| General | 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.
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 Fair Value Measurements and Disclosures 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 )
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. ASU 2016-02
1.
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.
2.
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.
3.
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. 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. |
