Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2014

or

For the transition period from              to

Commission File Number: 001-36219

Sizmek Inc.

(Exact name of registrant as specified in its charter)

401 Park Avenue South, 5th Floor

New York, New York 10016

(Address of principal executive offices) (Zip Code)

(212) 953-9300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

As of August 11, 2014, the registrant had 30,398,505 shares of Common Stock, par value $0.001, outstanding.

Table of Contents

SIZMEK INC.

Cautionary Note Regarding Forward-Looking Statements

The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. Certain statements contained herein may be deemed to constitute “forward-looking statements.”

Words such as “believe,” “expect,” “anticipate,” “project,” “estimate,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “objective,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions, among others, generally identify forward-looking statements, which speak only as of the date the statements were made.  All forward-looking statements are management’s present expectations of future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, among other things:

·                  our ability to further identify, develop and achieve commercial success for new online products;

·                  delays in product offerings;

·                  the development and pricing of competing online services and products;

·                  consolidation of the digital industry and of digital advertising networks;

·                  slower than expected development of the digital advertising market;

·                  our ability to protect our proprietary technologies;

·                  identifying acquisition opportunities and integrating our acquisitions with our operations, systems, personnel and technologies;

·                  security threats to our computer networks;

·                  operating in a variety of foreign jurisdictions;

·                  fluctuations in currency exchange rates;

·                  adaption to new, changing, and competitive technologies;

·                  potential additional impairment of our goodwill and potential impairment of our other long-lived assets;

·                  our ability to achieve some or all of the expected benefits of the spin-off and merger transaction; and

·                  other risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2013.

In particular, information included under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain forward-looking statements.

In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained herein might not occur. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this filing. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law. All subsequent forward-looking statements attributable to management or to any person authorized to act on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

2

Table of Contents

TABLE OF CONTENTS

3

Table of Contents

PART I—FINANCIAL INFORMATION

Item I.                     FINANCIAL STATEMENTS

SIZMEK INC. AND SUBSIDIARIES

CONSOLIDATED AND COMBINED BALANCE SHEETS

(In thousands, except par value amounts)

The accompanying notes are an integral part of these financial statements.

4

Table of Contents

SIZMEK INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

The accompanying notes are an integral part of these financial statements.

5

Table of Contents

SIZMEK INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

The accompanying notes are an integral part of these financial statements.

6

Table of Contents

SIZMEK INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

The accompanying notes are an integral part of these financial statements.

7

Table of Contents

SIZMEK INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(In thousands)

The accompanying notes are an integral part of these financial statements.

8

Table of Contents

SIZMEK INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

1.  Basis of Presentation

The Company

Sizmek Inc. (“Sizmek” the “Company,” “we,” “us,” and “our”), a Delaware corporation formed in 2013, operates a leading independent global online ad campaign management and distribution platform as measured by the number of advertising impressions served and the number of countries in which we serve customers.  Our revenues are principally derived from services related to online advertising. We help advertisers, agencies and publishers engage with consumers across multiple online media channels (mobile, display, rich media, video and social) while delivering efficient, impactful and measurable ad campaigns.  We connect nearly 14,000 advertisers and over 5,000 agencies to audiences in about 65 countries, serving more than 1.5 trillion impressions a year.

Separation from Digital Generation, Inc.

Prior to February 7, 2014, we operated as the online segment of Digital Generation, Inc. (“DG”), a leading global television and online advertising management and distribution business. On February 7, 2014, pursuant to the terms of the Agreement and Plan of Merger, dated as of August 12, 2013 (the “Merger Agreement”), by and among Extreme Reach Inc. (“Extreme Reach”), Dawn Blackhawk Acquisition Corp., a wholly-owned subsidiary of Extreme Reach (“Acquisition Sub”), and DG, all of our issued and outstanding shares of common stock, par value $0.001 per share (“Sizmek Common Stock”) were distributed by DG pro rata to its stockholders (the “Spin-Off”) with the DG stockholders receiving one share of Sizmek Common Stock for each share of the common stock of DG (“DG Common Stock”).  Immediately after the distribution of the Sizmek Common Stock, pursuant to the Merger Agreement, Acquisition Sub merged with and into DG with DG as the surviving corporation (the “Merger”) and all of the outstanding shares of DG Common Stock were converted into the right to receive $3.00 per share, and DG became a wholly-owned subsidiary of Extreme Reach.  Prior to the Spin-Off, DG contributed to us all of the business and operations of its online advertising segment, all of DG’s cash, most of the working capital from its television segment, and certain other corporate assets pursuant to the separation and redemption agreement and related documents, and we agreed to indemnify DG and affiliates of DG (including Extreme Reach) for all pre-closing liabilities of DG, including stockholder litigation, tax obligations, and employee liabilities. Sizmek now operates as a separate, stand-alone publicly-traded company in the online advertising services business segment.

Carve-out Financial Statements Prior to Spin-Off

Prior to our Spin-Off from DG on February 7, 2014, our combined financial statements were derived from the consolidated financial statements and accounting records of DG.  These statements reflected the combined historical results of operations, financial position and cash flows of DG’s online business primarily conducted through MediaMind Technologies Inc., EyeWonder, LLC, Peer39, Inc., and Unicast, and an allocable portion of DG’s corporate costs.  Prior to the Spin-Off, our financial statements are presented as if such businesses had been combined for all periods presented.

All intercompany transactions have been eliminated. All intercompany transactions between us and DG have been included in these combined financial statements and are considered to be effectively settled for cash in the combined financial statements at the time the transaction is recorded. The total net effect of the settlement of these intercompany transactions is reflected in the combined statements of cash flows as a financing activity and in the combined balance sheet as “Parent company investment.”

For periods prior to our Spin-Off on February 7, 2014, the combined financial statements include expense allocations for (1) certain corporate functions historically provided by DG, including, but not limited to, finance, audit, legal, information technology, human resources, communications, compliance, and shared services; (2) employee benefits and incentives; and (3) share-based compensation. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro-rata basis of combined revenues, headcount or other measures of the Company and DG. We consider the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to or the benefit received by us during the periods presented. The allocations may not, however, reflect the expense we would have incurred as an independent, publicly-traded company for the periods presented. We benefited from sharing the corporate cost structure of DG rather than incurring such costs ourselves on a stand-alone basis. For the six months ended June 30, 2013, DG reported corporate overhead (excluding share-based compensation) of $12.7 million. The amount of such corporate overhead that was allocated to us in these carve-out financial statements was $4.9 million, in accordance with the allocation principles for preparing carve-out financial statements.  As a result, these carve-out financial statements include corporate overhead expenses which represent approximately 39% of DG’s total corporate overhead for the first six months of 2013.  After the Spin-Off, we ultimately expect about 70% to 75% of DG’s total corporate overhead will shift to us, rather than the 39% that was allocated to us during the six months ended June 30, 2013.  Accordingly, we expect our corporate overhead costs as a stand-alone public company will be substantially greater than the amounts that were allocated to us in the carve-out financial statements prior to completion of the Spin-Off.

9

Table of Contents

DG used a centralized approach to cash management and the financing of its operations.  Prior to the Spin-Off, the majority of our cash was transferred to DG on a daily basis, and DG funded our operating and investing activities as needed. Cash transfers to and from DG’s cash management accounts are reflected in “Parent company investment.”

Prior to the Spin-Off, the combined financial statements included certain assets and liabilities that were held at the DG corporate level but were specifically identifiable or otherwise allocable to us. The cash and cash equivalents held by DG at the corporate level were not specifically identifiable to us and therefore were not allocated to us for any of the periods presented prior to the Spin-Off; however, at the Spin-Off date, cash and working capital associated with DG’s TV business were contributed to us.  Cash and cash equivalents in our combined balance sheet prior to the Spin-Off primarily represents cash held locally by entities included in our combined financial statements. DG’s third-party debt and the related interest expense have not been allocated to us for any period as we were not the legal obligor and those amounts were paid off on or about February 7, 2014 as part of DG’s Merger with Extreme Reach.

2. General

Principles of Consolidation and Combination

The consolidated and combined financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the accounts of our subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation or combination.  For the period prior to the Spin-Off, the carve-out financial statements have been prepared on a basis that management believes to be reasonable to reflect the financial position, results of operations and cash flows of the Company’s operations, including portions of DG’s corporate costs and administrative shared services. These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

These financial statements have been prepared by us without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.  However, we believe the disclosures are adequate to make the information presented not misleading.  The unaudited consolidated and combined financial statements reflect all adjustments, which are, in the opinion of management, of a normal and recurring nature and necessary for a fair presentation of our financial position as of the balance sheet dates, and the results of operations and cash flows for the periods presented.

Seasonality

Our business is seasonal. Revenues tend to be the highest in the fourth quarter as a large portion of our revenues follow the advertising patterns of our customers.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to the recoverability and useful lives of our long-lived assets, the adequacy of our allowance for doubtful accounts and credit memo reserves, contingent consideration and income taxes. We base our estimates on historical experience, future expectations and on other relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

See Note 5 for a discussion of the risk of a future impairment of our goodwill.

Assets and Liabilities of DG’s TV Business

Pursuant to the Separation and Redemption Agreement, DG contributed to us substantially all of its television business current assets and certain other assets existing on February 7, 2014, and we agreed to assume substantially all of DG’s television business liabilities that existed on February 7, 2014 or were attributable to periods up to and including February 7, 2014.  These net assets contributed were recorded at $75.7 million.  The details of these assets and liabilities outstanding as of June 30, 2014 were as follows (in thousands):

10

Table of Contents

Derivative Instruments

We enter into foreign currency forward contracts and options to hedge a portion of the exposure to the variability in expected future cash flows resulting from changes in related foreign currency exchange rates between the New Israeli Shekel (“NIS”) and the U.S. Dollar. These transactions are designated as cash flow hedges, as defined by Accounting Standards Codification (“ASC”) Topic 815, “Derivatives and Hedging.”

ASC Topic 815 requires that we recognize derivative instruments as either assets or liabilities in our balance sheet at fair value. These contracts are Level 2 fair value measurements in accordance with ASC Topic 820, “Fair Value Measurements and Disclosures.” For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss), net of taxes, and reclassified into earnings (various operating expenses) in the same period or periods during which the hedged transaction affects earnings.

Our cash flow hedging strategy is to hedge against the risk of overall changes in cash flows resulting from certain forecasted foreign currency rent and salary payments during the next twelve months. We hedge portions of our forecasted expenses denominated in the NIS with foreign currency forward contracts and options.  At June 30, 2014, we had $2.1 million notional amount of foreign currency forward contracts and options outstanding that had a net fair value asset balance of $0.0 million ($0.0 million asset, net of a $0.0 million liability). The net asset is included in “other current assets” and is expected to be recognized in our results of operations in the next twelve months.  As a result of our hedging activities, we incurred the following gains in our results of operations (in thousands):

At December 31, 2013, we had $5.2 million notional amount of foreign currency forward contracts and options outstanding that had a net fair value asset balance of $0.1 million ($0.1 million asset, net of a $0.0 million liability). The vast majority of any gain or loss from hedging activities is included in our various operating expenses.  It is our policy to offset fair value amounts recognized for derivative instruments executed with the same counterparty. In connection with our foreign currency forward contracts and options and other banking arrangements, we have agreed to maintain $1.7 million of cash in bank accounts with our counterparty, which we classify as restricted cash on our balance sheet.

Accumulated Other Comprehensive Income (Loss)

Components of accumulated other comprehensive income (loss) (“AOCI” or “AOCL”), net of tax, for the three and six months ended June 30, 2014 and 2013 were as follows (in thousands):

11

Table of Contents

12

Table of Contents

The following tables summarize the reclassifications from AOCL to the consolidated and combined statements of operations for the three and six months ended June 30, 2014 and 2013 (in thousands):

Merger, Integration and Other Expenses

Merger, integration and other expenses reflect the expenses incurred in (i) DG’s Merger with Extreme Reach and our Spin-Off from DG, (ii) acquiring or disposing of a business, (iii) integrating an acquired operation (e.g., severance pay, office closure costs) into the Company and certain other expenses.  A summary of our merger, integration and other expenses are as follows (in thousands):

(1)  See discussion of Merger and Spin-Off under “Separation from Digital Generation, Inc.” in Note 1.

13

Table of Contents

Recently Issued Accounting Guidance

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).”  ASU 2014-09 modifies revenue recognition guidance for U.S. GAAP.  Previous revenue recognition guidance in U.S. GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions.  In contrast, International Accounting Standards Board (“IASB”) provided limited guidance on revenue recognition.  Accordingly, the FASB and IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”).  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  To achieve that core principle, an entity should apply the following steps:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

For Sizmek, the amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted.  An entity shall adopt the amendments in ASU 2014-09 by either (i) retrospectively adjusting each prior reporting period presented or (ii) retrospectively adjusting for the cumulative effect of initially applying ASU 2014-09 at the date of initial adoption.  We have not as yet determined (i) the extent to which we expect ASU 2014-09 will impact our reported revenues or (ii) the manner in which it will be adopted.

Recently Adopted Accounting Guidance

Effective January 1, 2014, we adopted ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” on a prospective basis.  ASU 2013-11 amends the accounting guidance related to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss, or a tax credit carryforward exists and certain criteria are met.  The adoption of ASU 2013-11 did not have a material impact on our financial statements.

3. Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

·                  Level 1—Quoted prices in active markets for identical assets or liabilities.

·                  Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

·                  Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

We have classified our assets and liabilities that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.

The tables below set forth by level assets and liabilities that were accounted for at fair value as of June 30, 2014 and December 31, 2013. The carrying values of our accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these financial instruments. The tables do not include cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value (in thousands).

14

Table of Contents

(a) Included in cash and cash equivalents.

(b) Included in other current assets.

(c) Included in other non-current assets.

(d) Included in current assets of TV business.

(e) Included in non-current assets of TV business.

(f) Included in current liabilities of TV business.

The fair value of our money market funds was determined based upon quoted market prices.  The currency forward derivatives/options are derivative instruments whose value is based upon quoted market prices from various market participants. We have a zero cost basis in these derivative instruments. Our marketable equity securities relate to a single issuer that has an adjusted cost basis of $0.3 million.

In connection with our Spin-Off from DG, DG contributed a revenue sharing asset to us that resulted from DG’s sale of its Springbox unit.  We are entitled to a percentage of the revenues collected by the business for three years after the closing date (June 1, 2012).  Revenue sharing payments are generally made once a year.  We have estimated the future revenues of Springbox based on the historical revenues and certain other factors, discounted to their present value.  The following table provides a reconciliation of changes in the fair values of our Level 3 assets (in thousands):

Also in connection with our Spin-Off from DG, we assumed a portion of a revenue earnout arrangement that DG had agreed to in its purchase of North Country.  Under the arrangement, to the extent North Country’s revenues exceed a specified amount for the twelve months ended July 31, 2014; we are obligated to pay the North Country sellers a fee equal to a percentage of those revenues up to a maximum of $225,000. We have estimated North Country’s future revenues based on the historical revenues and certain other factors.  The following table provides a reconciliation of changes in the fair values of our Level 3 liabilities (in thousands):

15

Table of Contents

Revenue and other earnout arrangements sometimes require a minimum level of performance (e.g., revenues, adjusted EBITDA) before any earnout payment becomes due.  Accordingly, there can be significant volatility in the earnout liability. Each reporting period, we update our estimates of the performance indicators (e.g., revenue, adjusted EBITDA) and the corresponding earnout levels achieved, discounted to their present values.  Changes in fair value are recorded in cost of revenues in the accompanying statements of operations.

In connection with our acquisition of Republic Project, we agreed to a contingent consideration component of the purchase price based on 2014 and 2015 revenues and adjusted EBITDA.  The earnouts have minimum levels for revenue and adjusted EBITDA before any earnout payment becomes due.  As of June 30, 2014, we do not expect to make any payments with respect to the Republic Project contingent consideration arrangement.  See Note 4—Acquisition of Republic Project.

In May 2014, we purchased $1.0 million of Abakus convertible promissory notes (“Convertible Notes”) for $1.0 million.  The Convertible Notes are due 90 days after written notice after the earlier of (i) May 30, 2016 and (ii) an occurrence of an Event of Default (as defined).  Abakus is a private company that has developed a digital attribution software solution.  The Convertible Notes bear interest at 5% per annum payable at maturity.  The Convertible Notes are convertible into Abakus Series A Preferred Stock (“Series A Preferred”) as follows:

a)             Automatic conversion if Abakus sells $2.0 million of Series A Preferred (“Qualified Financing”), whereupon the Convertible Notes shall be converted, at Sizmek’s option, at either (i) 75% of the share price in the Qualified Financing, or (ii) the quotient of $7.0 million divided by the number of shares outstanding upon exercise of all dilutive securities, and

b)             Optional conversion at Sizmek’s election if Abakus completes an Equity Financing (as defined) that is not a Qualified Financing, whereupon the Convertible Notes shall be converted at 75% of the share price in the Equity Financing.

In addition, upon a Change in Control, as defined, the Convertible Notes shall be paid off at the greater of (i) the outstanding balance, or (ii) the amount the holder would have received upon conversion of the Convertible Notes.  The Convertible Notes are considered held-to-maturity securities and carried at amortized cost.  The fair value of the Convertible Notes is not readily determinable.  The Convertible Notes are included in other non-current assets.

4. Acquisition of Republic Project

On October 4, 2013, we acquired the assets and operations of privately-held Republic Project, a cloud-based ad platform that enables agencies and brands to create, deliver and measure social and mobile rich media campaigns, for $1.1 million in cash, a $0.3 million deferred payment obligation and contingent consideration we valued at zero. The contingent consideration payment ranges from zero to $13.1 million based on reaching revenue and adjusted EBITDA performance targets in 2014 and 2015.

The objective was to expand our product offerings and to better serve the advertising community. We expect to realize operating synergies from this transaction, and we expect Republic Project to create opportunities to sell its services to our customers. Republic Project has been included in our results of operations since the date of closing.

The purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values. We allocated $0.3 million to customer relationships, $0.6 million to developed technology and $0.4 million to noncompetition agreements. The customer relationships, developed technology and noncompetition agreements acquired in the transaction are being amortized on a straight-line basis over 5 years, 4 years and 4 years, respectively. The weighted average amortization period is 4.2 years. The intangible assets created in the acquisition are deductible for tax purposes.

16

Table of Contents

5. Goodwill

We operate as a single reporting unit. Changes in the carrying value of our goodwill for the six months ended June 30, 2014 are as follows (in thousands):

We test goodwill for possible impairment each year on December 31st and whenever events or changes in circumstances indicate the carrying value of our goodwill may not be recoverable. The goodwill impairment test involves a two-step process. In the first step, we compare the fair value of our online reporting unit to its carrying value. If the fair value of our online reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of our online reporting unit is less than its carrying value, we must perform the second step of the impairment test to measure the amount of the impairment loss. In the second step, the reporting unit’s fair value is allocated to its assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit’s goodwill is less than the carrying value, the difference is recorded as an impairment loss. At December 31, 2013, we performed our annual goodwill impairment test for our online reporting unit and determined it was not impaired.  At June 30, 2014, we are not aware of any indicators of impairment of our goodwill.

Risk of Future Impairment

At December 31, 2013, based on a variety of methods including a discounted cash flow model (a Level 3 fair value measurement) that uses our internal forecast, we determined the fair value of our online reporting unit was only 5% in excess of its carrying value.  In preparing our discounted cash flow model, we make assumptions about future revenues and expenses to determine the cash flows that will result from the online reporting unit.

As with any forecast, there is substantial risk the forecasted cash flows of our online reporting unit may fall short of our expectations.  If actual or expected future cash flows should fall sufficiently below our current forecast, it is likely we would be required to record another goodwill impairment charge.  Future net cash flows are impacted by a variety of factors including revenues, operating margins, capital expenditures, income tax rates, and a discount rate.

Further, the market value of our common stock plus a reasonable control premium is an indicator of the fair value of our Company.  If the market value of our common stock should decline sufficiently below the book value of our shareholders’ equity for an extended period of time, it would likely cause us to conclude that our goodwill is impaired and we would be required to record another goodwill impairment charge.

6.  Share-based Compensation

Prior to our Spin-Off from DG on February 7, 2014, certain of our employees participated in DG’s equity based incentive programs.  Share-based compensation expense reflected in the accompanying financial statements up until February 7, 2014 relates to DG’s stock plan awards and not to our stock awards.  Immediately prior to completing the Spin-Off transaction, all outstanding equity awards became fully vested and were converted into shares of DG Common Stock, to the extent the award had an intrinsic value. Equity awards with no intrinsic value were cancelled.  DG’s equity incentive plans were terminated in connection with the Merger Agreement (see Note 1).  Below is a summary of our share-based compensation expense related to stock awards (in thousands):