Sizmek Inc. - FORM 10-Q

Attached files

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EX-32.1 - EXHIBIT 32.1 - Sizmek Inc.	exhibit_32-1.htm
EX-31.1 - EXHIBIT 31.1 - Sizmek Inc.	exhibit_31-1.htm
EX-31.2 - EXHIBIT 31.2 - Sizmek Inc.	exhibit_31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2016

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 x

Non-accelerated filer o		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 10, 2016, the registrant had 29,118,526 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 products and services including mobile, video and programmatic solutions;

our ability to replace our existing Sizmek MDX platform with a new platform that is currently in development without experiencing service disruptions;

our ability to expand our partnership program by inviting developers with the latest technology and features to partner with us and implement their technology onto our platform;

continued or accelerating decline in our flash based 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, 2015.

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, 2016			December 31, 2015
	(unaudited)
Assets
CURRENT ASSETS:
Cash and cash equivalents	$	40,288		$	42,046
Accounts receivable (less allowances of $1,736 as of March 31, 2016 and $1,795 as of December 31, 2015)		52,210			64,595
Restricted cash		1,581			1,538
Other current assets		3,908			4,568
Current assets of TV business		284			678
Total current assets		98,271			113,425
Property and equipment, net		32,115			29,410
Goodwill		9,337			8,411
Intangible assets, net		16,158			16,931
Deferred income taxes		511			523
Restricted cash		4,208			4,478
Other non-current assets		5,758			4,807
Total assets	$	166,358		$	177,985

Liabilities and Stockholders’ Equity
CURRENT LIABILITIES:
Accounts payable	$	5,732		$	3,683
Accrued liabilities		33,127			39,037
Current liabilities of TV business		424			1,203
Total current liabilities		39,283			43,923
Deferred income taxes		848			919
Other non-current liabilities		8,239			7,613
Total liabilities		48,370			52,455

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; 29,118 issued and outstanding at March 31, 2016; 29,584 issued and 29,228 outstanding at December 31, 2015		29			30
Treasury stock, at cost (356 shares at December 31, 2015)		—			(1,510	)
Additional capital		366,580			368,658
Accumulated deficit		(245,241	)		(238,289	)
Accumulated other comprehensive loss		(3,380	)		(3,359	)
Total stockholders’ equity		117,988			125,530
Total liabilities and stockholders’ equity	$	166,358		$	177,985

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

SIZMEK INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Three Months Ended March 31,
	2016			2015
Revenues:
Platform solutions	$	34,430		$	32,892
Programmatic solutions		6,095			3,867
Total		40,525			36,759
Cost of revenues (excluding depreciation and amortization):
Platform solutions		13,664			10,835
Programmatic solutions		4,587			2,825
Total		18,251			13,660
Selling and marketing		14,822			14,203
Research and development		3,209			2,903
General and administrative		5,556			4,554
Merger, integration and other		2,768			834
Depreciation and amortization		2,922			7,439
Loss from operations		(7,003	)		(6,834	)
Other (income) expense, net		(526	)		979
Loss before income taxes		(6,477	)		(7,813	)
Provision for income taxes		475			132
Net loss	$	(6,952	)	$	(7,945	)

Basic and diluted loss per common share	$	(0.24	)	$	(0.27	)

Weighted average common shares outstanding:
Basic and diluted		29,034			29,783

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

SIZMEK INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OFCOMPREHENSIVE LOSS

(In thousands)

	Three Months Ended March 31,
	2016			2015
Net loss	$	(6,952	)	$	(7,945	)
Other comprehensive gain (loss):
Unrealized gain (loss) on derivatives, net of tax		251			(95	)
Unrealized gain (loss) on available for sale securities, net of tax		23			(228	)
Foreign currency translation adjustment		(295	)		(804	)
Total other comprehensive loss		(21	)		(1,127	)
Total comprehensive loss	$	(6,973	)	$	(9,072	)

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, 2015		29,584		$	30			(356	)	$	(1,510	)	$	368,658		$	(238,289	)	$	(3,359	)	$	125,530
Net loss		—			—			—			—			—			(6,952	)		—			(6,952	)
Share-based compensation		—			—			—			—			867			—			—			867
Common stock issued pursuant to RSU agreements, net of shares tendered to satisfy required tax withholding		273			—			—			—			(159	)		—			—			(159	)
Purchase of treasury stock		—			—			(383	)		(1,277	)		—			—			—			(1,277	)
Retirement of treasury stock		(739	)		(1	)		739			2,787			(2,786	)		—			—			—
Other comprehensive loss		—			—			—			—			—			—			(21	)		(21	)
Balance at March 31, 2016		29,118		$	29			—		$	—		$	366,580		$	(245,241	)	$	(3,380	)	$	117,988

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

SIZMEK INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Three Months Ended March 31,
	2016			2015
Cash flows from operating activities:
Net loss	$	(6,952	)	$	(7,945	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation of property and equipment		1,458			3,553
Amortization of intangibles		1,464			3,886
Share-based compensation		867			846
Deferred income taxes		(75	)		(327	)
Benefit for accounts receivable recoveries		(59	)		(60	)
Gain (loss) from recovery of TV business net assets		149			(114	)
Changes in operating assets and liabilities:
Accounts receivable		12,453			7,938
Other assets		412			(2,241	)
Accounts payable and other liabilities		(4,071	)		(2,195	)
Net cash provided by operating activities		5,646			3,341

Cash flows from investing activities:
Purchases of property and equipment		(1,153	)		(2,321	)
Capitalized costs of developing software		(3,564	)		(4,245	)
Other		—			(29	)
Net cash used in investing activities		(4,717	)		(6,595	)

Cash flows from financing activities:
Purchases of treasury stock		(1,277	)		(4,500	)
Payments of TV business liabilities		(948	)		(139	)
Proceeds from TV business assets		413			952
Payment of tax withholding obligation for shares tendered		(159	)		(164	)
Payment of Financing Property and equipment		(579	)		—
Net cash used in financing activities		(2,550	)		(3,851	)

Effect of exchange rate changes on cash and cash equivalents		(137	)		(357	)
Net decrease in cash and cash equivalents		(1,758	)		(7,462	)
Cash and cash equivalents at beginning of year		42,046			90,672

Cash and cash equivalents at end of period	$	40,288		$	83,210

Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	89		$	430
Cash received for interest	$	—		$	(27	)
Extended payment obligations incurred to purchase software	$	—		$	960

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

SIZMEK INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED 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 19,000 advertisers and 3,700 agencies to audiences in approximately 65 countries, serving more than 1.3 trillion impressions a year.

Sizmek works directly and indirectly with media agencies, advertisers, creative agencies, and publishers. Our primary customers are media agencies. The ability to execute advertising campaigns in a timely and scalable manner is a crucial requirement for our customers. Our technology empowers advertisers and agencies to deliver their creative assets to broad audiences, ensure consistent quality of the consumer experience, and utilize our data for rigorous analysis and optimization. We focus on online media advertising, including display, video, mobile, social and connected TV channels.

Our online campaign management platform, Sizmek MDX, helps advertisers, agencies and publishers simplify the complexities of managing their advertising budgets across multiple online media channels and formats, such as desktop, mobile, rich media, social media, in-stream video, interactive video, display and search. The Sizmek MDX platform strives to provide our customers with an easy-to-use, end-to-end solution to enhance planning, creative, delivery, measurement and optimization of online media campaigns. Our solutions are delivered through a scalable technology platform that allows delivery of sophisticated, global online media advertising campaigns, as well as smaller, more targeted campaigns. Presently, our R&D team is designing and developing a new ad management platform, the Sizmek MDX-NXT platform, which will be a single, end-to-end, integrated platform encompassing all channels and formats. Portions of the MDX-NXT platform are operating currently and we expect substantially all features and functionalities to be operational mid to late 2016.

Our focus on open ad management means guiding advertisers and publishers through this complex and fragmented online landscape by providing products and services to help advertisers reach, engage and optimize their desired audience for each particular campaign. Open ad management means:

end-to-end—bringing together all of the technology, intelligence and strategic guidance that a client needs to execute the most effective, global campaign; and

choice—providing an open, flexible framework that allows each client to choose what's best for their particular needs.

Reach. Our integrated platform simplifies the complexities of managing online media advertising campaigns across multiple websites, advertising formats and channels and allows customers to manage varying publisher-imposed creative content restrictions. Our open architecture technology enables advertisers to reach audiences on many device types through the placement of ads in multiple formats on numerous channels including desktop, mobile, tablet and social, and is also designed to accommodate new and emerging online media channels such as connected TVs.

Engage. Since our incorporation, we believe our Flash and HTML5 based authoring environments have helped advertisers and publishers create innovative and scalable formats for rich media, in-stream video, standard banners and emerging media capabilities. These capabilities include interactive video and synced media that enable advertisers to interact with their target audience more effectively and yield higher engagement, performance and recall rates among consumers.

Optimize. Our platform and services are designed to help our customers deliver the most effective campaigns through data driven real-time targeting and creative optimization. This allows advertisers to reach specific consumer segments by assigning the best performing and most relevant creative advertisements throughout the campaign. Through our analytics capabilities, we offer advertisers the ability to target specific content categories through real-time exchange and/or programmatic bought inventory, offering cookie-less contextual targeting for greater efficiency and protection from unsafe content.

2. General

Principles of Consolidation

The consolidated 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. 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, 2015.

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 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.

For the three months ended December 31, 2015, the Company recorded an impairment charge related to its long-lived assets in the amount of $64.2 million. In addition, we shortened the estimated remaining life of many of our remaining long-lived assets. As a result, depreciation and amortization expense recorded for the three months ended March 31, 2016 is significantly lower than amounts recorded in the prior year. The Company estimates that the impairment charges and changes in remaining life assumptions reduced the amount of depreciation and amortization expense it recorded for the three months ended March 31, 2016 by $5.0 million and decrease our net loss by $5.0 million and our loss per share by $0.17.

Risk of Future Goodwill and Long-Lived Assets Impairments

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 $78.5 million. The details of these assets and liabilities outstanding as of March 31, 2016 and December 31, 2015 were as follows (in thousands):

Description	March 31, 2016		December 31, 2015
Current assets of television business:
Income tax receivables	$	284	$	515
Trade accounts receivable		—		163
Total	$	284	$	678

Current liabilities of television business:
Accrued liabilities	$	—	$	930
Uncertain tax positions		424		273
Total	$	424	$	1,203

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, 2016, we had $12.4 million notional amount of foreign currency forward contracts and options outstanding that had a net fair value asset balance of $0.2 million ($0.3 million asset, net of a $0.1 million liability). At December 31, 2015, we had $14.5 million notional amount of foreign currency forward contracts and options outstanding that had a net fair value liability balance of $0.1 million ($0.3 million liability, net of a $0.2 million asset). The net asset (at March 31, 2016) and net liability (at December 31, 2015) is included in current assets and accrued liabilities, respectively, 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,
	2016		2015
Hedging (loss) gain recognized in operations	$	3	$	(71	)

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 $1.6 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, 2016 and 2015 were as follows (in thousands):

	Three Months Ended March 31, 2016
	Foreign Currency Translation			Unrealized Gains (Losses) on Foreign Currency Derivatives			Unrealized Gain on Available for Sale Securities		Total Accumulated Other Comprehensive Loss
Balance at December 31, 2015	$	(4,244	)	$	(71	)	$	956	$	(3,359	)

Other comprehensive income (loss) before reclassifications		(295	)		254			23		(18	)
Amounts reclassified out of AOCL		—			(3	)		—		(3	)
Net current period activity		(295	)		251			23		(21	)

Balance at March 31, 2016	$	(4,539	)	$	180		$	979	$	(3,380	)

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

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

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

The following table summarizes the reclassifications from AOCI or AOCL to the consolidated statements of operations for the three months ended March 31, 2016 and 2015 (in thousands):

	Amounts Reclassified out of AOCI or AOCL
	Three Months Ended March 31, 2016			Three Months Ended March 31, 2015			Affected Line Items in the Consolidated Statements of Operations
Gains (losses) on cash flow hedges:
Foreign currency derivatives	$	1		$	(8	)	Cost of revenues
Foreign currency derivatives		—			(3	)	Selling and marketing
Foreign currency derivatives		7			(48	)	Research and development
Foreign currency derivatives		1			(11	)	General and administrative
Foreign currency derivatives		(6	)		(1	)	Other, net
Total before taxes		3			(71	)
Tax amounts		—			7
Income (loss) after tax	$	3		$	(64	)

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	2016		2015
Severance (1)	$	434	$	324
TV business (2)		149		(114	)
Special projects		110		117
Integration costs (3)		2,075		507
Total	$	2,768	$	834

(1) -

Severance costs primarily relate to consolidating the workforces of acquired businesses and eliminating redundancy. All costs shown above were paid in the period the expense was recognized, or shortly thereafter.

(2) -

Represents (income) or expense due to realizing more or less TV net assets than originally estimated at the time of the Spin-Off.

(3) –

Represents redundant operating expenses incurred to integrate our 2015 acquisitions into our existing structure and workflow.

Recently Issued Accounting Guidance

Adopted

In September 2015, the Financial Accounting Standards Board ("FASB") issued ASU 2015-16, "Business Combinations." ASU 2015-16 modifies how changes to provisional amounts determined during the measurement period of a business combination are recognized. Under existing accounting literature, changes to provisional amounts determined during the measurement period of a business combination, resulting from facts and circumstances that existed at the acquisition date, are recognized by retrospectively adjusting the provisional amounts at the acquisition date. However, under ASU 2015-16, an acquirer recognizes adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined. For Sizmek, ASU 2015-16 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period.

Issued

In May 2014, the 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.

In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 by one year. As a result, for Sizmek, the amendments in ASU 2014-09 are now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. 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.

In January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Presently, Sizmek recognizes changes in the fair value of its equity investments that have a readily determinable fair value in accumulated other comprehensive income / loss. ASU 2016-01 also contains certain other provisions. For Sizmek, ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted. We anticipate that the adoption of ASU 2016-01 will result in greater volatility of our operating results as the changes in fair value of our equity investments that have a readily determinable fair value will be reflected in net income rather than accumulated other comprehensive income / loss.

In February 2016, the FASB issued ASU 2016-02, "Leases" Topic 842. ASU 2016-02 modifies accounting for leases under GAAP. The core principle of ASU 2016-02 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. For operating leases, a lessee is required to do the following:

Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position.

Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis.

Classify all cash payments within operating activities in the statement of cash flows.

In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP.

For Sizmek, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period.

In March 2016, the FASB issued ASU 2016-09, "Compensation – Stock Compensation (Topic 718)." ASU 2016-09 will change how companies account for certain aspects of share-based payments to employees. Entities will be required to recognize the income tax effects of awards in the income statement when the awards vest or settle (i.e. additional paid in capital or APIC pools will be eliminated). The guidance also will change how an employer accounts for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and for forfeitures.

The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted in any annual or interim period for which financial statement have not been issued or made available to issuance, but all of this guidance must be adopted in the same period. If an entity early adopts the guidance in interim period, any adjustment must be reflected as of the beginning of the fiscal year that includes that interim period.

We have not as yet determined (i) the extent to which we expect ASU 2016-09 will impact our financial reports 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, 2016 and December 31, 2015. 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, 2016
	Balance Sheet Location	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Total Fair Value Measurements
Assets:
Money market funds	(a)	$	10,959	$	—	$	10,959
Marketable equity securities	(b)		1,320		—		1,320
Currency forward derivatives / options	(c)		—		204		204
Total		$	12,279	$	204	$	12,483

		Fair Value Measurements at December 31, 2015
	Balance Sheet Location	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Total Fair Value Measurements
Assets:
Money market funds	(a)	$	23,932	$	—	$	23,932
Marketable equity securities	(b)		1,297		—		1,297
Total		$	25,229	$	—	$	25,229
Liabilities:
Currency forward derivatives / options	(d)	$	—	$	86	$	86

(a) Included in cash and cash equivalents.

(b) Included in other non-current assets.

(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.

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, or

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. Acquisitions

StrikeAd

On May 28, 2015, we acquired substantially all the assets and operations, and assumed certain liabilities, of privately-held StrikeAd, Inc. and its affiliates (collectively, “StrikeAd”) for $9.8 million. The purchase price includes $7.7 million in cash paid at closing and deferred payment obligations totaling $2.1 million. StrikeAd operates a mobile demand side platform (“DSP”) based in the United Kingdom. We are combining the StrikeAd assets with our existing programmatic assets to build an end-to-end DSP for use by our customers. The objective of the transaction was to accelerate the development of our mobile technology in order to better serve the advertising community. We expect to realize operating synergies from this transaction. StrikeAd 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 $4.3 million to developed technology, $1.2 million to customer relationships and $11.0 million to goodwill. The developed technology and customer relationships acquired in the transaction are presently being amortized on a straight-line basis over 3.2 years and 5.5 years, respectively. The weighted average amortization period is 3.7 years. See Goodwill, Intangible Assets and Impairments note below. The goodwill and other intangible assets created in the acquisition are deductible for tax purposes. As part of the acquisition, the seller guaranteed to provide a fixed amount of working capital on the acquisition date. Any shortfall from the guaranteed amount can be withheld from our deferred payment obligation. The updated purchase price allocation will be considered preliminary until the final amount of working capital acquired has been determined.

Point Roll

On November 12, 2015, we acquired all of the shares of Point Roll, Inc. (“Point Roll”) from TEGNA Inc. (“Tegna”) for a total purchase price of $20.0 million, subject to adjustment. Of the total purchase price (i) $11.0 million was paid in cash at closing, (ii) $7.0 million will be paid one year after the closing date and (iii) up to $2.0 million will be paid one year after the closing date, subject to any indemnification claims or other contingencies, of which we currently expect to pay only $0.6 million. Point Roll provides rich media and dynamic creative ad serving technologies that allow interactivity in online advertising, such as streaming video, polling, and e-mail and data collection. The purchase price was paid from cash on hand. The objective of the transaction was to realize significant operating synergies by combining the operations of Point Roll with our existing online ad serving operations.

The purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values. During the three months ended March 31, 2016, we revised the purchase price allocation from our original estimates which increased goodwill by $0.9 million, increased other intangible assets by $0.7 million, increased current assets by $0.2 million, increased other long term assets by $0.4 million, reduced property and equipment by $0.5 million, increase liabilities by $2.9 million which reduced the purchase price by $1.2 million. Each of the customer relationships and trade names acquired in the transaction are being amortized on a straight-line basis over 4.1 years. The goodwill and other intangible assets created in the acquisition are not deductible for tax purposes. The liabilities assumed include $1.2 million for an uncertain tax position relating to a period prior to our purchase. Tegna has agreed to indemnify us for this potential exposure. Accordingly, we have recorded an indemnification asset for $1.2 million in purchase accounting. As part of the acquisition, the seller guaranteed to provide a fixed amount of working capital on the acquisition date. Any shortfall from the guaranteed amount can be withheld from our deferred payment obligation. The updated purchase price allocation will be considered preliminary until the final amount of working capital acquired has been determined.

Purchase Price Allocations

The following table summarizes the updated estimated fair values of the assets acquired and liabilities assumed at the respective dates of acquisition for the above referenced transactions (in millions).

Category	Point Roll			StrikeAd
Current assets	$	9.8		$	3.6
Property and equipment		0.9			—
Other assets		1.6			—
Customer relationships		7.0			1.2
Trade names		0.5			—
Developed technology		—			4.3
Noncompetition agreements		—			—
Goodwill		5.6			11.0
Total assets acquired		25.4			20.1
Less liabilities assumed		(6.8	)		(10.3	)
Net assets acquired	$	18.6		$	9.8

Pro Forma Information

The following pro forma information presents our results of operations for the three months ended March 31, 2016 and 2015 as if the acquisitions of Point Roll and StrikeAd had occurred on January 1, 2015 (in thousands). A table of actual amounts is provided for reference.

	As Reported Three Months Ended March 31,						Unaudited Pro Forma Three Months Ended March 31,
	2016			2015			2016			2015
Revenue	$	40,525		$	36,759		$	40,525		$	48,309
Net loss		(6,952	)		(7,945	)		(6,952	)		(10,420	)

5. Goodwill, Intangible Assets and Impairments

Goodwill

We operate as a single reporting unit. Changes in the carrying value of our goodwill for the three months ended March 31, 2016 were as follows (in thousands):

	Goodwill		Accumulated Impairment Losses			Net Carrying Value
Balance at December 31, 2015	$	396,354	$	(387,943	)	$	8,411
2016 activity		926		—			926
Balance at March 31, 2016	$	397,280	$	(387,943	)	$	9,337

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.

During the fourth quarter of 2015, we determined that indicators of potential impairment existed requiring us to perform both a long-lived asset impairment test and a goodwill impairment test. These indicators included (i) revenues and operating results sufficiently below our earlier forecast which prompted us to reduce our long range forecast, and (ii) a sharp decline in our market capitalization during the fourth quarter of 2015 such that our market capitalization plus a reasonable control premium was well below the book value of our total stockholders' equity. In 2015, we recorded goodwill and long-lived asset impairment charges of $47.4 million and $64.2 million, respectively.

Risk of Future Goodwill and Long-Lived Assets Impairment

At March 31, 2016 and December 31, 2015, based on our discounted cash flow (DCF) 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 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.

6. Share-based Compensation

All share-based compensation expense relates to awards issued from Sizmek’s Amended and Restated 2014 Incentive Award Plan.

	Three Months Ended March 31,
Description	2016		2015
Sizmek share-based compensation	$	867	$	846

In the first quarter of 2016, Sizmek’s Compensation Committee granted (i) 471,362 performance-based Restricted Stock Units (“RSUs”) and, (ii) 431,116 time-based RSUs to certain of our employees and directors. The RSUs expected to vest, were valued at $2.8 million. 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 $6.1 million at March 31, 2016.

7. Income Taxes

For the three months ended March 31, 2016, our effective tax rate was (7.3)% compared to (1.7)% for the three months ended March 31, 2015. 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 Israel, the U.S. and state jurisdictions within the U.S. As a result, we do not recognize a tax benefit in Israel, the U.S. or state jurisdictions within the U.S. when we incur taxable losses as realization of those tax benefits is not more-likely-than-not. Conversely, in certain foreign jurisdictions we report earnings and recognize a tax expense or benefit on that income in accordance with the tax statutes of those jurisdictions.

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, 2016, we recognized one additional uncertain tax position related a state and local income tax matter. Approximately $0.4 million of the increase relates to a position we acquired from Point Roll, for which we have an offsetting indemnification asset from the seller. Interest and penalties related to uncertain tax positions are recognized in income tax expense. For each of the three month periods ended March 31, 2016 and 2015, we recognized less than $0.1 million of interest and penalties related to uncertain tax positions in our financial statements. The changes in uncertain tax positions for the three months ended March 31, 2016 and 2015 were as follows (in thousands):

	Three Months Ended March 31,
	2016		2015
Balance at beginning of year	$	2,677	$	1,507
Additions or Subtractions, net		90		(17	)
Balance at end of period	$	2,767	$	1,490

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

As of March 31, 2016, we provided a valuation allowance against substantially all of our (i) U.S. federal and state NOL carryforwards and (ii) NOL carryforwards in Israel, as ultimate realization of these NOLs was determined to be not 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, 2016 and December 31, 2015, 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 2015 remain open to examination. Israeli and United Kingdom income tax returns remain open to examination for 2010 through 2015 and 2009 through 2015, 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.

8. 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. The Company does not include any potentially dilutive securities in its calculation of diluted loss per common share, since their effect would be anti-dilutive.

The following table presents our loss per common share for the three months ended March 31, 2016 and 2015 (in thousands, except per share data):

	Three Months Ended March 31,
	2016			2015
Net loss	$	(6,952	)	$	(7,945	)

Weighted average common shares outstanding — basic		29,034			29,783
Dilutive securities		—			—
Weighted average common shares outstanding - diluted		29,034			29,783

Basic and diluted loss per common share	$	(0.24	)	$	(0.27	)

Antidilutive securities not included:
Stock options and RSUs		1,079			1,092

9. 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,
	2016		2015
Revenues:
United States	$	23,001	$	19,600
Europe, Middle East and Africa		10,465		9,350
Asia Pacific		5,298		5,894
Latin America		1,094		1,351
North America (excluding U.S.)		667		564
Total	$	40,525	$	36,759

For the three months ended March 31, 2016, about 43.2% of our revenues were attributable to foreign jurisdictions. However, no single 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,
	2016		2015
Revenues:
Platform solutions	$	34,430	$	32,892
Programmatic solutions		6,095		3,867
Total	$	40,525	$	36,759

The following table summarizes our property and equipment, net by country (in thousands):

	March 31, 2016		December 31, 2015
Property and equipment, net:
Israel	$	24,141	$	21,387
United States		6,099		6,441
Other countries		1,875		1,582
Total	$	32,115	$	29,410

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 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 report, 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 financial statements and notes to unaudited consolidated 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 financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2015 (“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 5 to our unaudited consolidated financial statements in this report regarding the risk of a future impairment of our goodwill and long-lived assets.

Overview

We operate a leading open ad management and distribution platform. We assist 19,000 advertisers and 3,700 agencies engage with consumers in approximately 65 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:

continue to expand the products available on our platform;

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

control our costs.

In 2016, our key strategic initiatives include:

driving new mobile, video, programmatic and data business with a particular emphasis on omni-channel delivery and measurement, and dynamic creative;

positioning Sizmek as the most credible, reliable provider of omni-channel solutions;

working to complete the development of the Sizmek MDX-NXT platform;

enhancing our mobile DSP platform to accommodate self-serve advertisers and integrate the platform with Sizmek MDX-NXT; and

completing the integration of our Point Roll business.

Acquisitions

We have a history of acquisitions. In May and November 2015, we acquired StrikeAd, Inc. and Point Roll, Inc. 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 2016 Highlights

Revenues increased $3.8 million, or 10.2%, compared to the same quarter of 2015

Our core products (all products excluding flash based rich media) increased $9.4 million or 32.0% while our flash based rich media revenues continued to decline falling $5.6 million, or 74.6%.

In the first quarter of 2016, foreign currency exchange rates generally weakened compared with the U.S. Dollar. This resulted in us reporting lower revenues ($0.6 million) and lower operating expenses ($0.6 million) than if the exchange rates were held constant with those in effect in the first quarter of 2015.

Loss from operations increased $0.2 million in the first quarter of 2016 as compared to the same period of 2015. This increase was due to higher cost of revenue, merger, integration and other costs ($8.5 million) mainly due to acquisitions we made during 2015, offset by higher revenues ($3.8 million) and lower depreciation and amortization ($4.5 million) as a result of the long-lived asset impairment recorded in the fourth quarter of 2015.

Results of Operations

Three Months Ended March 31, 2016 vs. Three Months Ended March 31, 2015

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

							% Change			As a % of Revenue
	Three Months Ended						2016			Three Months Ended
	March 31,						vs.			March 31,
	2016			2015			2015			2016			2015
Revenues:
Platform solutions	$	34,430		$	32,892			5	%		85.0	%		89.5	%
Programmatic solutions		6,095			3,867			58			15.0			10.5
Total		40,525			36,759			10			100.0			100.0
Costs and expenses:
Cost of revenues (a) :
Platform solutions		13,664			10,835			26			33.7			29.5
Programmatic solutions		4,587			2,825			62			11.3			7.7
Total		18,251			13,660			34			45.0			37.2
Selling and marketing		14,822			14,203			4			36.6			38.6
Research and development		3,209			2,903			11			7.9			7.9
General and administrative		5,556			4,554			22			13.7			12.4
Merger, integration and other		2,768			834			232			6.8			2.3
Depreciation and amortization		2,922			7,439			(61	)		7.2			20.2
Total costs and expenses		47,528			43,593			9			117.2			118.6

Loss from operations		(7,003	)		(6,834	)		2			(17.2	)		(18.6	)

Other (income) expense, net		(526	)		979			(154	)		(1.3	)		2.7

Loss before income taxes		(6,477	)		(7,813	)		(17	)		(15.9	)		(21.3	)
Provision for income taxes		475			132			260			1.2			0.3
Net loss	$	(6,952	)	$	(7,945	)		(12	)		(17.1	)		(21.6	)

(a) Excluding depreciation and amortization.

Revenues – Platform solutions. For the three months ended March 31, 2016, Platform revenues increased by $1.5 million, or 5%, as compared to the same period in the prior year. Our Platform products (excluding flash based rich media) increased $7.1 million or 28.1% while our flash based rich media revenues continued to decline falling $5.6 million, or 74.6%. Our flash based rich media services revenue declined due to a continuing reduction in the number of impressions served and the average selling price per impression served. Our core products revenue grew primarily due to greater usage of our (i) mobile services (ii) smart versioning optimization product, (iii) in-stream product and (iv) our viewability and verification products, partially offset by declines in other services.

Revenues – Programmatic solutions. For the three months ended March 31, 2016, Programmatic solutions revenues increased by $2.2 million, or 58%, as compared the same period in the prior year. Revenues increased due to (i) our May 2015 acquisition of StrikeAd, and (ii) growth in our trading revenues.

Cost of Revenues – Platform solutions. For the three months ended March 31, 2016, Platform cost of revenues increased by $2.8 million, or 26%, as compared to the same period in the prior year. As a percentage of total revenues, platform cost of revenues increased to 33.7% in 2016, as compared to 29.5% in 2015. Platform cost of revenues increased primarily due to (i) salary and salary related expenses mainly due to our November 2015 acquisition of Point Roll ($1.8 million), and (ii) delivery costs increased $1.4 million due to a 2015 decision to lease computing power in the cloud rather than own file servers. The decision to lease cloud computing power gives us greater flexibility and more reliability but increases costs. In addition, the entire leasing cost is charged to the area using the server. When the file server was owned only the maintenance cost was charged to the area using the server and the cost of the equipment was recognized over time as depreciation expense.

Cost of Revenues – Programmatic solutions. For the three months ended March 31, 2016, Programmatic cost of revenues increased by $1.8 million, or 62%, as compared to the same period in the prior year. Our programmatic gross profit percentage decreased to 24.7% in 2016, as compared to 26.9% in 2015. The decrease was largely due to (i) the acquisition of StrikeAd, which operates at a lower gross profit percentage than our historical trading operation and (ii) our pricing decisions to accept a lower gross profit margin in order to attract more business.

Selling and Marketing. For the three months ended March 31, 2016, selling and marketing expense increased $0.6 million, or 4%, as compared to the same period in the prior year. This increase is mainly due to (i) salary expenses ($0.3 million), as a result of increase sales headcount acquired from our 2015 acquisitions and (ii) professional fees ($0.3 million) largely due to marketing costs to redesign our website. As a percentage of revenues, selling and marketing expense decreased to 36.6% in the first quarter 2016 as compared to 38.6% in the first quarter of 2015.

Research and Development. For the three months ended March 31, 2016, research and development expense increased $0.3 million, or 11%, as compared to the same period in the prior year. Gross R&D spending declined by $0.4 million or 5% due to reductions in headcount, however, the Company’s capitalization of wages for software development declined by $0.7 million, or 16%. The decrease in capitalized wages was due to working fewer hours on software development projects that qualified for capitalization.

General and Administrative. For the three months ended March 31, 2016, general and administrative expense increased by $1.0 million, or 22%, as compared to the same period in the prior year. The increase is mainly due to (i) an increase in our provision for doubtful accounts ($0.3 million) and (ii) an increase in salary and compensation expenses ($0.4 million). As a percentage of revenues, general and administrative expense increased slightly to 13.7% in 2016, as compared to 12.4% in 2015.

Merger, Integration and Other. For the three months ended March 31, 2016, merger, integration and other costs increased by $1.9 million, or 232%, as compared to the same period in the prior year. The increase largely related to our 2015 acquisitions of StrikeAd and Point Roll.

Depreciation and Amortization. For the three months ended March 31, 2016, depreciation and amortization decreased by $4.5 million, or 61%, as compared to the same period in the prior year. The decrease is entirely the result of a long-lived asset impairment charge recorded at the end of 2015 which wrote off a large portion of our intangible assets and therefore will reduce amortization expenses in 2016 and onward.

Other (income) expense, net. For the three months ended March 31, 2016, other income, net was $0.5 million as compared to a net expense of $1.0 million for the same period in 2015. The change relates entirely to changes in foreign currency exchange gains and losses, which generated losses in prior year, but generate gains in the current year.

Provision for Income Taxes. For the three months ended March 31, 2016, our effective tax rate was (7.3)% compared to (1.7)% for the same period in 2015. 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 both in the U.S. and Israel are in a net operating loss position and we have not recognized a tax benefit for those losses as ultimate realization of the tax benefit is not more likely than not.

Financial Condition

The following table sets forth certain major balance sheet accounts as of March 31, 2016 and December 31, 2015 (in thousands):

	March 31, 2016		December 31, 2015
Assets:
Cash and cash equivalents	$	40,288	$	42,046
Accounts receivable, net		52,210		64,595
Property and equipment, net		32,115		29,410
Goodwill		9,337		8,411
Intangible assets, net		16,158		16,931

Liabilities:
Accounts payable and accrued liabilities		38,859		42,720
Deferred income taxes		848		919

Stockholders’ equity		117,988		125,530

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 the three month ended March 31, 2016 primarily relates to (i) our net loss ($6.9 million) , (ii) our investment in capital assets ($4.7 million), (iii) our purchases of treasury stock ($1.3 million) and (iv) additional financing activity ($1.3 million), partially offset by changes in operating assets and liabilities ($12.6 million).

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 116 days and 107 days at March 31, 2016 and December 31, 2015, respectively.

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, 2016 and2015, purchases of property and equipment used to power our ad serving platform were $3.6 million and $4.2 million, respectively.

Intangible assets decreased during the three months ended March 31, 2016 as a result of amortization.

Accounts payable and accrued liabilities decreased $3.8 million to $38.9 million at March 31, 2016 as compared to $42.7 million at December 31, 2015. The decrease primarily relates to the timing of payments.

Stockholders' equity decreased by $7.5 million to $118.0 million at March 31, 2016 compared to $125.5 million at December 31, 2015, principally as a result of reporting a $6.9 million net loss.

Liquidity and Capital Resources

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

	Three Months Ended March 31,
	2016			2015
Operating activities:
Net loss	$	(6,952	)	$	(7,945	)
Depreciation and amortization		2,922			7,439
Share-based compensation and other		882			345
Changes in operating assets and liabilities, net		8,794			3,502
Total		5,646			3,341

Investing activities:
Purchases of property and equipment		(1,153	)		(2,321	)
Capitalized costs of developing software		(3,564	)		(4,245	)
Other		—			(29	)
Total		(4,717	)		(6,595	)

Financing activities:
Purchases of treasury stock		(1,277	)		(4,500	)
Payments of TV business liabilities		(948	)		(139	)
Proceeds from TV business assets		413			952
Other		(159	)		(164	)
Payment of Financing property and equipment		(579	)		—
Total		(2,550	)		(3,851	)

Effect of exchange rate changes on cash and cash equivalents		(137	)		(357	)

Net (decrease) increase in cash and cash equivalents	$	(1,758	)	$	(7,462	)

We generate cash from operating activities principally from net loss adjusted for certain non-cash expenses such as (i) depreciation and amortization and (ii) changes in operating assets and liability. In the first quarter of 2016, we generated $5.6 million in cash from operating activities, as compared to $3.3 million in the first quarter of 2015. In the first quarter of 2016, the increase in cash generated from operating activities ($2.3 million) was primarily due to increased cash collections from customers.

We have invested our cash in (i) property and equipment and (ii) the development of software.

In 2016, our cash used in financing activities includes payment of an outstanding obligation related to the former TV business. In 2016 and 2015, we used cash in financing activities to purchase our common stock.

Sources of Liquidity

Our sources of liquidity include:

cash and cash equivalents on hand (including $7.4 million held outside the United States at March 31, 2016, 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 routinely evaluate our liquidity requirements, including alternative sources and uses of cash. As a result of this process:

we expect to use cash in connection with:

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

the organic growth of our business.

we could use cash in connection with:

the strategic acquisition of related businesses or investments, 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. Since implementation of our share repurchase program through March 31, 2016, we made share repurchases totaling $9.3 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.

During 2016, we expect we will purchase property and equipment and incur capitalized software development costs of approximately $17 million to $19 million, a portion of which will be used toward completion of our Sizmek MDX-NXT ad serving platform. We expect to use cash to further expand and develop our business as we anticipate our new ad serving platform will be fully operational by mid-2016.

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, 2016, 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 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, 2016 through January 31, 2016	250,656	$	3.36	250,656	$	21,140
February 1, 2016 through February 29, 2016	132,391	$	3.19	132,391	$	20,713
March 1, 2016 through March 31, 2016	—	$	—	—	$	20,713

Total	383,047	$	3.30	383,047

Item 6. EXHIBITS

Exhibits
3.1(a) 3.2(b) 31.1 *		Amended and Restated Certificate of Incorporation of Registrant. Second Amended and Restated Bylaws of Registrant. 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, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Operations, (iii) Unaudited Consolidated Statements of Comprehensive Loss, (iv) Unaudited Consolidated Statement of Stockholders’ Equity, (v) Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements.

*	Filed herewith.
**	Furnished 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.

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 10, 2016	By:	/s/ NEIL H. NGUYEN
	Name:	Neil H. Nguyen
	Title:	Chief Executive Officer and President


Date: May 10, 2016	By:	/s/ KENNETH SAUNDERS
	Name:	Kenneth Saunders
	Title:	Chief Financial Officer

Sizmek Inc. - FORM 10-Q - May 10, 2016

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Sizmek Inc. Reports