Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2024

Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements and related disclosures are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Our condensed 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 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. The results of operations for the three and nine months ended September 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 Report on 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 are presented as net loss from discontinued operations in our condensed 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 the three and nine months ended September 30, 2023 as follows:

a.Additional paid-in capital was understated by $0.9 million as of September 30, 2023, and salaries and benefits expense was understated by an immaterial amount for the three months ended September 30, 2023 and overstated by $0.6 million for the nine months ended September 30, 2023, 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. This 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.

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 September 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 September 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 September 30, 2024. The following tables reflect the errors discussed in a through d above.

The following table reflects the revisions to the previously issued condensed consolidated balance sheet as of September 30, 2023 (in thousands):


	As Previously Reported		Revision Adjustment		As Currently Reported
Liabilities and Stockholders' Equity
Deferred tax liability	$	15,009	$	338	$	15,347	(d)
Total liabilities	687,066		338		687,404
Stockholders’ Equity / Members’ Deficit
Additional paid-in capital	$	849,398	$	867	$	850,265	(a) (b)
Accumulated deficit	(646,242)		7,027		(639,215)		(a) (b) (d)
Accumulated other comprehensive loss	(435)		156		(279)		(d)

Total stockholders' equity attributable to System1, Inc.	$	202,732	$	8,050	$	210,782
Non-controlling interest	37,746		(8,388)		29,358		(b)
Total stockholders' equity	$	240,478	$	(338)	$	240,140
Total liabilities and stockholders' equity	$	927,544	$	—	$	927,544

The following tables reflect the revisions to the previously issued condensed consolidated statement of operations for the three and nine months ended September 30, 2023 (in thousands):


	Three Months Ended September 30, 2023
	As Previously Reported		Revision Adjustment		As Currently Reported
Salaries and benefits	$	26,689	$	6	$	26,695	(a)
Total operating expenses	108,666		6		108,672
Operating loss	(20,848)		(6)		(20,854)

Loss before income tax	$	(27,038)	$	(6)	$	(27,044)
Income tax expense (benefit)	(920)		(196)		(1,116)		(d)
Net loss from continuing operations	(26,118)		190		(25,928)
Net loss from discontinued operations, net of tax	(137,209)		—		(137,209)
Net loss	(163,327)		190		(163,137)
Less: Net loss from continuing operations attributable to non-controlling interest	(6,328)		247		(6,081)		(b)
Less: Net loss from discontinued operations attributable to non-controlling interest	(25,566)		—		(25,566)
Net loss attributable to System1, Inc.	$	(131,433)	$	(57)	$	(131,490)

Amounts attributable to System1, Inc.:
Net loss from continuing operations	$	(19,790)	$	(57)	$	(19,847)	(a) (b) (d)
Net loss from discontinued operations	(111,643)		—		(111,643)
Net loss attributable to System1, Inc.	$	(131,433)	$	(57)	$	(131,490)

Basic and diluted net loss per share:
Continuing operations	$	(0.21)	$	—	$	(0.21)
Discontinued operations	(1.19)		0.01		(1.18)		(b)
Basic and diluted net loss per share	$	(1.40)	$	0.01	$	(1.39)

Weighted average number of shares outstanding - basic and diluted	93,941		418		94,359		(b)


	Nine Months Ended September 30, 2023
	As Previously Reported		Revision Adjustment		As Currently Reported
Salaries and benefits	$	82,484	$	(588)	$	81,896	(a)
Total operating expenses	373,349		(588)		372,761
Operating loss	(67,498)		588		(66,910)

Loss before income tax	$	(98,033)	$	588	$	(97,445)
Income tax expense (benefit)	(10,626)		(988)		(11,614)		(d)
Net loss from continuing operations	(87,407)		1,576		(85,831)
Net loss from discontinued operations, net of tax	(163,222)		—		(163,222)
Net loss	(250,629)		1,576		(249,053)
Less: Net loss from continuing operations attributable to non-controlling interest	(19,543)		554		(18,989)		(b)
Less: Net loss from discontinued operations attributable to non-controlling interest	(30,472)		—		(30,472)
Net loss attributable to System1, Inc.	$	(200,614)	$	1,022	$	(199,592)

Amounts attributable to System1, Inc.:
Net loss from continuing operations	$	(67,864)	$	1,022	$	(66,842)	(a) (b) (d)
Net loss from discontinued operations	(132,750)		—		(132,750)
Net loss attributable to System1, Inc.	$	(200,614)	$	1,022	$	(199,592)

Basic and diluted net loss per share:
Continuing operations	$	(0.73)	$	0.02	$	(0.71)	(b)
Discontinued operations	(1.42)		—		(1.42)
Basic and diluted net loss per share	$	(2.15)	$	0.02	$	(2.13)

Weighted average number of shares outstanding - basic and diluted	93,281		368		93,649		(b)

The following tables reflect the revisions related to the previously issued condensed consolidated statement of comprehensive loss for the three and nine months ended September 30, 2023 (in thousands):


	Three Months Ended September 30, 2023
	As Previously Reported		Revision Adjustment		As Currently Reported
Net loss	$	(163,327)	$	190	$	(163,137)	(a) (d)
Other comprehensive loss:
Foreign currency translation loss	(188)		—		(188)
Comprehensive loss	(163,515)		190		(163,325)
Comprehensive loss attributable to non-controlling interest	(31,932)		247		(31,685)		(b)
Comprehensive loss attributable to System1, Inc.	$	(131,583)	$	(57)	$	(131,640)


	Nine Months Ended September 30, 2023
	As Previously Reported		Revision Adjustment		As Currently Reported
Net loss	$	(250,629)	$	1,576	$	(249,053)	(a) (d)
Other comprehensive loss:
Foreign currency translation loss	(109)		(1)		(110)		(c)
Comprehensive loss	(250,738)		1,575		(249,163)
Comprehensive loss attributable to non-controlling interest	(50,019)		554		(49,465)		(b)
Comprehensive loss attributable to System1, Inc.	$	(200,719)	$	1,021	$	(199,698)

The following tables reflect the revisions to the previously issued condensed consolidated statement of changes in stockholders' equity for the nine months ended September 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 $1.6 million, an increase of non-controlling interest of $1.8 million, a reduction in accumulated deficit of $1.0 million and a reduction in additional paid-in-capital of $1.0 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
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
Net loss	—	—		—	—		—		(131,433)		—		(31,894)		(163,327)
Issuance of restricted stock, net of forfeitures and shares withheld for taxes	656	—		—	—		(54)		—		—		—		(54)


	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
Other comprehensive loss	—	—		—	—		—		—		(165)		(23)		(188)
Stock-based compensation	—	—		—	—		7,102		—		—		—		7,102
Balance at September 30, 2023	94,258	$	9	21,513	$	2	$	851,277	$	(640,237)	$	(278)	$	27,588	$	238,361

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
Net loss	—	—		—	—		—		(57)		—		247		190		(a) (b) (d)
Issuance of restricted stock, net of forfeitures and shares withheld for taxes	—	—		—	—		258		—		—		(258)		—		(a) (b)
Stock-based compensation	—	—		—	—		(609)		—		—		615		6		(a) (b)
Balance at September 30, 2023	—	$	—	—	$	—	$	(1,012)	$	1,022	$	(1)	$	1,770	$	1,779

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


	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
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
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
Net loss	—	—		—	—		—		(131,490)		—		(31,647)		(163,137)
Issuance of restricted stock, net of forfeitures and shares withheld for taxes	656	—		—	—		204		—		—		(258)		(54)
Other comprehensive loss	—	—		—	—		—		—		(165)		(23)		(188)
Stock-based compensation	—	—		—	—		6,493		—		—		615		7,108
Balance at September 30, 2023	94,258	$	9	21,513	$	2	$	850,265	$	(639,215)	$	(279)	$	29,358	$	240,140

The following table reflects the revisions to the previously issued condensed consolidated statement of cash flows for the nine months ended September 30, 2023 (in thousands):


	As Previously Reported		Revision Adjustment		As Currently Reported
Cash Flows from Operating Activities
Net loss	$	(250,629)	$	1,576	$	(249,053)	(a) (d)
Stock-based compensation	43,909		203		44,112		(a)
Deferred tax benefits	(18,397)		(988)		(19,385)		(d)
Changes in operating assets and liabilities:
Accrued expenses and other current liabilities	1,708		(1,779)		(71)		(c)
Other non-current liabilities	(4,510)		988		(3,522)		(d)
Net cash used by operating activities	(5,908)		—		(5,908)

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Management’s estimates are based on historical information available as of the date of the condensed consolidated financial statements and various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from those estimates.

Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, valuation of goodwill, acquired intangible assets, assets held for sale and long-lived assets, valuation and recognition of stock-based compensation awards, income taxes, contingent consideration and determination of the fair value of the warrant liabilities. On an ongoing basis, management evaluates our estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities.

Risks

We are subject to certain business and operational risks, including competition from alternative technologies, as well as dependence on key Advertising Partners, key employees, key contracts, and growth to achieve our business and operational objectives.

As of September 30, 2024, we had two paid search advertising partnership agreements with Google and one paid search advertising partnership agreement with Microsoft. One of the Google agreements expires on February 28, 2025. Under certain circumstances, each of these agreements may be terminated by either us or the respective Advertising Partner immediately or with minimal notice.

We recorded revenue of $6.6 million from an Advertising Partner and an estimated contra revenue liability of $5.8 million at September 30, 2024, due to certain Network Partners related to traffic sent to our platform by those Network Partners that generated search advertising revenue. We have currently withheld payment to the impacted Network Partners pending our comprehensive ongoing review of whether such traffic generating the search advertising revenue was valid or otherwise complied with the terms of our commercial arrangements with such Network Partners. For any traffic determined to be either invalid or not in compliance with such commercial arrangements, the corresponding amounts may be withheld from our Network Partners as a result of such violations and, in such cases, would be recognized as revenue in the period in which such final determinations are made.