffic on, our owned and operated websites or through 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, Zemanta, Taboola, and TikTok. Through RAMP, we process approximately 187 million daily advertising campaign optimizations and ingest over 7 billion rows of data daily across approximately 40 advertising vertical categories as of December 31, 2023. 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. 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 category verticals. 59 S1 Holdco, LLC ("S1 Holdco") was founded in 2013 with a focus on monetizing user traffic acquired by our Network Partners. 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, while monetizing user traffic through our network of owned and operated websites. As of December 31, 2023, S1 Holdco owns and operates 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. Our primary operations are in the United States; and we also have operations in Canada and the Netherlands. Operations outside the United States are subject to risks inherent in operating under different legal systems as well as various political and economic environments. Among the risks are changes in existing tax laws, changes in the regulatory framework in foreign jurisdictions, data privacy laws, possible limitations on foreign investment and income repatriation, government foreign exchange controls, exposure to currency exchange fluctuations and employment laws impacting foreign employees. We do not engage in hedging activities to mitigate our exposure to fluctuations in foreign currency exchange rates. As a result of the current uncertainty in economic activity, including geopolitical developments and other macroeconomic factors such as rising interest rates, inflation and the impact of earlier supply chain disruptions, we are unable to predict the size and duration of the impact on our revenue and our results of operations. The Trebia Merger 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 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. Additionally, following the Merger, 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. We were 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 our historical financial statements, 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) our consolidated results, including S1 Holdco and Protected following the closing of the Merger (see Note 3, Merger) . The accompanying financial information include a Predecessor period, which include the periods through January 26, 2022 concurrent with completion of the Merger, and a Successor period from January 27, 2022 through December 31, 2022, and thereafter. 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. Sale of Protected On September 6, 2023, we announced that it had received a non-binding indication of intent from Just Develop It Limited (“JDI”), one of our significant shareholders, which is principally owned and managed by certain members of Protected management team, related to the potential acquisition of Protected, which operates our subscription business. Subsequently, on November 30, 2023, we completed the sale of Protected, pursuant to the terms of a share purchase agreement (“Share Purchase Agreement”). Pursuant to the Share Purchase Agreement, the Purchasing Parties acquired all of the outstanding preference and ordinary shares of Protected (“Protected Disposition”) for total consideration comprised of: (a) $240.0 million in cash, subject to certain adjustments, (b) the return and subsequent cancellation of approximately 29.1 million shares of our Class A common stock, par value 60 $0.0001 per share, owned by JDI and other entities and individuals affiliated with the Purchasing Parties and (c) confirmation from JDI, Protected and the Protected CEO that the financial performance benchmarks related to certain contingent earnout payments based on the future performance of Protected’s business in an aggregate amount of up to $60.0 million included in the Business Combination Agreement will, as a result of the Protected Disposition, no longer be achievable. The results of operations of our Protected business are presented as net loss from discontinued operations in our consolidated statements of operations for all periods presented, and the assets and liabilities for our Protected business have been classified as held for sale from discontinued operations and segregated for all periods presented in the consolidated balance sheets. Unless otherwise noted, the information contained in this Management Discussion and Analysis relates solely to our continuing operations and does not include the operations of our Protected business (see Note 19, Discontinued Operations). Components of Our Results of Operations Revenue Revenue is earned from revenue-sharing arrangements with our Network Partners related to the use of our RAMP platform and additional services provided to them in order to direct advertising by our Advertising Partners to their digital online inventory. We have determined that we are the agent in these transactions and therefore report revenue on a net basis, because (a) we do not control the underlying digital online inventory, (b) we do not acquire the corresponding user-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 the revenue generated under our revenue-sharing arrangements on a net basis, based on the difference between amounts received by us from our Advertising Partners, less amounts remitted to the Network Partners based on the underlying revenue-sharing agreements. We also earn revenue by directly acquiring traffic to our owned and operated websites and utilizing our RAMP platform and additional services to generate end-users for 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 Advertising Partners. For this revenue, we have determined that we are the principal since we have a risk of loss on the user-traffic that we are 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 the digital online inventory available on our website. We recognize revenue upon delivering user-traffic to our Advertising Partners based on a cost-per-click or cost-per-thousand impression basis. The payment terms with our Advertising Partners is typically 30 days. 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. We have two reportable segments: • Owned and Operated Advertising ("O&O"); and • Partner Network. Operating Expenses We classify our operating expenses into the following categories: Cost of revenue (excluding depreciation and amortization) . Cost of revenue (excluding depreciation and amortization) primarily consists of traffic acquisition costs, which are the costs to place advertisements to acquire customers to our websites and services, as well as domain name registration costs and licensing costs to provide mapping services to Mapquest.com. We do not pre-pay any traffic acquisition costs, and therefore, such costs are expensed as incurred. 61 Salaries and benefits. Salaries and benefits expenses include salaries, bonuses, stock-based compensation, and employee benefits costs. Selling, general, and administrative . Selling, general, and administrative expenses consist of fees for professional services, occupancy costs and travel and entertainment. These costs are expensed as incurred. Depreciation and amortization . Depreciation and amortization expenses are primarily attributable to our capital investment(s) and consist of property and equipment depreciation and amortization of intangible assets with finite lives. Impairment of goodwill . The impairment of goodwill when the carrying amount of a reporting unit exceeds its fair value. Other Expenses Other expenses consist of the following: Interest expense, net. Interest expense consists of interest on our debt and the amortization of deferred financing costs and debt discount. Loss on extinguishment of related-party debt. The recognition of the unamortized portion of the loan fees upon settlement of our related party debt and restructuring of a portion of the cash consideration held back in connection with our CouponFollow acquisition which was converted into a Promissory Note. Refer to Note 4, Acquisitions and Note 12, Related-Party Transactions for a dditional information. Change in fair value of Warrant liabilities. The mark to market of our liability-classified Public and Private Warrants. Income tax benefit We are the sole managing member of S1 Holdco and, as a result, consolidate the financial results of S1 Holdco. S1 Holdco is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, S1 Holdco is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by S1 Holdco is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss of S1 Holdco, as well as any stand-alone income or loss generated by us . Results of Operations 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 (in thousands). 62 Successor Predecessor Year Ended December 31, 2023 Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 Revenue $ 401,971 $ 612,229 $ 52,712 Operating expenses: Cost of revenue (excluding depreciation and amortization) 248,745 438,839 41,507 Salaries and benefits 106,505 138,045 31,181 Selling, general, and administrative 54,307 50,831 15,665 Depreciation and amortization 78,403 69,469 1,000 Impairment of goodwill — 372,728 — Total operating expenses 487,960 1,069,912 89,353 Operating loss (85,989) (457,683) (36,641) Other expense (income): Interest expense, net 48,745 31,609 1,049 Loss on extinguishment of related-party debt 2,004 — — Change in fair value of Warrant liabilities (5,109) 3,751 — Total other expense 45,640 35,360 1,049 Loss before income tax (131,629) (493,043) (37,690) Income tax benefit (20,371) (108,680) (629) Net loss from continuing operations (111,258) (384,363) (37,061) Net loss from discontinued operations, net of tax (174,327) (56,959) — Net loss (285,585) (441,322) (37,061) Less: Net loss from continuing operations attributable to non-controlling interest (25,531) (99,841) — Less: Net loss from discontinued operations attributable to non-controlling interest (32,833) (11,089) — Net loss attributable to System1, Inc. $ (227,221) $ (330,392) $ (37,061) 63 Successor Predecessor Year Ended December 31, 2023 Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 Revenue 100 % 100 % 100 % Operating expenses: Cost of revenue (excluding depreciation and amortization) 62 % 72 % 79 % Salaries and benefits 26 % 23 % 59 % Selling, general, and administrative 14 % 8 % 30 % Depreciation and amortization 20 % 11 % 2 % Impairment of goodwill — % 61 % — % Total operating expenses 121 % 175 % 170 % Operating loss (21) % (75) % (70) % Other expense (income): Interest expense, net 12 % 5 % 2 % Loss on extinguishment of related-party debt — % — % — % Change in fair value of Warrant liabilities (1) % 1 % — % Total other expense 11 % 6 % 2 % Loss before income tax (33) % (81) % (72) % Income tax benefit (5) % (18) % (1) % Net loss from continuing operations (28) % (63) % (70) % Net loss from discontinued operations, net of tax (43) % (9) % — % Net loss (71) % (72) % (70) % Less: Net loss from continuing operations attributable to non-controlling interest (6) % (16) % — % Less: Net loss from discontinued operations attributable to non-controlling interest (8) % (2) % — % Net loss attributable to System1, Inc. (57) % (54) % (70) % * Percentages may not sum due to rounding The comparability of our operating results for the year ended December 31, 2023 (Successor) compared to the period ended December 31, 2022 (Successor) is impacted by the Merger. Expense contributions from our 2022 acquisitions for each of the respective comparison periods generally were not separately identifiable due to the integration of these businesses into our existing operations. Comparisons of Results of Operations for the year ended December 31, 2023, to the periods from January 1, 2022 through January 26, 2022 (Predecessor) and January 27, 2022 through December 31, 2022 (Successor). 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 owned and operated 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 64 divided by O&O sessions. We define O&O RPS as O&O Revenue divided by O&O sessions. We define Network RPS as Network Partner revenue divided by Network sessions. Revenue The following table presents our revenue by reportable segment (in thousands). Successor Predecessor Year Ended December 31, 2023 Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 2023 vs. 2022 change (%) Owned and Operated Advertising $ 328,934 $ 556,303 $ 49,249 (46)% Partner Network 73,037 55,926 3,463 23% Total revenue $ 401,971 $ 612,229 $ 52,712 (40)% Owned and Operated Advertising Owned and Operated Advertising revenue decreased by $276.6 million, or 46%, primarily due to deteriorating macroeconomic conditions, such as reductions in both advertiser and overall consumer demand, which led to a decreased supply of consumer sessions available to be acquired. For the year ended December 31, 2023, compared to prior year, sessions decreased 281 million to 3,828 million from 4,109 million, with a corresponding decrease in O&O RPS of approximately $0.06 to $0.09 from $0.15. Partner Network Partner Network revenue increased $13.6 million, or 23%, due to our continued investment in this business and growth from newer partners that continue to generate more traffic to our platform. This was partially offset by deteriorating macroeconomic conditions, such as reductions to both advertiser and overall consumer demand, leading to a slight reduction in RPS. For the year ended December 31, 2023, compared to prior year, sessions increased 1,636 million to 2,776 million from 1,140 million, and Network RPS decreased by approximately $0.01 to $0.03 from $0.04. Cost of revenue (excluding depreciation and amortization) Cost of revenue (excluding depreciation and amortization) decreased $231.6 million, or 48%, was primarily due to a d ecrease of $237 million in our O&O reportable segment, which was directionally consistent with the decrease in revenue. For the year ended December 31, 2023, compared to prior year, our CPS decreased $0.05 to $0.06 from $0.11. Our chief operating decision maker measures and evaluates reportable segments based on segment operating revenue as well as adjusted gross profit and other measures. We define and calculate adjusted gross profit as revenue less advertising expense incurred to acquire users. The remaining cost of revenue consists of non-advertising expenses such as set-up costs, royalties and fees. We exclude the following items from segment adjusted gross profit: depreciation and amortization of property, equipment and leasehold improvements, amortization of intangible assets and, at times, certain other transactions or adjustments. The following table presents our adjusted gross profit by reportable segment (in thousands). 65 Successor Predecessor Year Ended December 31, 2023 Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 2023 vs. 2022 change (%) Owned and Operated Advertising $ 107,696 $ 138,560 $ 8,768 (27)% Partner Network 53,420 42,291 3,012 18% Total adjusted gross profit $ 161,116 $ 180,851 $ 11,780 (16)% Refer to the Revenue and Cost of revenue (excluding depreciation and amortization) discussions above. Salaries and benefits Salaries and benefits decreased $62.7 million, or 37% primarily d ue to a $58 million decrease in stock-based compensation related to the 2022 Merger. Selling, general, and administrative Selling, general, and administrative expense decreased $12.2 million, or 18% primarily due to additional costs associated with the Merger and the prior year acquisitions, partially offset by an increase in our bad debt expenses. Depreciation and amortization Depreciation and amortization expense increased $7.9 million, or 11% primarily due to increased amortization related to our acquired intangible assets resulting from the Merger and our other subsequent acquisitions, as well as increased amortization related to our continued investment in internally developed software. Impairment of goodwill Impairment of goodwill decreased by $372.7 million in 2023 , primarily due to impairment of goodwill recorded during the period ended December 31, 2022. Refer to Note 6, Goodwill, Internal-Use Software Development Costs, Net, and Intangible Assets, Net for additional information. Interest expense, net Interest expense, net increased $16.1 million, or 49%, primarily due to higher interest rates experienced during the current year as compared to the prior year. Loss on extinguishment of related-party debt Loss on extinguishment of related-party debt increased $2.0 million due to t he recognition of the unamortized portion of the loan fees upon settlement of our related party loans, and a portion of the cash consideration held back in connection with our prior CouponFollow acquisition which was converted into a Promissory Note. Refer to Note 4, Acquisitions and Note 12, Related-Party Transactions for a dditional information. Change in fair value of Warrant liabilities Adjustment to the fair value of warrant liabilities decreased $8.9 million to a decrease of $5.1 million in the year ended December 31, 2023 from an increase of $3.8 million to the prior year , driven by the fluctuations in the market value of our Class A common stock. Income tax benefit 66 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, valuation allowance and outside basis adjustments. Net loss from discontinued operations, net of tax Net loss from discontinued operations, net of tax is comprised of the goodwill impairment charge, final loss on sale and the results of operations of our subscription business segment, which was sold on November 30, 2023. The net loss from discontinued operations, net of tax only includes direct operating expenses incurred that (1) are clearly identifiable as costs being disposed of upon completion of the sale and (2) will not be continued by us on an ongoing basis. Indirect expenses which supported our subscription business, and which remained as part of the continuing operations following the sale are not reflected in loss from discontinued operations, net of tax. Liquidity and Capital Resources Our main source of liquidity is cash generated from operating and financing activities, which primarily includes cash derived from revenue generating activities, in addition to proceeds from our issuance of debt (as described further below). As of December 31, 2023 , our principal source of liquidity was our cash in the amount of $135.3 million which is primarily held in operating and deposit accounts. To date, our available liquidity and operations have been financed through cash received in the Merger, indebtedness available under our credit facilities, other indebtedness, sale of our Protected business segment, and cash flows from operations. Specific to the year ended December 31, 2023, with the close of the sale of Protected, we received consideration of $240.0 million in cash, subject to certain adjustments. We were also able to secure short term financing from our related parties, all of which were repaid by the end of the year. Our revenue is 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 for additional information. Going Concern Considerations The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern. The going concern basis of presentation assumes that we will continue in operation one year after the date these consolidated financial statements are issued and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. As of June 1, 2023, we 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. The failure to timely deliver the audited financial statements resulted in an event of default under the Term Loan and provided Bank of America the ability to immediately call the outstanding principal balances of the Term Loan and Revolving Facility of $430.0 million, at the request of, or with the consent of, the required majority of lenders until the time that the 2022 audited financial statements were delivered to Bank of America. We did not have sufficient liquidity to settle the outstanding principal balances should they be called, nor had we identified sufficient alternative sources of capital. As a result, this matter raised substantial doubt about our ability to continue as a going concern. We delivered the 2022 audited financial statements to Bank of America on June 6, 2023, resulting in the remediation of the event of default. Accordingly, Bank of America no longer had the ability to call the outstanding principal balances on the Term Loan and Revolving Facility. 67 Starting in the third quarter of 2022 and continuing into 2023, we 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. In response to these conditions, we obtained additional financing in the second quarter of 2023 which was expected to provide us with sufficient liquidity to manage through the current business environment. However, subsequent to the quarter ended June 30, 2023, we experienced increased customer acquisition costs in addition to the loss of a significant Network Partner, both of which further negatively impacted our future cash forecasts and negatively impacted our forecasted compliance with the maximum leverage ratio covenant of the Term Loan (see Note 11, Debt, Net). Accordingly, we determined that there was substantial doubt about our ability to continue as a going concern as of June 30, 2023 and September 30, 2023. We had an accumulated deficit of $707.7 million as of December 31, 2023, a net loss of $285.6 million for the year ended December 31, 2023, and had cash outflows from operations of $24.7 million for the year ended December 31, 2023. On November 30, 2023, we completed the sale of Protected, which resulted in a net inflow of cash of $180.3 million , net of transaction expenses and after mandatory and voluntary debt payoffs (see Note 19, Discontinued Operations). As of December 31, 2023, we have paid off or paid down all of our outstanding notes, revolvers and loans (see Note 11, Debt, Net and Note 12, Related-Party Transactions), with the exception of the Term Loan and had unrestricted cash on hand of $135.3 million. On January 17, 2024, we completed the repurchase of $63.7 million in principal amount of our Term Loan for an aggregate purchase price of $40.9 million pursuant to a Dutch auction tender offer (see Note 11, Debt, Net ) . Following the repurchase, the outstanding principal amount of the Term Loan was $301.3 million . We have principal and interest payments due of approximately $5.0 million and $6.6 million, respectively, per quarter on our Term Loan, and as of the date of this filing, we have available capacity of $50.0 million under the 2022 Revolving Note, subject to maximum leverage ratio covenant (see Note 11, Debt, Net). In addition, we have implemented a significant reduction in headcount in both the second quarter of 2023 and in early September 2023, resulting in approximately $14.5 million of annualized prospective cash savings. As a result of the net cash inflow from the sale of Protected and an evaluation of our forecasted future cash flows from operating activities (including the impact of the headcount reductions taken in the second and third quarters of 2023), we believe that we have sufficient resources to continue as a going concern for the twelve-month period following the date these financial statements are issued. Accordingly, we have alleviated the substantial doubt regarding our ability to continue as a going concern that previously existed as of September 30, 2023, and we will have sufficient liquidity to meet our obligations as they become due over the next twelve months. Credit Facilities Term Loan In connection with the Merger, we entered into a new loan (“Term Loan”) and revolving facility (“2022 Revolving Facility” and, together with the Term Loan "Credit Agreement") with Bank of America, N.A. as administrative agent, on January 27, 2022, providing for a 5.5 year Term Loan with an initial principal balance of $400.0 million and with the net proceeds of $376.0 million , of which a portion of the proceeds were used by us, to settle the outstanding debt of $172.0 million with Cerberus Business Finance, LLC. The 2022 Revolving Facility provided borrowing availability of up to $50.0 million. As of December 31, 2023, there was no balance outstanding on the 2022 Revolving Facility and principal of $365.0 million was outstanding on the Term Loan. Through December 31, 2025, $5.0 million of the Term Loan is payable quarterly. From March 31, 2026, $7.5 million 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 Secured Overnight Financing Rate (“SOFR”) plus 4.75%. The Term Loan is amortized in quarterly installments on each scheduled payment date. The Term Loan comes with a leverage ratio covenant, which goes into effect only if the utilization on the 2022 Revolving Facility exceeds 35% of the total availability under the 2022 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 68 defined in the credit agreement) should not exceed 5.40. The Credit Agreement has certain financial and nonfinancial covenants, including the "springing" leverage ratio covenant described above. The Credit Agreement also requires that we deliver our audited consolidated financial statements to our lenders 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 have an additional 30 days to cure such default. The 2022 Revolving Facility matures in January 2027, and accordingly, it is classified within long-term debt, net on the consolidated balance sheet. The interest rate on the 2022 Revolving Facility is the adjusted SOFR plus 2.5% with an adjusted SOFR floor of 0%. In March 2022, we borrowed $49.0 million under our 2022 Revolving Facility, to fund a portion of the purchase price related to the CouponFollow acquisition. In October 2022, we borrowed the remaining $1.0 million available. In December 2023, we repaid the full $50 million that was outstanding, therefore, as of December 31, 2023, there was no outstanding balance. We have been able to and expect to be able to continue to make the required payments of principal and interest on the Credit Agreement (as and when due) on a timely basis. On January 17, 2024, we completed the repurchase of $63.7 million in principal amount of our Term Loan for an aggregate purchase price of $40.9 million (at discount of 64.2% of its par value) pursuant to a Dutch auction tender offer. Following the repurchase, the outstanding principal amount of the Term Loan was $301.3 million. We used available cash on hand to fund the repurchase. 2023 Revolving Note On April 10, 2023, we entered into a $20.0 million Revolving Note (“2023 Revolving Note”) with trusts established for the benefit of our co-founders (“Lenders”). Each Lender provided a $10.0 million commitment for an aggregate principal of $20.0 million under the 2023 Revolving Note. Any borrowed loan amounts outstanding under the 2023 Revolving Note accrue interest at the rate of SOFR plus 3.15%. The maturity date under the 2023 Revolving Note is July 10, 2024 ( “ Maturity Date ” ) with automatic three-month extensions, unless we or any Lender provides written notice of our election not to extend the 2023 Revolving Note, unless there is an event of default that is then continuing as the time of such extension . 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 loan fee equal to 12.0% of each Lender's commitment under the 2023 Revolving Note, or $2.4 million in total. The closing loan fee was originally payable within 180 days of April 10, 2023, but which payment was subsequently extended to November 30, 2023. The full amount of $2.4 million closing loan fee was paid as of December 31, 2023. Further, this closing loan fee was capitalized in prepaid and other current assets, and amortized on a straight-line basis through the Maturity Date. As of December 31, 2023 there was no balance outstanding on the 2023 Revolver Note, and we terminated the 2023 Revolver Note. Promissory Note On September 6, 2023, we entered into a $5.2 million Senior Unsecured Promissory Note (the “Promissory Note”) with the Lender, in order to convert the amount held back and owed to him as a result of the acquisition of CouponFollow (see Note 4, Acquisitions) into a loan to us (the “Loan”). The amount of the Loan was equal to the amount of the Holdback liability of $5.2 million owed to the Lender. The Promissory Note accrues interest at SOFR plus 3.15%. Under the terms of the agreement, the Promissory Note became due and payable immediately upon sale of Protected. Per the terms of the note we (i) must prepay the Loan under certain circumstances, which include consummation of a strategic transaction, the refinancing of the existing credit agreement, the incurrence by us of any indebtedness exceeding $2.5 million, or the sale of any of our assets in excess of $2.5 million; (ii) may prepay the Loan at any time without penalty or interest; and (iii) must make four substantially equal amortization payments on April 1, 2024, May 1, 2024, June 1, 2024, and July 1, 2024, unless there is an event of default, including a continuing event of default on the Credit Agreement, at which 69 point the holder may declare all amounts due immediately. The Lender under the Promissory Note is also entitled to a closing fee equal to 12% of the initial principal amount outstanding under the Promissory Note with 50% paid on October 15, 2023 and the remaining 50% due on December 15, 2023. We recorded expense of approximately $0.6 million within loss on extinguishment of related-party debt on our consolidated statements of operations, which related to the 12% closing fee payable to the Lender. Upon completion of the Protected disposal, the Promissory Note, accrued interest and the remaining 50% of the closing fee was settled. Term Note On October 6, 2023, we entered into a $2.5 million Term Loan Note (“Term Note”) with Openmail2, LLC (“Term Lender”), which is principally owned and managed by trusts established for the benefit of our co-founders. The amounts outstanding under the Term Note accrue interest at the rate per annum equal to the SOFR plus 5.75%. The maturity date under the Term Note is December 31, 2024, unless there is an event of default, including a continuing event of default on the credit agreement, at which point the holder may declare all amounts due immediately . We must prepay the Loan under certain circumstances, which include (i) the consummation of a strategic transaction or (ii) upon the full refinancing and termination of the existing credit agreement. The Lender was also entitled to a closing fee equal to 10.0% of the principal amount of the Term Note, payable within 180 days of October 6, 2023. Upon completion of the Protected disposal, the Term Note, accrued interest and closing fee was settled. The previously unamortized portion of the loan fee of $0.2 million was included in loss on extinguishment of related-party debt on our consolidated statements of operations. Secured Facility On October 6, 2023, Protected, our indirect wholly-owned subsidiary at the time, entered into a Secured Facility Agreement providing for a $10.0 million term loan (“Secured Facility”) with a subsidiary of JDI ("Secured Lender") , one of our significant shareholders, which is principally owned and managed by certain members of the Protected management team . Pursuant to the Secured Facility, the Secured Lender provided a $10.0 million commitment to Protected, which amount was (i) drawn down in full on the closing date and (ii) secured by the assets of Protected pursuant to a deed granted in favor of the Secured Lender pursuant to a Debenture between Protected and the Secured Lender, dated October 6, 2023. The amounts outstanding under the Secured Facility accrue interest at the rate of 8.5% per annum. The amounts outstanding under the Secured Facility are due upon the earlier of (i) October 6, 2024 or (ii) the date on which Protected undergoes a Change of Control. The Secured Lender was also entitled to a closing fee equal to 12.0% the principal amount of the borrowings under the Secured Facility, which was paid in full on the closing date. In addition, Protected agreed to reimburse the Secured Lender for their reasonable and documented costs incurred in connection with the negotiation, documentation and execution of the Secured Facility. Upon completion of the Protected disposal, the Secured Facility, the related loan fee and an early settlement fee were settled. The previously unamortized portion of the loan fee and the early settlement fee for an aggregate amount of $1.4 million was included in net loss from discontinued operations, net of tax on our consolidated statements of operations. Cash Flows The following table summarizes our cash flows for the periods presented (in thousands): 70 Successor Predecessor December 31, 2023 Period from January 27, 2022 through December 31, 2022 Period from January 1, 2022 through January 26, 2022 Net cash provided by (used in) operating activities $ (24,742) $ 3,317 $ (10,603) Net cash provided by (used in) investing activities $ 203,179 $ (454,009) $ (441) Net cash used in financing activities $ (74,072) $ (27,729) $ — Operating Activities Our cash flows from operating activities are primarily impacted by growth in our operations, timing of collections from our partner and related payments to our suppliers for advertising inventory and data. We typically pay suppliers in advance of collections from our clients and our collection and payment cycles can vary from period to period. In addition, seasonality may impact cash flows from operating activities on a sequential quarterly basis during the year. In the year ended December 31, 2023 (Successor), cash used in operating activities of $24.7 million resulted primarily from a net loss of $285.6 million, a payment long-term earnout liabilities of $20.0 million, a decrease in accrued expenses and other current liabilities of $19.4 million and a noncash tax benefit of $22.3 million. This was partially offset by noncash items including an impairment of goodwill of $115.5 million, depreciation and amortization expense of $105.2 million, and stock-based compensation expense of $53.1 million, and a decrease in accounts receivable of $20.9 million and an increase in deferred revenue of $15.3 million. In the period from January 27, 2022 to December 31, 2022 (Successor), cash provided by operating activities of $3.3 million resulted primarily from noncash items including an impairment of goodwill of $372.7 million, depreciation and amortization expense of $118.7 million, stock-based compensation of $108.3 million, amortization of debt issuance costs of $4.8 million and a change in fair value of warrants of $3.8 million, and an increase in deferred revenue of $9.0 million and a decrease in accounts receivable of $4.6 million. This was partially offset by a net loss of $441.3 million, a noncash deferred tax benefit of $118.0 million, a decrease in other long-term liabilities of $18.1 million, a payment of long-term earnout liabilities of $20.0 million and a decrease in accrued expenses and other current liabilities of $22.0 million. During the period from January 1, 2022 through January 26, 2022 (Predecessor), cash used in operating activities of $10.6 million resulted primarily from a net loss of $37.1 million, including a decrease in accounts payable of $67.6 million due to the Merger. This was partially offset by an increase in accrued expenses of $57.5 million, noncash stock-based compensation of $23.7 million and a decrease in accounts receivable of $11.1 million due to the Merger. Investing Activities Our primary investing activities consisted of the sale of our Protected business segment on November 30, 2023, acquisitions of businesses, which included the first quarter 2022 acquisitions of S1 Holdco, Protected, CouponFollow and RoadWarrior, and the second quarter 2022 acquisition of Answers, as well as costs capitalized for internally developed software. In the year ended December 31, 2023 (Successor), cash provided by investing activities of $203.2 million resulted primarily from proceeds from sale of our Protected business segment. In the period from January 27, 2022 to December 31, 2022 (Successor), cash used in investing activities of $454.0 million resulted primarily from the acquisitions of S1 Holdco, Protected, RoadWarrior, CouponFollow and Answers. 71 In the period from January 1, 2022 to January 26, 2022 (Predecessor), cash used in investing activities of $0.4 million resulted from costs capitalized for internally developed software. Financing Activities Our financing activities consisted primarily of borrowings and repayments of our indebtedness under our credit facilities and redemptions of our Class A common stock. In the year ended December 31, 2023 (Successor), cash used in financing activities of $74.1 million resulted primarily from repayment of the 2022 Revolving Facility of $50.0 million and repayment of the 2023 Revolving Note of $20.0 million. In the period from January 27, 2022 to December 31, 2022 (Successor), cash used in financing activities of $27.7 million resulted primarily from redemptions of Trebia Class A ordinary shares in the amount of $510.5 million and repayment of existing term loan of $187.5 million, partially offset by proceeds from the Term Loan and 2022 Revolving Facility of $450.0 million and the Cannae Backstop of $246.5 million. In August 2022, our Board of Directors authorized up to $25.0 million for the repurchase of our Class A common stock and Public Warrants ("2022 Repurchase Program"). During the fiscal year ended December 31, 2023 we repurchased 190 thousand shares of our Class A common stock for an aggregate purchase price of $1.1 million under the 2022 Repurchase Program. In the period from January 1, 2022 to January 26, 2022 (Predecessor), there was no cash provided or used in financing activities. 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 $5.0 million annually between July 2023 and June 2026 . As of December 31, 2023, we remain contractually obligated to spend a remaining $11.1 million towards this commitment. Acquisitions 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 72 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. 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 revenue and expenses during the reporting period. We believe that the accounting estimates below are most critical to understanding our financial condition and historical and future results of operations. 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 when 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 We allocate the consideration transferred to the fair value of assets acquired and liabilities assumed based on their estimated fair values. The excess of the consideration transferred over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make 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 future cash flows. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Goodwill We perform annual impairment testing on goodwill in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below our carrying value. 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 our 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 our respective carrying amount, including goodwill. If the estimated fair value exceeds 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, not to exceed the carrying amount of goodwill. The fair values of our reporting units are computed through weighting a discounted cash flow model and a reference transaction model which include inputs developed using both internal and market-based data. The key assumptions in a discounted cash flow model include, but are 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 reflects 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 these models include, but are not limited to, the selection of comparable transactions, revenue and “EBITDA” is defined as net income or loss before results from discontinued operations, interest, income tax expense or benefit, and depreciation and amortization 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. Stock-Based Compensation 73 Compensation cost related to stock-based payments is measured based on the fair value of the units issued and recognized in salaries and benefits expenses on our consolidated statement of operations. We have elected to treat stock-based payment awards with time-based service condition(s) only as a single award, with the related compensation expense recognized on a straight-line basis. The assumptions used in the Black-Scholes model to value equity in the Predecessor period are based upon the following; (i) The fair value of S1 Holdco’s equity was determined by S1 Holdco’s Board of Directors, with input from management and contemporaneous valuation reports prepared by a third-party valuation specialist, as the equity was not publicly traded, (ii) The expected term of the award is estimated by considering the contractual term and vesting period of the award, the employees’ expected exercise behavior and the post-vesting employee turnover rate. For non-employees, the expected life equals the contractual term of the award, (iii) The risk-free interest rate is based on published U.S. Treasury Department interest rates for the expected term of the underlying award and (iv) The volatility was based on the expected unit price volatility of the underlying units over the expected term of the award which is based upon historical share price data of an index of comparable publicly traded companies. Income Taxes We are the sole managing member of S1 Holdco and, as a result, consolidate the financial results of S1 Holdco. S1 Holdco is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, S1 Holdco is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by S1 Holdco is passed through to and included in the taxable income or loss of our 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 our allocable share of any taxable income or loss of S1 Holdco, as well as any stand-alone income or loss generated by us. Various of our subsidiaries are subject to income tax in the United States and in other countries. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities (“DTAs” and “DTLs”, as applicable) for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine DTAs and DTLs on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on DTAs and DTLs is recognized in income in the period that includes the enactment date. We recognize DTAs to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted under the tax law, and results of operations. If we determine that we would not be able to realize our DTAs in the future in excess of their net recorded amount, we would make an adjustment to the DTA valuation allowance, which would increase the provision for income taxes. We record uncertain tax positions on the basis of a two-step process in which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of our technical merits and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We recognize both accrued interest and penalties, when appropriate, in the provision for income taxes on the accompanying consolidated statements of operations. Recently Issued Accounting Pronouncements For information regarding recent accounting pronouncements, refer to Note 2, Summary of Significant Accounting Policies . 74