System1 Inc
For the period ended Mar 31, 2024. Filed May 9, 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.
Mar 31, 2024 · Filed May 9, 2024
Extracted filing text, with the paragraph anchors used by the comparison.
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Item 4.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. 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. 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”) in March 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. The results of operations for the three months ended March 31, 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 months ended March 31, 2023 as follows:
a. Accrued expenses and other current liabilities were understated by $0.9 million, additional paid-in capital was understated by $1.7 million and salaries and benefits expense was understated by $0.3 million as a result of our not accelerating expenses upon 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 impact 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 corrections related to such errors described above.
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 March 31, 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 March 31, 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 March 31, 2024.
The following table reflects the revisions and the impact of reporting Discontinued Operations related to the sale of Protected to the previously issued condensed consolidated balance sheet as of March 31, 2023 (in thousands):
| As Previously Reported · Revision Adjustment · As Revised · Impact of Reclassification of Discontinued Operations · As Currently Reported | ||||||
|---|---|---|---|---|---|---|
| Liabilities and Stockholders' Equity | ||||||
| Current liabilities: | ||||||
| Accrued expenses and other current liabilities | 85,727 | 890 | 86,617(a) | (14,620) | 71,997 | |
| Total current liabilities | 199,354 | 890 | 200,244 | — | 200,244 | |
| Deferred tax liability | 35,995 | 830 | 36,825(d) | (13,318) | 23,507 | |
| Total liabilities | 669,119 | 1,720 | 670,839 | — | 670,839 | |
| Stockholders’ Equity / Members’ Deficit | ||||||
| Additional paid-in capital | 837,093 | 1,652 | 838,745 | (a) (b) | — | 838,745 |
| Accumulated deficit | (479,579) | 6,155 | (473,424) | (a) (b) (d) | — | (473,424) |
| Accumulated other comprehensive loss | (479) | 156 | (323)(d) | — | (323) | |
| Total stockholders' equity attributable to System1, Inc. | 357,046 | 7,963 | 365,009 | — | 365,009 | |
| Non-controlling interest | 78,632 | (9,683) | 68,949(b) | — | 68,949 | |
| Total stockholders' equity | 435,678 | (1,720) | 433,958 | — | 433,958 | |
| Total liabilities and stockholders' equity | $1,104,797 | $— | $1,104,797 | $— | $1,104,797 | |
The following table reflects therevisions and the impact of reporting Discontinued Operations related to the sale of Protected to the previously issued condensed consolidated statement of operations, for the three months ended March 31, 2023 (in thousands):
| As Previously Reported · Revision Adjustment · As Revised · Impact of Reclassification of Discontinued Operations · As Currently Reported | ||||||
|---|---|---|---|---|---|---|
| Salaries and benefits | 38,398 | 296(a) | 38,694 | (10,547) | 28,147 | |
| Total operating expenses | 205,346 | 296 | 205,642 | (60,295) | 145,347 | |
| Operating loss | (37,492) | (296) | (37,788) | 13,559 | (24,229) | |
| Other expense (income): | ||||||
| Interest expense, net | 11,451 | — | 11,451 | (49) | 11,402 | |
| Total other (income) expense, net | 10,042 | — | 10,042 | (49) | 9,993 | |
| Loss before income tax | (47,534) | (296) | (47,830) | 13,608 | (34,222) | |
| Income tax benefit | (4,408) | (496)(d) | (4,904) | 1,075 | (3,829) | |
| Net loss from continuing operations | (43,126) | 200 | (42,926) | 12,533 | (30,393) | |
| Net loss from discontinued operations, net of tax | — | — | — | (12,533) | (12,533) | |
| Net loss | (43,126) | 200 | (42,926) | — | (42,926) | |
| Less: Net loss from continuing operations attributable to non-controlling interest | (9,174) | 50(b) | (9,124) | 2,367 | (6,757) | |
| Less: Net loss from discontinued operations attributable to non-controlling interest | — | — | — | (2,367) | (2,367) | |
| Net loss attributable to System1, Inc. | $(33,952) | $150 | $(33,802) | $— | $(33,802) | |
| Amounts attributable to System1, Inc.: | ||||||
| Net loss from continuing operations | $(33,952) | $150(b) | $(33,802) | $10,166 | $(23,636) | |
| Net loss from discontinued operations | — | — | — | (10,166) | (10,166) | |
| Net loss attributable to System1, Inc. | $(33,952) | $150 | $(33,802) | $— | $(33,802) | |
| Basic and diluted net loss per share: | ||||||
| Continuing operations | $(0.37) | $0.01(b) | $(0.36) | $0.11 | $(0.25) | |
| Discontinued operations | — | — | — | (0.11) | (0.11) | |
| Basic and diluted net loss per share | $(0.37) | $0.01 | $(0.36) | $— | $(0.36) | |
| Weighted average number of shares outstanding - basic and diluted | 92,460 | 311(b) | 92,771 | 92,771 | ||
The following table reflects therevisions related tothe previously issued condensed consolidated statement of comprehensive loss for the three months ended March 31, 2023 (in thousands):
| As Previously Reported · Revision Adjustment · As Currently Reported | ||||
|---|---|---|---|---|
| Net loss | $(43,126) | $200 | (a) (d) | $(42,926) |
| Other comprehensive income (loss) | ||||
| Foreign currency translation income (loss) | (108) | (108) | ||
| Comprehensive loss | (43,234) | 200 | (43,034) | |
| Comprehensive loss attributable to non-controlling interest | (9,220) | 50(b) | (9,170) | |
| Comprehensive loss attributable to System1, Inc. | $(34,014) | $150 | $(33,864) | |
The following tables reflect the revisions to the previously issued condensed consolidated statement of changes in stockholders' equity for the quarter ended March 31, 2023. Although the impact is pervasive throughout the condensed consolidated statement of changes in stockholders' equity as a result of the errors described above, the most significant impact is a reduction of net loss of $0.2 million, an increase of non-controlling interest of
$0.5 million, a reduction in accumulated deficit of $0.2 million and a reduction in additional paid-in-capital of $0.2 million.
| Class A Common Stock · Class C Common Stock | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Shares · Amount · Shares · Amount · Additional Paid-In-Capital · Accumulated Deficit · Accumulated Other Comprehensive Income · 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 income (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 | |
| 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) | |
| Other comprehensive income (loss) | — | — | — | — | — | — | — | — | —(c) | |
| Stock-based compensation | — | — | — | — | (760) | — | — | 958 | 198 | (a) (b) |
| Balance at March 31, 2023 | — | $— | — | $— | $(227) | $150 | $— | $475 | $398 | |
| 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 income (loss) | — | — | — | — | — | — | (62) | (47) | (109) |
| Stock-based compensation | — | — | — | — | 6,203 | — | — | 958 | 7,161 |
| Balance at March 31, 2023 | 93,147 | $9 | 21,513 | $2 | $838,745 | $(473,424) | $(322) | $68,949 | $433,959 |
The following table reflects the revisions to the previously issued condensed consolidated statement of cash flows for the three months ended March 31, 2023 (in thousands):
| As Previously Reported · Revision Adjustment · As Currently Reported | ||||
|---|---|---|---|---|
| Cash Flows from Operating Activities | ||||
| Net loss | $(43,126) | $200 | (a) (d) | $(42,926) |
| Stock-based compensation | 13,925 | 197(a) | 14,122 | |
| Deferred tax benefits | (7,373) | (496)(d) | (7,869) | |
| Changes in operating assets and liabilities | ||||
| Accrued expenses and other liabilities | (4,660) | (397)(a) | (5,057) | |
| Other long-term liabilities | (149) | 496(d) | 347 | |
| Net cash used in operating activities | $(5,801) | $— | $(5,801) | |
The text of this filing, as the company filed it with the SEC, without its images or exhibits. This is not investment advice.