UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  For the quarterly period ended June 30, 2013

 

¨ 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 000-52170

 

 

 

INNERWORKINGS, INC. 

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   20-5997364
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)

 

600 West Chicago Avenue, Suite 850

Chicago, Illinois 60654

Phone: (312) 642-3700

(Address, Zip Code and telephone number, including area code, of principal executive offices)

 

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:  ¨

 

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:  ¨

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check one:

 

Large accelerated filer:  ¨ Accelerated filer:  x
Non-accelerated filer:  ¨ (Do not check if a smaller reporting company) 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:   ¨    No:  x

 

As of August 5, 2013, the Registrant had 50,957,708 shares of Common Stock, par value $0.0001 per share, outstanding.

 

 
 

  

INNERWORKINGS, INC.

 

TABLE OF CONTENTS

 

 

    Page
PART I. FINANCIAL INFORMATION  
     
Item 1. Condensed Consolidated Financial Statements 3
     
  Condensed Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2012 and 2013 (Unaudited) 3
     
  Condensed Consolidated Balance Sheet as of December 31, 2012 and June 30, 2013 (Unaudited) 4
     
  Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2012 and 2013 (Unaudited) 5
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
     
Item 4. Controls and Procedures 24
   
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 25
     
Item 1A. Risk Factors 25
     
Item 6. Exhibits 26
     
SIGNATURES 27
   
EXHIBIT INDEX 28
           

 

2
 

  

PART I. FINANCIAL INFORMATION

  

Item 1.  Condensed Consolidated Financial Statements

 

InnerWorkings, Inc. and subsidiaries

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2012   2013   2012   2013 
Revenue  $201,397,471   $210,875,626   $389,943,873   $415,191,751 
Cost of goods sold   153,551,408    162,699,024    300,704,427    321,022,654 
Gross profit   47,846,063    48,176,602    89,239,446    94,169,097 
Operating expenses:                    
Selling, general and administrative expenses   37,644,103    42,257,681    70,727,367    83,993,470 
Depreciation and amortization   2,936,981    2,648,396    5,381,077    5,114,063 
Income from operations   7,264,979    3,270,525    13,131,002    5,061,564 
Other income (expense):                    
Gain on sale of investment   247,875    -    495,572    - 
Interest income   43,047    555    94,788    7,889 
Interest expense   (660,492)   (514,825)   (1,358,586)   (999,932)
Other, net   (124,329)   25,510    13,939    (420,653)
Total other expense   (493,899)   (488,760)   (754,287)   (1,412,696)
Income before income taxes   6,771,080    2,781,765    12,376,715    3,648,868 
Income tax expense   2,296,680    878,420    4,214,627    850,393 
Net income  $4,474,400   $1,903,345   $8,162,088   $2,798,475 
                     
Basic earnings per share  $0.09   $0.04   $0.17   $0.06 
Diluted earnings per share  $0.09   $0.04   $0.16   $0.05 
                     
Comprehensive income  $3,493,203   $1,705,075   $7,582,597   $749,009 

 

See accompanying notes.

  

3
 

  

InnerWorkings, Inc. and subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEET

 

   December 31,   June 30, 
   2012   2013 
Assets      (unaudited) 
Current assets:          
Cash and cash equivalents  $17,218,899   $14,164,356 
Accounts receivable, net of allowance for doubtful accounts of $1,553,926 and $1,475,854, respectively   149,246,568    151,357,448 
Unbilled revenue   30,798,230    27,041,664 
Inventories   17,406,863    16,390,726 
Prepaid expenses   16,210,053    16,276,354 
Deferred income taxes   1,513,414    1,440,660 
Other current assets   21,051,907    18,715,608 
Total current assets   253,445,934    245,386,816 
Property and equipment, net   17,078,384    19,516,534 
Intangibles and other assets:          
Goodwill   214,086,880    262,004,506 
Intangible assets, net of accumulated amortization of $18,195,508 and $19,847,228, respectively   36,396,865    39,367,233 
Deferred income taxes   413,244    - 
Other assets   822,275    699,262 
    251,719,264    302,071,001 
Total assets  $522,243,582   $566,974,351 
Liabilities and stockholders' equity          
Current liabilities:          
Accounts payable-trade  $121,132,051   $117,661,216 
Current portion of contingent consideration   7,795,489    29,241,446 
Due to seller   10,796,850    685,114 
Other liabilities   8,111,051    9,394,107 
Accrued expenses   17,558,675    13,405,782 
Total current liabilities   165,394,116    170,387,665 
Revolving credit facility   65,000,000    78,300,000 
Deferred income taxes   5,000,740    6,960,274 
Contingent consideration, net of current portion   63,869,281    80,249,969 
Total liabilities   299,264,137    335,897,908 
Stockholders' equity:          
Common stock, par value $0.0001 per share, 200,000,000 and 200,000,000 shares authorized, 60,735,561 and 61,268,422 shares issued, 50,200,098 and 50,932,298 shares outstanding, respectively   6,074    6,127 
Additional paid-in capital   198,117,936    203,233,352 
Treasury stock at cost, 10,535,463 and 10,336,124 shares, respectively   (67,071,323)   (64,824,042)
Accumulated other comprehensive income (loss)   205,462    (1,844,004)
Retained earnings   91,721,296    94,505,010 
Total stockholders' equity   222,979,445    231,076,443 
Total liabilities and stockholders' equity  $522,243,582   $566,974,351 

 

See accompanying notes.

  

4
 

 

InnerWorkings, Inc. and subsidiaries

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

   Six Months Ended June 30, 
   2012   2013 
Cash flows from operating activities          
Net income  $8,162,088   $2,798,475 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Depreciation and amortization   5,381,077    5,114,063 
Stock-based compensation expense   2,451,374    2,054,106 
Deferred income taxes   806,152    720,547 
Gain on sale of investment   (495,572)   - 
Excess tax benefit from exercise of stock awards   (7,447,068)   (1,066,357)
Change in fair value of contingent consideration liability   466,685    (1,040,557)
Other operating activities   434,060    269,988 
Change in assets, net of acquisitions:          
Accounts receivable and unbilled revenue   (16,611,005)   5,692,347 
Inventories   2,455,852    1,029,174 
Prepaid expenses and other   (6,895,351)   4,244,632 
Change in liabilities, net of acquisitons:          
Accounts payable   (5,364,653)   (6,379,266)
Accrued expenses and other   6,659,812    (5,132,129)
Net cash provided by (used in) operating activities   (9,996,549)   8,305,023 
           
Cash flows from investing activities          
Purchases of property and equipment   (5,045,823)   (5,822,741)
Payments for acquisitions, net of cash acquired   287,396    (11,559,092)
Payments to seller for acquisitions completed prior to 2009   (3,000,000)   - 
Proceeds from sale of marketable securities   499,122    - 
Other investing activities   11,567    - 
Net cash used in investing activities   (7,247,738)   (17,381,833)
           
Cash flows from financing activities          
Net borrowings from revolving credit facility   13,000,000    13,300,000 
Payments of contingent consideration   (5,491,958)   (10,059,238)
Proceeds from exercise of stock options   1,171,660    1,842,044 
Excess tax benefit from exercise of stock awards   7,447,068    1,066,357 
Other financing activities   (7,270)   (36,642)
Net cash provided by financing activites   16,119,500    6,112,521 
           
Effect of exchange rate changes on cash and cash equivalents   (123,182)   (90,254)
Decrease in cash and cash equivalents   (1,247,969)   (3,054,543)
Cash and cash equivalents, beginning of period   13,219,385    17,218,899 
Cash and cash equivalents, end of period  $11,971,416   $14,164,356 

 

See accompanying notes.

  

5
 

  

InnerWorkings, Inc. and subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Three and Six Months Ended June 30, 2013

 

1.Summary of Significant Accounting Policies

 

Basis of Presentation of Interim Financial Statements

 

The accompanying unaudited consolidated financial statements of InnerWorkings, Inc. and subsidiaries (the “Company”) included herein have been prepared to conform to the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation of the accompanying unaudited financial statements have been included, and all adjustments are of a normal and recurring nature. The operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year of 2013. These condensed interim consolidated financial statements and notes should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto as of December 31, 2012 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2013.

 

Foreign Currency Translation

 

The functional currency for the Company’s foreign operations is the local currency. Assets and liabilities of these operations are translated into U.S. currency at the rates of exchange at the balance sheet date. The resulting translation adjustments are included in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Income and expense items are translated at average monthly rates of exchange. The net realized losses on foreign currency transactions were $0.1 million and immaterial during the three months ended June 30, 2012 and 2013, respectively, and immaterial and $0.4 million during the six months ended June 30, 2012 and 2013, respectively. 

 

Goodwill and Other Intangibles

 

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with ASC 350, Intangibles—Goodwill and Other, goodwill is not amortized, but instead is tested for impairment annually, or more frequently if circumstances indicate a possible impairment may exist. Absent any interim indicators of impairment, the Company has elected to test for goodwill impairment as of December 31 of each year. ASU 2011-08, “Testing Goodwill for Impairment,” permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. If the quantitative test is required, in the first step, the fair value for each reporting unit is compared to its book value including goodwill. In the case that the fair value is less than the book value, a second step is performed which compares the implied fair value of goodwill to the book value of goodwill. The fair value for the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair values of the identifiable assets and liabilities. If the implied fair value of the goodwill is less than the book value of the goodwill, the difference is recognized as an impairment.

 

The Company defines its two reporting units as North America and International. The provisions of ASU 2011-08 were adopted in the fourth quarter of 2012. Based on the qualitative factors assessed, the Company concluded it was not more likely than not that the fair value of the North America reporting unit was less than its carrying amount primarily because (1) the Company’s overall financial performance has been positive in the face of mixed economic environments and (2) forecasts of operating income and cash flows generated by the North America reporting unit appear sufficient to support the book value of its net assets. However, due to economic factors internationally, it was determined that the quantitative test was necessary for the International reporting unit. No impairment was identified as a result of this test as of December 31, 2012.

  

6
 

  

InnerWorkings, Inc. and subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

1.Summary of Significant Accounting Policies (Continued)

 

The following is a summary of the goodwill balance for each operating segment as of June 30, 2013:

 

   North America   International   Total 
Balance as of December 31, 2012   120,453,194    93,633,686    214,086,880 
Goodwill acquired related to 2013 acquisitions   42,322,899    6,764,441    49,087,340 
Finalization of purchase accounting for prior year acquisitions   176,886    177,879    354,765 
Foreign exchange impact   (46,339)   (1,478,140)   (1,524,479)
Balance as of June 30, 2013  $162,906,640   $99,097,866   $262,004,506 

     

In accordance with ASC 350, Intangibles – Goodwill and Other, the Company amortizes its intangible assets with finite lives over their respective estimated useful lives and reviews for impairment whenever impairment indicators exist. The Company’s intangible assets consist of customer lists, noncompete agreements, trade names and patents. The Company’s customer lists, which have an estimated weighted-average useful life of fourteen years, are being amortized using the economic life method. The Company’s noncompete agreements, trade names and patents are being amortized on the straight-line basis over their estimated weighted-average useful lives of approximately four years, twelve years and ten years, respectively.

 

The following is a summary of the intangible assets:

  

   December
31, 2012
   June 30,
2013
   Weighted
Average Life
 
Customer lists  $50,008,913   $54,612,561    14.4 years 
Noncompete agreements   1,077,349    1,077,349    3.9 years 
Trade names   3,467,655    3,467,655    12.4 years 
Patents   38,456    56,896    10.0 years 
    54,592,373    59,214,461      
Less accumulated amortization   (18,195,508)   (19,847,228)     
Intangible assets, net  $36,396,865   $39,367,233      

  

Amortization expense related to these intangible assets was $1.3 million and $0.9 million during the three month periods ended June 30, 2012 and 2013, respectively, and $2.2 million and $1.8 million during the six month periods ended June 30, 2012 and 2013, respectively.

 

The estimated amortization expense for the next five years is as follows:

 

Remainder of 2013  $2,117,891 
2014   3,997,043 
2015   3,797,357 
2016   3,649,324 
2017   3,502,014 
Thereafter   22,303,604 
   $39,367,233 

    

7
 

 

InnerWorkings, Inc. and subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

1.Summary of Significant Accounting Policies (Continued)

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation awards to employees and directors in accordance with ASC 718, Compensation-Stock Compensation. Compensation expense for stock options is measured by determining the fair value using the Black-Scholes option valuation model and is then recognized over the requisite service period of the awards, which is generally the vesting period, on a straight-line basis for the entire award.

 

Stock-based compensation cost recognized during the period is based on the portion of the share-based payment awards that are ultimately expected to vest. Accordingly, stock-based compensation cost recognized has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

During the six month periods ended June, 2012 and 2013, the Company granted 131,660 and 226,971 options, respectively. In addition, during the six month periods ended June 30, 2012 and 2013, the Company granted 115,361 and 216,649 restricted common shares, respectively. During the six month periods ended June 30, 2012 and 2013, 1,930,048 and 553,838 options were exercised and restricted common shares vested, respectively. The Company recorded stock-based compensation expense of $1.4 million and $1.1 million for the three months ended June 30, 2012 and 2013, respectively, and $2.5 million and $2.1 million for the six months ended June 30, 2012 and 2013, respectively

 

2.Acquisitions

 

During the second quarter of 2013, the Company acquired 100% of the voting equity interests of one domestic and one international company. Neither of these acquisitions were individually material.

 

These acquisitions contributed revenues and gross profit which represent approximately 2% of the Company’s consolidated results for the three months ended June 30, 2013. Pro forma results of these acquisitions are not disclosed as they would not have a material impact on the Company’s financial statements. 

 

The following table summarizes the total consideration paid and the amount of identified assets acquired and liabilities assumed at the acquisition dates. At June 30, 2013, the purchase price allocations are preliminary and subject to change as more detailed analyses are completed and additional information about the fair value of assets and liabilities becomes available. Specifically, the Company is finalizing the determination of the fair values of the intangible assets acquired and the contingent consideration liabilities. Changes to these fair values will also impact the amount of goodwill recorded in connection with the acquisitions. These valuations will be completed within one year of the acquisition date. 

 

Cash  $5,462,557 
Contingent consideration   6,924,514 
Total consideration transferred  $12,387,071 
      
Cash and cash equivalents  $471,106 
Accounts receivable   2,878,098 
Inventory   136,642 
Other assets   126,056 
Customer list   1,916,805 
Goodwill   9,729,812 
Accounts payable   (2,036,060)
Other current liabilities   (263,835)
Deferred income taxes   (571,553)
Total identifiable net assets and goodwill  $12,387,071 

 

8
 

 

InnerWorkings, Inc. and subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

2.Acquisitions (Continued)

 

Goodwill generally consists of expected synergies from combining operations of these acquisitions with the Company’s existing operations. Acquisition related costs were included in selling, general and administrative expenses and were immaterial. The goodwill is not expected to be deductible for tax purposes.

 

Contingent Consideration

 

In connection with certain of the Company’s acquisitions, contingent consideration is payable in cash or common stock upon the achievement of certain performance measures over future periods. For the acquisitions occurring subsequent to January 1, 2009, the Company has recorded the acquisition date fair value of the contingent consideration liability as additional purchase price.  The Company has recorded $109.5 million in contingent consideration at June 30, 2013 related to these arrangements.  Any adjustments made to the fair value of the contingent consideration liability subsequent to the acquisition date will be recorded in the Company’s results of operations.

 

As of June 30, 2013, the potential maximum contingent payments are payable as follows:

 

   Cash   Common Stock   Total 
2013  $4,598,333   $332,500   $4,930,833 
2014   11,726,235    16,412,963    28,139,198 
2015   14,746,860    19,877,910    34,624,770 
2016   31,411,905    27,493,645    58,905,550 
2017   -    20,050,000    20,050,000 
   $62,483,333   $84,167,018   $146,650,351 

   

3.Income Taxes

 

The Company’s effective income tax rate was 33.9% and 31.6% in the three months ended June 30, 2012 and 2013, respectively, and 34.1% and 23.3% in the six months ended June 30, 2012 and 2013, respectively. The Company’s effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted each period by discrete factors and events.

 

The decrease in the effective tax rate for the six months ended June 30, 2013 was primarily due to the 2012 R&D tax credit which was recognized in the first quarter of 2013. On January 2, 2013, the President signed the American Taxpayer Relief Act of 2012. The legislation retroactively extended the R&D tax credit for two years, from January 1, 2012 through December 31, 2013. The company’s effective income tax rate for the six months ended June 30, 2013 reflected the 2012 R&D tax credit of $0.3 million. Excluding the impact of this discrete event, the effective tax rate for the six months ended June 30, 2013 was 31.8% which decreased from the prior year due to international expansion into countries with lower statutory tax rates, as well as the 2013 R&D tax credit.

 

 

9
 

  

InnerWorkings, Inc. and subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

4.Earnings Per Share

 

Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted average shares outstanding plus share equivalents that would arise from the exercise of stock options and vesting of restricted common shares. Shares which would have an antidilutive effect on diluted earnings per share are excluded from the calculation. There were 742,331 and 1,328,086 antidilutive shares excluded for the three month periods ended June 30, 2012 and 2013, respectively, and 742,331 and 1,125,995 antidilutive shares excluded for the six month periods ended June 30 2012 and 2013, respectively. The computations of basic and diluted earnings per common share for the three and six months ended June 30, 2012 and 2013 are as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2012   2013   2012   2013 
Numerator:                
Net Income  $4,474,400   $1,903,345   $8,162,088   $2,798,475 
                     
Denominator:                    
Denominator for basic earnings per share—weighted-average shares   48,617,646    50,728,372    47,904,961    50,533,521 
Effect of dilutive securities:                    
Employee stock options and restricted common shares   2,089,310    1,237,167    2,649,681    1,512,479 
                     
Denominator for dilutive earnings per share   50,706,956    51,965,539    50,554,642    52,046,000 
                     
Basic earnings per share  $0.09   $0.04   $0.17   $0.06 
Diluted earnings per share  $0.09   $0.04   $0.16   $0.05 

  

5.Accumulated Other Comprehensive Income (Loss)

 

The table below presents changes in the components of accumulated other comprehensive income (loss) for the six months ended June 30, 2013:

 

   Foreign currency   Unrealized holding gains on available-for-sale securities   Total 
Balance as of December 31, 2012  $204,124   $1,338   $205,462 
Other comprehensive income (loss) before reclassifications   (2,048,128)   -    (2,048,128)
Amounts reclassified from accumulated other comprehensive income   -    (1,338)   (1,338)
Net current-period other comprehensive income (loss)   (2,048,128)   (1,338)   (2,049,466)
Balance as of June 30, 2013  $(1,844,004)  $-   $(1,844,004)

  

10
 

  

InnerWorkings, Inc. and subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

6.Related Party Transactions

 

Investment in Echo Global Logistics, Inc.

 

As previously disclosed, in February 2005 the Company acquired shares of common stock of Echo Global Logistics, Inc. (“Echo”), a technology enabled transportation and logistics business process outsourcing firm. Two former members of our Board of Directors, Eric P. Lefkofsky and Peter J. Barris, were also directors of Echo during 2012. In addition, Jack M. Greenberg and Eric D. Belcher have a direct and/or an indirect ownership interest in Echo. Following Echo’s initial public offering in October 2009, the Company has periodically sold shares of Echo common stock. The Company sold 13,655 and 28,398 of its shares of Echo’s common stock for $249,582 and $499,122, respectively, and recorded a gain on sale of investment of $247,875 and $495,572 during the three and six months ended June 30, 2012, respectively. During the first quarter of 2013, the Company sold the remaining 123 shares of Echo’s common stock, and the proceeds and realized gain were immaterial. The Company classified its shares of Echo’s common stock as “available for sale” in accordance with ASC 320, Investments—Debt and Equity Securities. The investment was stated at fair value based on market prices, with any unrealized gains and losses included as a separate component of stockholders’ equity. Any realized gains and losses and interest and dividends have been determined using the specific identification method and included in other income. At June 30, 2013, the Company no longer owned any shares of Echo’s common stock.

 

Agreements and Services with Related Parties

 

The Company provides print procurement services to Echo. The total amount billed for such print procurement services was $25,044 and $20,668 during the three months ended June 30, 2012 and 2013, respectively, and $52,185 and $54,193 during the six months ended June 30, 2012 and 2013, respectively.  In addition, Echo has provided transportation services to the Company. As consideration for these services, Echo billed the Company $2,944,296 and $2,344,162 during the three months ended June 30, 2012 and 2013, respectively, and $5,099,982 and $5,513,162 during the six months ended June 30, 2012 and 2013, respectively. The net amount payable to Echo at June 30, 2013 was $255,368.

 

The Company provides print procurement services to Arthur J. Gallagher & Co. J. Patrick Gallagher, Jr., who was appointed to the Company’s Board of Directors in August 2011, is the Chairman, President and Chief Executive Officer of Arthur J. Gallagher & Co. and has a direct ownership interest in Arthur J. Gallagher & Co. The total amount billed for such print procurement services was $123,145 and $190,607 during the three months ended June 30, 2012 and 2013, respectively, and $262,219 and $280,933 during the six months ended June 30, 2012 and 2013, respectively. Additionally, Arthur J. Gallagher & Co. provides insurance brokerage and risk management services to the Company. As consideration of these services, Arthur J. Gallagher & Co. billed the Company $52,400 and $179,238 during the three months ended June 30, 2012 and 2013, respectively, and $52,400 and $277,546 during the six months ended June 30, 2012 and 2013, respectively. The net amount receivable from Arthur J. Gallagher & Co. at June 30, 2013 was $45,270.

 

 

11
 

  

InnerWorkings, Inc. and subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

7.Fair Value Measurement

 

ASC 820 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on observable or unobservable inputs to valuation techniques that are used to measure fair value. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions.

 

The fair value hierarchy consists of the following three levels:

 

  Level 1: Inputs are quoted prices in active markets for identical assets or liabilities.
  Level 2: Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data.
  Level 3: Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

 

The Company's potential contingent consideration payments relating to acquisitions occurring subsequent to January 1, 2009 are its only Level 3 liabilities as of December 31, 2012 and June 30, 2013. The fair value of the liabilities determined by this analysis is primarily driven by the probability of reaching the performance measures required by the purchase agreements and the associated discount rate. Probabilities are estimated by reviewing financial forecasts and assessing the likelihood of reaching the required performance measures based on factors specific to each acquisition as well as the Company’s historical experience with similar arrangements. If an acquisition reaches the required performance measure, the estimated probability would be increased to 100%, and if the measure is not reached, the probability would be reduced to reflect the amount earned, if any, depending on the terms of the agreement. Discount rates are estimated by using the local government bond yields plus the Company’s credit spread. A one percentage point increase in the discount rate across all contingent consideration liabilities would result in a decrease to the fair value of approximately $2.1 million.

 

The following table sets forth the Company’s financial assets and financial liabilities measured at fair value on a recurring basis and the basis of measurement at December 31, 2012 and June 30, 2013, respectively:

 

At June 30, 2013  Total Fair Value
Measurement
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)
 
Assets:                    
Money market funds(1)  $667,174   $667,174   $-   $- 
Liabilities:                    
Contingent consideration  $(109,491,415)  $-   $-   $(109,491,415)

 

At December 31, 2012  Total Fair Value
Measurement
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)
 
Assets:                    
Money market funds(1)  $667,045   $667,045   $-   $- 
Liabilities:                    
Contingent consideration  $(71,664,770)  $-   $-   $(71,664,770)

 

 

(1)Included in cash and cash equivalents on the balance sheet.

  

12
 

  

InnerWorkings, Inc. and subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

7.Fair Value Measurement (Continued)

 

The following table provides a reconciliation of the beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3):

 

   Fair Value Measurements at
Reporting Date Using
Significant Unobservable Inputs
(Level 3)
 
   Contingent Consideration 
Balance as of December 31, 2012  $(71,664,770)
Contingent consideration from 2013 acquisitions   (42,924,165)
Contingent consideration payments paid in cash   720,821 
Contingent consideration payments paid in common stock   614,216 
Reclassified to Due to seller   1,628,512 
Change in fair value (1)   1,040,557 
Foreign exchange impact (2)   1,093,414 
Balance as of June 30, 2013  $(109,491,415)

  

(1)Adjustments to original contingent consideration obligations recorded were the result of using revised financial forecasts and updated fair value measurements. These changes are recognized within selling, general and administrative expenses on the consolidated statement of comprehensive income.

 

(2)Changes in the contingent consideration liability which are caused by foreign exchange rate fluctuations are recognized in other comprehensive income.

 

13
 

  

InnerWorkings, Inc. and subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

8.Commitments and Contingencies

 

In November 2010, in connection with the Circuit City Stores, Inc. (“Circuit City”) bankruptcy proceedings, the Trustee of the Circuit City Liquidating Trust (the “Trust”) filed a lawsuit against the Company in United States Bankruptcy Court in the Eastern District of Virginia for the avoidance of payments as allegedly preferential transfers of $3.2 million paid to the Company during the 90 days preceding the filing of the bankruptcy petition of Circuit City on November 10, 2008. In January 2013, the Company and the Trust entered into a settlement agreement resolving this preference claim as well the Company’s administrative and general unsecured claims against the Trust for a net payment to the Trust of $900,000.

 

In May 2011, Her Majesty’s Revenue and Customs (“HMRC”) contacted the Company’s United Kingdom subsidiary, InnerWorkings Europe Limited (formerly Etrinsic), to request information relating to its position that certain printed matter and direct mail products are zero-rated under the U.K.’s VAT law. Although Etrinsic has voluntarily exchanged information with the HMRC as to its position that the products at issue are zero-rated for VAT pursuant to UK law and HMRC’s guidance, HMRC has stated that it disagrees with Etrinsic’s position and in March 2012, HMRC issued Etrinsic a VAT assessment of £2,316,008 for VAT periods covering the 2008, 2009, 2010 and 2011 calendar years. Etrinsic sought independent review of the assessment with HMRC, and HMRC upheld the assessment. Etrinsic appealed the HMRC’s assessment at the UK Tax Tribunal. In order to appeal the claim, the Company paid £2,316,008 to the HMRC on July 6, 2012. This payment was included in other current assets. In the fourth quarter of 2012, the Company accrued a loss reserve reflecting an anticipated settlement of £925,000, inclusive of all VAT periods for the 2008 through 2012 calendar years. In July 2013, the Company finalized settlement with the HMRC and received a refund of the amounts paid to HMRC in July 2012 less the settlement amount which was not materially different than the estimated reserve of £925,000.

 

In December 2010, e-Lynxx Corporation filed a complaint against the Company and numerous other defendants for patent infringement in the United States District Court for the Middle District of Pennsylvania. As to the Company, the complaint alleges, among other things, that certain aspects of the Company’s PPM4 TM technology infringe on two patents owned by e-Lynxx purporting to cover a system and method for competitive pricing and procurement of customized goods and services, and seeks monetary damages, interest, costs, attorneys’ fees, punitive damages and a permanent injunction. In May 2013, e-Lynxx asserted that the monetary damages it seeks from the Company are in the range of $35 million to $88 million for the period from May 2009 through December 2012; e-Lynxx has not yet specified damages sought for 2013 and future periods. The Company disputes the allegations contained in e-Lynxx’s complaint and intends to vigorously defend this matter. Specifically, the Company contends that the patents at issue are invalid and not infringed, and, therefore, e-Lynxx is not entitled to any relief and the complaint should be dismissed. Further, even if e-Lynxx could establish liability, the Company contends that e-Lynxx is not entitled to the excessive monetary relief it seeks. On July 25, 2013, the Court granted the Company’s motion for summary judgment, finding that the Company did not infringe the patents-in-suit. The time for filing an appeal of this judgment has not yet expired. The Company believes that an unfavorable outcome is reasonably possible or remote but not probable, and therefore, no reserve has been recorded for a potential loss. The loss that is reasonably possible or remote cannot be estimated.

 

In October 2012, a former sales employee of the Company filed an arbitration claim against the Company arising from the Company’s termination of his employment in November 2011. He alleges disability discrimination, defamation, breach of employment agreement, invasion of privacy, and wage payment claims, and seeks monetary damages of $2.75 million, interest, punitive damages, injunctive relief, declaratory relief, and attorneys’ fees and costs. The Company disputes these allegations and intends to vigorously defend itself in the matter. Specifically, the Company contends that it lawfully terminated his employment for cause, and, therefore, that he is not entitled to any relief and his claims should be dismissed. The matter is currently in the discovery phase, and an arbitration hearing is scheduled for November 2013.

 

14
 

  

InnerWorkings, Inc. and subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

9.Recently Issued Accounting Pronouncements

 

In February 2012, the FASB issued ASU 2013-02 which requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. These requirements are effective for public companies for reporting periods beginning after December 15, 2012. The Company adopted ASU 2013-02 in the first quarter of 2013 and included the required disclosures in Note 5.

 

10.Business Segments

 

The Company is organized and managed as two business segments, North America and International, and is viewed as two operating segments by the chief operating decision maker for purposes of resource allocation and assessing performance. “Other” consists of shared service activities and unallocated corporate expenses.

 

Management evaluates the performance of its operating segments based on net revenues and Adjusted EBITDA which is a non-GAAP financial measure. The accounting policies of each of the operating segments are the same as those described in the summary of significant accounting policies in Note 1. Adjusted EBITDA represents income from operations with the addition of depreciation and amortization and stock-based compensation expense, less income/expense related to changes in the fair value of contingent consideration liabilities. Management does not evaluate the performance of its operating segments using asset measures.

 

The table below presents financial information for the Company’s reportable operating segments and Other for the three and six month periods noted (in thousands):

 

   North America   International   Other   Total 
Three Months Ended June 30, 2013:                    
Net revenue from third parties  $162,135   $48,741   $-   $210,876 
Net revenue from other segments   2    589    (591)   - 
Total net revenues   162,137    49,330    (591)   210,876 
Adjusted EBITDA (1)   12,978    287    (7,914)   5,351 
Three Months Ended June 30, 2012:                    
Net revenue from third parties  $161,762   $39,635   $-   $201,397 
Net revenue from other segments   23    233    (256)   - 
Total net revenues   161,785    39,868    (256)   201,397 
Adjusted EBITDA (1)   16,872    1,561    (6,561)   11,872 
                     
                     
    North America    International    Other    Total 
Six Months Ended June 30, 2013:                    
Net revenue from third parties  $327,094   $88,098   $-   $415,192 
Net revenue from other segments   20    855    (875)   - 
Total net revenues   327,114    88,953    (875)   415,192 
Adjusted EBITDA (1)   25,760    475    (15,046)   11,189 
Six Months Ended June 30, 2012:                    
Net revenue from third parties  $318,746   $71,198   $-   $389,944 
Net revenue from other segments   66    632    (698)   - 
Total net revenues   318,812    71,830    (698)   389,944 
Adjusted EBITDA (1)   31,623    1,853    (12,046)   21,430 

 

(1)Adjusted EBITDA, which represents income from operations with the addition of depreciation and amortization, stock-based compensation expense and income/expense related to changes in the fair value of contingent consideration liabilities, is considered a non-GAAP financial measure under SEC regulations. Income from operations is the most directly comparable financial measure calculated in accordance with GAAP. The Company presents this measure as supplemental information to help investors better understand trends in its business results over time. The Company's management team uses Adjusted EBITDA to evaluate the performance of the business. Adjusted EBITDA is not equivalent to any measure of performance required to be reported under GAAP, nor should this data be considered an indicator of the Company's overall financial performance and liquidity. Moreover, the Adjusted EBITDA definition the Company uses may not be comparable to similarly titled measures reported by other companies.

 

15
 

  

InnerWorkings, Inc. and subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)

 

10.Business Segments (Continued)

 

The table below reconciles the total of the reportable segments' Adjusted EBITDA and the Adjusted EBITDA included in Other to income before income taxes (in thousands):

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2012   2013   2012   2013 
                 
Adjusted EBITDA  $11,872   $5,351   $21,430   $11,189 
Depreciation and amortization   (2,937)   (2,648)   (5,381)   (5,114)
Stock-based compensation   (1,404)   (1,081)   (2,451)   (2,054)
Change in fair value of contingent consideration   (266)   1,649    (467)   1,041 
Total other income (expense)   (494)   (489)   (754)   (1,413)
                     
Income before income taxes  $6,771   $2,782   $12,377   $3,649 

  

11. Subsequent Event

 

On July 25, 2013, the Company acquired 100% of the outstanding shares of capital stock and other equity interests of the U.S. and international businesses of EYELEVEL, a leading global provider of permanent retail displays and store fixtures, pursuant to two purchase agreements for an aggregate purchase price of up to $54,000,000 (the “Consideration”). The Consideration will be payable as follows: (A) $11,900,000 paid in cash at closing, subject to an adjustment for estimated working capital; (B) a holdback of $600,000 payable in cash pending confirmation of actual working capital; (C) up to $17,500,000 to be paid in shares of Company Common Stock if certain financial milestones are achieved during annual measurement periods between July 1, 2013 and June 30, 2017; and (D) up to $24,000,000 payable in shares of Company Common Stock if Cumulative EBITDA (as defined in the purchase agreements) equals or exceeds $40,000,000 for the period beginning on July 1, 2013 and ending on June 30, 2017; provided that if Cumulative EBITDA falls below $40,000,000 but equals or exceeds $30,000,000, the sellers will be entitled to receive a partial payment as set forth in the purchase agreements. As a result of this acquisition, EYELEVEL will extend the Company’s permanent display capabilities to international markets. EYELEVEL’s current and future clients will have the ability to benefit from the Company’s enterprise print management services. The purchase price allocation is not yet finalized and will be prepared during the third quarter. Results of operations for EYELEVEL will be included in our consolidated financial statements from the date of acquisition.

 

 

16
 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We are a leading provider of global print management and promotional solutions to corporate clients across a wide range of industries. With proprietary technology, an extensive supplier network and deep domain expertise, the Company procures, manages and delivers printed materials and promotional products as part of a comprehensive outsourced enterprise solution. Our technology and database of information is designed to capitalize on excess manufacturing capacity and other inefficiencies in the traditional print supply chain to obtain favorable pricing and to deliver high-quality products and services for our clients. Since 2002, we have expanded from a regional focus to a national and now global focus.

 

Our proprietary software applications and database create a fully-integrated solution that stores, analyzes and tracks the production capabilities of our supplier network, as well as quote and price data for print jobs. As a result, we have one of the largest independent repositories of equipment profiles and price data for print suppliers in the United States. We leverage our technology to match our print jobs with suppliers that are optimally suited to meet the client’s needs at a highly competitive price.

 

Through our network of more than 10,000 global suppliers, we offer a full range of print, fulfillment and logistics services that allow us to procure printed products on virtually any substrate. The breadth of our product offerings and services and the depth of our supplier network enable us to fulfill all of the print procurement needs of our clients. By leveraging our technology platform and data, our clients are able to reduce overhead costs, redeploy internal resources and obtain favorable pricing and service terms. In addition, our ability to track individual transactions and provide customized reports detailing print procurement activity on an enterprise-wide basis provides our clients with greater visibility and control of their print expenditures.

 

We generate revenue by procuring and purchasing printed products from our suppliers and selling those products to our clients. We procure printed products for clients across a wide range of industries, such as retail, financial services, hospitality, non-profits, healthcare, food and beverage, broadcasting and cable, education, transportation and utilities. Our clients fall into two categories, enterprise and middle market. We enter into arrangements with our enterprise clients to provide some, or substantially all, of their printed products, typically on a recurring basis. We provide printed products to our middle market clients on an order-by-order basis.

 

We were formed in 2001, commenced operations in 2002 and converted from a limited liability company to a Delaware corporation in January 2006. Our corporate headquarters are located in Chicago, Illinois. As of June 30, 2013, we had approximately 1,400 employees and independent contractors in more than 30 countries. We organize our operations into two segments based on geographic regions: North America and International. The North America segment includes operations in the United States and Canada, and the International segment includes operations in the United Kingdom, continental Europe, the Middle East, Latin America and Asia. During the six months ended June 30, 2013, we generated global revenue from third parties of $327.1 million in the North America segment and $88.1 million in the International segment. We believe the opportunity exists to expand our business into new geographic markets. Our objective is to continue to increase our sales in the major print markets in the United States and internationally. We intend to hire or acquire more account executives within close proximity to these large markets.

 

Revenue

 

We generate revenue through the sale of printed products to our clients. Our revenue was $389.9 million and $415.2 million during the six months ended June 30, 2012 and 2013, respectively. Total revenue increased 4.7% from the prior year of which 6% was from organic growth, excluding the loss of a portion of a significant customer. Our revenue is generated from two different types of clients: enterprise and middle market. Enterprise clients usually order printed products in higher dollar amounts and volume than our middle market clients. We categorize a client as an enterprise client if we have a contract with the client for the provision of printing services on a recurring basis; if the client has signed an open-ended purchase order, or a series of related purchase orders; or if the client has enrolled in our e-stores program, which enables the client to make online purchases of printing services on a recurring basis. We categorize all other clients as middle market clients. We enter into contracts with our enterprise clients to provide some or a specific portion of their printed products on a recurring basis. Our contracts with enterprise clients are generally three to five years, subject to termination by either party upon prior notice ranging from 90 days to twelve months.

 

Several of our enterprise clients have outsourced substantially all of their recurring print needs to us. We provide printed products to our middle market clients on an order-by-order basis. During the six months ended June 30, 2013, enterprise clients accounted for 77% of our revenue, while middle market clients accounted for 23% of our revenue.

 

Our revenue consists of the prices paid by our clients for printed products. These prices, in turn, reflect the amounts charged to us by our suppliers plus our gross profit. Our gross profit margin, in the case of some of our enterprise clients, is fixed by contract or, in the case of middle market clients, is dependent on prices negotiated on a job-by-job basis. Once either type of client accepts our pricing terms, the selling price is established and we procure the product for our own account in order to re-sell it to the client. We take full title and risk of loss for the product upon shipment. The finished product is typically shipped directly from our supplier to a destination specified by our client. Upon shipment, our supplier invoices us for its production costs and we invoice our client.

  

17
 

  

Our revenue from enterprise clients tends to generate lower gross profit margins than our revenue from middle market clients because the gross profit margins established in our contracts with large enterprise clients are generally lower than the gross profit margins typically realized in our middle market business. Although our enterprise revenue generates lower gross profit margins, our enterprise business tends to be as profitable as our middle market business on an operating profit basis because the commission expense associated with enterprise clients is generally lower.

 

Cost of Goods Sold and Gross Profit

 

Our cost of goods sold consists primarily of the price at which we purchase products from our suppliers. Our selling price, including our gross profit, in the case of some of our enterprise clients, is based on a fixed gross margin established by contract or, in the case of middle market clients, is determined at the discretion of the account executive or production manager within predetermined parameters. Our gross margins on our enterprise clients are typically lower than our gross margins on our middle market clients. As a result, our cost of goods sold as a percentage of revenue for our enterprise clients is typically higher than those for our middle market clients. Our gross profit for the six months ended June 30, 2012 and 2013 was $89.2 million and $94.2 million, or 22.9% and 22.7% of revenue, respectively.

 

Operating Expenses

 

Our selling, general and administrative expenses consist of commissions paid to our account executives, compensation costs for our management team and production managers as well as compensation costs for our finance and support employees, public company expenses, corporate systems, legal and accounting, facilities and travel and entertainment expenses. Selling, general and administrative expenses as a percentage of revenue were 18.1% and 20.2% for the six months ended June 30, 2012 and 2013, respectively.

 

We accrue for commissions when we recognize the related revenue. Some of our account executives receive a monthly draw to provide them with a more consistent income stream. The cash paid to our account executives in advance of commissions earned is reflected as a prepaid expense on our balance sheet. As our account executives earn commissions, a portion of their commission payment is withheld and offset against their prepaid commission balance, if any. Our prepaid commission balance, net of accrued earned commissions not yet paid, increased to $8.5 million as of June 30, 2013 from $8.3 million as of December 31, 2012.

 

We agree to provide our clients with printed products that conform to the industry standard of a “commercially reasonable quality,” and our suppliers in turn agree to provide us with products of the same quality. In addition, the quotes we execute with our clients include customary industry terms and conditions that limit the amount of our liability for product defects. Product defects have not had a material adverse effect on our results of operations.

 

Comparison of three months ended June 30, 2012 and 2013

 

Revenue

 

Our revenue from third parties by segment for each of the years presented was as follows:

 

   Three Months Ended June 30, 
   2012   % of Total   2013   % of Total 
   (dollars in thousands) 
North America  $161,762    80.3%  $162,135    76.9%
International   39,635    19.7    48,741    23.1 
                     
Revenue  $201,397    100.0%  $210,876    100.0%

   

North America

 

North America revenue increased by $0.4 million, or 0.2%, from $161.8 million during the three months ended June 30, 2012 to $162.1 million during the three months ended June 30, 2013. This increase in revenue is driven primarily by organic new enterprise and middle market account growth, offset by the loss of a portion of a significant customer.

 

International

 

International revenue increased by $9.1 million, or 23.0%, from $39.6 million during the three months ended June 30, 2012 to $48.7 million during the three months ended June 30, 2013. This increase is primarily due to revenue contributed from prior year European acquisitions, as well as organic growth in Latin America, which includes expansion into Brazil.

  

18
 

  

Cost of goods sold

 

Our cost of goods sold increased by $9.1 million, or 6.0%, from $153.6 million during the three months ended June 30, 2012 to $162.7 million during the three months ended June 30, 2013. The increase is a result of the revenue growth during the three months ended June 30, 2013. Our cost of goods sold as a percentage of revenue was 76.2% and 77.2% during the three months ended June 30, 2012 and 2013, respectively.

 

Gross Profit

 

Our gross profit as a percentage of revenue, which we refer to as gross margin, was 23.8% and 22.8% during the three months ended June 30, 2012 and 2013, respectively. This decrease is primarily due to shift in the customer mix between enterprise and middle market as well as timing.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses increased by $4.6 million, or 12.3%, from $37.6 million during the three months ended June 30, 2012 to $42.3 million during the three months ended June 30, 2013. As a percentage of revenue, selling, general and administrative expenses increased from 18.7% for the three months ended June 30, 2012 to 20.0% for the three months ended June 30, 2013. The increase in selling, general and administrative expenses is primarily due to incremental sales commission and cost of procurement staff to secure new enterprise accounts and increased professional fees incurred in connection with ongoing litigation. The increase in selling, general and administrative expenses as a percent of revenue is due to actual revenues being less than expected due to the loss of a portion of a significant customer.

 

Depreciation and amortization

 

Depreciation and amortization expense decreased by $0.3 million, or 9.8%, from $2.9 million during the three months ended June 30, 2012 to $2.6 million during the three months ended June 30, 2013.

 

Income from operations

 

Income from operations decreased by $4.0 million, or 55.0%, from $7.3 million during the three months ended June 30, 2012 to $3.3 million during the three months ended June 30, 2013. As a percentage of revenue, income from operations was 3.6% and 1.6% during the three months ended June 30, 2012 and 2013, respectively. This decrease is primarily attributable to the increase in selling, general and administrative expenses discussed above.

 

Other expense

 

Other expense was $0.5 million for each of the three months ended June 30, 2012 and 2013.

 

Income tax expense

 

Income tax expense decreased by $1.4 million, or 61.8%, from $2.3 million during the three months ended June 30, 2012 to $0.9 million during the three months ended June 30, 2013. Our effective tax rate was 33.9% and 31.6% for the three months ended June 30, 2012 and 2013, respectively. The decrease in the effective tax rate is due to international expansion into countries with lower statutory tax rates, as well as the 2013 R&D credit described in Note 3 to our Consolidated Financial Statements.

 

Net income

 

Net income decreased by $2.6 million, or 57.5%, from $4.5 million during the three months ended June 30, 2012 to $1.9 million during the three months ended June 30, 2013. Net income as a percentage of revenue was 2.2% and 0.9% during the three months ended June 30, 2012 and 2013, respectively. This decrease is primarily attributable to the increase in selling, general and administrative expenses discussed above.

 

Comparison of six months ended June 30, 2012 and 2013

 

Revenue

 

Our revenue from third parties by segment for each of the years presented was as follows:

 

   Six Months Ended June 30, 
   2012   % of Total   2013   % of Total 
   (dollars in thousands) 
North America  $318,746    81.7%  $327,094    78.8%
International   71,198    18.3    88,098    21.2 
                     
Revenue  $389,944    100.0%  $415,192    100.0%

   

19
 

  

North America

 

North America revenue increased by $8.3 million, or 2.6%, from $318.7 million during the six months ended June 30, 2012 to $327.1 million during the six months ended June 30, 2013. This increase in revenue is driven primarily by organic new enterprise and middle market account growth, offset by the loss of a portion of a significant customer.

 

International

 

International revenue increased by $16.9 million, or 23.7%, from $71.2 million during the six months ended June 30, 2012 to $88.1 million during the six months ended June 30, 2013. This increase is primarily due to revenues contributed from prior year acquisitions, as well as organic growth in Latin America, which includes expansion in to Brazil.

 

Cost of goods sold

 

Our cost of goods sold increased by $20.3 million, or 6.8%, from $300.7 million during the six months ended June 30, 2012 to $321.0 million during the six months ended June 30, 2013. The increase is a result of the revenue growth during the six months ended June 30, 2013. Our cost of goods sold as a percentage of revenue was 77.1% and 77.3% during the six months ended June 30, 2012 and 2013, respectively.

 

Gross Profit

 

Our gross profit as a percentage of revenue, which we refer to as gross margin, was 22.9% and 22.7% during the six months ended June 30, 2012 and 2013, respectively. This decrease is primarily due to shift in customer mix between enterprise and middle market.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses increased by $13.3 million, or 18.8%, from $70.7 million during the six months ended June 30, 2012 to $84.0 million during the six months ended June 30, 2013. As a percentage of revenue, selling, general and administrative expenses increased from 18.1% for the six months ended June 30, 2012 to 20.2% for the six months ended June 30, 2013. The increase in selling, general and administrative expenses is primarily due to incremental sales commission and cost of procurement staff to secure new enterprise accounts and increased professional fees incurred in connection with ongoing litigation. The increase in selling, general and administrative expenses as a percent of revenue is due to actual revenues being less than expected due to the loss of a portion of a significant customer.

 

Depreciation and amortization

 

Depreciation and amortization expense decreased by $0.3 million, or 0.5%, from $5.4 million during the six months ended June 30, 2012 to $5.1million during the six months ended June 30, 2013.

 

Income from operations

 

Income from operations decreased by $8.1 million, or 61.5%, from $13.1 million during the six months ended June 30, 2012 to $5.1 million during the six months ended June 30, 2013. As a percentage of revenue, income from operations was 3.4% and 1.2% during the six months ended June 30, 2012 and 2013, respectively. This decrease is primarily attributable to the increase in selling, general and administrative expenses discussed above.

 

Other expense

 

Other expense increased by $0.7 million from $0.8 million for the six months ended June 30, 2012 to $1.4 million during the six months ended June 30, 2013. The increase is primarily attributable to a decrease in the gain on sale of shares of Echo of $0.5 million and an increase in foreign currency losses of $0.4 million, offset by a decrease in net interest expense of $0.3 million.

 

Income tax expense

 

Income tax expense decreased by $3.4 million, or 79.8%, from $4.2 million during the six months ended June 30, 2012 to $0.9 million during the six months ended June 30, 2013. Our effective tax rate was 34.1% and 23.3% for the six months ended June 30, 2012 and 2013, respectively.

 

The decrease in the effective tax rate was primarily due to the 2012 R&D tax credit which was recognized in the first quarter of 2013. On January 2, 2013, the President signed the American Taxpayer Relief Act of 2012. The legislation retroactively extended the R&D tax credit for two years, from January 1, 2012 through December 31, 2013. Our effective tax rate for the six months ended June 30, 2013 reflected the 2012 R&D tax credit of $0.3 million. Excluding the impact of this discrete event, the effective tax rate for the six months ended June 30, 2013 was 31.8% which decreased from the prior year due to international expansion into countries with lower statutory tax rates, as well as the 2013 R&D tax credit.

  

20
 

  

Net income

 

Net income decreased by $5.4 million, or 65.7%, from $8.2 million during the six months ended June 30, 2012 to $2.8 million during the six months ended June 30, 2013. Net income as a percentage of revenue was 2.1% and 0.7% during the six months ended June 30, 2012 and 2013, respectively. This decrease is primarily attributable to the increase in selling, general and administrative expenses discussed above.

 

21
 

  

Liquidity and Capital Resources

 

At June 30, 2013, we had $14.2 million of cash and cash equivalents.

 

Operating Activities. Cash provided by/used in operating activities primarily consists of net income adjusted for certain non-cash items, including depreciation and amortization, and the effect of changes in working capital and other activities. Cash provided by operating activities for the six months ended June 30, 2013 was $8.3 million and consisted of net income of $2.8 million and $6.1 million of non-cash items, offset by $0.5 million used by working capital and other activities. The most significant impact on working capital and other activities consisted of a decrease in accounts payable of $6.4 million and a decrease in accrued expenses and other liabilities of $5.1 million, offset by a decrease in accounts receivable and unbilled revenue of $5.7 million and a decrease in prepaid expenses and other assets of $4.2 million.

 

Cash used in operating activities for the six months ended June 30, 2012 was $10.0 million and consisted of net income of $8.2 million, and $9.0 million of non-cash items, offset by $7.4 million of excess tax benefits on exercises of stock awards and $19.8 million used by working capital and other activities. The most significant impact on working capital and other activities consisted of an increase in accounts receivable and unbilled revenue of $16.6 million and an increase in prepaid expenses and other of $6.9 million offset by an increase in accrued expenses of $6.7 million.

 

Investing Activities. Cash used in investing activities in the six months ended June 30, 2013 of $17.4 million was attributable to capital expenditures of $5.8 million and payments for current year acquisitions, net of cash acquired, of $11.6 million.

 

Cash used in investing activities in the six months ended June 30, 2012 of $7.2 million was primarily attributable to capital expenditures of $5.0 million and payments to sellers for acquisitions closed prior to 2009 of $3.0 million, offset by proceeds from the sale of Echo shares and other investments of $0.5 million.

 

Financing Activities.   Cash provided by financing activities in the six months ended June 30, 2013 of $6.1 million was primarily attributable to net borrowings under the revolving credit facility of $13.3 million, proceeds from the exercise of stock options of $1.8 million and excess tax benefits over compensation cost on exercised stock awards of $1.1 million, offset by payments of contingent consideration of $10.1 million.

 

Cash provided by financing activities in the six months ended June 30, 2012 of $16.1 million was primarily attributable to the $13.0 million of borrowings under the revolving credit facility and $7.4 million of excess tax benefits over compensation cost on exercised stock awards, offset by $5.5 million of payments of contingent consideration.

 

We will continue to utilize cash, in part, to fund acquisitions of or make strategic investments in complementary businesses and to expand our sales force. Although we can provide no assurances, we believe that our available cash and cash equivalents and the $71.0 million available under our revolving credit facility as of June 30, 2013 will be sufficient to meet our working capital and operating expenditure requirements for the foreseeable future. Thereafter, we may find it necessary to obtain additional debt financing.

 

We earn a significant amount of our operating income outside the United States, which is deemed to be permanently reinvested in foreign jurisdictions. We do not currently foresee a need to repatriate funds; however, should we require more capital in the United States than is generated by our operations locally or through debt or equity issuances, we could elect to repatriate funds held in foreign jurisdictions. If foreign earnings were to be remitted to the United States, foreign tax credits would be available to reduce any U.S. tax due upon repatriation. Included in our cash and cash equivalents are amounts held by foreign subsidiaries. We had $7.2 million and $8.8 million of foreign cash and cash equivalents as of December 31, 2012 and June 30, 2013, respectively, which are generally denominated in the local currency where the funds are held.

 

Off-Balance Sheet Obligations

 

We do not have any off-balance sheet arrangements.

 

Contractual Obligations

 

With the exception of the contingent consideration in connection with our business acquisitions discussed in Note 2 and Note 11 in the Notes to Consolidated Financial Statements, there have been no material changes outside the normal course of business in the contractual obligations disclosed in Item 7 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, under the caption “Contractual Obligations.”

 

  

22
 

  

Critical Accounting Policies and Estimates

 

As of June 30, 2013, there were no material changes to our critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Recent Accounting Pronouncements

 

In February 2012, the FASB issued ASU 2013-02 which requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. These requirements are effective for public companies for reporting periods beginning after December 15, 2012. We have adopted ASU 2013-02 in the current quarter and included the required disclosures in Note 5 in the Notes to Condensed Consolidated Financial Statements.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains words such as “may,” “will,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “project,” “estimate” and “objective” or the negative thereof or similar terminology concerning the Company’s future financial performance, business strategy, plans, goals and objectives. These expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include information concerning our possible or assumed future performance or results of operations and are not guarantees. While these statements are based on assumptions and judgments that management has made in light of industry experience as well as perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances, they are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different. Some of the factors that would cause future results to differ from the recent results or those projected in forward-looking statements include, but are not limited to, the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Additional Information

 

We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, other reports and information filed with the SEC and amendments to those reports available, free of charge, through our Internet website (http://www.inwk.com) as soon as reasonably practical after we electronically file or furnish such materials to the SEC. All of our filings may be read or copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on the operation of the Public Filing Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

  

23
 

  

Item 3.            Quantitative and Qualitative Disclosures about Market Risk

 

Commodity Risk

 

We are dependent upon the availability of paper, and paper prices represent a substantial portion of the cost of our products. The supply and price of paper depend on a variety of factors over which we have no control, including environmental and conservation regulations, natural disasters and weather. We believe a 10% increase in the price of paper would not have a significant effect on our consolidated statements of income or cash flows, as these costs are generally passed through to our clients.

 

Interest Rate Risk

 

We have exposure to changes in interest rates on our revolving credit facility. Interest is payable at the adjusted LIBOR rate or the alternate base rate. Assuming our $150.0 million revolving credit facility was fully drawn, a 1.0% increase in the interest rate would increase our annual interest expense by $1.5 million.

 

Our interest income is sensitive to changes in the general level of U.S. interest rates, in particular because all of our investments are in cash equivalents and marketable securities. The average duration of our investments as of June 30, 2013 was less than one year. Due to the short-term nature of our investments, we believe that there is no material risk exposure.

 

Foreign Currency Risk

 

We transact business in various foreign currencies other than the U.S. dollar, principally the Euro, British pound sterling, Peruvian Nuevo Sol, Colombian peso, and Chilean peso, which exposes us to foreign currency risk. For the six months ended June 30, 2013, we derived approximately 21.2% of our revenue from international customers, and we expect the percentage of revenue derived from outside the United States to increase in future periods as we continue to expand globally. Revenue and related expenses generated from our international operations are denominated in the functional currencies of the corresponding country. The functional currency of our subsidiaries that either operate or support these markets is generally the same as the corresponding local currency. The results of operations of, and certain of our intercompany balances associated with, our international operations are exposed to foreign exchange rate fluctuations. Changes in exchange rates could negatively affect our revenue and other operating results as expressed in U.S. dollars. We may record significant gains or losses on the remeasurement of intercompany balances. Foreign exchange gains and losses recorded to date have been immaterial to our financial statements. At this time we do not, but in the future we may enter into derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the impact hedging activities would have on our results of operations.

 

Item 4.            Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2013. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2013, our chief executive officer and chief financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

  

Changes in Internal Control over Financial Reporting

 

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the six months ended June 30, 2013 that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

24
 

  

PART II. OTHER INFORMATION

 

Item 1.            Legal Proceedings

 

In November 2010, in connection with the Circuit City Stores, Inc. (“Circuit City”) bankruptcy proceedings, the Trustee of the Circuit City Liquidating Trust (the “Trust”) filed a lawsuit against us in United States Bankruptcy Court in the Eastern District of Virginia for the avoidance of payments as allegedly preferential transfers of $3.2 million paid to us during the 90 days preceding the filing of the bankruptcy petition of Circuit City on November 10, 2008. In January 2013, we and the Trust entered into a settlement agreement resolving this preference claim as well our administrative and general unsecured claims against the Trust for a net payment to the Trust of $900,000.

 

In May 2011, Her Majesty’s Revenue and Customs (“HMRC”) contacted our United Kingdom subsidiary, InnerWorkings Europe Limited (formerly Etrinsic), to request information relating to its position that certain printed matter and direct mail products are zero-rated under the U.K.’s VAT law. Although Etrinsic voluntarily exchanged information with the HMRC as to its position that the products at issue are zero-rated for VAT pursuant to UK law and HMRC’s guidance, HMRC stated that it disagreed with Etrinsic’s position and in March 2012, HMRC issued Etrinsic a VAT assessment of £2,316,008 for VAT periods covering the 2008, 2009, 2010 and 2011 calendar years. Etrinsic sought independent review of the assessment with HMRC, and HMRC upheld the assessment. Etrinsic appealed the HMRC’s assessment at the UK Tax Tribunal. In order to appeal the claim, we paid £2,316,008 to the HMRC on July 6, 2012. This payment was included in other current assets. In the fourth quarter of 2012, we accrued a loss reserve reflecting an anticipated settlement of £925,000, inclusive of all VAT periods for the 2008 through 2012 calendar years. In July 2013, we finalized settlement with the HMRC and received a refund of the amounts paid to HMRC in July 2012 less the settlement amount which was not materially different than the estimated reserve of £925,000.

 

In December 2010, e-Lynxx Corporation filed a complaint against us and numerous other defendants for patent infringement in the United States District Court for the Middle District of Pennsylvania. As to us, the complaint alleges, among other things, that certain aspects of the Company’s PPM4 TM technology infringe on two patents owned by e-Lynxx purporting to cover a system and method for competitive pricing and procurement of customized goods and services, and seeks monetary damages, interest, costs, attorneys’ fees, punitive damages and a permanent injunction. In May 2013, e-Lynxx asserted that the monetary damages it seeks from us are in the range of $35 million to $88 million for the period from May 2009 through December 2012; e-Lynxx has not yet specified damages sought for 2013 and future periods. We dispute the allegations contained in e-Lynxx’s complaint and intend to vigorously defend this matter. Specifically, we contend that the patents at issue are invalid and not infringed, and, therefore, e-Lynxx is not entitled to any relief and the complaint should be dismissed. Further, even if e-Lynxx could establish liability, we contend that e-Lynxx is not entitled to the excessive monetary relief it seeks. On July 25, 2013, the Court granted our motion for summary judgment, finding that we did not infringe the patents-in-suit. The time for filing an appeal of this judgment has not yet expired. We believe that an unfavorable outcome is reasonably possible or remote but not probable, and therefore, no reserve has been recorded for a potential loss. The loss that is reasonably possible or remote cannot be estimated.

 

In October 2012, a former sales employee filed an arbitration claim against us arising from our termination of his employment in November 2011. He alleges disability discrimination, defamation, breach of employment agreement, invasion of privacy, and wage payment claims, and seeks monetary damages of $2.75 million, interest, punitive damages, injunctive relief, declaratory relief, and attorneys’ fees and costs. We dispute these allegations and intend to vigorously defend ourselves in the matter. Specifically, we contend that we lawfully terminated his employment for cause, and, therefore, that he is not entitled to any relief and his claims should be dismissed.  The matter is currently in the discovery phase, and an arbitration hearing is scheduled for November 2013.

 

Item 1A.         Risk Factors

 

There have been no material changes in the risk factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012.

  

25
 

  

Item 6.            Exhibits

  

Exhibit No     Description of Exhibit
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101   Sections of the InnerWorkings, Inc. Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013, are formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Statement of Comprehensive Income; (ii) Condensed Consolidated Balance Sheet; (iii) Condensed Consolidated Statement of Cash Flows; (iv) Notes to Condensed Consolidated Financial Statements; and (v) document and entity information.

 

26
 

  

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.

  

  INNERWORKINGS, INC.
     
Date: August 9, 2013 By:  /s/    Eric D. Belcher
    Eric D. Belcher
    Chief Executive Officer
     
Date: August 9, 2013 By: /s/    Joseph M. Busky
    Joseph M. Busky
    Chief Financial Officer

 

27
 

  

EXHIBIT INDEX

 

Number   Description
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101   Sections of the InnerWorkings, Inc. Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013, are formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Statement of Comprehensive Income; (ii) Condensed Consolidated Balance Sheet; (iii) Condensed Consolidated Statement of Cash Flows; (iv) Notes to Condensed Consolidated Financial Statements; and (v) document and entity information.

 

28

 

EXHIBIT 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

INNERWORKINGS, INC.

PURSUANT TO

SECTION 302 Of THE SARBANES-OXLEY ACT OF 2002

 

I, Eric D. Belcher, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of InnerWorkings, Inc.;

 

  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  b) designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

 

  d) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 9, 2013 /s/    Eric D. Belcher
  Eric D. Belcher
  Chief Executive Officer

 

 

 

 

EXHIBIT 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

INNERWORKINGS, INC.

PURSUANT TO

SECTION 302 Of THE SARBANES-OXLEY ACT OF 2002

 

I, Joseph M. Busky, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of InnerWorkings, Inc.;

 

  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  b) designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

 

  d) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 9, 2013 /s/    Joseph M. Busky
  Joseph M. Busky
  Chief Financial Officer

 

 

 

 

 

EXHIBIT 32.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 Of THE SARBANES-OXLEY ACT OF 2002

 

I, Eric D. Belcher, Chief Executive Officer of InnerWorkings, Inc. (the “Company”), hereby certify, that:

 

(1) The Company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2) The information contained in the Form 10-Q fairly presents, in all material aspects, the financial condition and results of operations of the Company.

 

/s/ Eric D. Belcher  
Eric D. Belcher  
Chief Executive Officer  
August 9, 2013  

 

 

 

 

EXHIBIT 32.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 Of THE SARBANES-OXLEY ACT OF 2002

 

I, Joseph M. Busky, Chief Financial Officer of InnerWorkings, Inc. (the “Company”), hereby certify, that:

 

(1) The Company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2013 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2) The information contained in the Form 10-Q fairly presents, in all material aspects, the financial condition and results of operations of the Company.

 

/s/ Joseph M. Busky  
Joseph M. Busky  
Chief Financial Officer  
August 9, 2013