System1, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023. Amounts below are in millions of dollars unless noted. System1 operates an advertising customer-acquisition platform through its RAMP technology. Its subscription software business, Protected, was classified as held for sale and discontinued operations; continuing-operations figures generally exclude Protected. The merger accounting change in 2022 limits comparability of some periods.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Change / context |
|---|---|---|---|
| Continuing-operations revenue | $87.8 | $156.9 | Down 44% |
| Operating loss | $(20.8) | $(355.2) | Prior period included $340.1 goodwill impairment |
| Net loss from continuing operations | $(26.1) | $(299.6) | Prior period also included the impairment |
| Net loss from discontinued operations | $(137.2) | $(14.1) | 2023 includes $118.8 of impairment charges |
| Total net loss | $(163.3) | $(313.7) | Net loss attributable to System1: $(131.4); $(1.40) per share |
- Revenue mix: Owned and Operated Advertising revenue was $66.2, down 54%; Partner Network revenue was $21.6, up 63%. Management cited lower advertiser and consumer demand, fewer O&O sessions and lower revenue per session. Partner Network growth reflected newer partners and increased traffic, partly offset by lower revenue per session.
- Margins: Cost of revenue was 58% of revenue versus 71% a year earlier. Segment adjusted gross profit was $39.2, down 18%; the filing does not present this company-defined measure as a GAAP gross margin.
- Nine-month results: Continuing revenue was $305.9, down 42% on the filing’s stated comparison. Continuing net loss was $87.4; total net loss was $250.6, including $163.2 from discontinued operations.
- Cash flow: For the nine months, operating cash outflow was $5.9, investing cash outflow $6.9 and financing cash outflow $1.1. Cash and cash equivalents were $4.9 at quarter-end. Cash, cash equivalents and restricted cash, including amounts in assets held for sale, totaled $25.0.
- Debt and balance sheet: Term Loan principal was $370.0 and the 2022 revolving facility was fully drawn at $50.0; total debt carrying value, net of fees, was $403.3. Management cited approximately $15.0 of principal and interest payments per quarter. Total assets were $927.5, total liabilities $687.1 and stockholders’ equity $240.5.
Material changes, outlook and risks
- Protected sale process: System1 received a non-binding indication of intent from significant shareholder JDI to acquire Protected for $240.0 in cash, assumption of certain potential earnouts and delivery of approximately 29.1 million System1 shares held by JDI and related persons. A board special committee is evaluating the proposal and alternatives; no definitive sale agreement was disclosed. Protected’s held-for-sale classification prompted $115.5 of goodwill impairment and $3.3 of additional held-for-sale impairment. Its Q3 revenue was $54.6.
- Going concern: Management concluded that substantial doubt exists about the Company’s ability to continue as a going concern for the twelve months following issuance. The filing cites deteriorating demand, increased customer acquisition costs, the loss of a significant Network Partner, limited cash and no remaining availability under the 2023 related-party revolving note. Covenant noncompliance could trigger default and cross-default provisions. Management’s plans include cost reductions, additional financing and the potential Protected sale; execution and proceeds are uncertain.
- Subsequent financing: After quarter-end, the Company obtained a $10.0 secured loan for Protected and a $2.5 related-party term loan. A November receivables-factoring agreement provides an initial maximum advance of $5.0, with no amount drawn as of the filing’s issuance. The company also reported approximately $14.5 in annualized savings from headcount reductions.
- Concentration and contingencies: Google generated 84% of Q3 revenue; the filing also identifies dependence on key advertising and network partners. The Company disclosed an October California class-action complaint concerning subscription auto-renewal disclosures and stated it intends to defend itself. Other disclosed legal matters were settled or accrued at immaterial amounts.
- Controls: Disclosure controls were not effective, and material weaknesses in internal control over financial reporting remained unremediated. The filing describes prior-period restatements and immaterial adjustments, and outlines a remediation plan. Management cautions that the weaknesses could permit material misstatements not to be prevented or detected timely.
- Guidance: The filing provides no quantified revenue, earnings or cash-flow guidance. Management says macroeconomic conditions make the impact on revenue and results difficult to predict.
Key facts for investors to verify
- Whether the JDI Protected proposal becomes a definitive transaction, its final terms, timing and net cash proceeds.
- Near-term cash needs, financing availability, debt-service capacity and compliance with leverage covenants and cross-default provisions.
- The pace of recovery, if any, in O&O sessions and revenue per session, and the durability of Partner Network growth after the loss of a significant partner.
- Protected’s remaining liabilities, earnout obligations and separation costs, and how its sale or continued ownership affects liquidity.
- Progress in remediating internal-control weaknesses and any further accounting adjustments or restatements.