Business context and reporting period
This is Trebia Acquisition Corp.’s unaudited Form 10-Q for the quarter ended September 30, 2021—not an operating-company 10-Q for System1, Inc. Trebia was a SPAC and had not begun operations or generated operating revenue. Its principal activity was seeking a business combination. In June 2021, Trebia agreed to combine with System1 and Protected.net; the transaction had not closed as of the reporting date.
Financial results and condition
| Metric | Quarter ended September 30, 2021 | Nine months ended September 30, 2021 |
|---|---|---|
| Operating revenue | None | None |
| Formation and operating costs | $0.781 million | $2.747 million |
| Net income | $6.100 million | $23.962 million |
| Basic and diluted earnings per share | $0.09 | $0.37 |
| Net cash used in operating activities | Not separately stated | $1.117 million |
Net income primarily reflected non-cash fair-value gains: $6.881 million on warrant liabilities in the quarter; year to date, $16.055 million on warrants, $7.494 million on the forward purchase agreement (FPA), and a $3.160 million gain on FPA termination. These gains do not represent operating performance or operating cash generation. The comparable 2020 figures cover the three-month quarter and the period from inception through September 30, respectively, rather than matching nine-month periods.
At September 30, Trebia reported $517.500 million in its trust account and $177,107 in cash outside the trust, against a $2.307 million working-capital deficit. Total assets were $517.799 million; total liabilities were $57.669 million, including $36.951 million of warrant liabilities, a $450,000 related-party note, and $18.113 million of deferred underwriting fees. The $517.500 million of redeemable Class A shares was presented outside permanent equity. Trebia reported a $57.370 million shareholders’ deficit. The filing reports no revenue-based margins and no long-term debt at the reporting date.
Changes versus prior period and unusual items
- Q3 2021 net income of $6.100 million compared with a restated $0.944 million net loss in Q3 2020, largely because the warrant fair-value movement changed from a gain of $1.529 million to a gain of $6.881 million.
- Nine-month 2021 net income of $23.962 million compared with a restated $9.432 million loss from inception through September 2020. The periods are not directly comparable in length.
- Cash outside the trust fell from $843,643 at December 31, 2020 to $177,107 at September 30, 2021. Trebia drew $450,000 under non-interest-bearing, unsecured sponsor notes, due at the earlier of May 31, 2022 or a business-combination closing.
- The company restated previously issued financial statements for classification and earnings-per-share errors involving redeemable Class A shares. It said the restatement did not affect total assets, total liabilities, cash flows, or net income.
Transaction, outlook, risks, and contingencies
The proposed System1/Protected transaction contemplated approximately $462.5 million of cash consideration and $667.5 million of equity consideration, subject to adjustments. If redemptions exceed $417.5 million, cash consideration would be reduced and equity consideration increased dollar-for-dollar under the stated terms; further cash reductions may be elected if redemptions exceed $462.5 million. Proposed financing included a $400 million first-lien term loan and a $50 million revolving facility, subject to conditions. Cannae agreed to provide up to $200 million toward redemption backstops; the filing described additional seller backstop arrangements as potentially covering redemptions in full.
Trebia’s business-combination deadline was June 19, 2022. Management stated that low working capital and the need for additional financing raised substantial doubt about Trebia’s ability to continue as a going concern through that date. Sponsor financing was not assured; absent additional capital, Trebia might need to reduce spending or suspend pursuit of a transaction. If no combination is completed by the deadline, public shares are generally subject to redemption from the trust, while warrants may expire worthless. COVID-19 was identified as a possible impediment to finding or completing a transaction, with its impact not readily determinable.
No specific operating guidance was provided. Disclosure controls were deemed ineffective because of a material weakness in accounting for complex financial instruments. Management described remediation steps, but gave no assurance they would fully address the weakness. The filing reported no legal proceedings.
Most important facts for investors to verify
- Whether and when the proposed business combination closed, and the final terms, approvals, financing conditions, and redemption levels.
- The final funding and debt structure, including whether the proposed term loan, revolver, and redemption backstops were available and on what terms.
- Whether Trebia obtained enough working capital to meet expenses through the business-combination deadline.
- The effect of the restatement and the status and effectiveness of remediation for the material weakness in financial reporting controls.
- How much of reported earnings came from non-cash changes in warrant and FPA fair values rather than operating activity.