System1 Inc

Net loss from discontinued operations, net of tax

Net loss from discontinued operations, net of tax is comprised of 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

We expect existing cash and cash equivalents, cash flows from operations and financing activities to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities for at least the next 12 months. Our main sources of liquidity have historically been, and are expected to be from cash on hand, cash flows from operations and financing activities. Our ability to fund future operating expenses and capital expenditures, and our ability to meet our future debt service obligations, will depend on our ability to execute on our operational strategy and may be affected by our profitability, as well as general economic, financial and other factors which are beyond our control.

We continue to develop and implement plans to improve our liquidity. Our main focus is executing on our operational strategy, which includes continued focus on expanding the number of advertising partners that are utilizing or integrated with RAMP by continuing to attract and monetize users with commercial intent on our owned and operated web properties and on behalf of our network partners as well as optimizing bids and driving higher returns on advertising spend. Additionally, we are focused on our current cost structure by reducing our cash operating expenses and debt service obligations. Adverse macroeconomic conditions have affected, and may in the future affect, the demand for advertising, resulting in fluctuations in the amounts our advertisers spend on advertising, which could have a negative impact on our financial condition and operating results.

As of March 31, 2024, we had unrestricted cash and cash equivalents of $69.9 million and $50.0 million available to borrow on our 2022 Revolving Facility. For the three months ended March 31, 2024, the Company had cash outflows from operations of $16.0 million. The principal drivers of our cash outflow from operations for thethree months ended March 31, 2024, were cash bonus-related payments of $7.2 million primarily related to 2023 annual employee performance bonuses, $1.8 million of audit fees, $2.4 million of consulting fees, and interest paid on our Term Loan of $8.2 million.

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.

Credit Facilities

Term Loan

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. The 2022 Revolving Facility provided borrowing availability of up to $50.0 million. As of March 31, 2024, there was no balance outstanding on the 2022 Revolving Facility and principal of $296.3 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 the second quarter 2022, such that the first lien leverage ratio (as 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 toour lenders within 120 days of our fiscal year end, December 31. Should we fail to distribute the financial statements toour lender within 120 days, we have an additional 30 days to cure such default.

The 2022 Revolving Facility matures in January 2027, and accordingly, when there is a balance outstanding it is classified within long-term debt, net on the condensed 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%. As of March 31, 2024, there was no outstanding balance.

On January 17, 2024, we completed the repurchase of $63.7 million in principal amount of our Term Loan indebtedness or 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(see Note 5, Debt, Net).

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.

Cash Flows

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

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 three months ended March 31, 2024, cash used in operating activities of $16.0 million. The principal drivers of our cash outflow from operations three months ended March 31, 2024, were cash bonus payments of $7.2 million primarily related to 2023 annual employee performance bonuses, $1.8 million of audit fees, $2.4 million of consulting fees, and interest paid on our Term Loan of $8.2 million.

In the three months ended March 31, 2023, cash used in operating activities of $5.8 million resulted primarily from a net loss of $42.9 million, noncash deferred tax benefit of $7.9 million, an adjustment for the change in fair value of warrants of $1.4 million, a payment of long-term earnout liabilities of $10.0 million and a decrease in accrued expenses and other current liabilities of $5.1 million. This was partially offset by noncash items including depreciation and amortization expense of $29.4 million, stock-based compensation of $14.1 million, an increase in deferred revenue of $6.2 million, a decrease in accounts receivable of $11.3 million, and an increase in other long-term liabilities of $0.3 million.

Investing Activities

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

In the three months ended March 31, 2024, cash used in investing activities of $1.6 million resulted primarily from costs capitalized for internally developed software.

In the three months ended March 31, 2023, cash used in investing activities of $2.4 million resulted primarily from costs capitalized for internally developed software and purchases of property and equipment.

Financing Activities

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

In the three months ended March 31, 2024, cash used in financing activities of $48.2 million resulted primarily from repayment of the 2022 Term Note of $46.1 million.

In the three months ended March 31, 2023, cash used in financing activities of $9.1 million resulted primarily from repayment of existing term loan of $5.0 million, taxes paid related to net settlement of stock awards of $2.8 million, and payment of acquisition holdback of $1.3 million.

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 March 31, 2024, we remain contractually obligated to spend a remaining $10.0 million towards this commitment.

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 condensed consolidated financial statements.

Critical Accounting Policies and Estimates

We prepare our financial statements in accordance with GAAP. Preparing these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

The critical accounting estimates, assumptions, and judgments that we believe to have the most significant impact on our condensed consolidated financial statements are stock-based compensation, business combinations and valuation of goodwill and income taxes.

There have been no material changes to our critical accounting policies and estimates as described in our Annual Report.

Recently Issued Accounting Pronouncements

For information regarding recent accounting pronouncements, refer to Note 2, Summary of Significant Accounting Policies.