System1, Inc. — FY2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021. This filing’s audited financial statements are for Trebia Acquisition Corp., System1’s SPAC predecessor, which had not begun operating business activities by year-end. System1 completed its business combination with S1 Holdco and Protected on January 27, 2022. The filing says the acquired businesses’ 2021 financial statements and related operating-company MD&A were to be provided in a separate Form 8-K amendment; the figures below therefore do not represent System1’s combined operating results.
Business context
System1 describes an omnichannel customer-acquisition platform built around its responsive acquisition marketing platform (RAMP), which uses machine learning to acquire and monetize consumer-intent traffic through advertising networks, owned websites and advertiser relationships. Its portfolio includes sites such as MapQuest, Info.com, Startpage and HowStuffWorks. The business combination added Protected, whose TotalAV security and privacy software had 2.3 million paying subscribers and $144.6 million of revenue in 2021, according to the filing’s business discussion; those figures are not the audited financial results presented in this 10-K.
Financial results and liquidity
| Metric | FY2021 | Prior period |
|---|---|---|
| Operating revenue | None; predecessor was a blank-check company and generated no operating revenue | None |
| Operating and formation costs | $13.3 million | $0.8 million from inception on February 11, 2020 through December 31, 2020 |
| Net income (loss) | $21.0 million | $(29.9) million for the 2020 inception period |
| Cash used in operating activities | $1.2 million | $0.4 million for the 2020 inception period |
| Cash outside Trust Account | $53,147 at December 31 | $843,643 |
| Cash in Trust Account | $517.5 million at December 31 | $517.5 million |
| Current liabilities | $13.0 million | $0.6 million |
| Warrant liability | $29.3 million | $53.0 million |
| Deferred underwriting fee payable | $18.1 million | $18.1 million |
The FY2021 net income was driven by non-cash gains: $23.7 million from the change in warrant fair value, $7.5 million from the change in FPA fair value and a $3.2 million gain on termination of the forward purchase agreement, offset by operating and formation costs. Accordingly, it does not indicate operating profitability; revenue-based margins are not meaningful. Operating cash flow also reflected a $12.1 million benefit from changes in operating assets and liabilities.
At year-end, the predecessor reported a $12.9 million working-capital deficit and substantial doubt about its ability to continue as a going concern before the transaction. Management said closing the business combination and obtaining new financing alleviated that doubt. The $450,000 sponsor note outstanding at year-end was repaid at closing. The filing reported no long-term debt at December 31, 2021. It describes post-closing commitments for a $400 million term loan and a $50 million revolver; the text here does not establish their drawn balances after closing.
Changes, outlook, risks and unusual items
- The business combination closed after the reporting date, changing the company from a SPAC into the public parent of System1 and Protected. The Class A shares began NYSE trading as SST on January 28, 2022.
- Management plans to grow existing advertising lines, develop direct-advertiser relationships, expand subscription products, pursue acquisitions and selectively expand internationally. The filing provides no quantified operating-company guidance or forecast.
- System1 states that 19% of advertiser spend on its platform came from outside the United States in 2021, versus 8% in the prior year. RAMP processed more than 15 million campaign optimizations and ingested 5 billion rows of data daily, according to the business discussion.
- Major risks include dependence on Google and other traffic-acquisition partners, cost-effective marketing, advertising demand and performance, privacy and data-protection rules, cybersecurity and platform reliability, competition, acquisition integration, financing constraints, and resale or dilution of shares.
- Management identified material weaknesses in financial reporting controls, including insufficient accounting resources and segregation of duties, acquisition accounting and review controls, formal financial-reporting procedures, complex financial-instrument accounting, and IT general controls. Disclosure controls and internal control over financial reporting were deemed ineffective at December 31, 2021. Remediation was underway; effectiveness had not yet been demonstrated.
- The company is defending a trademark and unfair-competition lawsuit over its use of “System1.” A motion to dismiss filed January 14, 2022 was pending; the filing does not state a clear quantified exposure.
- The tax receivable agreement provides certain former owners 85% of specified tax benefits actually realized by System1, subject to its terms and assumptions.
Most important facts for investors to verify
- Review the separate Form 8-K amendment and acquired-business financial statements for S1 Holdco and Protected to assess actual combined revenue, earnings, cash flow, debt and liquidity.
- Confirm the post-combination debt drawn, interest costs, covenant requirements and available liquidity, including the status of the term loan and revolver.
- Track remediation and independent testing of the disclosed material weaknesses, and any subsequent restatements or reporting delays.
- Assess the outcome and potential financial impact of the “System1” trademark litigation.
- Review transaction-related share issuance, lockups, warrants, earnout or conversion conditions, and the tax receivable agreement’s potential cash obligations.