SYSTEM1, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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SYSTEM1 MANAGEMENT REPORT ON FINANCIAL POSITION AND RESULTS OF OPERATIONS

Unless otherwise indicated or the context otherwise requires, references in this
section to "the Company," "System1," "we," "us," "our" and other similar terms
refer to System1 Inc. and its subsidiaries.


The following discussion and analysis of the financial condition and results of
operations of System1 should be read together with our condensed consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q, as well as our audited consolidated financial statements
and related notes included in our prospectus, dated April 13, 2022, filed with
the Securities and Exchange Commission, or SEC. The following discussion and
analysis should also be read together with the section entitled "Organization
and description of business" as of March 31, 2022 (Successor) and for the period
from January 1, 2022 through January 26, 2022 (Predecessor), the period from
January 27, 2022 through March 31, 2022 (Successor) and for the year ended
December 31, 2021. In addition to historical information, the following
discussion and analysis contains forward-looking statements. Our actual results
may differ significantly from those projected in such forward-looking
statements. Factors that might cause future results to differ materially from
those projected in such forward-looking statements include, but are not limited
to, those discussed in the sections entitled "Risk Factors" and "Cautionary
Statement Regarding Forward-Looking Statements." Certain amounts may not foot
due to rounding, and all figures presented are in thousands with the exception
of percentages and per share figures.


Company presentation

We operate an omnichannel customer acquisition platform, delivering high-intent
customers to advertisers and selling antivirus software packages to end user
customers. We provide these services through our proprietary responsive
acquisition marketing platform, or RAMP. Operating seamlessly across major
advertising networks and advertising category verticals to acquire users on our
behalf, RAMP allows us to monetize these acquired users through its
relationships with third party advertisers and advertising networks, which we
refer to its "Advertising Partners". RAMP also allows third party advertising
platforms and publishers, which we refer to as our "Network Partners", to send
user traffic to, and monetize user traffic on, our owned and operated websites.
RAMP operates across our network of owned and operated websites and related
products, allowing us to monetize user traffic that we source from various
acquisition marketing channels, including Google, Facebook, Taboola, Snapchat
and TikTok.


Through RAMP, we process approximately almost 19 million daily advertising
campaign optimizations and ingest 6 billion rows of data daily across 40
advertising verticals. We are able to efficiently monetize user intent by
linking data on consumer engagement, such as first party search data, with data
on monetization and advertising spend. This context-enriched data, combined with
our proprietary and data science driven algorithms, creates a closed-loop system
that is not reliant on personally identifiable information or information
obtained through third-party cookies, but which allows RAMP to efficiently match
consumer demand with the appropriate advertiser or advertising experience across
advertising verticals.


S1 Holdco, LLC ("S1 Holdco"), one of entities acquired in the merger described
below, was founded in 2013 with a focus on monetizing user traffic acquired by
its network. Since launching, it has expanded to support additional advertising
formats across numerous advertising platforms, and have acquired several leading
websites, enabling it to control user acquisition and experience, and monetize
user traffic on its behalf. Today S1 Holdco owns and operates over 40 websites,
including leading search engines like info.com and Startpage.com, and publishing
digital media sites and utilities such as HowStuffWorks, Mapquest and
ActiveBeat.


Protected.net Group Limited, another entity acquired in the Merger described
below, provides a comprehensive antivirus product solution to its customers that
provides robust and resilient protection against online threats. The product
consists of a core antivirus software, with the ability to add additional
products and services, to build up a security package based on a customer's
needs. These products include unlimited devices, Adblock, ID Protect and
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are managed to ensure they provide a value-added service to the customer base.
The software is sold in either a monthly or annual subscription predominantly
through the flagship brand TotalAV. As of March 31, 2022, Protected had over 2.2
million active subscribers for its products.

The Company's primary operations are in the United States; however, the Company
also has operations in Canada, the United Kingdom and the Netherlands.
Operations outside the United States are subject to risks inherent in operating
under different legal systems and various political and economic environments.
Among the risks are changes in existing tax laws, possible limitations on
foreign investment and income repatriation, government foreign exchange
controls, and exposure to currency exchange fluctuations. The Company does not
engage in hedging activities to mitigate its exposure to fluctuations in foreign
currency exchange rates.

The Company was deemed the accounting acquirer in the Merger based on an
analysis of the criteria outlined in Accounting Standards Codification 805,
Business Combinations. S1 Holdco was deemed to be the predecessor entity based
on an analysis of the criteria outlined in the Accounting Standards Codification
805, Business Combinations. Accordingly, the historical financial statements of
S1 Holdco became the historical financial statements of the combined company,
upon the consummation of the Merger. As a result, the financial statements
included in this report reflect (i) the historical operating results of S1
Holdco prior to the Merger; and (ii) the combined results of the Company
following the closing of the Merger. The accompanying financial information
include a predecessor period, which include the periods through January 26, 2022
concurrent with the Merger discussed below, and the successor period from
January 27, 2022 through March 31, 2022. A black-line between the Successor and
Predecessor periods has been placed in the condensed consolidated financial
statements and in the tables to the notes to the statements to highlight the
lack of comparability between these two periods and differentiate the cut-off of
these periods.


The Merger

On June 28, 2021, the Company entered into a Business Combination Agreement (as
amended on November 30, 2021, January 10, 2022 and January 25, 2022), (the
"Business Combination Agreement") by and among S1 Holdco, Trebia, and Protected
(collectively, the "Companies"). On January 26, 2022 (the "Closing Date"), the
Company consummated the business combination (the "Merger") pursuant to the
Business Combination Agreement. Following the consummation of the Merger, the
combined company is organized via an "Up-C" structure, in which substantially
all of the assets and business operations of System1 are held by S1 Holdco. The
combined Companies' business continues to operate through the subsidiaries of S1
Holdco and Protected. Additionally, Trebia's ordinary shares, warrants and units
ceased trading on the New York Stock Exchange ("NYSE"), and System1 Inc.'s Class
A common stock and the Public Warrants began trading on the NYSE on January 28,
2022 under the symbols "SST" and "SST.WS," respectively.

The consideration paid to the existing equity holders of S1 Holdco and Protected
in connection with the Merger was a combination of cash, Class A common stock
and Class C common stock.

The total cash consideration under the business combination agreement (“Cash Contribution at Closing”) was $444,948.

The aggregate equity consideration paid under the Business Combination Agreement
and/or retained S1 Holdco Class B Units was $619,738, consisting of (a) the
aggregate equity consideration payable under the Business Combination Agreement,
consisting of shares of Class A common stock (valued at $10.00 per share) and
Replacement Awards, and (b) the aggregate Class B Units in S1 Holdco retained by
S1 Holdco equity holders at the Closing (valued at $10.00 per share).

In connection with the Merger, System1 and Cannae Holdings, Inc. ("Cannae")
entered into the Backstop Agreement (the "Backstop Agreement") whereby Cannae
agreed, subject to the other terms and conditions, to subscribe for System1
Class A common stock in order to fund a certain amount of redemptions by
shareholders of System1 to be redeemed at the closing of the Merger. As a result
of shareholder redemptions, System1 shareholders
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provided $7,031 of the cash used to fund the Closing Cash Consideration, and
Cannae provided $246,484 of the cash used to fund the Closing Cash Consideration
pursuant to its obligations under the Backstop Agreement.

Concurrently with the consummation of the Merger, System1 entered into a tax
receivable agreement with the minority holders of S1 Holdco, (the "Tax
Receivable Agreement"), pursuant to which, among other things, the parties to
the Tax Receivable Agreement have agreed to the allocation and payment of 85% of
the actual savings, if any, in U.S. federal, state and local income tax that
System1 may realize as a result of certain tax benefits (if any) related to the
transactions contemplated by the Business Combination Agreement and future
exchanges of Class B Units in S1 Holdco (together with the corresponding shares
of the Company's shares of Class C common stock) in exchange for shares of the
Company's Class A common stock. No amounts have been recorded as of March 31,
2022, related to the Tax Receivable Agreement as any tax savings are uncertain.

COVID-19[feminine]

The worldwide spread of COVID-19 has resulted, and is expected to continue to
result, in a global slowdown of economic activity which is likely to decrease
demand for a broad variety of goods and services, including those provided by
our clients, while also disrupting sales channels and advertising and marketing
activities for an unknown period of time until the virus is contained or
economic activity normalizes. Our revenue growth and results of operations have
been resilient despite the headwinds created by the COVID-19 pandemic. The
extent to which ongoing and future developments related to the global impact of
the COVID-19 pandemic, including related vaccination measures and inoculation
rates designed to curb its spread, continue to impact the business, financial
condition and results of operations and cash flows, cannot be predicted with
certainty. Many of these ongoing and future developments are beyond our control,
including the speed of contagion or the spread of new variants, the development,
distribution and implementation of effective preventative or treatment measures,
including vaccines (and vaccination rates), the scope of governmental and other
restrictions on travel, discretionary services and other activity, and the
public reactions and receptiveness to these developments. See "Risk Factors" of
the Amendment No. 3 to FORM S-1 filed with the U.S. Securities and Exchange
Commission on April 13, 2022 for further discussion of the adverse impacts of
the COVID-19 pandemic on our business.



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Components of our operating results

Sector results:

We have three reportable segments: owned and operated, partner network and subscription.


Comparison of Results of Operations for the period from January 1, 2022 through
January 26, 2022 (Predecessor) and for the period from January 27, 2022 through
March 31, 2022 (Successor) with the three months ended March 31, 2021
(Predecessor)


                                                    Successor                     Predecessor              Predecessor
                                                                                  Period from
                                               Period from January              January 1, 2022
                                                 27, 2022 through               through January         Three Months Ended
                                                  March 31, 2022                    26, 2022              March 31, 2021
Revenue:
Owned and Operated                             $         130,258                $      49,791          $         139,426
Partner Network                                            7,976                        2,921                      8,135
Subscription                                              27,874                            -                          -
Total Revenue                                  $         166,108                $      52,712          $         147,561




                                              Successor                   Predecessor              Predecessor
                                             Period from                  Period from
                                           January 27, 2022             January 1, 2022
                                            through March               through January         Three Months Ended
                                               31, 2022                     26, 2022              March 31, 2021
Segment Adjusted Gross Profit:
Owned and Operated                         $      32,791                $       9,310          $          32,128
Partner Network                                    7,976                        2,921                      8,135
Subscription                                      12,647                            -                          -
Total Adjusted Gross Profit                $      53,414                $      12,231          $          40,263



Revenue

Revenue is earned from revenue-sharing arrangements with the Company's Network
Partners for the use of the Company's RAMP platform and related services
provided to them to direct advertising by the Advertising Partners to their
advertising space. The Company has determined it is the agent in these
transactions and reports revenue on a net basis, because (a) the Company does
not control the underlying advertising space, (b) the Company does not acquire
the traffic and does not have risk of loss in connection therewith, and (c) the
pricing is in the form of a substantively fixed-percentage revenue-sharing
arrangement. The Company reports this revenue on a net basis for the amount
retained from its revenue-sharing arrangements representing the difference
between amounts received from the Advertising Partners, less amounts remitted to
the Network Partners based on underlying contracts.

The Company also earns revenue by directly acquiring traffic to its owned and
operated websites and utilizing its own RAMP platform and related services to
connect its Advertising Partners to its owned and operated websites. For this
revenue stream, the Company is the principal in the transaction and reports
revenue on a gross basis for the amount received from the Advertising Partners.
For this revenue, the Company has determined that it is the principal since it
has a risk of loss on the traffic that it is acquiring for monetization with its
Advertising Partners, and, in the
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In the case of its owned and operated websites, the Company maintains the website, provides the content, and bears the cost and risk of loss associated with advertising space on its websites.

The Company recognizes revenue when the traffic is delivered to its Advertising partners based on cost per click or cost per thousand impressions. The payment term with its Advertising partners is usually 30 days.

The Company, through Protected.net, is also engaged in selling security software
subscriptions to customers. The subscription business provides real-time
antivirus protection, a safe-browsing feature, adblocking, identity-theft
protection, blocking of malicious websites and data breach monitoring.
Subscription revenue is primarily derived from the (i) delivery of the antivirus
software and (ii) delivery of the additional add-on service(s), which all are
provided on a fixed-price basis. The performance obligations related to
subscription, maintenance and support are satisfied over the length of the
contract, and the associated subscription revenue is recognized over the
contract term on a ratable basis, which is consistent with transfer of control.
The Company's services rendered to customers are generally paid for in advance
with cash receipts recorded as deferred revenue and revenue recognized over
time, generally the annual subscription period.

The timing of customer billing and payment relative to the start of the service
period varies from contract to contract; however, the Company bills many of its
customers in advance of the provision of services under its contracts, resulting
in contract liabilities consisting of deferred revenue ("contract liabilities").
Deferred revenue represents billings under noncancelable contracts before the
related product or service is transferred to the customer. The portion of
deferred revenue that is anticipated to be recognized as revenue during the
succeeding twelve-month period is recorded as deferred revenue and the remaining
portion is recorded as deferred revenue, noncurrent.

Revenue may fluctuate from period to period due to a number of factors including
seasonality and the shift in mix of user acquisition sources from Advertising
Partners, and renewal rates of customers for subscription services.

Functionnary costs

We classify our operating expenses into the following four categories:

Cost of Revenues. Cost of revenues primarily consists of traffic acquisition
costs, which are the costs to place advertisements to acquire customers to the
Company's websites and services, as well as content, publishing, domain name
registration costs, and licensing costs to provide mapping services to
Mapquest.com, and licensing costs related to the utilization of antivirus engine
licensing costs related to APIs for the antivirus product.. The Company does not
pay any up-front payments, incentive payments or bonuses and such costs are
expensed as incurred.

Salaries, Commissions, and Benefits. Salaries, commissions and benefits expenses
include salaries, bonuses, stock-based compensation, costs incurred in the
preliminary project planning and post-implementation stages of internal use
software development, employee benefits costs associated with our executive,
finance, legal, human resources, compliance, and other administrative personnel,
as well as accounting and legal professional services fees.

We plan to continue investing in enterprise infrastructure to support our growth. We expect salaries, commissions and benefits to increase in absolute dollars over future periods.

Selling, general and administrative expenses. Selling, general and administrative expenses include fees for professional services, accommodation expenses, travel and entertainment. These costs are expensed as incurred.

We plan to continue investing in enterprise infrastructure to support our growth. We expect general and administrative expenses to increase in absolute dollars in future periods.

Depreciation and Amortization. Depreciation and amortization expenses are
primarily attributable to the Company's capital investment(s) and consist of
fixed asset depreciation and amortization of intangible assets considered to
have finite lives.
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Other expenses

Other expenses include the following:

Interest charges. Interest expense is primarily related to our debt, which bears a variable interest rate.

Loss on fair value of warrants. The loss on fair value of warrants relates to the mark-to-market valuation of our public and private warrants classified as liabilities.

Provision for (benefit from) income taxes

The Company is the managing member of S1 Holdco and, as a result, consolidates
the financial results of S1 Holdco in its condensed consolidated financial
statements. S1 Holdco is a pass-through entity for U.S. federal and most
applicable state and local income tax purposes. As an entity classified as a
partnership for tax purposes, S1 Holdco is not subject to U.S. federal and
certain state and local income taxes. Any taxable income or loss generated by S1
Holdco is passed through to its members, including the Company. The Company is
taxed as a corporation and pays corporate federal, state and local taxes with
respect to income allocated from S1 Holdco based on the Company's economic
interest in S1 Holdco. Various subsidiaries of the Company are subject to income
tax in the United States and in other countries.


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Operating results

The following tables set forth our consolidated results of operations and our
consolidated results of operations as a percentage of revenue for the periods
presented.



                                                 Successor                      Predecessor               Predecessor
                                                                                Period from
                                            Period from January               January 1, 2022
                                             27, 2022 through                 through January         Three Months Ended
                                              March 31, 2022                     26, 2022               March 31, 2021

(in thousands)
Revenue                                    $          166,108                $       52,712          $          147,561
Operating expenses:
Cost of revenues                                      120,131                        41,760                     110,785
Salaries, commissions, and benefits                    43,459                        35,175                      15,195
Selling, general, and administrative                   14,981                        14,817                       6,950
Depreciation and amortization                          23,311                         1,000                       3,689
Total operating expenses                              201,882                        92,752                     136,619
Operating (loss) income                               (35,774)                      (40,040)                     10,942
Interest expense                                        4,776                         1,049                       4,048
Loss on warrant fair value                             13,761                             -                           -
(Loss) income before income tax                       (54,311)                      (41,089)                      6,894
Income tax expense                                    (16,252)                         (629)                        151
Net (loss) income                          $          (38,059)               $      (40,460)         $            6,743
Net (loss) attributable to non-controlling
interest                                               (8,068)                            -                           -
Net (loss) income attributable to System1,
Inc.                                       $          (29,991)               $      (40,460)         $            6,743




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                                                  Successor                           Predecessor                     Predecessor
                                           Period from January 27,              Period from January 1,
                                           2022 through March 31,              2022 through January 26,        Three Months Ended March
                                                    2022                                 2022                          31, 2021
Revenue                                                     100  %                                100  %                          100  %
Operating expenses:
Cost of revenues                                             72  %                                 79  %                           75  %
Salaries, commissions, and benefits                          26  %                                 67  %                           10  %
Selling, general, and administrative                          9  %                                 28  %                            5  %
Depreciation and amortization                                14  %                                  2  %                            2  %
Total operating expenses                                    121  %                                176  %                           93  %
Operating (loss) income                                     (21) %                                (76) %                            7  %
Interest expense                                              3  %                                  2  %                            3  %
Loss on warrant fair value                                    8  %                                  -  %                            -  %
(Loss) income before income tax                             (32) %                                (78) %                            5  %
Income tax expense                                              9%                                    1%                               -
Net (loss) income                                           (23) %                                (77) %                            5  %
Net (loss) attributable to non-controlling
interest                                                      5  %                                  -  %                            -  %
Net (loss) income attributable to System1,
Inc.                                                        (18) %                                (77) %                            5  %


* Percentages may not add up due to rounding


The comparability of our operating results for the three months ended March 31,
2022 (Successor) compared to the three months ended March 31, 2021 (Predecessor)
was impacted by the Merger, as discussed above, and the acquisitions of
RoadWarrior and CouponFollow in the Successor period portion of the quarter
ended March 31, 2022. In the discussion of our results of operations for these
periods we may quantitatively disclose the impact of our acquired businesses to
the extent they remain ascertainable. Expense contributions from our recent
acquisitions for each of the respective period comparisons generally were not
separately identifiable due to the integration of these businesses into our
existing operations.

Revenue


                                                  Successor                              Predecessor                         Predecessor
                                           Period from January 27,               Period from January 1, 2022        Three Months Ended March 31,
             (in thousands)              2022 through March 31, 2022               through January 26, 2022                     2021
Revenue                                  $                   166,108             $                     52,712       $                     147,561



The increase in revenue in 2022 was primarily due to the acquisition of
Protected which contributed to subscription revenue, and growth in the Owned and
Operated segment. Revenue from Protected was $27,874, and the Owned and Operated
revenue segment increased $40,623 driven by an increase of 234 million sessions
with Revenue Per Session ("RPS") flat. Partner Network segment revenue increased
$2,762 as RPS increased by approximately $0.01, offsetting a decrease of 31
million sessions.



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Cost of revenue

                                               Successor                          Predecessor                   Predecessor
                                        Period from January 27,              Period from January 1,
                                        2022 through March 31,              2022 through January 26,        Three Months Ended
  (in thousands, except percentages)             2022                                 2022                    March 31, 2021
Cost of revenues                        $               120,131             $                 41,760       $             110,785
Percent of revenue                                     72     %                             79     %                       75  %



The increase in cost of revenues in 2022 was due to an increase in user
acquisition costs of $30,754 in the Owned and Operated segment and the
acquisition of Protected which contributed $18,414 to the cost of revenue. User
acquisition costs for the three months ended March 31, 2022 were $138,052 and
drove 975 million sessions at $0.14 Cost Per Session ("CPS"), compared to user
acquisition costs of $107,298, driving 741 million sessions at $0.15 CPS for the
same period in 2021 (Predecessor). User acquisition costs accounted for 85% and
97% of total cost of revenue for the three months ended March 31, 2022
(Successor) and 2021 (Predecessor), respectively.

Salaries, commissions and benefits

                                               Successor                          Predecessor                   Predecessor
                                        Period from January 27,              Period from January 1,
                                        2022 through March 31,              2022 through January 26,        Three Months Ended
  (in thousands, except percentages)             2022                                 2022                    March 31, 2021
Salaries, commissions and benefits      $                43,459             $                 35,175       $              15,195
Percent of revenue                                     26     %                             67     %                       10  %




The increase in salaries, commissions, and benefits was primarily due to an
increase in stock-based compensation of $54,865 driven by payments associated
with the Company's equity awards as a result of the Merger, of which $27,698 was
recognized upon the close of the Merger, an increase in salaries and bonus
related expenses of $5,013 due to increased headcount related to the Merger and
the acquisitions of Roadwarrior and CouponFollow, and an increase in expenses
related to the Merger transaction of $3,567 for taxes on equity payouts and
transaction bonuses.

Selling, general and administrative expenses

                                                 Successor                           Predecessor                  Predecessor
                                          Period from January 27,                Period from January
                                           2022 through March 31,                  1, 2022 through            Three Months Ended
   (in thousands, except percentages)               2022                          January 26, 2022              March 31, 2021
Selling, general, and administrative     $           14,981                     $       14,817              $            6,950
Percent of revenue                                        9       %                         28      %                        5    %



The increase in selling, general, and administrative expense was primarily due
to an increase of $24,653 in costs associated with the Merger, an increase in
audit and other professional fees of $2,281 to support increased compliance
requirements as a public company, an increase in business taxes of $1,551, an
increase in network and bandwidth costs of $862, and an increase in corporate
insurance costs of $770 as a result of becoming a public company.



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Depreciation and amortization
                                               Successor                          Predecessor                   Predecessor
                                        Period from January 27,              Period from January 1,
                                        2022 through March 31,              2022 through January 26,        Three Months Ended
  (in thousands, except percentages)             2022                                 2022                    March 31, 2021
Depreciation and amortization           $                23,311             $                  1,000       $               3,689
Percent of revenue                                     14     %                              2     %                        2  %



The increase in amortization expense is mainly attributable to the addition of intangible assets following the merger.

Interest expense

                                               Successor                          Predecessor                   Predecessor
                                        Period from January 27,              Period from January 1,
                                        2022 through March 31,              2022 through January 26,        Three Months Ended
  (in thousands, except percentages)             2022                                 2022                    March 31, 2021
Interest expense                        $                 4,776             $                  1,049       $               4,048
Percent of revenue                                      3     %                              2     %                        3  %



The increase in interest expense was due to an increase in our outstanding loan
balances as a result of the new facility which we entered into as part of the
Merger. Our outstanding loan balance, excluding loan origination fees, was
$449,000 and $181,924 at March 31, 2022 (Successor) and 2021 (Predecessor),
respectively.


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Loss on warrant fair value

                                               Successor                          Predecessor                   Predecessor
                                        Period from January 27,              Period from January 1,
                                        2022 through March 31,              2022 through January 26,        Three Months Ended
  (in thousands, except percentages)             2022                                 2022                    March 31, 2021
Loss on warrant fair value              $                13,761             $                      -       $                   -
Percent of revenue                                      8     %                              -     %                        -  %


The loss on the fair value of the warrants in 2022 is due to a change in the fair value of the liabilities related to the warrants due to the increase in the market value of the Company’s Class A common shares.

Provision for (benefit from) income taxes

                                                Successor                           Predecessor                  Predecessor
                                         Period from January 27,                Period from January
                                          2022 through March 31,                  1, 2022 through            Three Months Ended
  (in thousands, except percentages)               2022                          January 26, 2022              March 31, 2021
Provision for (benefit from) income
taxes                                   $          (16,252)                    $         (629)             $              151
Effective tax rate                                   29.92       %                       1.53      %                     2.19    %




The income tax expense varied from the expense calculated using the federal
statutory income tax rate for the period from January 1, 2022 through January
26, 2022 (Predecessor), the period from January 27, 2022 through March 31, 2022
(Successor), and for the three months ended March 31, 2021 (Predecessor),
primarily due to income (loss) from non-taxable pass-through entities related to
non-controlling interests, state taxes, foreign rate differential, change in
fair value of warrant liabilities, non-deductible expenses, outside basis
adjustments, and Global Intangible Low-taxed Income.

Cash and capital resources

As of March 31, 2022 (Successor) and December 31, 2021 (Predecessor), we had
cash and cash equivalents of $42,178 and $47,896, respectively, which consists
of amounts held as bank deposits.


To date, the Company's available liquidity and operations have been financed
through the initial public offering of Trebia, the backstop agreement, external
loan facilities, and cash flows from operations. The Company is subject to
certain business risks, including dependence on key employees, dependence on key
contracts, competition from alternative technologies, and dependence on growth
to achieve its business and operational objectives.

The Company's revenue was dependent on two key Advertising Partners, which are
Google and Microsoft, and which comprised 88% and 4%, respectively, of the
Company's revenue for the period from January 1, 2022 through January 26, 2022
(Predecessor), 73% and 3%, respectively, of the Company's revenue from January
27, 2022 through March 31, 2022 (Successor), and 83% and 5%, respectively, of
the Company's revenue for the three months ended March 31, 2021 (Predecessor).

The Company has (i) two paid advertising partnership agreements with
Google, and (ii) a paid advertising partnership agreement with Microsoft. A die Google contracts have been renewed with an effective date of
March 1, 2021and has a two-year term until February 28, 2023. The other
Google contract was renewed for a period of two years July 31, 2023. All Microsoft contract agreements were originally scheduled to expire on

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November 30, 2021. However, the parties initially agreed to a three-month
extension through February 28, 2022, and thereafter the contract continues to
automatically renew on a month to month basis as the parties work to finalize a
renewal or long-term extension of this arrangement. All three agreements may be
terminated by the respective Advertising Partner immediately or with minimal
notice under certain circumstances.

We evaluate whether any conditions or events have occurred, individually and in
the aggregate, that could raise substantial doubt about our ability to continue
as a going concern for the twelve-month assessment period from the date of this
filing. Our ability to continue as a going concern is dependent on our ability
to generate sufficient cash flow from operations to meet our financial
obligations including scheduled debt payments and maturities. In connection with
the Merger, the Company entered into a new loan ("Term Loan") and revolver
facility ("Revolver Facility") agreement on January 26, 2022 (Predecessor). See
discussion over the details of the New Facility below in the Debt section. The
Company has been able to and expects to continue to be able to make payments on
the principal and interest on a timely basis.


The coronavirus pandemic has adversely affected the Company's results of
operations and the Company has experienced unpredictable reductions in demand
for certain products and services. There is uncertainty around the duration and
breadth of the COVID-19 pandemic and, as a result, the ultimate impact on the
Company's business, financial condition, or operating results cannot be
reasonably estimated with certainty at this time. To the extent that existing
capital resources and sales growth are not sufficient to fund future activities,
the Company may need to raise capital resources through additional equity or
debt financings. Additional funds may not be available on terms favorable to the
Company or at all. Failure to raise additional capital, if and when needed,
could have a material adverse effect on the Company's consolidated financial
position, results of operations, and cash flows.


Debt

As of December 31, 2021 (Predecessor), S1 Holdco had principal of $172,038
outstanding under a term loan secured from Cerberus Business Finance, LLC.
Amortization payments of $1,750 were due quarterly and, upon delivery of the
prior year's audited consolidated financial statements, S1 Holdco was required
to make a payment of 50% of excess free cash flow, as defined. S1 Holdco also
had a $20,000 revolving line of credit. No amounts were outstanding as of
December 31, 2021 under the revolving line of credit.

Interest payments on the secured financing were due monthly at London InterBank
Offered Rate ("LIBOR"), plus 7% with a LIBOR floor of 1%. Maturity for the
secured financing was August 22, 2022. The facility had certain financial and
nonfinancial covenants, including a leverage ratio.

In connection with the Merger disclosed in Note 3, Orchid Merger Sub II LLC (a
subsidiary of S1 Holdco) entered into a new loan ("Term Loan") and revolving
facility ("Revolving Facility") on January 27, 2022, providing for a 5.5 year
term loan with a principal balance of $400,000 and with the net proceeds of
$376,000, of which a portion of the proceeds were used by S1 Holdco, to settle
the outstanding debt of $172,038 with Cerberus Business Finance, LLC. In
addition, the Company also obtained a Revolving Facility of $50,000 on January
27, 2022.

For every interest period, the interest rate on the Term Loan is the adjusted
Term Secured Overnight Financing Rate ("Term SOFR") plus 4.75% with an adjusted
Term SOFR floor of 0.50%. The Term Loan will amortize in quarterly installments
on each scheduled payment date (commencing with the scheduled payment date
occurring on June 30, 2022). The new loan comes with a springing covenant, which
goes into effect if the utilization on the Revolving Facility exceeds 35% at
each quarter-end starting from the first full quarter after the effective date
of the Merger, such that the first lien leverage ratio (as defined in the credit
agreement) should not exceed 5.40. For the period covering June 30, 2022 through
and including December 31, 2025, $5,000 of the amortization payment will be made
quarterly. For March 31, 2026 (scheduled payment date) and thereafter, $7,500 of
the amortization payment will be made quarterly.

The Revolving Facility will mature five years from the Closing Date. The interest rate on the revolving facility is adjusted forward SOFR plus 2.75% with an adjusted forward SOFR floor of 0%. In March 2022the company

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borrowed $49,000 under its revolving credit facility primarily to fund the cash portion of the purchase price consideration for the acquisition of CouponFollow. From March 31, 2022 (Successor), this amount is still outstanding.

As of March 31, 2022 (Successor), future minimum principal payments on long-term
debt are as follows: remainder for 2022 $15,000, 2023-$20,000, 2024-$20,000,
2025-$20,000, 2026-$30,000 and 2027-$344,000. Loan fees amounting to $1,265 have
been offset against the loan balance. Interest expense was $2,492, $4,776 and
$4,286 for the period from January 1, 2022 through January 26, 2022
(Predecessor), the period from January 27, 2022 through March 31, 2022
(Successor), and for the three months ended March 31, 2021 (Predecessor),
respectively.

Cash flow

The following table summarizes our cash flows for the periods presented:

                                               Successor                      Predecessor               Predecessor
                                                                              Period from
                                          Period from January               January 1, 2022
                                           27, 2022 through                 through January         Three Months Ended
            (in thousands)                  March 31, 2022                     26, 2022               March 31, 2021
Net cash provided by (used in) operating
activities                               $          (26,216)               $      (10,490)         $           10,128
Net cash used in investing activities    $         (428,850)               $         (441)         $           (1,440)
Net cash used in financing activities    $          (12,143)               $            -          $           (6,603)


Operating Activities

Our cash flows from operating activities are primarily influenced by the growth of our business, increases or decreases in recoveries from our customers and related payments to our vendors for inventory and advertising data. We generally pay suppliers before recoveries from our customers. Our collection and payment cycles may vary from period to period. Additionally, seasonality may impact cash flow from operating activities on a sequential quarterly basis during the year.

In the period from January 1, 2022 to January 26, 2022 (Predecessor), cash used
in operating activities of $10,490 resulted primarily from a net loss of
$40,460, and a decrease in accounts payable of $67,600 due to the Merger. This
was partially offset by an increase in accrued expenses of $57,170, non-cash
expenses of $27,988 primarily due to stock-based compensation of $27,698 and a
decrease in accounts receivable of $11,118 due to the Merger.

In the period from January 27, 2022 to March 31, 2022 (Successor), cash used in
operating activities of $26,216 resulted primarily from a net loss of $38,059, a
decrease in accrued expenses of $171,341 an increase in accounts receivable of
$14,522 due to the Merger. This was partially offset by non-cash expenses of
$48,969 primarily due to change in fair value of warrants of $13,761,
stock-based compensation of $27,167, depreciation and amortization expense of
$23,311, non-cash tax benefit of $17,141, increase in long term liabilities of
$88,832, increase in accounts payable of $66,170, and a decrease in deferred
revenue of $3,654 of due to the Merger.

Within three months March 31, 2021 (Predecessor), cash from operating activities of $10,128 primarily from owned-and-operated advertising revenue, offset by marketing expenses incurred to drive growth and salary, commission and benefit costs.

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Investing activities

Our primary investing activities consist of acquisitions of businesses, such as
the acquisition of S1 Holdco, Protected, RoadWarrior and CouponFollow in 2022 as
well as costs capitalized for internally developed software.

In the period of January 1, 2022 for January 26, 2022 (Predecessor), cash used in investing activities of $441 result from expenses related to the development costs of software for internal use.

In the period from January 27, 2022 to March 31, 2022 (Successor), cash used in
investing activities of $428,850 resulted primarily from the acquisitions of S1
Holdco, Protected, RoadWarrior and CouponFollow, partially offset by purchases
of property and equipment of $1,373 and expenditures related to internal-use
software development costs of $922.

In the three months ended March 31, 2021 (Predecessor), cash used in investing
activities of $1,440 resulted primarily from capitalized expenditures related to
internal-use software development costs.

Fundraising activities

Our financing activities consisted primarily of borrowings and repayments of our
debt, distributions to members related to tax obligations, acquisition related
contingent consideration and proceeds from the sale of assets.

In the period of January 1, 2022 for January 26, 2022 (Predecessor), no cash was provided or used in financing activities.

In the period from January 27, 2022 to March 31, 2022 (Successor), cash used in
financing activities of $12,143 resulted primarily from redemptions of Trebia
Class A ordinary shares of $510,469, repayment of existing term loan of
$172,488, and payment of debt financing costs related to the New Facility of
$24,423, partially offset by proceeds from the new facility of $449,000 and the
Cannae backstop of $246,484.

In the three months ended March 31, 2021 (Predecessor), cash used in financing
activities of $6,603 resulted primarily from repayments of debt of $1,750 and
payment of acquisition related contingent consideration of $5,000.

Off-balance sheet arrangements

We do not have any relationships with entities often referred to as structured
finance or special purpose entities that have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. We did not have any other off-balance sheet arrangements
during the periods presented other than the indemnification agreements.

Contractual obligations and known future cash requirements

Service contracts

On June 18, 2021 the Company entered into an agreement with a service provider
whereby the Company is contractually obligated to pay $6,900 and $8,000 in the
first and second years of the contract, respectively. The contract commencement
date was July 1, 2021. The Company has paid a total of $5,776 to this service
provider as of March 31, 2022 (Successor), $616 during the period January 1,
2022 to January 26, 2022 (Predecessor) and $934 during the period January 27,
2022 to March 31, 2022 (Successor).

Executive compensation

Ian Weingarten was hired as CEO of S1 Holdco on April 10, 2019. He was entitled
to a cash-settled profit interests of 5% of the value of S1 Holdco, which was
contingent upon (i) a participation threshold of $300 million
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(which has been adjusted as indicated in S1 holdco operating agreement) and (ii) a four-year vesting period, or some acceleration in connection with a qualifying change of control transaction.

In February 2021, Mr. Weingarten's employment with S1 Holdco was terminated and
the parties entered into a separation agreement. In connection with the
separation agreement, S1 Holdco agreed to payment of separation pay benefits
consistent with the terms of Mr. Weingarten's employment agreement, including
the payment of the liability accrued for the cash-settled profits interest of 5%
of S1 Holdco, which was deemed vested as to a 3.75% profits interest and
forfeited as to the remaining 1.25% profits interest, in each case, above the
applicable adjusted threshold amount (subject to further reduction to a 2.5%
profits interest in the event that the Merger was not consummated). S1 Holdco
recorded a liability for this arrangement of $11,132 as of December 31, 2021
(Predecessor). In January 2022, as part of the Merger, S1 Holdco settled the
profits interest liability pursuant to the separation agreement with the Mr.
Weingarten.

Contingencies

From time to time, System1 is subject to contingencies that arise in the
ordinary course of business. System1 records an accrual for a contingency when
it is both probable that a liability has been incurred and the amount of the
loss can be reasonably estimated. System1 does not currently believe the
resolution of any such contingencies will have a material adverse effect upon
System1's consolidated balance sheets, statements of comprehensive loss, or
statements of cash flows.

Significant Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with GAAP. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosures of contingent assets and liabilities at the
date of our financial statements, and the reported amounts of revenues and
expenses during the reporting period.

Significant estimates and assumptions reflected in these condensed consolidated
financial statements include, but are not limited to, valuation of goodwill,
acquired intangible assets and long-lived assets for impairment, inputs into the
valuation of the Company's share-based compensation awards, income taxes,
variable and contingent consideration and determination of the fair value of the
warrant liabilities. Significant estimates affecting the condensed consolidated
financial statements have been prepared on the basis of the most current and
best available information, including historical experience, known trends and
other market-specific or other relevant factors that the Company believes to be
reasonable. On an ongoing basis, management evaluates its estimates, as there
are changes in circumstances, facts and experience. Changes in estimates are
recorded in periods which they become known. However, actual results from the
resolution of such estimates and assumptions may vary from those used in the
preparation of the condensed consolidated financial statements. The full extent
to which the COVID-19 pandemic will directly or indirectly impact the Company's
business, results of operations and financial condition will depend on future
developments that are highly uncertain.

Business combinations

The results of a business acquired in a business combination are included in the
Company's condensed consolidated financial statements from the date of
acquisition. The Company allocates the purchase price, which is the sum of the
consideration provided which may consist of cash, equity, or a combination of
the two, in a business combination to the identifiable assets and liabilities of
the acquired business at their acquisition-date fair values. Any excess amount
paid over the identifiable net assets is recorded as goodwill. The goodwill is
non-deductible for tax purposes. The process for estimating the fair values of
the acquired business involves the use of significant estimates and assumptions,
including estimating average industry purchase price multiples, customer and
service attrition rate and estimating future cash flows. The Company estimates
the fair value based on assumptions believed to be reasonable, but which are
inherently uncertain and unpredictable and, as a result, actual results may
differ from estimates. During the measurement period, not to exceed one year
from the date of acquisition, the Company may
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record adjustments to the assets acquired and liabilities assumed, with a
corresponding offset to goodwill. At the conclusion of the measurement period,
any subsequent adjustments are reflected in the Company's Condensed Consolidated
Statements of Operations.

Transaction costs associated with business combinations are expensed as incurred
and are included in Selling, general and administrative expenses in the
Company's Condensed Consolidated Statements of Operations. When purchase
consideration includes contingent consideration, the Company records the fair
value of the contingent consideration as of the date of acquisition, and
subsequently remeasures the contingent consideration at fair value each
reporting period through earnings.

Good will

Goodwill represents the excess of the purchase price over the fair value of net
assets acquired and identifiable intangibles in a business combination. The
Company accounts for goodwill in accordance with Accounting Standards
Codification ("ASC") 350, Intangibles-Goodwill and Other, which requires the
Company to test goodwill at the reporting unit level for impairment at least
annually.

The Company has the option to assess goodwill for possible impairment by
performing a qualitative analysis to determine if it is more likely than not
that the fair value of a reporting unit is less than its carrying amount or to
perform the quantitative impairment test. The quantitative impairment test
involves comparing the estimated fair value of a reporting unit with its
respective book value, including goodwill. If the estimated fair value exceeds
book value, goodwill is considered not to be impaired. If, however, the fair
value of the reporting unit is less than book value, an impairment loss is
recognized in an amount equal to the excess.

The determination of fair values requires us to make significant estimates and
assumptions. These estimates include, but are not limited to, future expected
cash flows from a market participant perspective, discount rates, industry data
and management's prior experience. Unanticipated events or circumstances may
occur that could affect the accuracy or validity of such assumptions, estimates
or actual results.

The Company tests for goodwill impairment annually at December 31st. During the
period from January 1, 2022 through January 26, 2022 (Predecessor), the period
from January 27, 2022 through March 31, 2022 (Successor), and for the three
months ended March 31, 2021 (Predecessor), there were no triggering events
identified, and therefore no impairment charges recorded on goodwill.

Stock-based compensation

Compensation cost related to share-based payment transactions is measured based
on the fair value of the units issued and recognized within "Salaries,
commissions, and benefits" in the Company's consolidated statement of
operations. The Company has elected to treat share-based payment awards with
graded vesting schedules and time-based service condition only as a single award
and recognizes share-based compensation expense on a straight-line basis over
the vesting period, which is generally four years. After the Merger, the
Company's fair value of common stock is derived from the market price of the
Class A common stock which is traded on the NYSE. The assumptions used in the
Black-Scholes model to value equity in the Predecessor period are based upon the
following:

• Fair value of ordinary shares: S1 Holdco’s the shares were not publicly traded, therefore the fair value was determined by S1 Holdco’s Board of Directors, with management input and contemporaneous valuation reports prepared by a third-party valuation specialist.

•Expected Term: The expected life of the option is estimated by considering the
contractual term of the option, the vesting period of the option, the employees'
expected exercise behavior and the post-vesting employee turnover rate. For
non-employees, the expected life equals the contractual term of the option.

• Risk-free interest rate: the risk-free interest rate is based on US Treasury Department interest rates for the expected durations of the underlying options.

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•Volatility: The volatility was based on the expected unit price volatility of
the underlying units over the expected term of the option which is based upon
historical share price data of an index of comparable publicly traded companies.

The Company recorded total share-based compensation expense of $27,698 from
January 1, 2022 through January 26, 2022 (Predecessor), $27,167 from January 27,
2022 through March 31, 2022 (Successor), and $146 for the three months ended
March 31, 2021 (Predecessor). Share-based compensation expense is included in
the Salaries, commissions, and benefits expense in the Condensed Consolidated
Statements of Operations.

Recently issued accounting pronouncements

See Note 2 to our unaudited condensed consolidated financial statements included
in this Quarterly Report on Form 10-Q for a discussion of recently adopted
accounting pronouncements and recently issued accounting pronouncements not yet
adopted.

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