System1 Inc
For the period ended Jun 30, 2024. Filed Aug 8, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Jun 30, 2024 · Filed Aug 8, 2024
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Item 4. Controls and Procedures
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with United States of America generally accepted accounting principles ("GAAP") applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Ourcondensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Our fiscal year ends on December 31, 2024. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as filed with the Securities and Exchange Commission ("SEC") on March 15, 2024.
In our opinion, the unaudited interim condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair statement of our financial position, results of operations, and cash flows. Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform with the current period presentation. These reclassifications had no effect on the results of operations, financial position or cash flows for any period presented. The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2024 or future operating periods.
There have been no changes to our significant accounting policies described in our Annual Reporton Form 10-K for the fiscal year ended December 31, 2023 that have had a material impact on our condensed consolidated financial statements and related notes.
We completed the sale of Total Security Limited, formerly known as Protected.net Group Limited ("Protected") on November 30, 2023. The results of operations of our Protected business prior to its sale are presented as net loss from discontinued operations in ourcondensed consolidated statements of operations in the periods applicable (see Note 12, Discontinued Operations).
Revision of Previously Issued Consolidated Financial Statements
During the fourth quarter of 2023, we identified certain errors related to our previously issued financial statements as of and for thethree and six months ended June 30, 2023 as follows:
a. Additional paid-in capital was understated by $1.2 million as of June 30, 2023, and salaries and benefits expense was overstated by $0.9 million and $0.6 million for the three and six months ended June 30, 2023, respectively, as a result of not accelerating expenses upon the forfeiture of certain cash and equity Replacement Awards (as defined in Note 9, Net Loss Per Share) previously granted in 2022 that impacted the condensed consolidated balance sheet, condensed consolidated statements of operations, condensed consolidated statements of changes in stockholders' equity, and condensed consolidated statement of cash flows.
b. We did not appropriately account for changes in equity and earnings per share, specifically:
(i) the carrying amount of non-controlling interest was not updated as changes in ownership events occurred during each reporting period;
(ii) certain equity Replacement Awards granted during 2022 were not properly considered in the allocation of net income (loss) to controlling and non-controlling interest and earnings per share. These errors impacted the condensed consolidated balance sheets, condensed consolidated statement of operations, condensed consolidated statements of changes in stockholders' equity, and condensed consolidated statement of cash flows.
c. We made additional corrections for other immaterial errors.
d. We adjusted for the tax impacts of the revisions related to such errors described above.
e. We adjusted for a $6.8 million misclassification of cash held in a treasury deposit account from restricted cash, current to cash and cash equivalents, as there were no legal restrictions on the balance.
We concluded that the errors were not material, either individually or in the aggregate, to our previously issued condensed consolidated financial statements for the impacted period. To correct the immaterial errors, we have revised our previously issued condensed consolidated financial statements as of and for the period ended June 30, 2023.
We have revised the condensed consolidated balance sheet, condensed consolidated statement of operations, condensed consolidated statement of comprehensive income (loss), condensed consolidated statement of changes in stockholders' equity, and condensed consolidated statement of cash flows for the period ended June 30, 2023, as well as the associated Notes to the condensed consolidated financial statements to reflect the correction of these immaterial errors in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2024. The following tables reflect the errors discussed inathroughe above.
The following table reflects the revisions and the impact of reporting Discontinued Operations related to the sale of our Protected business to the previously issued condensed consolidated balance sheet as of June 30, 2023 (in thousands):
| As Previously Reported · Revision Adjustment · As Revised · Impact of Reclassification of Discontinued Operations · As Currently Reported | ||||||
|---|---|---|---|---|---|---|
| Assets | ||||||
| Current assets: | ||||||
| Cash and cash equivalents | $8,603 | $6,848 | $15,451(e) | $(11,149) | $4,302 | |
| Restricted cash, current | 11,762 | (6,848) | 4,914(e) | (1,649) | 3,265 | |
| Total current assets | 95,130 | — | 95,130 | — | 95,130 | |
| Liabilities and Stockholders' Equity | ||||||
| Deferred tax liability | $29,851 | $534 | $30,385(d) | $(11,956) | $18,429 | |
| Total liabilities | 681,268 | 534 | 681,802 | — | 681,802 | |
| Stockholders’ Equity / Members’ Deficit | ||||||
| Additional paid-in capital | $842,350 | $1,218 | $843,568 | (a) (b) | $— | $843,568 |
| Accumulated deficit | (514,809) | 7,084 | (507,725) | (a) (b) (d) | — | (507,725) |
| Accumulated other comprehensive loss | (270) | 156 | (114)(d) | — | (114) | |
| Total stockholders' equity attributable to System1, Inc. | $327,282 | $8,458 | $335,740 | $— | $335,740 | |
| Non-controlling interest | 69,663 | (8,992) | 60,671(b) | — | 60,671 | |
| Total stockholders' equity | $396,945 | $(534) | $396,411 | $— | $396,411 | |
| Total liabilities and stockholders' equity | $1,078,213 | $— | $1,078,213 | $— | $1,078,213 | |
The following tables reflect therevisions and the impact of reporting Discontinued Operations related to the sale of our Protected business to the previously issued condensed consolidated statement of operations, for the three and six months ended June 30, 2023 (in thousands):
| Three Months Ended June 30, 2023 | |||||||
|---|---|---|---|---|---|---|---|
| As Previously Reported · Revision Adjustment · As Revised · Impact of Reclassification of Discontinued Operations · As Currently Reported | |||||||
| Salaries and benefits | $43,991 | $(890)(a) | $43,101 | $(16,047) | $27,054 | ||
| Total operating expenses | 183,660 | (890) | 182,770 | (64,031) | 118,739 | ||
| Operating loss | (36,422) | 890 | (35,532) | 13,707 | (21,825) | ||
| Loss before income tax | $(50,782) | $890 | $(49,892) | $13,715 | $(36,177) | ||
| Income tax benefit | (6,605) | (296)(d) | (6,901) | 231 | (6,670) | ||
| Net loss from continuing operations | (44,177) | 1,186 | (42,991) | 13,484 | (29,507) | ||
| Net loss from discontinued operations, net of tax | — | — | — | (13,484) | (13,484) | ||
| Net loss | (44,177) | 1,186 | (42,991) | — | (42,991) | ||
| Less: Net loss from continuing operations attributable to non-controlling interest | (8,947) | 257(b) | (8,690) | 2,525 | (6,165) | ||
| Less: Net loss from discontinued operations attributable to non-controlling interest | — | — | — | (2,525) | (2,525) | ||
| Net loss attributable to System1, Inc. | $(35,230) | $929 | $(34,301) | $— | $(34,301) | ||
| Amounts attributable to System1, Inc.: | |||||||
| Net loss from continuing operations | $(35,230) | $929 | (a) (b) (d) | $(34,301) | $10,959 | $(23,342) | |
| Net loss from discontinued operations | — | — | — | (10,959) | (10,959) | ||
| Net loss attributable to System1, Inc. | $(35,230) | $929 | $(34,301) | $— | $(34,301) | ||
| Basic and diluted net loss per share: | |||||||
| Continuing operations | $(0.38) | $0.01(b) | $(0.37) | $0.12 | $(0.25) | ||
| Discontinued operations | — | — | — | (0.12) | (0.12) | ||
| Basic and diluted net loss per share | $(0.38) | $0.01 | $(0.37) | $— | $(0.37) | ||
| Weighted average number of shares outstanding - basic and diluted | 93,425 | 374(b) | 93,799 | 93,799 | |||
| Six Months Ended June 30, 2023 | |||||||
|---|---|---|---|---|---|---|---|
| As Previously Reported · Revision Adjustment · As Revised · Impact of Reclassification of Discontinued Operations · As Currently Reported | |||||||
| Salaries and benefits | $82,389 | $(594)(a) | $81,795 | $(26,594) | $55,201 | ||
| Total operating expenses | 389,006 | (594) | 388,412 | (124,326) | 264,086 | ||
| Operating loss | (73,914) | 594 | (73,320) | 27,266 | (46,054) | ||
| Loss before income tax | $(98,316) | $594 | $(97,722) | $27,323 | $(70,399) | ||
| Income tax benefit | (11,013) | (792)(d) | (11,805) | 1,306 | (10,499) | ||
| Net loss from continuing operations | (87,303) | 1,386 | (85,917) | 26,017 | (59,900) | ||
| Net loss from discontinued operations, net of tax | — | — | — | (26,017) | (26,017) | ||
| Net loss | (87,303) | 1,386 | (85,917) | — | (85,917) | ||
| Less: Net loss from continuing operations attributable to non-controlling interest | (18,121) | 307(b) | (17,814) | 4,892 | (12,922) | ||
| Less: Net loss from discontinued operations attributable to non-controlling interest | — | — | — | (4,892) | (4,892) | ||
| Net loss attributable to System1, Inc. | $(69,182) | $1,079 | $(68,103) | $— | $(68,103) | ||
| Amounts attributable to System1, Inc.: | |||||||
| Net loss from continuing operations | $(69,182) | $1,079 | (a) (b) (d) | $(68,103) | $21,125 | $(46,978) | |
| Net loss from discontinued operations | — | — | — | (21,125) | (21,125) | ||
| Net loss attributable to System1, Inc. | $(69,182) | $1,079 | $(68,103) | $— | $(68,103) | ||
| Basic and diluted net loss per share: | |||||||
| Continuing operations | $(0.74) | $0.01(b) | $(0.73) | $0.23 | $(0.50) | ||
| Discontinued operations | — | — | — | (0.23) | (0.23) | ||
| Basic and diluted net loss per share | $(0.74) | $0.01 | $(0.73) | $— | $(0.73) | ||
| Weighted average number of shares outstanding - basic and diluted | 92,945 | 343(b) | 93,288 | 93,288 | |||
The following tables reflect therevisions related tothe previously issued condensed consolidated statement of comprehensive loss for the three and six months ended June 30, 2023 (in thousands):
| Three Months Ended June 30, 2023 | ||||
|---|---|---|---|---|
| As Previously Reported · Revision Adjustment · As Currently Reported | ||||
| Net loss | $(44,177) | $1,186 | (a) (d) | $(42,991) |
| Other comprehensive income (loss) | ||||
| Foreign currency translation income (loss) | 187 | (1)(c) | 186 | |
| Comprehensive loss | (43,990) | 1,185 | (42,805) | |
| Comprehensive loss attributable to non-controlling interest | (8,897) | 257(b) | (8,640) | |
| Comprehensive loss attributable to System1, Inc. | $(35,093) | $928 | $(34,165) | |
| Six Months Ended June 30, 2023 | ||||
|---|---|---|---|---|
| As Previously Reported · Revision Adjustment · As Currently Reported | ||||
| Net loss | $(87,303) | $1,386 | (a) (d) | $(85,917) |
| Other comprehensive (loss) income: | ||||
| Foreign currency translation (loss) income | 79 | (1)(c) | 78 | |
| Comprehensive loss | (87,224) | 1,385 | (85,839) | |
| Comprehensive loss attributable to non-controlling interest | (18,087) | 307(b) | (17,780) | |
| Comprehensive loss attributable to System1, Inc. | $(69,137) | $1,078 | $(68,059) | |
The following tables reflect the revisions to the previously issued condensed consolidated statement of changes in stockholders' equity for the six months ended June 30, 2023 (in thousands). Although the impact of such revisions is pervasive throughout the condensed consolidated statement of changes in stockholders' equity as a result of the errors described above, the most significant revisions include a reduction of net loss of $1.4 million, an increase of non-controlling interest of $1.2 million, a reduction in accumulated deficit of $1.1 million and a reduction in additional paid-in-capital of $0.7 million.
| Class A Common Stock · Class C Common Stock | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Shares | Amount | Shares | Amount | Additional Paid-In-Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Non-Controlling Interest | Total Stockholders’Equity | |
| As Previously Reported | |||||||||
| Balance at December 31, 2022 | 91,674 | $9 | 21,747 | $2 | $831,566 | $(439,296) | $(260) | $78,650 | $470,671 |
| Net loss | — | — | — | — | — | (33,952) | — | (9,174) | (43,126) |
| Cumulative-effect of adoption of ASU 2016-13 | — | — | — | — | — | (326) | — | — | (326) |
| Issuance of restricted stock, net of forfeitures and shares withheld for taxes | 832 | — | — | — | (1,730) | — | — | — | (1,730) |
| Issuance of common stock in connection with settlement of incentive plan | 407 | — | — | — | 1,659 | — | — | — | 1,659 |
| Conversion of Class C shares to Class A shares | 234 | — | (234) | — | 955 | — | — | (955) | — |
| Increase in tax receivable agreement liability | — | — | — | — | (441) | — | — | — | (441) |
| Other comprehensive loss | — | — | — | — | — | — | (62) | (47) | (109) |
| Stock-based compensation | — | — | — | — | 6,963 | — | — | — | 6,963 |
| Balance at March 31, 2023 | 93,147 | $9 | 21,513 | $2 | $838,972 | $(473,574) | $(322) | $68,474 | $433,561 |
| Net loss | — | — | — | — | — | (35,230) | — | (8,947) | (44,177) |
| Issuance of restricted stock, net of forfeitures and shares withheld for taxes | 455 | — | — | — | (314) | — | — | — | (314) |
| Other comprehensive income (loss) | — | — | — | — | — | — | 209 | (22) | 187 |
| Class A Common Stock · Class C Common Stock | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Shares · Amount · Shares · Amount · Additional Paid-In-Capital · Accumulated Deficit · Accumulated Other Comprehensive Loss · Non-Controlling Interest · Total Stockholders’Equity | ||||||||||
| Stock-based compensation | — | — | — | — | 5,571 | — | — | — | 5,571 | |
| Balance at June 30, 2023 | 93,602 | $9 | 21,513 | $2 | $844,229 | $(508,804) | $(113) | $59,505 | $394,828 | |
| Revision Adjustments | ||||||||||
| Net loss | — | $— | — | $— | $— | $150 | $— | $50 | $200 | (a) (b) (d) |
| Issuance of restricted stock, net of forfeitures and shares withheld for taxes | — | — | — | — | 281 | — | — | (281) | — | (a) (b) |
| Issuance of common stock in connection with settlement of incentive plan | — | — | — | — | 160 | — | — | (160) | —(b) | |
| Conversion of Class C shares to Class A shares | — | — | — | — | 92 | — | — | (92) | —(b) | |
| Stock-based compensation | — | — | — | — | (760) | — | — | 958 | 198 | (a) (b) |
| Balance at March 31, 2023 | — | $— | — | $— | $(227) | $150 | $— | $475 | $398 | |
| Net loss | — | — | — | — | — | 929 | — | 257 | 1,186 | (a) (b) (d) |
| Issuance of restricted stock, net of forfeitures and shares withheld for taxes | — | — | — | — | 181 | — | — | (181) | — | (a) (b) |
| Other comprehensive loss | — | — | — | — | — | — | (1) | — | (1)(c) | |
| Stock-based compensation | — | — | — | — | (615) | — | — | 615 | — | (a) (b) |
| Balance at June 30, 2023 | — | $— | — | $— | $(661) | $1,079 | $(1) | $1,166 | $1,583 | |
| As Revised | ||||||||||
| Net loss | — | $— | — | $— | — | $(33,802) | $— | $(9,124) | $(42,926) | |
| Cumulative-effect of adoption of ASU 2016-13 | — | — | — | — | — | (326) | — | — | (326) | |
| Issuance of restricted stock, net of forfeitures and shares withheld for taxes | 832 | — | — | — | (1,449) | — | — | (281) | (1,730) | |
| Issuance of common stock in connection with settlement of incentive plan | 407 | — | — | — | 1,819 | — | — | (160) | 1,659 | |
| Conversion of Class C shares to Class A shares | 234 | — | (234) | — | 1,047 | — | — | (1,047) | — | |
| Increase in tax receivable agreement liability | — | — | — | — | (441) | — | — | — | (441) | |
| Other comprehensive loss | — | — | — | — | — | — | (62) | (47) | (109) | |
| Stock-based compensation | — | — | — | — | 6,203 | — | — | 958 | 7,161 | |
| Class A Common Stock · Class C Common Stock | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Shares | Amount | Shares | Amount | Additional Paid-In-Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Non-Controlling Interest | Total Stockholders’Equity | |
| Balance at March 31, 2023 | 93,147 | $9 | 21,513 | $2 | $838,745 | $(473,424) | $(322) | $68,949 | $433,959 |
| Net loss | — | — | — | — | — | (34,301) | — | (8,690) | (42,991) |
| Issuance of restricted stock, net of forfeitures and shares withheld for taxes | 455 | — | — | — | (133) | — | — | (181) | (314) |
| Other comprehensive income (loss) | — | — | — | — | — | — | 208 | (22) | 186 |
| Stock-based compensation | — | — | — | — | 4,956 | — | — | 615 | 5,571 |
| Balance at June 30, 2023 | 93,602 | $9 | 21,513 | $2 | $843,568 | $(507,725) | $(114) | $60,671 | $396,411 |
The following table reflects the revisions to the previously issued condensed consolidated statement of cash flows for the six months ended June 30, 2023 (in thousands):
| As Previously Reported · Revision Adjustment · As Currently Reported | ||||
|---|---|---|---|---|
| Cash Flows from Operating Activities | ||||
| Net loss | $(87,303) | $1,386 | (a) (d) | $(85,917) |
| Stock-based compensation | 31,656 | 196(a) | 31,852 | |
| Other, net 1 | 3,588 | 431(c) | 4,019 | |
| Deferred tax benefits | (13,493) | (792)(d) | (14,285) | |
| Changes in operating assets and liabilities: | ||||
| Prepaid expenses and other current assets | (834) | (431)(c) | (1,265) | |
| Accrued expenses and other current liabilities | (10,963) | (1,582)(c) | (12,545) | |
| Other non-current liabilities | 516 | 792(c) | 1,308 | |
| Net cash provided by operating activities | 1,352 | — | 1,352 | |
| _______________ | ||||
1 To conform to current period presentation, the amount related to amortization of debt issuance costs included inother, net has been reclassified toamortization of debt issuance costs in the condensed consolidated statement of cash flows.
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