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STOCK-BASED COMPENSATION | 12 Months Ended
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Dec. 31, 2022
Share-Based Payment Arrangement [Abstract] |
STOCK-BASED COMPENSATION | STOCK-BASED COMPENSATION As described in Note 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, the Replacement Awards continue to vest over the original vesting schedule of the original underlying awards. The Company recognized a total stock-based compensation expense of $23,705 upon the consummation of the Merger during the period January 1, 2022 through January 26, 2022 (Predecessor). The Company recognized stock-based compensation expense of $21,290 under these awards during the period January 27, 2022 through December 31, 2022 (Successor). The unrecognized stock-based compensation expense associated with these unvested Replacement Awards was $13,025 a s of December 31, 2022. When the VWAP of the Company’s common stock price exceeded the threshold in March 2022 the Sponsor RSAs and Sponsor RSUs vested, and the Company recorded their conversion from Class D common stock to Class A common stock on its Consolidated Statements of Changes in Stockholders' Equity. The Company also recorded $12,745 in stock-based compensation expense associated with the vesting of the Sponsor RSUs during the period January 27, 2022 through March 31, 2022 (Successor). Since these Sponsor RSAs and Sponsor RSUs had a market condition to vest, the Company estimated the fair values of these market-based RSAs and RSUs using a Monte Carlo simulation. The key assumptions used to determine the fair value of these market-based RSUs and RSAs were as follows:
Risk-free interest rate | 1.6 | %
Expected price volatility | 50.0 | %
Cost of equity | 23.6 | %
Expected term (years) | 5
Fair value of Class A Common stock | $ | 10.00 |
The Company recorded $7,706 in stock-based compensation expense for Sponsor Promote Shares during the period January 27, 2022 through March 31, 2022 (Successor). The Company recorded the following total stock-based compensation expense:
| Successor |  |  | Predecessor
| Period from January 27, 2022 through December 31, 2022 |  |  | Period from January 1, 2022 through January 26, 2022 |  | Year Ended December 31, 2021
Stock-based compensation expense | $ | 106,943 |  |  |  | $ | 23,705 |  |  | $ | 413 |
RSUs generally vest over three years, subject to the holder's continued service through the vesting date. The following summarizes RSU activity:
| Shares |  | Weighted-Average Grant Date Fair Value per Share
Unvested as of January 27, 2022 | — |  |  | $ | — |
Granted | 7,488 |  | * | $ | 9.94 |
Vested | (1,221) |  | * | $ | 10.31 |
Forfeited | (804) |  |  | $ | 10.13 |
Unvested as of December 31, 2022 | 5,463 |  |  | $ | 9.83 |
____________________ *Excludes the 2,900 market-based RSUs and RSAs discussed above. At December 31, 2022, the Company had unrecognized stock-based compensation relating to restricted stock of approximately $35,272, which is expected to be recognized over a weighted-average period of 1.6 years. On April 27, 2022, the Company filed a registration statement on Form S-8 covering the shares and awards issued and granted under the System1, Inc. 2022 Incentive Award Plan ("Award Plan”). On May 10, 2022, the Company’s Board of Directors authorized the issuance of 1,900 replacement RSUs in connection with S1 Holdco unvested value creation units outstanding at the time of the Merger, pursuant to the terms of the BCA and an additional 4,900 RSUs from the authorized Award Plan pool of shares. Protected.net Incentive Plan In connection with the Merger and acquisition of Protected.net described in Note 3—MERGER, which was consummated on January 27, 2022, the Company effected an incentive plan for eligible recipients as defined in the BCA (see Note 3—MERGER), which may include employees and non-employees, including the Protected.net CEO, totaling up to $100,000 payable in fully-vested shares of the Company’s Class A common stock. If the last twelve months ("LTM") Cash EBITDA (as defined in the BCA) of the Protected.net business exceeds $55,000 on or prior to December 31, 2023, a bonus pool of $50,000 payable in fully-vested shares of the Company’s Class A common stock (the “2023 Award”) shall be allocated to eligible recipients as of December 31, 2023. Shares under the 2023 Award will be issued to eligible recipients within 30 days of December 31, 2023. Further, if the LTM Cash EBITDA of the Protected.net business exceeds $65,000 on or prior to December 31, 2024, an additional bonus pool of $50,000 also payable in fully-vested shares of the Company’s Class A common stock (the “2024 Award”) shall be allocated to eligible recipients as of December 31, 2024. Shares under the 2024 Award will be issued to eligible recipients within 30 days of December 31, 2024. The number of shares payable under the 2023 Award and the 2024 Award will be determined based on the volume-weighted average price of the Company’s Class A common stock over the 20 consecutive trading days preceding the 5 trading days prior to the applicable settlement dates. The distribution of shares to eligible recipients for both the 2023 Award and the 2024 Award shall be at the sole discretion of the Protected.net CEO, or the System1, Inc. Board if the Protected.net CEO is no longer employed by the Company. On August 30, 2022, the Company modified the 2023 Award to change this award from a bonus payable in fully-vested shares of the Company's Class A common stock to a $40,000 cash payment settleable in four equal quarterly cash installments beginning upon the modification of the 2023 Award. During the year ended December 31, 2022, the Company recognized $35,436 for the 2023 Award, within Salaries and benefits expenses on the accompanying consolidated statements of operations. On June 1, 2023, the Company further modified the 2023 Award, deferring the last quarterly cash installment of $10,000 such that $5,000 was due on May 30, 2023, $5,000 is due on July 1, 2023, and providing additional cash bonus payments of up to $10,000, $6,000 due on October 1, 2023 (the "October Payment") and $1,000 due on the first of each month of November 2023 through February 2024 (together the "Remaining Payments"). All of the payments due under this modification are conditioned upon the members of the Protected senior management (i) entering into employment agreements that include certain protective covenants in favor of Protected and (ii) remaining employed by Protected (other than as a result of a termination without cause) through all applicable payment dates. The October Payment and the Remaining Payments are conditioned upon the Protected business (x) not exceeding certain trailing three-month customer acquisition marketing spending caps or (y) achieving certain monthly (or trailing twelve-month) minimum EBITDA thresholds. Although the LTM Cash EBITDA target for the 2024 Award has not been met, the Company determined that it was probable of achievement, and accordingly, it recorded pro rata portions of the $50,000 payable for this award. or $15,824, within salaries and benefits expenses on the accompanying consolidated statements of operations for the year ended December 31, 2022. As of December 31, 2022, stock-based compensation has been recorded as current and non-current Protected.net Incentive Plan liabilities within the consolidated balance sheet. The remaining liability for the modified 2023 Award will be recorded over the remaining service period with graded vesting attribution for each quarterly installm ent. The remaining liability for the 2024 Award will be recorded over the remaining service period to the extent that management determines that the achievement of the LTM Cash EBITDA target and issuance of the Series A common stock is considered probable. CouponFollow Incentive Plan In connection with the acquisition of CouponFollow described in Note 4—ACQUISITIONS, which was consummated on March 4, 2022, the Company approved and adopted the CouponFollow Incentive Plan, which includes CouponFollow’s key employees, including CouponFollow’s founder (“Principal Participant” and together collectively the “Participants”). The CouponFollow Incentive Plan provides for total payments of $35,000 payable at the Company’s option in cash or in fully-vested shares of the Company’s Class A common stock, consisting of a fixed amount of $10,000 and contingent amounts of $25,000, which can be earned over a three calendar year period between each January 1 to December 31 of 2022, 2023 and 2024 (each a “Performance Period” and collectively, the “Performance Periods”). In order to receive any payments under the CouponFollow Incentive Plan, the Participants must maintain continuous employment through the last day of each Performance Period to be eligible for the following earnout payment amounts (with the exception of the Principal Participant who is still eligible if terminated without cause or if he terminates his employment for good reason) in the amounts and at the times set forth below: •Fixed Amount. Over the course of the Performance Periods, the Company shall pay to each of the employed eligible Participants a total of $10,000 (the “Fixed Amount”) in three substantially equal pro rata installment payments (as set forth in each Participant’s applicable award agreement) within 60 days of the end of each Performance Period. •Tier 1 Target. If, during any of the Performance Periods, the CouponFollow business achieves the first tier TTM EBITDA (as defined in the CouponFollow Incentive Plan) for the first time (the “Tier 1 Target”), the Company will pay a total of $10,000 (the “Tier 1 Amount”) in substantially equal pro rata amounts (as set forth in each Participant’s applicable award agreement) at the times in the table set forth below. •Tier 2 Target. If, during any of the Performance Periods, the CouponFollow business achieves the second tier TTM EBITDA for the first time (the “Tier 2 Target”), the Company will pay an additional $7,500 (the “Tier 2 Amount”) in substantially equal pro rata amounts (as set forth in each Participant’s applicable award agreement) at the times in the table set forth below. •Tier 3 Target. If, during any of the Performance Periods, the CouponFollow business achieves the third tier TTM EBITDA for the first time (the “Tier 3 Target” and together with the Tier 1 Target and Tier 2 Target, collectively the “Targets”), the Company will pay an additional $7,500 (the “Tier 3 Amount” and together with the Tier 1 Amount and the Tier 2 Amount, collectively the “Tier Amounts”) in substantially equal pro rata amounts (as set forth in each Participant’s applicable award agreement) at the times in the table set forth below.
Performance Period* |  | Fixed Amount |  | Tier 1 Amount** |  | Tier 2 Amount** |  | Tier 3 Amount** |  | Total Maximum Payment per Performance Period
Dec. 31, 2022 |  | $ | 3,333 |  |  | $ | 3,333 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,666 |
Dec. 31, 2023 |  | 3,333 |  |  | 3,333 |  |  | 3,750 |  |  | — |  |  | 10,416 |
Dec. 31, 2024 |  | 3,334 |  |  | 3,334 |  |  | 3,750 |  |  | 7,500 |  |  | 17,918 |
|  | $ | 10,000 |  |  | $ | 10,000 |  |  | $ | 7,500 |  |  | $ | 7,500 |  |  | $ | 35,000 |
*Payments for each applicable Performance Period are paid within 60 calendar days of the end of the applicable Performance Period.
**If the Tier 1 Amount is not achieved in the first Performance Period but is achieved in the second Performance Period, the Tier 1 Amount for the first Performance Period shall be paid out at the end of the second Performance Period and if achieved in the third Performance period the full amount will be paid at the end of the third Performance Period. If the Tier 2 Amount is not achieved in the second Performance Period but is achieved in the third Performance Period, the Tier 2 Amount will be paid at the end of the third Performance Period. If the Tier 2 Amount or the Tier 3 Amount is achieved in the first Performance Period, such Tier Amounts shall be paid as noted in the table above.
If a Participant’s continued employment is terminated prior to applicable payment date(s), with the exception of the Principal Participant as discussed above, the Company will reverse all prior liabilities for their pro rata share of any Tier Amounts associated with that Participant. If the Company elects to settle the payment obligations with respect to any Tier Amount in shares of the Company’s Class A common stock, the number of shares payable under the CouponFollow Incentive Plan will be determined based on the VWAP of the Company’s Class A common stock over the 30 trading day period immediately preceding the respective settlement date, but in any event, shall be capped at 4,667 shares of the Company’s Class A common stock in the aggregate. Any amount over the maximum number of shares is to be settled in cash. As of December 31, 2022, the Company has determined that it was not probable that the CouponFollow business would achieve any of the Targets during the Performance Periods, and accordingly, it did not record a liability for any of the Tier Amounts set forth in the CouponFollow Incentive Plan. During the year ended December 31, 2022, the Company recognized $3,333 for the Fixed Amount, within Salaries and benefits expenses on the accompanying consolidated statements of operations, which was settled in shares during 2023. Stock-Based Award Plan The Company is authorized to issue restricted stock, restricted stock units, stock options, stock appreciation rights, and other stock-based and cash-based awards under its 2022 Incentive Award Plan. The number of shares authorized for grant is subject to increase each year on January 1, equal to the lesser of (a) a number of shares equal to 2.5% of the aggregate number of common stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as is determined by the board of directors. On January 1, 2023, the number of shares authorized for grant under the Company’s 2016 Incentive Award Plan was increased by 2.8 million shares in accordance with plan provisions.

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