What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-08-05 compared with 2026-05-12 · 100 added, 58 removed, 168 unchanged (48% of the section changed)

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Company Overview

We operate flagship internet utilities including CouponFollow, MapQuest, and Startpage.com, and a best-in-class marketing platform powered by artificial intelligence, enabling third party publishers ("Network Partners") to monetize and maximize the value of user traffic across a wide range of advertising category verticals.

Reorganization

On August 1, 2024, we undertook a corporate reorganization, the result of which was that all of the assets and business operations of the Company are now held by System1 Holdings, LLC ("System1 Holdings"), a newly formed intermediate holding company of which we maintain the controlling interest and in which the non-controlling interest is owned by the holders of our Class C common stock.

Following the corporate reorganization, (a) System1 Holdings now owns 100% of S1 Holdco, LLC ("S1 Holdco"), the previous intermediate holding company with the non-controlling interests, and 100% of S1 Media, LLC ("S1 Media"), another new subsidiary formed in connection with the corporate reorganization, (b) S1 Media holds the assets and business operations associated with our Products businesses, which include CouponFollow, Startpage and MapQuest, and our acquisition marketing platform and (c) S1 Holdco holds our assets related to our Marketing businesses.

System1 Holdings holds our remaining assets and business operations.

S1 Holdco and its subsidiaries remain obligors and guarantors under our Term Loan and Revolving Facility, and System1 Holdings and S1 Media are not parties thereto.

Reverse Stock Split

On June 10, 2025, we filed a certificate of amendment to our Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware to effect a 1-for-10 reverse stock split of Class A and Class C common stock.

All share data and per share data amounts included in this Form 10-Q have been retrospectively adjusted to reflect the effect of the reverse stock split.

We operate flagship internet utilities including CouponFollow, MapQuest, and Startpage, and a best-in-class marketing platform powered by artificial intelligence, enabling third party publishers ("Network Partners") to monetize and maximize the value of user traffic across a wide range of advertising category verticals.

How We Assess the Performance of Our Business

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The key indicators of the financial condition and operating performance of the business is Gross profit.

To help assess performance with this key indicator, the revenue metrics we use are return on traffic acquisition cost ("RTAC"), Products sessions and Products revenue-per-session ("Products RPS").

To help assess performance with this key indicator, the revenue metrics we use are Active Marketing Partners ("AMP"), Revenue per AMP, Products sessions and Products revenue-per-session ("Products RPS").

In addition, we also use Adjusted Gross Profit and Adjusted EBITDA as non-GAAP financial measures.

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The following table sets forth our condensed consolidated results of operations and our condensed consolidated results of operations as a percentage of revenue for the periods presented (in thousands):

Three Months Ended March 31,

Three Months Ended June 30,

Percentage of Revenue*

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*Percentages may not sum due to rounding

Six Months Ended June 30,

Percentage of Revenue*

Operating expenses:

Cost of revenue

Salaries and benefits

Selling, general, and administrative

Impairment of long-lived assets

Total operating expenses

Operating loss

Other expense:

Interest expense, net

Change in fair value of warrant liabilities

Total other expense, net

Loss before income tax

Income tax benefit

Net loss attributable to non-controlling interest

Net loss attributable to System1, Inc.

*Percentages may not sum due to rounding

Revenue Metrics

The key non-financial performance metrics we use to evaluate our business, track the effectiveness of our operations and measure our performance are Revenue per AMP, the number of Products sessions and Products RPS.

We define Active Marketing Partners ("AMP") as partners who monetize user traffic on our platform and generate revenue above a predetermined minimum per quarter.

We define AMP as partners who monetize user traffic on our platform and generate revenue above a predetermined minimum per quarter.

We define Revenue per AMP as GAAP Revenue from Marketing Partners divided by AMP.

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The following table presents our revenue by reportable segment (in thousands):

Three Months Ended March 31,

Three Months Ended June 30,

Total revenue

Marketing revenue decreased by $33.9 million, or 65% for the three months ended March 31, 2026 compared to the prior period, primarily due to the termination for convenience of our Adsense for Domains monetization arrangement with Google and the significant reduction in marketing activities for search monetization in our publishing business.

For the three months ended March 31, 2026, compared to the prior period, AMP decreased by approximately 93 to 56 from 149, primarily due to the termination for convenience of our Adsense for Domains monetization arrangement with Google.

Revenue per AMP increased by approximately $0.1 million to $0.2 million from $0.1 million.

Products revenue decreased by $3.4 million, or 15%, for the three months ended March 31, 2026 compared to the prior period, primarily due to a change in mix shift from higher RPS sessions to lower RPS sessions.

For the three months ended March 31, 2026, compared to the prior period, Products sessions increased by approximately 178.0 million to 653.7 million from 475.7 million while Products RPS decreased by approximately $0.02 to $0.03 from $0.05.

Six Months Ended June 30,

Total revenue

Marketing revenue decreased for the three and six months ended June 30, 2026 compared to the prior periods, primarily due to the significant reduction in marketing activities for search monetization in our publishing business and the termination for convenience of our Adsense for Domains monetization arrangement with Google.

For the three months ended June 30, 2026, compared to the prior period, AMP decreased by 74 to 59 from 133.

Revenue per AMP increased by $0.03 million to $0.16 million from $0.13 million, or 16%.

Similarly, for the six months ended June 30, 2026, compared to the prior period, AMP decreased by 91 to 65 from 156.

Revenue per AMP increased by $0.10 million to $0.32 million from $0.22 million, or 45%.

Products revenue decreased for the three and six months ended June 30, 2026 compared to the prior periods, primarily due to a change in mix shift from higher RPS sessions to lower RPS sessions.

For the three months ended June 30, 2026, compared to the prior period, Products sessions increased by 164.4 million to 686.9 million from 522.5 million while Products RPS decreased by $0.02 to $0.03 from $0.05.

Similarly, for the six months ended June 30, 2026, compared to the prior period, Products sessions increased by 342.3 million to 1.3 billion from 998.2 million while Products RPS decreased by $0.02 to $0.03 from $0.05.

Cost of revenue

Cost of revenue decreased $32.2 million, or 70%, for the three months ended March 31, 2026 compared to the prior period primarily due to a decrease in advertising spend and agency fees which is correlated with the decrease in revenue.

This was primarily related to the termination for convenience of our Adsense for Domains monetization arrangement with Google and a related significant reduction in marketing activities for search monetization in our publishing business.

Amortization expense for our platform recorded in cost of revenue decreased $8.1 million or 62% for the three months ended March 31, 2026 compared to the prior period primarily due to our developed technology reaching the end of its estimated useful life.

Cost of revenue decreased for the three and six months ended June 30, 2026 compared to the prior periods primarily due to a decrease in advertising spend and agency fees which is correlated with the decrease in revenue.

This was primarily related to the significant reduction in marketing activities for search monetization in our publishing business.

Amortization expense for our platform recorded in cost of revenue decreased $11.9 million and $20.0 million for the three and six months ended June 30, 2026, respectively, compared to the prior periods primarily due to our developed technology reaching the end of its estimated useful life.

Our chief operating decision maker measures and evaluates reportable segments based on segment operating revenue and segment adjusted gross profit.

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We exclude the following items from segment adjusted gross profit:

other cost of revenue (total cost of revenue excluding traffic acquisition cost), salaries and benefits, selling, general and administrative expenses and, at times, certain other transactions or adjustments.

other cost of revenue (total cost of revenue excluding traffic

acquisition cost), salaries and benefits, selling, general and administrative expenses and, at times, certain other transactions or adjustments.

The following table presents our segment adjusted gross profit by reportable segment (in thousands):

Three Months Ended March 31,

Three Months Ended June 30,

Total adjusted gross profit

Six Months Ended June 30,

Total adjusted gross profit

See the Revenue and Cost of revenue discussions above for the changes to adjusted gross profit.

Salaries and benefits

Salaries and benefits expense decreased $4.2 million, or 17% for the three months ended March 31, 2026 compared to the prior period.

The decrease was primarily driven by a $2.4 million reduction in payroll and bonus expenses due to lower headcount, a $1.3 million decline in stock-based compensation resulting from less restricted stock unit outstanding and no stock appreciation rights expense, and a $1.2 million increase in capitalized internally developed software costs.

This was offset by an increase of $1.5 million in severance related expenses due to our reduction in workforce.

Salaries and benefits expense decreased for the three and six months ended June 30, 2026 compared to the prior periods.

For the three months ended June 30, 2026, the $9.2 million decrease is primarily driven by a $5.0 million reduction in payroll, bonus, severance, and employment benefits expenses due to our reduction in workforce, a $3.2 million reduction in stock-based compensation resulting from no stock appreciation rights expense, a $0.7 million reduction in CouponFollow share-based liability expense due to the liability being fully accrued as of December 31, 2025, and a $0.3 million net reduction of other immaterial expense items.

For the six months ended June 30, 2026, the $13.4 million decrease is primarily driven by a $6.2 million reduction in payroll, bonus, severance, and employment benefits expenses due to our reduction in workforce, a $4.6 million reduction in stock-based compensation resulting from less restricted stock units outstanding and no stock appreciation rights expense, a $1.3 million increase in capitalized internally developed software costs and a $1.4 million reduction in CouponFollow share-based liability expense due to the liability being fully accrued as of December 31, 2025.

This was offset by a $0.1 million net increase of other immaterial expense items.

Selling, general, and administrative

Selling, general, and administrative expense increased $0.2 million, or 1% for the three months ended March 31, 2026 compared to the prior period.

The increase was primarily driven by a $0.9 million increase in software and subscription services, offset by a decrease of $0.7 million in professional services and consulting fees.

Selling, general, and administrative expense decreased for the three and six months ended June 30, 2026 compared to the prior periods.

For the three months ended June 30, 2026, the $3.0 million decrease is primarily driven by a $1.8 million reduction in amortization expense resulting from long-lived assets impairment in the first quarter of 2026 or reaching the end of their estimated useful life since the prior period, a $0.4 million reduction in professional services and consulting fees, a $0.2 million reduction in software and subscription services and a $0.6 million net decrease of other immaterial expense items.

For the six months ended June 30, 2026, the $2.8 million decrease is primarily driven by a $2.1 million reduction in depreciation and amortization expense resulting from to long-lived assets impairment in the first quarter of 2026 or reaching the end of their estimated useful life since the prior period, a $1.5 million reduction in

professional services and consulting fees and a $0.2 million reduction in rent expense.

This was offset by a $1.0 million increase in software and subscription services.

Impairment of long-lived assets

Impairment of long-lived assets increased $36.8 million for the three months ended March 31, 2026 compared to the prior period due to the recognition of long-lived asset impairment expense at our Marketing asset group.

Impairment of long-lived assets increased $0.9 million and $37.7 million for the three and six months ended June 30, 2026, compared to the prior periods due to the recognition of long-lived assets impairment expense at our Marketing asset group during the first and second quarter of 2026.

There was no impairment of long-lived assets during 2025.

Other expense:

Interest expense, net

Interest expense, net decreased $0.5 million, or 6%, for the three months ended March 31, 2026 compared to the prior period primarily due to lower average interest rates in 2026 compared to 2025, offset by a higher loan balance primarily due to the drawdown of our Revolving Facility at the end of 2025.

Interest expense, net was flat for the three months ended June 30, 2026 and decreased $0.5 million for the six months ended June 30, 2026 compared to the prior periods primarily due to lower average interest rates in 2026 compared to 2025, offset by a higher loan balance primarily due to the drawdown of our Revolving Credit Facility at the end of 2025.

Change in fair value of warrant liabilities

Change in fair value of warrant liabilities was flat for the three months ended March 31, 2026 compared to the prior period due to the fair value remeasurement of our Warrants which have been delisted from the New York Stock Exchange.

Change in fair value of warrant liabilities was flat for the three and six months ended June 30, 2026 compared to the prior periods due to the fair value remeasurement of our Warrants which have been delisted from the New York Stock Exchange.

Income tax benefit

The difference between the effective tax rates for the periods presented and the federal statutory tax rate of 21% was primarily due to the exclusion of non-controlling loss, state taxes, foreign rate differential, valuation allowance activity related to unrealizable deferred tax assets and outside basis adjustments.

The difference between the effective tax rates for the periods presented and the federal statutory tax rate of 21% was primarily due to the exclusion of non-controlling loss, state taxes, foreign rate differential, non-deductible expenses, increases to the valuation allowance activity related to unrealizable deferred tax assets and outside basis adjustments.

Non-GAAP Financial Measures

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The following table reconciles Revenue to Gross Profit and Adjusted Gross Profit for the periods presented (in millions):

Three Months Ended March 31,

Three Months Ended June 30,

Cost of revenue

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Adjusted Gross Profit

The decrease in adjusted gross profit for the three months ended March 31, 2026 is primarily related to our decrease in revenue.

See "Management's Discussion and Analysis of Financial Condition and Results of Operations, — Revenue Metrics" for additional information for explanations of our changes in revenue.

The decrease in adjusted gross profit for the three months ended June 30, 2026, compared to the prior period is primarily related to our decrease in revenue, offset by less amortization as our developed technology reached the end of its estimated useful life.

See "Revenue Metrics" and "Cost of revenue" for discussion of the changes in our revenue and cost of revenue.

Adjusted EBITDA

that we do not consider indicative of our core operating performance, including, but not limited to impairment expense, deferred compensation, gain (loss) on extinguishment of debt, non-cash revaluation of warrant liability and acquisition and restructuring costs.

Adjusted EBITDA is defined as net income (loss) before interest expense, income taxes, depreciation and amortization expense, stock-based compensation expense, and other cash and non-cash based income or expenses that we do not consider indicative of our core operating performance, including, but not limited to impairment expense, deferred compensation, gain (loss) on extinguishment of debt, non-cash revaluation of warrant liability and acquisition and restructuring costs.

We believe that the use of Adjusted Gross Profit and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors.

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The following table reconciles net loss to Adjusted EBITDA for the periods presented (in millions):

Three Months Ended March 31,

Three Months Ended June 30,

Income tax benefit

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Stock-based compensation & distributions to members

Non-cash revaluation of warrant liability

Acquisition and restructuring costs

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We have experienced declining cash flows and financial performance primarily as a result of reductions in Advertising Partner and overall consumer demand for our marketing services.

As of March 31, 2026, we had unrestricted cash and cash equivalents of $51.5 million, negative net working capital, which we define as current assets less current liabilities, of $14.1 million.

We had an aggregate principal amount outstanding of $50.0 million under our revolving facility with a maturity date of January 27, 2027, and $252.6 million of term debt outstanding on our term loan which matures in July 2027.

Management determined, as a result of this evaluation, that our current cash and cash equivalents, net working capital position, and the upcoming maturity date of our revolving facility raise substantial doubt about our ability to continue as a going concern for the twelve-month period following the date of this filing.

Our plan is to continue exploring options of refinancing all of our debt obligations.

Management cannot conclude as of the date of this filing that its plans are probable of being successfully implemented.

There can be no assurance that we will be able to obtain financing that will provide us with sufficient liquidity to satisfy our revolving facility in January 2027 or our term loan in July 2027.

As of June 30, 2026, we had unrestricted cash and cash equivalents of $40.5 million, negative net working capital, which we define as current assets less current liabilities, of $27.4 million.

We have an aggregate principal amount outstanding of $50.0 million under our revolving facility with a maturity date of January 27, 2027, and $245.1 million of term debt outstanding on our term loan which matures in July 2027.

At our annual meeting of stockholders held on July 22, 2026, the stockholders approved an exchange agreement with all lenders under our Existing Credit Agreement, satisfying settlement of the outstanding balance on our revolving facility which was due January 2027, and reducing the principle and extending the maturity date on our Term Loan.

For information See Item 1, "Financial Statements — Note 5, Debt, Net" .

Our principal sources of liquidity are expected to be from cash on hand and cash flows from financing activities.

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See our concentration with customers discussion at Item 1 "Financi al Statements — Note 2, Summary of Significant Accounting Policies " for additional information.

Our main focus is executing on our operational strategy, which includes continued focus on expanding the number of advertising partners that are utilizing or integrated with our platform by continuing to attract and monetize users with commercial intent on our owned and operated web properties and on behalf of our Network Partners as well as optimizing bids and driving higher returns on advertising spend.

Additionally, we are focused on our current cost structure by reducing our cash operating expenses and debt service obligations.

Management determined, as a result of this evaluation, that our current cash and cash equivalents and net working capital position raise substantial doubt about our ability to continue as a going concern for the twelve month period following the date of this filing.

Management has initiated cost-reduction programs consisting of reduction in force and reducing activities for businesses, which immediately reduced our cash burn rate.

Management cannot conclude as of the date of this filing that its plans are probable of mitigating the conditions and events that raise substantial doubt.

As a result, management has concluded that substantial doubt exists about our ability to continue as a going concern.

monetize users with commercial intent on our Products and on behalf of our Network Partners as well as optimizing bids and driving higher returns on advertising spend.

Additionally, we are focused on our current cost structure by reducing our cash operating expenses.

Adverse macroeconomic conditions have affected, and may in the future affect, the demand for advertising, resulting in fluctuations in the amounts our advertisers spend on advertising, which could have a negative impact on our financial condition and operating results.

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The following table summarizes our cash flows for the periods presented (in thousands):

Three Months Ended March 31,

Net cash used in operating activities

Six Months Ended June 30,

Net cash (used in) provided by operating activities

Net cash used in investing activities

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In addition, seasonality may impact cash flows from operating activities on a sequential quarterly basis during the year.

In the three months ended March 31, 2026, cash used in operating activities of $26.1 million resulted primarily from favorable changes in net income, excluding the impact of non-cash items offset by unfavorable changes in working capital balances.

In the six months ended June 30, 2026, cash used in operating activities of $28.2 million resulted primarily from unfavorable changes in net income, excluding the impact of non-cash items offset by unfavorable changes in working capital balances.

The unfavorable changes in working capital balances included $13.0 million in outflows related to the payment of an earnout obligation for the CouponFollow acquisition offset by an decrease in account receivable balances.

In the three months ended March 31, 2025, cash used in operating activities of $15.9 million resulted primarily from $13.2 million in outflows related to the payment of earnout obligations for the CouponFollow acquisition and $4.3 million in net interest paid on our Term Loan.

In the six months ended June 30, 2025, cash provided by operating activities of $8.5 million resulted primarily from the timing of revenue share payments to our partners.

Investing Activities

In the three months ended March 31, 2026 and 2025, cash used in investing activities of $2.2 million and $1.5 million resulted primarily from capitalization of software development costs.

In the six months ended June 30, 2026 and 2025, cash used in investing activities of $3.5 million and $3.1 million resulted primarily from capitalization of software development costs.

Financing Activities

Our financing activities consisted primarily of borrowings and repayments of our indebtedness under our credit facilities.

In the three months ended March 31, 2026, cash used in financing activities of $7.7 million resulted primarily from $7.5 million repayment of principal and interest on our Term Loan which increased by $2.5 million on March 31, 2026, and $0.2 million of share repurchases.

In the three months ended March 31, 2025, cash used in financing activities of $5.3 million resulted primarily from repayment of principal and interest on our Term Loan.

In the six months ended June 30, 2026, cash used in financing activities of $15.2 million resulted primarily from $15.0 million repayment of principal and interest on our Term Loan which increased by $2.5 million on March 31, 2026, offset by other immaterial items.

In the six months ended June 30, 2025, cash used in financing activities of $8.1 million resulted primarily from a $10.0 million repayment of principal and interest on our Term Loan, offset by $2.3 million of cash received from the private placement with our founders family foundation.

Off-Balance Sheet Arrangements

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Contractual Obligations and Known Future Cash Requirements

Service Agreements

In June 2023, we entered into a multi-year agreement with a data cloud platform service provider whereby we are contractually obligated to spend $5.0 million annually between July 2023 and June 2026 .

As of March 31, 2026 , we have fulfilled our contractual obligation towards this commitment.

In June 2023, we entered into a multi-year agreement with a data cloud platform service provider whereby we are contractually obligated to spend $5.0 million in each annual period between July 2023 and June 2026.

As of June 30, 2026, we have fulfilled our contractual obligation towards this commitment.

A new agreement was signed with the same service provider with obligated spend of $5.0 million in each annual period through June 2029.

Contingencies

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Our actual results could differ from these estimates.

The critical accounting estimates, assumptions, and judgments that we believe to have the most significant impact on our condensed consolidated financial statements are valuation of goodwill, intangible assets, stock-based compensation and income taxes.

There have been no material changes to our critical accounting policies and estimates as described in our Annual Report on Form 10-K filed with the SEC on March 11, 2026.

Our critical accounting policies and estimates are described in our Annual Report on Form 10-K filed with the SEC on March 11, 2026.

During the first half of 2026, we identified triggering events that required us to evaluate long-lived assets for impairment.

As a result, we determined that impairment of long-lived assets should be included as a critical accounting estimate.

Accordingly, we believe the estimates, assumptions, and judgments associated with our most critical accounting policies are those relating to valuation of goodwill, intangible assets, impairment of long-lived assets, stock-based compensation and income taxes.

The impairment of long-lived assets policy is described as follows:

Impairment of Long-Lived Assets

We assess the recoverability of our long-lived assets when events or changes in circumstances indicate that their carrying amount may not be recoverable.

Such events or changes in circumstances may include a significant adverse change in the extent or manner in which a long-lived asset is being used;

significant adverse changes in legal factors or in the business climate that could affect the value of a long-lived asset;

an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset;

current or future operating or cash flow losses that demonstrate continuing losses associated with the use of a long-lived asset;

or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of our previously estimated useful life.

We perform impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash

flows of other assets and liabilities.

We assess recoverability of our long-lived assets by determining whether the carrying amount of the asset group can be recovered through projected undiscounted cash flows over their remaining useful lives inclusive of an estimated residual value.

If the carrying amount of the asset group exceeds the forecasted undiscounted cash flows, an impairment loss is recognized and measured as the amount by which the carrying amount exceeds the estimated fair value.

An impairment loss is recognized in the statement of operations in the period in which management determines such impairment has occurred.

Recently Issued Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis