Sizmek Inc. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Sizmek Inc.	Financial_Report.xls
EX-31.2 - EXHIBIT 31.2 - Sizmek Inc.	exhibit_31-2.htm
EX-32.1 - EXHIBIT 32.1 - Sizmek Inc.	exhibit_32-1.htm
EX-31.1 - EXHIBIT 31.1 - Sizmek Inc.	exhibit_31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-36219

Sizmek Inc.

(Exact name of registrant as specified in its charter)

Delaware		37-1744624
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

500 West 5th Street, Suite 900

Austin, Texas 78701

(Address of principal executive offices) (Zip Code)

(512) 469-5900

(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.

Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o
(Do not check if a smaller reporting company)

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 May 14, 2015, the registrant had 29,548,307 shares of Common Stock, par value $0.001, outstanding.

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 video and mobile products;

continued or accelerating decline in our rich-media business;

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 and disposition 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, 2014.

In particular, information included under the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains 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.

PART I—FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

SIZMEK INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

	March 31, 2015			December 31, 2014
	(unaudited)
Assets
CURRENT ASSETS:
Cash and cash equivalents	$	83,210		$	90,672
Accounts receivable (less allowances of $753 and $813 as of March 31, 2015 and December 31, 2014, respectively)		42,889			51,125
Deferred income taxes		638			636
Restricted cash		1,512			1,538
Other current assets		7,502			5,254
Current assets of TV business		1,518			2,470
Total current assets		137,269			151,695
Property and equipment, net		37,959			34,036
Goodwill		40,154			40,154
Intangible assets, net		67,450			71,306
Deferred income taxes		346			387
Restricted cash		3,947			3,941
Other non-current assets		3,047			3,393
Total assets	$	290,172		$	304,912

Liabilities and Stockholders’ Equity
CURRENT LIABILITIES:
Accounts payable	$	2,941		$	3,976
Accrued liabilities		18,379			19,171
Current liabilities of TV business		142			395
Total current liabilities		21,462			23,542
Deferred income taxes		7,911			8,242
Other non-current liabilities		6,994			6,433
Non-current liabilities of TV business		260			260
Total liabilities		36,627			38,477

STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value—Authorized 15,000 shares; issued and outstanding—none		—			—
Common stock, $0.001 par value—Authorized 200,000 shares; 30,489 issued and 29,543 outstanding at March 31, 2015; 30,399 issued and 30,071 outstanding at December 31, 2014		30			30
Treasury stock, at cost (946 shares and 328 shares at March 31, 2015 and December 31, 2014, respectively)		(6,500	)		(2,000	)
Additional capital		371,943			371,261
Accumulated deficit		(109,286	)		(101,341	)
Accumulated other comprehensive loss		(2,642	)		(1,515	)
Total stockholders’ equity		253,545			266,435
Total liabilities and stockholders’ equity	$	290,172		$	304,912

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

SIZMEK INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Three Months Ended March 31,
	2015			2014
Revenues	$	36,759		$	38,379
Cost of revenues (excluding depreciation and amortization)		13,660			14,486
Selling and marketing		14,203			15,588
Research and development		2,903			3,548
General and administrative		4,554			8,105
Merger, integration and other		834			4,945
Depreciation and amortization		7,439			6,528
Loss from operations		(6,834	)		(14,821	)
Other expense, net		979			3
Loss before income taxes		(7,813	)		(14,824	)
Provision (benefit) for income taxes		132			(406	)
Net loss	$	(7,945	)	$	(14,418	)

Basic and diluted loss per common share	$	(0.27	)	$	(0.47	)

Weighted average common shares outstanding:
Basic and diluted		29,783			30,399

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

SIZMEK INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED AND COMBINED STATEMENTS OFCOMPREHENSIVE LOSS

(In thousands)

	Three Months Ended March 31,
	2015			2014
Net loss	$	(7,945	)	$	(14,418	)
Other comprehensive income (loss):
Unrealized loss on derivatives, net of tax		(95	)		(77	)
Unrealized loss on available for sale securities, net of tax		(228	)		(734	)
Foreign currency translation adjustment		(804	)		97
Total other comprehensive loss		(1,127	)		(714	)
Total comprehensive loss	$	(9,072	)	$	(15,132	)

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

SIZMEK INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

	Common Stock (Shares / Amount)				Treasury Stock (Shares / Amount)						Additional Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance at December 31, 2014		30,399	$	30		(328	)	$	(2,000	)	$	371,261		$	(101,341	)	$	(1,515	)	$	266,435
Net loss		—		—		—			—			—			(7,945	)		—			(7,945	)
Share-based compensation		—		—		—			—			846			—			—			846
Common stock issued pursuant to RSU agreements, net of shares tendered to satisfy required tax withholding		90		—		—			—			(164	)		—			—			(164	)
Purchase of treasury stock		—		—		(618	)		(4,500	)		—			—			—			(4,500	)
Other comprehensive loss		—		—		—			—			—			—			(1,127	)		(1,127	)
Balance at March 31, 2015		30,489	$	30		(946	)	$	(6,500	)	$	371,943		$	(109,286	)	$	(2,642	)	$	253,545

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

SIZMEK INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(In thousands)

	Three Months Ended March 31,
	2015			2014
Cash flows from operating activities:
Net loss	$	(7,945	)	$	(14,418	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation of property and equipment		3,553			2,519
Amortization of intangibles		3,886			4,009
Share-based compensation		846			6,589
Deferred income taxes		(327	)		(419	)
Benefit for accounts receivable recoveries		(60	)		(93	)
Gain from recovery of TV business net assets		(114	)		—
Changes in operating assets and liabilities:
Accounts receivable		7,938			5,368
Other assets		(2,241	)		(1,665	)
Accounts payable and other liabilities		(2,195	)		(1,339	)
Net cash provided by operating activities		3,341			551

Cash flows from investing activities:
Purchases of property and equipment		(2,321	)		(920	)
Capitalized costs of developing software		(4,245	)		(2,592	)
Other		(29	)		(709	)
Net cash used in investing activities		(6,595	)		(4,221	)

Cash flows from financing activities:
Purchases of treasury stock		(4,500	)		—
Payments of TV business liabilities		(139	)		(8,345	)
Proceeds from TV business assets		952			27,589
Payment of tax withholding obligation for shares tendered		(164	)		—
Net contributions from Parent		—			44,833
Net cash (used in) provided by financing activities		(3,851	)		64,077

Effect of exchange rate changes on cash and cash equivalents		(357	)		21
Net (decrease) increase in cash and cash equivalents		(7,462	)		60,428
Cash and cash equivalents at beginning of year		90,672			22,648

Cash and cash equivalents at end of period	$	83,210		$	83,076

Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	430		$	805
Cash received for interest	$	(27	)	$	—
Extended payment obligations incurred to purchase equipment	$	960		$	—

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

SIZMEK INC. AND SUBSIDIARIES

NOTES TO 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 17,000 advertisers and 3,500 agencies to audiences in approximately 60 countries, serving more than 1.4 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 DG common stock ("DG Common Stock") they held. 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 each of the outstanding shares of DG Common Stock was 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, pursuant to the Separation and Redemption Agreement and related documents, 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; 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 EMEA, Ltd., and an allocable portion of DG's corporate costs. For the period 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.

For the period 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 period presented. The allocations may not, however, reflect the expense we would have incurred as an independent, publicly-traded company for the period presented. We benefited from sharing the corporate cost structure of DG rather than incurring such costs ourselves on a stand-alone basis.

The majority of the pre Spin-Off expense allocations were charged to general and administrative expense. For the periods subsequent to the Spin-Off, general and administrative expense as a percentage of revenues (excluding the accelerated recognition of share-based payment awards in 2014) has been comparable to the corresponding period of the prior year. Accordingly, while we benefited from sharing DG's cost structure prior to the Spin-Off, since the Spin-Off we have been able to control our corporate overhead expenses to a level reasonably consistent with the pre Spin-Off periods.

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 wholly-owned, and majority-owned and controlled 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 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, 2014.

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.

Effective November 1, 2014, we shortened the estimated remaining useful life of our Sizmek MDX platform assets from an average of 46 months to 20 months in anticipation of our new platform (which is currently in development). We anticipate the new platform will be operational by the end of 2015 and we expect to retire our existing platform by mid-2016. As a result, we recorded additional depreciation expense of $0.9 million during the first quarter of 2015, which increased our net loss and loss per share by $0.8 million and $0.03, respectively.

Risk of Goodwill Impairment

See Note 4 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 $78.5 million. The details of these assets and liabilities outstanding as of March 31, 2015 and December 31, 2014 were as follows (in thousands):

Description	March 31, 2015		December 31, 2014
Current assets of television business:
Income tax receivables	$	1,268	$	1,943
Trade accounts receivable	90		367
Springbox revenue sharing	160		160
Total	$	1,518	$	2,470

Current liabilities of television business:
Trade accounts payable	$	142	$	165
Accrued liabilities	—		230
Total	$	142	$	395

Non-current liabilities of television business:
Uncertain tax positions	$	260	$	260

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 were 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 a single counterparty using foreign currency forward contracts and options. At March 31, 2015, we had $14.7 million notional amount of foreign currency forward contracts and options outstanding that had a net fair value liability balance of $0.2 million ($0.3 million liability, net of a $0.1 million asset). At December 31, 2014, we had $14.3 million notional amount of foreign currency forward contracts and options outstanding that had a net fair value liability balance of $0.1 million ($0.2 million liability, net of a $0.1 million asset). The net liability is included in "accrued liabilities" and is expected to be recognized in our results of operations in the next twelve months. The vast majority of any gain or loss from hedging activities is included in our various operating expenses. As a result of our hedging activities, we incurred the following gains and losses in our results of operations (in thousands):

	Three Months Ended March 31,
	2015			2014
Hedging (loss) gain recognized in operations	$	(71	)	$	86

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 $1.5 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 months ended March 31, 2015 and 2014 were as follows (in thousands):

	Three Months Ended March 31, 2015
	Foreign Currency Translation			Unrealized Gains (Losses) on Foreign Currency Derivatives			Unrealized Gain (Loss) on Available for Sale Securities			Total Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2014	$	(2,672	)	$	(98	)	$	1,255		$	(1,515	)

Other comprehensive income (loss) before reclassifications		(804	)		(159	)		(228	)		(1,191	)
Amounts reclassified out of AOCL		—			64			—			64
Net current period activity		(804	)		(95	)		(228	)		(1,127	)

Balance at March 31, 2015	$	(3,476	)	$	(193	)	$	1,027		$	(2,642	)

	Three Months Ended March 31, 2014
	Foreign Currency Translation			Unrealized Gains (Losses) on Foreign Currency Derivatives			Unrealized Gain (Loss) on Available for Sale Securities			Total Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2013	$	(1,198	)	$	116		$	1,764		$	682

Other comprehensive income (loss) before reclassifications		97			(2	)		(734	)		(639	)
Amounts reclassified out of AOCI		—			(75	)		—			(75	)
Net current period activity		97			(77	)		(734	)		(714	)

Balance at March 31, 2014	$	(1,101	)	$	39		$	1,030		$	(32	)

The following table summarizes the reclassifications from AOCI or AOCL to the consolidated and combined statements of operations for the three months ended March 31, 2015 and 2014 (in thousands):

	Amounts Reclassified out of AOCI or AOCL
	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014			Affected Line Items in the Consolidated and Combined Statements of Operations
Gains (losses) on cash flow hedges:
Foreign currency derivatives	$	(8	)	$	7		Cost of revenues
Foreign currency derivatives		(3	)		3		Selling and marketing
Foreign currency derivatives		(48	)		35		Research and development
Foreign currency derivatives		(11	)		10		General and administrative
Foreign currency derivatives		(1	)		31		Other, net
Total before taxes		(71	)		86
Tax amounts		7			(11	)
Income after tax	$	(64	)	$	75

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 (iv) certain other items of income or expense not deemed to be part of our core operations. A summary of our merger, integration and other expenses is as follows (in thousands):

	Three Months Ended March 31,
Description	2015			2014
Severance	$	324		$	243
Merger and Spin-Off (1)		—			4,702
Recovery of TV business net assets (2)		(114	)		—
Special projects		117			—
Integration costs		507			—
Total	$	834		$	4,945

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

(2) - Represents a reduction in expense due to realizing more TV net assets than originally estimated at the time of the Spin-Off.

Israel Operations

The majority of our research and development activities and a large portion of our accounting functions are performed in Herzliya, Israel. In total, about 28% of our workforce is located in Israel. As a result, we are subject to risks associated with operating in the Middle East.

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 GAAP. Previous revenue recognition guidance in 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 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.

3. Fair Value Measurements

ASC 820, Fair Value Measurement, 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 March 31, 2015 and December 31, 2014. 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).

		Fair Value Measurements at March 31, 2015
	Balance Sheet Location	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value Measurements
Assets:
Money market funds	(a)	$	45,907	$	—	$	—	$	45,907
Revenue sharing arrangement	(b)		—		—		160		160
Marketable equity securities	(c)		1,368		—		—		1,368
Total		$	47,275	$	—	$	160	$	47,435
Liabilities:
Currency forward derivatives / options	(d)	$	—	$	228	$	—	$	228

		Fair Value Measurements at December 31, 2014
	Balance Sheet Location	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value Measurements
Assets:
Money market funds	(a)	$	35,953	$	—	$	—	$	35,953
Revenue sharing arrangement	(b)		—		—		160		160
Marketable equity securities	(c)		1,596		—		—		1,596
Total		$	37,549	$	—	$	160	$	37,709
Liabilities:
Currency forward derivatives / options	(d)	$	—	$	113	$	—	$	113

(a) Included in cash and cash equivalents.

(b) Included in current assets of TV business.

(d) Included in accrued liabilities.

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 and have a 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):

	Revenue Sharing Arrangement Three Months Ended March 31, 2015

Balance at beginning of year	$	160
Additions	—
Balance at end of period	$	160

In connection with an acquisition of a business, we sometimes include a contingent consideration component of the purchase price based on (i) future revenues or (ii) future revenues and operating results (e.g., adjusted EBITDA), that require minimum thresholds be met before any earnout payment becomes due. Accordingly, there can be significant volatility in the earnout liability. Each reporting period, we review our estimates of the performance indicators (e.g., revenue, adjusted EBITDA) and the corresponding earnout levels achieved, discounted to their present values. The change in fair value is recorded in cost of revenues in the accompanying statements of operations.

In connection with our acquisition of Republic Project, we agreed to make additional payments to the sellers if Republic's 2014 or 2015 revenues and adjusted EBITDA exceeded certain levels. As of March 31, 2015, we do not expect to make any payments with respect to the Republic Project contingent consideration arrangement.

Abakus Convertible Notes

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 or (ii) an occurrence of an Event of Default (as defined in the Convertible Notes). Abakus is a small 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:

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 in the Convertible Notes) 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 in the Convertible Notes, 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 are carried at amortized cost. The fair value of the Convertible Notes is not readily determinable. We are not aware of a market for the Convertible Notes. The Convertible Notes are included in other non-current assets.

4. Goodwill

We operate as a single reporting unit. Changes in the carrying value of our goodwill for the three months ended March 31, 2015 were as follows (in thousands):

	Goodwill		Accumulated Impairment Losses			Net Carrying Value
Balance at December 31, 2014	$	380,681	$	(340,527	)	$	40,154
2015 activity		—		—			—
Balance at March 31, 2015	$	380,681	$	(340,527	)	$	40,154

We evaluate 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. Generally, the goodwill impairment test involves a two-step process. In the first step, we compare the fair value of the Company to its carrying value. If the fair value of the Company exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the Company 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 Company'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 Company was being acquired in a business combination. If the implied fair value of the Company's goodwill is less than the carrying value, the difference is recorded as an impairment loss.

ASC 350-20-35 allows an entity to assess qualitatively whether it is necessary to perform step one of the prescribed two-step annual goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, the two-step goodwill impairment test is not required. At December 31, 2014, we performed a qualitative assessment of our goodwill and determined that the two-step process was not necessary. Further, at March 31, 2015, we are not aware of any events or changes in circumstances that would indicate the carrying value of our goodwill may not be recoverable.

Risk of Future Impairment

At March 31, 2015 and December 31, 2014, based on our discounted cash flow model that uses our internal forecast, we determined the fair value of the Company was only slightly in excess of its carrying value. In preparing our discounted cash flow model, we made assumptions about future revenues and expenses for several periods to determine the cash flows that would result.

As with any forecast, there is substantial risk our forecasted cash flows may fall short of our current 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 fall sufficiently below the current level 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.

5. 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 the stock awards (in thousands):

	Three Months Ended March 31,
Description	2015		2014
DG stock options and RSUs awarded to our employees	$	—	$	2,650
DG share-based awards allocated to us as part of corporate services		—		3,817
Sizmek share-based awards granted		846		122
Total	$	846	$	6,589

In the first quarter of 2015, Sizmek’s Compensation Committee granted (i) 159,245 performance-based Restricted Stock Units (“RSUs”), (ii) 192,867 time-based RSUs and (iii) 133,600 time-based stock options, to certain of our employees and directors. The RSUs and stock options expected to vest were valued at $2.8 million and $0.6 million, respectively. The awards (i) vest over periods ranging from one to three years, (ii) are subject to the employees’ continued employment with us or the director’s continued service on our Board of Directors, and (iii) with respect to the performance-based RSUs, are subject to reaching certain (a) revenue, (b) adjusted EBITDA and (c) free cash flow growth targets (i.e., performance conditions). The awards vest on an accelerated basis upon the occurrence of the holder’s (a) death, (b) termination by reason of disability, (c) termination without Cause (as defined) following a Change of Control (as defined) or (d) resignation for Good Reason (as defined) following a Change in Control. Unrecognized compensation costs related to unvested RSUs and stock options were $3.3 million at March 31, 2015.

6. Income Taxes

For the three months ended March 31, 2015, our effective tax rate was (1.7)% compared to 2.7% for the three months ended March 31, 2014. The effective tax rates for each period differ from the expected federal statutory rate of 35.0% as a result of state and foreign income taxes; certain non-deductible expenses; and changes in our valuation allowances in the U.S. and state jurisdictions within the U.S. The valuation allowance creates an effective tax rate of zero for income or loss earned in the U.S., substantially reducing our effective tax rate.

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than not sustain the position following an audit. For tax positions meeting the more-likely-than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. During the three months ended March 31, 2015, there were no additional uncertain tax positions. Interest and penalties related to uncertain tax positions are recognized in income tax expense. For each of the three month periods ended March 31, 2015 and 2014, we recognized less than $0.1 million of interest or penalties related to uncertain tax positions in our financial statements. The changes in uncertain tax positions for the three months ended March 31, 2015 and 2014 were as follows (in thousands):

	Three Months Ended March 31,
	2015			2014
Balance at beginning of year	$	1,507		$	1,701
Subtractions for tax positions related to prior years		(17	)		—
Balance at end of period	$	1,490		$	1,701

If we reduced our reserve for uncertain tax positions, it would result in our recognition of a tax benefit.

As of March 31, 2015, we provided a valuation allowance against substantially all of our U.S. and state NOL carryforwards as ultimate realization of these NOLs was not determined to be more-likely-than not. Accordingly, we have NOL carryforwards available to us (should we have sufficient future taxable income to utilize them) that are not reflected in our consolidated balance sheets at March 31, 2015 and December 31, 2014, respectively.

We are subject to U.S. federal income tax, income tax from multiple foreign jurisdictions including Israel and the United Kingdom, and income taxes of multiple state jurisdictions. U.S. federal, state and local income tax returns for 2011 through February 7, 2014 remain open to examination. Israeli and United Kingdom income tax returns remain open to examination for 2010 through 2014 and 2009 through 2014, respectively. Prior to our Spin-Off, our operating results had been included in DG's U.S. federal and state tax returns or tax returns of non-U.S. jurisdictions. Subsequent to our Spin-Off, we file stand-alone income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. Prior to our Spin-Off, we entered into a tax matters agreement with DG that governs the parties' respective rights, responsibilities and obligations with respect to taxes. The tax matters agreement generally provides that the filing of tax returns, the control of audit proceedings, and the payment of any additional tax liability relative to DG and its consolidated subsidiaries for periods prior to February 8, 2014 is our responsibility.

We do not provide deferred taxes on the undistributed earnings of our non-U.S. subsidiaries in situations where our intention is to reinvest such earnings indefinitely. Furthermore, we believe both our U.S. and non-U.S. subsidiaries have significant net assets, liquidity, and other financial resources available to meet their operational and capital investment requirements.

7. Loss per Share

Basic earnings (loss) per common share excludes dilution and is calculated by dividing net earnings (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per common share is calculated by dividing net earnings (loss) by the weighted-average number of common shares outstanding during the period, as adjusted for the potential dilutive effect of non-participating share-based awards such as stock options and RSUs.

On February 7, 2014, 30.4 million shares of our common stock were distributed to DG stockholders in conjunction with the Spin-Off. For comparative purposes, and to provide a more meaningful calculation of the weighted-average shares outstanding, we have assumed this amount to be outstanding for any period presented prior to the Spin-Off in the calculation of weighted-average shares outstanding.

The following table presents our loss per common share for the three months ended March 31, 2015 and 2014 (in thousands, except per share data):

	Three Months Ended March 31,
	2015			2014
Net loss	$	(7,945	)	$	(14,418	)

Weighted average common shares outstanding - basic		29,783			30,399
Dilutive securities		—			—
Weighted average common shares outstanding - diluted		29,783			30,399

Basic and diluted loss per common share	$	(0.27	)	$	(0.47	)

Antidilutive securities not included:
Stock options and RSUs		1,092			122

8. Geographical Information and Product Categories

We have one operating segment. Our chief operating decision maker is considered to be our Chief Executive Officer. The chief operating decision maker allocates resources and assesses performance of the business and other activities at the operating segment level.

The following table summarizes our revenues by geographic area (in thousands):

	Three Months Ended March 31,
	2015		2014
Revenues:
United States	$	19,600	$	18,762
Europe, Middle East and Africa		9,350		10,980
Asia Pacific		5,894		6,073
Latin America		1,351		1,513
North America (excluding U.S.)		564		1,051
Total	$	36,759	$	38,379

For the three months ended March 31, 2015, about 47% of our revenues were attributable to foreign jurisdictions. However, no one country other than the United States represented more than 10% of our consolidated revenues.

The following table summarizes our revenues by product category (in thousands):

	Three Months Ended March 31,
	2015		2014
Revenues:
Core products	$	25,897	$	23,404
Rich media		7,628		11,422
Programmatic managed services		3,234		3,553
Total	$	36,759	$	38,379

The following table summarizes our long-lived assets by country (in thousands):

	March 31, 2015		December 31, 2014
Long-Lived Assets:
Israel	$	27,876	$	24,818
United States		8,165		7,181
Other countries		1,918		2,037
Total	$	37,959	$	34,036

9. Related Party Transactions

Prior to the Spin-Off, DG provided certain management and administrative services to us. These services included, among others, accounting, treasury, audit, tax, legal, executive oversight, human resources, real estate, information technology and risk management. These expenses have been allocated to us on a basis of direct usage when identifiable, with the remainder allocated on the basis of revenue, headcount, or other measures. Further, DG also allocated to us (i) merger, integration and other expenses and (ii) share-based compensation, largely based on revenues. DG's allocation of these expenses to us was as follows (in thousands):

DG’s Expense Allocation to Sizmek	Three Months Ended March 31, 2014
Management and administrative services	$	637
Merger, integration and other	4,038
Share-based compensation	3,817
Total	$	8,492

Included in the above allocations are costs of DG's employee benefit plans and other employee incentives. Employee benefits and incentives include 401(k) matching contributions, participation in DG's long-term incentive compensation award plans and healthcare plans. The employee benefit and incentive costs are reflected in the statements of operations and are classified consistently with how the underlying employee's salary and other compensation costs have been recorded.

We consider the allocated cost for corporate services, employee benefits and incentives to be reasonable based on our utilization of such services. However, we believe the allocated cost for the services are different from the cost we would have incurred if we had been an independent publicly-traded company during those periods.

10. Subsequent Event – Agreement to Acquire StikeAd

On May 14, 2015, we entered into an Asset Purchase Agreement to acquire certain assets of StrikeAd, Inc. and its affiliates (collectively, “StrikeAd”) consisting of intellectual property (including capitalized software), receivables, contracts and relationships with customers and vendors, and property and equipment for $9.5 million in cash and the assumption of a $2.2 million promissory note. StrikeAd is a mobile DSP (demand side platform) provider based in the United Kingdom. We intend to combine the StrikeAd assets with our existing programmatic assets to build an end-to-end demand side platform for use by our customers. The transaction is expected to close during the second quarter of 2015.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with our unaudited consolidated and combined financial statements and notes thereto contained elsewhere in this Quarterly Report on Form 10-Q (“Report”).

The following discussion contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed elsewhere in this Form 10-Q, particularly in “Cautionary Note Regarding Forward-Looking Statements.”

Critical Accounting Policies and Estimates

The following discussion and analysis of the financial condition and results of operations are based on the unaudited consolidated and combined financial statements and notes to unaudited consolidated and combined financial statements contained in this Report that have been prepared in accordance with the rules and regulations of the SEC and do not include all the disclosures normally required in annual financial statements prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of our assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.

Our significant accounting policies are described in Note 2 to the consolidated and combined financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2014 (“Annual Report”). Our critical accounting policies are described in MD&A in our Annual Report. Our significant and critical accounting policies have not changed significantly since the filing of our Annual Report.

See Note 4 of our unaudited consolidated and combined financial statements regarding the risk of a future impairment of our goodwill.

Overview

We operate a leading open ad management and distribution platform. We assist 17,000 advertisers and 3,500 agencies engage with consumers in approximately 60 countries across multiple online media channels (mobile, display, rich media, video and social). Our revenues are principally derived from services related to online advertising. Our technology and service help advertisers overcome the fragmentation in the online advertising market and achieve optimal results from their advertising campaigns.

Our business can be impacted by several factors, including general economic conditions, the overall advertising market, new emerging digital technologies, and the continued growth of online and other alternative advertising.

Our Business Strategy

Our goal is to operate the leading independent ad management platform worldwide, and become the platform of choice among advertisers, agencies and publishers. We are in the process of completing the development of a single, end-to-end, integrated ad management platform across all channels and formats. In order to achieve our objective, we need to:

(i)	continue to expand the products available on our platform,

(ii)	expand our partnership program by inviting developers with the latest technology and features to partner with us and implement their technology onto our platform, and

(iii)

control our costs.

In 2015, we are focusing on four key growth areas:

(i)	Programmatic Decisioning—Our Peer 39 unit is the largest provider of data for ad buying (and selling) decisions. Our solutions provide page and event based data enabling advertisers to access safer, appropriate and relevant web page environments for their ads.

(ii)	Mobile—With our recent acquisition of Aerify, we now have a robust mobile offering across the mobile web and in-app technology.

(iii)

Video—Our roots and heritage, video is an area of the market also experiencing heavy growth, and is the vehicle of choice for branding advertisers as they move to digital and programmatic.

(iv)	Data—We intend to enable our clients to centralize, manage and activate their data and leverage deeper data sets within our Sizmek MDX platform for dynamic, creative targeting and frequency capping.

Completion of Merger and Spin-Off

Prior to February 7, 2014, we operated as the online segment of DG. On February 7, 2014 the Merger between DG, Extreme Reach and Acquisition Sub was completed. Immediately prior to the Merger, DG contributed its cash and most of its other working capital to us, and the shares of our common stock were distributed to DG's shareholders (the "Spin-Off") resulting in Sizmek becoming a new publicly-held company with its shares traded on the NASDAQ Global Select Market under the symbol SZMK. See Notes 1 and 9 of our consolidated and combined financial statements contained elsewhere herein.

Comparability of Operating Results before and after the Spin-Off

Prior to the Spin-Off, our combined financial statements were derived from the consolidated financial statements and accounting records of DG, which includes an allocation of DG's corporate costs. To a degree, prior to the Spin-Off we benefited from sharing the corporate cost structure of DG rather than incurring such costs ourselves on a stand-alone basis. Since the Spin-Off, we have been able to control our corporate overhead expenses to a level reasonably consistent with the pre Spin-Off periods. However, our operating results before and after the Spin-Off are not entirely comparable. In particular, operating results for the three months ended March 31, 2014 include (i) costs associated with accelerating the vesting of share-based payment awards in connection with consummating the Merger and Spin-Off ($6.3 million) and (ii) transaction related costs incurred in connection with completing the Merger and Spin-Off transactions ($4.7 million).

Acquisitions

We have a history of acquisitions. In August and September 2014, we acquired Aerify Media and Pixel, respectively. As a result of these acquisitions, our operating results from period to period are not entirely comparable. Each of the acquisitions has been included in our results of operations since their respective dates of closing.

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.

First Quarter 2015 Highlights

Revenues declined $1.6 million, or 4%, compared to the same quarter of 2014. Our rich media revenues continued to decline falling $3.8 million, or 33%, partially offset by a $2.5 million increase, or 11%, in our core products revenue.

In the first quarter of 2015, foreign currency exchange rates generally weakened compared with the U.S. Dollar. This resulted in us reporting lower revenues ($2.2 million) and lower operating expenses ($2.1 million) than if the exchange rates were held constant with those in effect in the first quarter of 2014.

Loss from operations decreased $8.0 million in the first quarter of 2015 as compared to the same period of 2014. The reduction in loss was due to lower share-based compensation expense ($5.7 million) and lower merger, integration and other costs ($4.1 million), partially offset by lower revenues ($1.6 million). The higher share-based compensation and merger, integration and other expenses in the prior year quarter were due to the completion of the Merger and Spin-Off.

Results of Operations

Three Months Ended March 31, 2015 vs. Three Months Ended March 31, 2014

The following table sets forth certain historical financial data (dollars in thousands):

							% Change			As a % of Revenue
	Three Months Ended						2015			Three Months Ended
	March 31,						vs.			March 31,
	2015			2014			2014			2015			2014
Revenues	$	36,759		$	38,379			(4	)%		100.0	%		100.0	%
Costs and expenses:
Cost of revenues (a)		13,660			14,486			(6	)		37.2			37.7
Selling and marketing		14,203			15,588			(9	)		38.6			40.6
Research and development		2,903			3,548			(18	)		7.9			9.3
General and administrative		4,554			8,105			(44	)		12.4			21.1
Merger, integration and other		834			4,945			(83	)		2.3			12.9
Depreciation and amortization		7,439			6,528			14			20.2			17.0
Total costs and expenses		43,593			53,200			(18	)		118.6			138.6

Loss from operations		(6,834	)		(14,821	)		(54	)		(18.6	)		(38.6	)

Other expense, net		979			3		NM				2.7			—

Loss before income taxes		(7,813	)		(14,824	)		(47	)		(21.3	)		(38.6	)
Provision (benefit) for income taxes		132			(406	)		(133	)		0.3			(1.0	)
Net loss	$	(7,945	)	$	(14,418	)		(45	)		(21.6	)		(37.6	)

(a) Excludes depreciation and amortization.

NMNot meaningful.

Revenues. For the three months ended March 31, 2015, revenues decreased $1.6 million, or 4%, as compared to the same period in the prior year. The decrease was due to a decline in our rich media services revenue ($3.8 million) and a slight drop in our programmatic managed services revenue ($0.3 million), partially offset by growth in our core products revenue ($2.5 million). Our rich media services revenue declined due to a reduction in the number of impressions served and a decrease in the average selling price per impression served. Our core products revenue grew primarily due to greater usage of our analytics capabilities ($1.2 million) and mobile services ($1.0 million) and our August 2014 purchase of Aerify Media ($0.6 million), partially offset by slight declines in other services.

For the three months ended March 31, 2015, foreign currency exchange rates generally weakened compared with the U.S. Dollar. This resulted in our reporting revenues $2.2 million lower than if the exchange rates were held constant with those in effect in the first quarter of 2014.

Cost of Revenues. For the three months ended March 31, 2015, cost of revenues decreased $0.8 million, or 6%, as compared to the same period in the prior year. As a percentage of revenues, cost of revenues decreased to 37.2% in the first quarter of 2015, as compared to 37.7% in the first quarter of 2014. Cost of revenues decreased primarily due to a reduction in compensation costs ($1.7 million), partially offset by increases in delivery costs ($0.6 million) and programmatic managed services costs ($0.2 million). In 2015, compensation costs were reduced due to lower average compensation levels per employee and a reduction in share-based compensation. In 2014, our share-based compensation expense was higher due to the accelerated vesting of all outstanding share-based payment awards in connection with the completion of the Merger and Spin-Off. In 2015, delivery costs increased due to the larger file sizes we now deliver, and we reduced the average gross margin we accept in our programmatic managed services business.

Selling and Marketing. For the three months ended March 31, 2015, selling and marketing expense decreased $1.4 million, or 9%, as compared to the same period in the prior year. The decrease relates to a reduction in share-based compensation ($1.2 million) and reseller costs ($0.4 million), partially offset by an increase in facility costs ($0.2 million). In 2014, our share-based compensation expense was higher due to the accelerated vesting of all outstanding share-based payment awards in connection with the completion of the Merger and Spin-Off. Reseller costs involve paying a commission or fee to the party responsible for causing the customer to use our platform in their online advertising. In 2015, our reseller costs declined due to lower average fees paid to resellers and lower revenues generated by resellers. As a percentage of revenues, selling and marketing expense decreased to 38.6% in the first quarter of 2015 as compared to 40.6% in the first quarter of 2014.

Research and Development. For the three months ended March 31, 2015, research and development expense decreased $0.6 million, or 18%, as compared to the same period in the prior year. The decrease was due to higher capitalized wages. The increase in capitalized wages was due to working more hours on software development projects that qualified for capitalization.

General and Administrative. For the three months ended March 31, 2015, general and administrative expense decreased $3.6 million, or 44%, as compared to the same period in the prior year. As a percentage of revenues, general and administrative expense decreased to 12.4% in 2015, as compared to 21.1% in 2014. The decrease was attributable to recognizing a smaller amount of share-based compensation. In 2014, we recognized $4.1 million as a result of the accelerated vesting of share-based payment awards in connection with the completion of the Merger and Spin-Off.

Merger, Integration and Other. For the three months ended March 31, 2015, merger, integration and other costs decreased $4.1 million, or 83%, as compared to the same period in the prior year. The decrease relates principally to the recognition of $4.7 million of costs relating to the completion of the Merger and Spin-Off transactions in February 2014. The 2014 amount excludes incremental costs associated with the accelerated vesting of all share-based awards in connection with the Merger and Spin-Off.

Depreciation and Amortization. For the three months ended March 31, 2015, depreciation and amortization increased $0.9 million, or 14%, as compared to the same period in the prior year. The increase was attributable to greater depreciation of capitalized software ($1.3 million), partially offset by lower depreciation of other property and equipment ($0.3 million) and lower amortization ($0.1 million). The increase in depreciation of capitalized software relates to (i) shortening the estimated remaining useful life of our Sizmek MDX platform from 46 months to 20 months effective November 1, 2014 in anticipation of retiring the MDX platform in June 2016 ($0.9 million) and (ii) an increase in capitalized software, which is attributable to working on more software development projects that qualify for capitalization. See Use of Estimates in Note 2 to our consolidated and combined financial statements.

Other expense, net. For the three months ended March 31, 2015, other expense, net was $1.0 million as compared to a nominal expense (less than $0.1 million) for the same period in 2014. The 2015 expense primarily relates to foreign exchange losses, which resulted from the strengthening of the U.S. dollar in comparison with other currencies in which we conduct business.

Provision (Benefit) for Income Taxes. For the three months ended March 31, 2015, our effective tax rate was (1.7)% compared to 2.7% for the same period in 2014. The effective tax rate for each period differs from the expected federal statutory rate of 35% as a result of non-deductible expenses, a change in our valuation allowance and state and foreign income taxes. Presently, our operations in the U.S. are in a net operating loss position and we have not recognized a tax benefit for those losses as realization of the tax benefit has not been determined to be likely.

Effect of Foreign Currency Exchange Rates. For the three months ended March 31, 2015, foreign currency exchange rates had weakened against the U.S. Dollar when compared to the same period in 2014. As a result, we reported lower revenues ($2.2 million), lower operating expenses ($2.1 million), and a lower operating loss ($0.1 million) than if the exchange rates were held constant during both periods.

Financial Condition

The following table sets forth certain major balance sheet accounts as of March 31, 2015 and December 31, 2014 (in thousands):

	March 31, 2015		December 31, 2014
Assets:
Cash and cash equivalents	$	83,210	$	90,672
Accounts receivable, net		42,889		51,125
Assets of TV business		1,518		2,470
Property and equipment, net		37,959		34,036
Goodwill		40,154		40,154
Intangible assets, net		67,450		71,306

Liabilities:
Accounts payable and accrued liabilities		21,320		23,147
Deferred income taxes		7,911		8,242

Stockholders’ equity		253,545		266,435

Cash and cash equivalents fluctuate with changes in operating, investing and financing activities. In particular, cash and cash equivalents fluctuate with (i) operating results, (ii) the timing of payments, (iii) capital expenditures, (iv) acquisition and investment activity, and (v) capital activity. The decrease in cash and cash equivalents during 2015 primarily relates to our net loss ($7.9 million) and our purchases of treasury stock ($4.5 million), partially offset by changes in operating assets and liabilities.

Accounts receivable generally fluctuate with revenues. As revenues increase or decrease, accounts receivable tend to increase or decrease, correspondingly. The number of days of revenue included in accounts receivable was 105 days and 96 days at March 31, 2015 and December 31, 2014, respectively.

Assets of TV business relate to assets contributed by DG immediately prior to the Merger. The majority of these assets consists of income tax receivables, but also includes DG's trade receivables from its television customers.

Property and equipment tends to increase when we make significant improvements to our equipment or properties, expand our platform or capitalize software development initiatives. It also can increase as a result of acquisition activity. Further, the balance of property and equipment is decreased by recording depreciation expense. For the three months ended March 31, 2015 and 2014, purchases of property and equipment used to power our ad serving platform were $2.3 million and $0.9 million, respectively. For the three months ended March 31, 2015 and 2014, capitalized costs of developing software were $4.2 million and $2.6 million, respectively.

Intangible assets decreased during the three months ended March 31, 2015 as a result of amortization.

Accounts payable and accrued liabilities decreased $1.8 million to $21.3 million at March 31, 2015 as compared to $23.1 million at December 31, 2014. The decrease primarily relates to the timing of payments.

Stockholders' equity decreased by $12.9 million to $253.5 million at March 31, 2015 compared to $266.4 million at December 31, 2014, principally as a result of reporting a $7.9 million net loss and our $4.5 million of purchases of treasury stock.

Liquidity and Capital Resources

The following table sets forth a summary of our statements of cash flows (in thousands):

	Three Months Ended March 31,
	2015			2014
Operating activities:
Net loss	$	(7,945	)	$	(14,418	)
Depreciation and amortization		7,439			6,528
Share-based compensation and other		345			6,077
Changes in operating assets and liabilities, net		3,502			2,364
Total		3,341			551

Investing activities:
Purchases of property and equipment		(2,321	)		(920	)
Capitalized costs of developing software		(4,245	)		(2,592	)
Other		(29	)		(709	)
Total		(6,595	)		(4,221	)

Financing activities:
Purchases of treasury stock		(4,500	)		—
Payments of TV business liabilities		(139	)		(8,345	)
Proceeds from TV business assets		952			27,589
Other		(164	)		—
Net contributions from Parent		—			44,833
Total		(3,851	)		64,077

Effect of exchange rate changes on cash and cash equivalents		(357	)		21

Net (decrease) increase in cash and cash equivalents	$	(7,462	)	$	60,428

We generate cash from operating activities principally from net loss adjusted for certain non-cash expenses such as (i) depreciation and amortization and (ii) share-based compensation. In the first quarter of 2015, we generated $3.3 million in cash from operating activities, as compared to $0.6 million in the first quarter of 2014. In the first quarter of 2015, the increase in cash generated from operating activities ($2.8 million) was primarily due to (i) a reduction in net loss after adding back the non-cash expenses of depreciation and amortization and share-based compensation ($1.6 million) and (ii) liquidating a larger portion of our net operating assets ($1.1 million).

Historically, we have invested our cash in (i) property and equipment, (ii) the development of software, (iii) strategic investments and (iv) the acquisition of complementary businesses.

In 2014, we obtained cash from financing activities as a result of capital contributions from DG, our former parent, and liquidating the net TV assets contributed by DG. In 2015, we used cash in financing activities as a result of our purchases of our common stock.

Sources of Liquidity

Our sources of liquidity include:

cash and cash equivalents on hand (including $6.5 million held outside the United States at March 31, 2015, all of which can be repatriated into the United States with little or no adverse tax consequences);

cash generated from operating activities;

borrowings from a credit facility we may enter into; and

the issuance of equity securities.

We believe our sources of liquidity, including (i) cash and cash equivalents on hand and (ii) cash generated from operating activities, will satisfy our capital needs for the next twelve months.

Cash Requirements

We expect to use cash in connection with:

the purchase of capital assets (including the development of capitalized software projects);

the organic growth of our business;

the strategic acquisition of related businesses, with cash requirements varying depending on if our common stock is used to fund all or part of any acquisition; and

purchases of our common stock.

In August 2014, our Board of Directors approved a $15 million share repurchase program. In March 2015, our Board of Directors increased the share repurchase program to $30 million. The program allows us to repurchase shares of our common stock through open market purchases, privately negotiated transactions or otherwise, subject to certain conditions. The share repurchase program does not have an expiration date. Through March 31, 2015, we made share repurchases totaling $6.5 million. Depending on market conditions and other factors, these repurchases may be commenced or suspended from time to time without notice. We have no obligation to repurchase shares under the share repurchase program.

In May 2015, we entered into an Asset Purchase Agreement to acquire certain assets of StrikeAd, Inc. and its affiliates (collectively, “StrikeAd”) consisting of intellectual property (including capitalized software), receivables, contracts and relationships with customers and vendors, and property and equipment for $9.5 million in cash and the assumption of a $2.2 million promissory note. StrikeAd is a mobile DSP (demand side platform) provider based in the United Kingdom. We intend to combine the StrikeAd assets with our existing programmatic assets to build an end-to-end demand side platform for use by our customers. The transaction is expected to close during the second quarter of 2015.

During 2015, we expect we will purchase property and equipment and incur capitalized software development costs of approximately $20 million to $22 million. We expect to use cash to further expand and develop our business.

Off-Balance Sheet Arrangements

We have entered into operating leases for all of our office facilities and certain equipment rentals. Generally these leases are for periods of three to ten years and usually contain one or more renewal options. We use leasing arrangements to preserve capital. We expect to continue to lease the majority of our office facilities under arrangements substantially consistent with the past.

Other than our operating leases, we are not a party to any off-balance sheet arrangement that we believe is likely to have a material impact on our current or future financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no material changes to the disclosure on this matter made in our Annual Report.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), as of the end of the period covered by this Report, our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on their evaluation of these disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the date of such evaluation.

Changes in Internal Control over Financial Reporting

During the three months ended March 31, 2015, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Although the Company is not a party to any of the litigation discussed below, under the Separation and Redemption Agreement that we entered into with DG in connection with the Spin-Off, we have agreed to indemnify and hold harmless DG and its former directors for the costs of defending the cases, and any damages that may be awarded to the plaintiff and purported class of former DG stockholders.

On January 14, 2014, a purported holder of common stock of Digital Generation, Inc. ("DG"), Equity Trading ("Plaintiff"), filed a complaint in the Supreme Court of the State of New York, County of New York, Equity Trading v. Scott K. Ginsburg, et al., No. 050112/2014, on behalf of itself and all others similarly situated, against DG, all directors of DG, Extreme Reach, Inc. ("Extreme Reach") and Dawn Blackhawk Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Extreme Reach ("Acquisition Sub"), alleging breaches of fiduciary duty in connection with the then pending Agreement and Plan of Merger, dated as of August 12, 2013, by and among Extreme Reach, Acquisition Sub and DG. The complaint sought an injunction barring the consummation of the transaction and unspecified monetary damages.

On January 16, 2014, Plaintiff filed with the New York state court a request seeking an order (i) preliminarily enjoining the Merger, (ii) requiring expedited discovery and (iii) scheduling a post-discovery hearing to continue the injunction (Plaintiff's "Request"), and on January 17, 2014, the New York state court issued an order setting a briefing schedule and a hearing for January 30, 2014, on Plaintiff's Request. On January 27, 2014, the defendants removed this action from the New York state court to the United States District Court for the Southern District of New York, causing the matter to now be captioned Equity Trading v. Scott K. Ginsburg, et al., 14 Civ. 499 (RWS) (RLE). The defendants also submitted briefing in opposition to the Request. At a hearing held on January 30, 2014, the Court denied Plaintiff's Request. On February 4, 2014, the Court agreed to a Stipulation for Extension of Time and Order (the "Scheduling Order"), providing a proposed briefing schedule. On February 26, 2014, Plaintiff filed a Motion to Remand the action to the Supreme Court of the State of New York, County of New York. On March 12, 2014, the defendants stipulated to remand. On April 11, 2014, Plaintiff filed an amended complaint, asserting the same causes of action as the initial complaint and adding certain additional factual allegations. On July 18, 2014, the defendants filed motions to dismiss the amended complaint. On September 16, 2014, Plaintiff filed oppositions to the motions to dismiss and a cross-motion to strike exhibits to the motions to dismiss. On October 24, 2014, the defendants filed replies in support of the motions to dismiss and an opposition to the cross-motion to strike. On November 14, 2014, Plaintiff filed a reply in support of the cross-motion to strike. Oral argument on the motions to dismiss and cross-motion to strike took place on February 5, 2015.

On March 13, 2015, Plaintiff and the defendants entered into a stipulation providing for the above-described action to be discontinued in its entirety without prejudice, with all of the parties bearing their own costs. The stipulation was filed with the Supreme Court of the State of New York, County of New York on March 15, 2015, and the court thereafter dismissed the action.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

See a description of our share repurchase program in Part I, Item 2 of this Report under the heading “Liquidity and Capital Resources” and sub heading “Cash Requirements.” The following table sets forth information with respect to purchases of shares of our common stock during the periods indicated:

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value that May Yet be Purchased Under the Plans or Programs (in thousands)

January 1, 2015 through January 31, 2015	154,837	$	6.46	154,837	$	12,000
February 1, 2015 through February 28, 2015	156,887	$	6.37	156,887	$	11,000
March 1, 2015 through March 31, 2015	306,665	$	8.15	306,665	$	23,500

Total	618,389	$	7.28	618,389	$	23,500

Item 6. EXHIBITS

Exhibits
3.1(a) 3.2(b) 10.1(c)		Amended and Restated Certificate of Incorporation of Registrant. Second Amended and Restated Bylaws of Registrant. Amendment to Meruelo Agreement, dated as of March 10, 2015, by and among Alex Meruelo Living Trust, Meruelo Investment Partners LLC and Alex Meruelo, and Sizmek Inc.
31.1 **		Rule 13a-14(a)/15d-14(a) Certification.
31.2 **		Rule 13a-14(a)/15d-14(a) Certification.
32.1 **		Section 1350 Certifications.
101 **		The following materials from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Unaudited Consolidated and Combined Statements of Operations, (iii) Unaudited Consolidated and Combined Statements of Comprehensive Loss, (iv) Unaudited Consolidated Statement of Stockholders’ Equity, (v) Unaudited Consolidated and Combined Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated and Combined Financial Statements.

**	Filed herewith.
(a)	Incorporated by reference to the exhibit bearing the same title filed with the Registrant’s Current Report on Form 8-K filed February 4, 2014.
(b)	Incorporated by reference to the exhibit bearing the same title filed with the Registrant’s Current Report on Form 8-K filed November 3, 2014.
(c)	Incorporated by reference to the exhibit bearing the same title filed with the Registrant’s Current Report on Form 8-K filed March 16, 2015.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SIZMEK INC.

Date: May 15, 2015	By:	/s/ NEIL H. NGUYEN
	Name:	Neil H. Nguyen
	Title:	Chief Executive Officer and President


Date: May 15, 2015	By:	/s/ KENNETH SAUNDERS
	Name:	Kenneth Saunders
	Title:	Chief Financial Officer

Sizmek Inc. - FORM 10-Q - May 15, 2015

Attached files

Sizmek Inc. Reports