System1, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition 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 should be read together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ending December 31, 2025. 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 Note Regarding Forward-Looking Statements." included in our Annual Report on Form 10-K. Company Overview 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 In assessing the performance of our business, we consider a variety of performance and financial measures. 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 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. We believe these non-GAAP measures provide useful supplemental information to investors to better evaluate ongoing business performance. These measures are not, and should not be viewed as, a substitute for accounting principles generally accepted in the United States of America ("GAAP") financial measures. Refer to the "Revenue Metrics", "Adjusted Gross Profit" and "Adjusted EBITDA" sections below. Components of Our Results of Operations Revenue We earn revenue by directly acquiring traffic to our owned and operated websites and utilizing our platform and additional services to monetize end-users for our Advertising Partners. For this revenue stream, we are the principal in the transaction and report revenue on a gross basis for the amounts received from Advertising Partners. We have determined that we are the principal since we direct the use of our owned and operating websites, and as such have a risk of loss on the user-traffic that we are acquiring for monetization with our Advertising Partners. Additionally, we maintain the website, provide the content and bear the cost and risk of loss associated with the digital online inventory available on our website. Revenue is also earned from revenue-sharing arrangements with our Network Partners related to the use of our platform and additional services provided to them in order to direct advertising by our Advertising Partners to their digital online inventory. We have determined that we are the agent in these transactions and therefore report revenue on a net basis, because our network partner runs the campaign to acquire user-traffic including managing traffic acquisition cost. We report the revenue generated under our revenue-sharing arrangements on a net basis, based on the difference between amounts received by us from our Advertising Partners, less amounts remitted to the Network Partners based on the underlying revenue-sharing agreements. 17 We recognize revenue as we deliver user-traffic to our Advertising Partners based on a cost-per-click, cost-per-action or cost-per-thousand impression basis. The payment terms with our Advertising Partners are generally 30 days. 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. We have two reportable segments: • Marketing; and • Products Operating Expenses We classify our operating expenses into the following categories: Cost of revenue . Cost of revenue primarily consists of traffic acquisition costs, which are the costs to place advertisements to acquire customers to our websites and services, domain name registration costs, licensing costs to provide mapping services to Mapquest.com and amortization related to our platform. We do not pre-pay any traffic acquisition costs, and therefore, such costs are expensed as incurred. Amortization related to our platform is recognized over the estimated useful life of the intangible asset. Salaries and benefits . Salaries and benefits expenses consists of salaries, bonuses, stock-based compensation, and employee benefits costs. Selling, general, and administrative . Selling, general, and administrative expenses consist of depreciation, general intangibles amortization, fees for software services, professional services, occupancy costs and travel and entertainment. Depreciation and general intangibles amortization expense are primarily attributable to our capital investment(s) and consist of property and equipment depreciation and amortization of intangible assets with finite lives. Impairment of long-lived assets. Impairment of long-lived assets consists of the impairment of our general intangibles that are no longer recoverable from future operations. Other Expenses or Incomes: Other expenses or incomes consist of the following: Interest expense, net . Interest expense consists of interest on our debt and the amortization of deferred financing costs and debt discount. Interest income consists of interest earned on our cash deposits. Change in fair value of warrant liabilities . The mark to market of our liability-classified Warrants. Income tax benefit As of August 1, 2024, we are the sole managing member of System1 Holdings and, as a result, consolidate the financial results of System1 Holdings. System1 Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, System1 Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by System1 Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss of System1 Holdings, as well as any stand-alone income or loss generated by us. 18 Results of Operations 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 June 30, 2026 Percentage of Revenue* 2025 Percentage of Revenue* Revenue $ 30,200 100 % $ 78,115 100 % Operating expenses: Cost of revenue 5,926 20 % 50,212 64 % Salaries and benefits 17,113 57 % 26,297 34 % Selling, general, and administrative 14,541 48 % 17,511 22 % Impairment of long-lived assets 911 3 % — — % Total operating expenses 38,491 127 % 94,020 120 % Operating loss (8,291) -27 % (15,905) -20 % Other expense: Interest expense, net 7,116 24 % 7,116 9 % Change in fair value of warrant liabilities — — % 68 — % Total other expense, net 7,116 24 % 7,184 9 % Loss before income tax (15,407) -51 % (23,089) -30 % Income tax benefit (75) — % (1,547) -2 % Net loss (15,332) -51 % (21,542) -28 % Less: Net loss attributable to non-controlling interest (2,733) -9 % (4,079) -5 % Net loss attributable to System1, Inc. $ (12,599) -42 % $ (17,463) -22 % *Percentages may not sum due to rounding 19 Six Months Ended June 30, 2026 Percentage of Revenue* 2025 Percentage of Revenue* Revenue $ 67,434 100 % $ 152,628 100 % Operating expenses: Cost of revenue 19,786 29 % 96,289 63 % Salaries and benefits 37,913 56 % 51,285 34 % Selling, general, and administrative 31,330 46 % 34,085 22 % Impairment of long-lived assets 37,733 56 % — — % Total operating expenses 126,762 188 % 181,659 119 % Operating loss (59,328) -88 % (29,031) -19 % Other expense: Interest expense, net 13,745 20 % 14,201 9 % Change in fair value of warrant liabilities — — % 100 — % Total other expense, net 13,745 20 % 14,301 9 % Loss before income tax (73,073) -108 % (43,332) -28 % Income tax benefit (150) — % (1,934) -1 % Net loss (72,923) -108 % (41,398) -27 % Less: Net loss attributable to non-controlling interest (13,257) -20 % (8,052) -5 % Net loss attributable to System1, Inc. $ (59,666) -88 % $ (33,346) -22 % *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. Marketing 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. We believe Revenue per AMP is a relevant measure to evaluate our effectiveness and efficiency in deploying capital to acquire monetizable traffic to our Marketing segment. Products We define Products sessions as the total number of monetizable user visits to our Products websites. Monetizable visits exclude those visits identified as spam, bot, or other invalid traffic. We define Products RPS as Products revenue divided by Products sessions. We believe Product sessions and RPS are relevant measures to evaluate our effectiveness and efficiency in converting monetizable traffic into revenue, which are key drivers of our Products reportable segment. 20 Revenue The following table presents our revenue by reportable segment (in thousands): Three Months Ended June 30, Change 2026 2025 ($) (%) Marketing $ 10,723 $ 54,142 $ (43,419) -80% Products 19,477 23,973 (4,496) -19% Total revenue $ 30,200 $ 78,115 $ (47,915) -61% Six Months Ended June 30, Change 2026 2025 ($) (%) Marketing $ 29,114 $ 106,392 $ (77,278) -73% Products 38,320 46,236 (7,916) -17% Total revenue $ 67,434 $ 152,628 $ (85,194) -56% Marketing 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 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 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 $20.0 million for the three and six months ended June 30, 2026, respectively, compared to the prior periods primarily due to our developed technology reaching the end of its estimated useful life. Our chief operating decision maker measures and evaluates reportable segments based on segment operating revenue and segment adjusted gross profit. We define and calculate segment adjusted gross profit as revenue less traffic acquisition costs incurred to acquire users. The remaining cost of revenue consists of non-advertising expenses such as set-up costs, royalties, fees and amortization related to our platform. We exclude the following items from segment adjusted gross profit: other cost of revenue (total cost of revenue excluding traffic 21 acquisition cost), salaries and benefits, selling, general and administrative expenses and, at times, certain other transactions or adjustments. The following table presents our segment adjusted gross profit by reportable segment (in thousands): Three Months Ended June 30, Change 2026 2025 ($) (%) Marketing $ 9,534 $ 19,633 $ (10,099) -51 % Products 17,547 22,697 (5,150) -23 % Total adjusted gross profit $ 27,081 $ 42,330 $ (15,249) -36 % Six Months Ended June 30, Change 2026 2025 ($) (%) Marketing $ 22,063 $ 41,420 $ (19,357) -47 % Products 34,864 43,652 (8,788) -20 % Total adjusted gross profit $ 56,927 $ 85,072 $ (28,145) -33 % See the Revenue and Cost of revenue discussions above for the changes to adjusted gross profit. Salaries and benefits 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 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 22 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 $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 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 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, non-deductible expenses, increases to the valuation allowance activity related to unrealizable deferred tax assets and outside basis adjustments. Non-GAAP Financial Measures In addition to our results being determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operational performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors in assessing our operating performance. Adjusted Gross Profit Adjusted Gross Profit is defined as gross profit plus depreciation and amortization recorded in cost of revenues. The following table reconciles Revenue to Gross Profit and Adjusted Gross Profit for the periods presented (in millions): 23 Three Months Ended June 30, 2026 2025 Revenue $ 30.2 $ 78.1 Less: Cost of revenue (5.9) (50.2) Gross profit 24.3 27.9 Add: amortization related to cost of revenue 1.2 13.1 Adjusted Gross Profit $ 25.5 $ 41.0 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 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. However, investors should be aware that when evaluating Adjusted Gross Profit and Adjusted EBITDA, we may incur future expenses similar to those excluded when calculating these measures. In addition, our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because not all companies may calculate Adjusted EBITDA in the same fashion. We adjust for nonoperating expenses and income, such as nonrecurring special projects, including for related consultant expenses, nonrecurring gain on the sale of assets, expenses associated with financing activities, and reorganization and severance expenses that result from the elimination or rightsizing of specific business activities or operations. Because of the limitations described above, Adjusted Gross Profit and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted Gross Profit and Adjusted EBITDA on a supplemental basis. Investors should review the reconciliation of Gross profit to Adjusted Gross Profit and net income (loss) to Adjusted EBITDA below and not rely on any single financial measure to evaluate our business. 24 The following table reconciles net loss to Adjusted EBITDA for the periods presented (in millions): Three Months Ended June 30, 2026 2025 Net loss $ (15.3) $ (21.5) Adjustments: Income tax benefit (0.1) (1.5) Interest expense 7.1 7.1 Depreciation and amortization 6.8 20.6 Impairment of long-lived assets 0.9 — Other expense (0.1) 0.1 Stock-based compensation & distributions to members 1.4 4.5 Non-cash revaluation of warrant liability — 0.1 Acquisition and restructuring costs 1.2 2.3 Adjusted EBITDA $ 1.9 $ 11.7 Liquidity and Capital Resources To date, our principal sources of liquidity have historically been from the sale of Total Security Limited (formerly known as Protected. net Group Limited), indebtedness available under our credit facilities, other indebtedness, and cash flows from operations. 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 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. Our ability to fund future operating expenses and capital expenditures, and our ability to meet our future debt service obligations, will depend on our ability to execute on our operational strategy and may be affected by our profitability, as well as general economic, financial and other factors which are beyond our control. Our revenue is dependent on two key Advertising Partners, which are Google and Microsoft. See our concentration with customers discussion at Item 1 "Financi al Statements — Note 2, Summary of Significant Accounting Policies " for additional information. 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. 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 25 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. Credit Facilities See Item 1, "Financial Statements — Note 5, Debt, Net" of this Quarterly Report on Form 10-Q. Cash Flows The following table summarizes our cash flows for the periods presented (in thousands): Six Months Ended June 30, 2026 2025 Net cash (used in) provided by operating activities $ (28,169) $ 8,543 Net cash used in investing activities $ (3,540) $ (3,107) Net cash used in financing activities $ (15,237) $ (8,094) Operating Activities Our cash flows from operating activities are primarily impacted by growth in our operations, timing of payments to our suppliers for advertising inventory and data and related collections from our partners. Payment and collection cycles can vary from period to period. In addition, seasonality may impact cash flows from operating activities on a sequential quarterly basis during the year. 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 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 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 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. 26 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 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 Commitments 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 From time to time, we are subject to contingencies that arise in the ordinary course of business. We record 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. We do not currently believe the resolution of any such contingencies will have a material adverse effect upon our condensed consolidated financial statements. Critical Accounting Policies and Estimates We prepare our financial statements in accordance with GAAP. Preparing these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. 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 27 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 For information regarding recent accounting pronouncements, see Item 1, "Financial Statements — Note 2, Summary of Significant Accounting Policies . " Item 3. Quantitative and Qualitative Disclosure about Market Risk As a "smaller reporting company", as defined by Rule 10(f)(1) of Regulation S-K, we are not required to provide this information.