Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
For the fiscal year ended December 31, 2018
Commission file number: 000-52170
 
INNERWORKINGS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-5997364
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
600 West Chicago Avenue, Suite 850, Chicago, IL 60654
 
(312) 642-3700
(Address of principal executive offices) (Zip Code)
 
(Registrants’ telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.0001 par value
 
Nasdaq Global Market
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes   ¨    No   ý
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes   ¨    No   ý 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act 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   ý    No   ¨
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).        Yes   ý     No   ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ¨
 
Accelerated filer  ý
 
Non-accelerated filer  ¨
 
Smaller reporting company  ¨
 
 
 
 
 
 
 Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨





Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes: ¨ No:  ý 

The aggregate market value of the common equity held by non-affiliates of the registrant as of June 30th, 2018 the last business day of the registrant’s most recent completed second quarter, was $319,588,359 (based on the closing sale price of the registrant’s common stock on that date as reported on the Nasdaq Global Market).
 
As of March 11, 2019, the registrant had 52,271,946 shares of common stock, par value $0.0001 per share, outstanding.

 
DOCUMENTS INCORPORATED BY REFERENCE
 
The registrant intends to file with the Securities and Exchange Commission a proxy statement pursuant to Regulation 14A within 120 days of the end of its fiscal year ended December 31, 2018. Portions of such proxy statement are incorporated by reference into Part III of this Annual Report on Form 10-K. 










TABLE OF CONTENTS
 
 
 
 
 
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
 
 
 
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
 
 
 
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions and Director Independence
Item 14.
Principal Accountant Fees and Services
 
 
 
 
 
 
 
Item 15.
Exhibits, Financial Statement Schedule
 
 
 
Signatures
 

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PART I
 
Unless otherwise indicated or the context otherwise requires, references in this Annual Report on Form 10-K to “InnerWorkings, Inc.,” “InnerWorkings,” the "Company” “we,” “us” or “our” are to InnerWorkings, Inc., a Delaware corporation and its subsidiaries.
 
Forward-Looking Statements 
 
Certain statements in this Annual Report on Form 10-K are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements involve a number of risks, uncertainties and other factors that could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors which could materially affect such forward-looking statements can be found in Part I, Item 1A entitled “Risk Factors” and Part II, Item 7 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K. Investors are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date hereof. Except as expressly required by federal securities laws, we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or changed circumstances.

Item 1.
Business
 
Our Company 

We are a leading global marketing execution firm for some of the world's most marketing intensive companies, including those listed in the Fortune 1000. As a comprehensive outsourced global solution, we leverage proprietary technology, an extensive supplier network and deep domain expertise to streamline the creation, production and distribution of marketing and promotional materials, signage and displays, retail experiences, events and promotions and product packaging across every major market worldwide. The items we source generally are procured through the marketing supply chain and we refer to these items collectively as marketing materials. Through our network of more than 10,000 global suppliers, we offer a full range of fulfillment and logistics services that allow us to procure marketing materials of virtually any kind. The breadth of our product offerings and services and the depth of our supplier network enable us to fulfill the marketing materials procurement needs of our clients.

Our proprietary software applications and databases create a fully-integrated solution that stores, analyzes and tracks the production capabilities of our supplier network, as well as detailed pricing data. As a result, we believe we have one of the largest independent repositories of supplier capabilities and pricing data for suppliers of marketing materials around the world. We leverage our supplier capabilities and pricing data to match our orders with suppliers that are optimally suited to meet the client’s needs at a highly competitive price. Our technology and databases of product and supplier information are designed to capitalize on excess manufacturing capacity and other inefficiencies in the traditional marketing materials supply chain to obtain favorable pricing while delivering high-quality products and services for our clients.
 
By leveraging our technology 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 procurement activity on an enterprise-wide basis provides our clients with greater visibility and control of their marketing materials expenditures.
 
We generate revenue by procuring and purchasing marketing materials from our suppliers and selling those products to our clients. We procure products for clients across a wide range of industries, such as retail, financial services, hospitality, consumer packaged goods, non-profits, healthcare, pharmaceuticals, food and beverage, broadcasting and cable, and transportation.
 
We were formed in 2001, commenced operations in 2002, and converted from a limited liability company to a Delaware corporation in 2006. Our corporate headquarters are located in Chicago, Illinois. For the year ended December 31, 2018, our annual revenue was $1.1 billion, and we operated in 67 global office locations.

We organize our operations into three segments based on geographic regions: North America, EMEA, and LATAM. The North America segment includes operations in the United States and Canada; the EMEA segment includes operations in the United Kingdom, continental Europe, the Middle East, Africa, and Asia; and the LATAM segment includes operations in Mexico, Central America, and South America. We believe the opportunity exists to expand our business into new geographic markets. Our objective is to

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continue to increase our sales in the major markets in the United States and internationally. We intend to hire or acquire more account executives within close proximity to these large markets.

Industry Overview
 
Our business of providing marketing execution solutions primarily includes the procurement of marketing materials, branded merchandise, product packaging and retail displays. Based on external sources, we estimate the global market for marketing materials, product packaging, and retail displays, in aggregate, to be approximately $600 billion annually.
 
Procurement of marketing materials is often dispersed across several areas of a business, including sales, marketing, communications and finance. The traditional process of procuring, designing and producing an order often requires extensive collaboration by manufacturers, designers, agencies, brokers, fulfillment and other middlemen, which is highly inefficient for the customer, who typically pays a mark-up at each intermediate stage of the supply chain. Consolidating marketing activities across the organization represents an opportunity to reduce total expenditure and decrease the number of vendors in the marketing supply chain.
 
To become more competitive, many large corporations seek to focus on their core competencies and outsource non-core business functions, which typically include marketing execution. According to a recent industry report, the global business process outsourcing market for managed procurement is more than $250 billion.
 
We seek to capitalize on the trends impacting the marketing supply chain and the movement towards outsourcing of non-core business functions by leveraging our propriety technology, deep domain expertise, extensive supplier network and purchasing power.
 
Our Solution 
 
Utilizing our proprietary technology and data, we provide our clients a global solution to procure and deliver marketing materials at favorable prices. Our network of more than 10,000 global suppliers offers a wide variety of products and a full range of print, fulfillment and logistics services.
 
Our procurement software and database seeks to capitalize on excess manufacturing capacity and other inefficiencies in the traditional supply chain for marketing materials. We believe that the most competitive prices we obtain from our suppliers are offered by the suppliers with the most unused capacity. We utilize our technology to:
 
greatly increase the number of suppliers that our clients can access efficiently;
obtain favorable pricing and deliver high quality products and services for our clients; and
aggregate our purchasing power.

Our proprietary technology and data streamline the procurement process for our clients by eliminating inefficiencies within the traditional marketing supply chain and expediting production. However, our technology cannot manage all of the variables associated with procuring marketing materials, which often involves extensive collaboration among numerous parties. Effective management of the procurement process requires that dedicated and experienced personnel work closely with both clients and suppliers. Our account executives and production managers perform that critical function.
 
Account executives act as the primary sales staff to our clients. Production managers manage the entire procurement process for our clients to ensure timely and accurate delivery of the finished product. For each order we receive, a production manager uses our technology to gather specifications, solicit bids from the optimal suppliers, establish pricing with the client, manage production and coordinate the purchase and delivery of the finished product.
 
Each client is assigned an account executive and one or more production managers, who develop relationships with client personnel responsible for authorizing and making purchases. Our largest clients often are assigned multiple production managers. In certain cases, our production managers function on-site at the client's offices. Whether on-site or off-site, a production manager functions as a virtual employee of the client. As of December 31, 2018, we had approximately 650 production managers and account executives, including over 275 working on-site at our clients' offices.

Our Proprietary Technology
 
Our proprietary technology is a fully-integrated solution that stores equipment profiles for our supplier network and price data for orders we quote and execute. Our technology allows us to match orders with the suppliers in our network that are optimally suited

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to produce an order at a highly competitive price. Our technology also allows us to efficiently manage the critical aspects of the procurement process, including gathering order specifications, identifying suppliers, establishing pricing, managing production and coordinating purchase and delivery of the finished product. 

Our database stores the production capabilities of our supplier network, as well as price and quote data for bids we receive and transactions we execute. As a result, we maintain one of the largest independent repositories of equipment profiles and price data for suppliers of marketing materials. Our production managers use this data to discover excess manufacturing capacity, select optimal suppliers, negotiate favorable pricing and efficiently procure high-quality products and services for our clients. We rate our suppliers based on product quality, customer service and overall satisfaction. This data is stored in our database and used by our production managers during the supplier selection process.
 
We believe our proprietary technology allows us to procure marketing materials more efficiently than traditional manual or semi-automated systems used by many manufacturers in the marketplace. Our technology includes the following features:
 
Customized order management. Our solution automatically generates customized data entry screens based on product type and guides the production manager to enter the required job specifications. For example, if a production manager selects “envelope” in the product field, the screen will automatically prompt the production manager to specify the size, paper type, window size and placement and display style.
Cost management. Our solution reconciles supplier invoices to executed orders to ensure the supplier adhered to the pricing and other terms contained in the order. In addition, it includes checks and balances that allow us to monitor important financial indicators relating to an order, such as projected gross margin and significant job alterations.
Standardized reporting. Our solution generates transaction reports that contain quote, supplier capability, price and customer service information regarding the orders the client has completed with us. These reports can be customized, sorted and searched based on a specified time period or the type of product, price or supplier. In addition, the reports give our clients insight into their spend for each individual job and on an enterprise-wide basis, which allows the client to track the amounts it spends on job components such as paper, production and logistics.
Task-tracking.  Our solution creates a work order checklist that sends e-mail reminders to our production managers regarding the time elapsed between certain milestones and the completion of specified deliverables. These automated notifications enable our production managers to focus on more critical aspects of the process and eliminate delays.
Historical price baseline.  Some of our larger clients provide us with pricing data for orders they completed before they began to use our solution. For these clients, our solution automatically compares our current price for a job to the price obtained by the client for a comparable historical job, which enables us to demonstrate on an ongoing basis the cost savings we provide.

We have created customized e-commerce stores on our client and third party platforms to order pre-selected products, such as personalized stationery, marketing brochures and promotional products. Automated order processes can send requests to our vendors for fulfillment or printing of variable print on demand products.
 
Our Clients
 
We procure marketing materials for corporate clients across a wide range of industries, such as retail, financial services, hospitality, consumer packaged goods, non-profits, healthcare, food and beverage, broadcasting and cable and transportation. Our clients also include manufacturers that outsource jobs to us because they do not have the requisite capabilities or capacity to complete an order. For the years ended December 31, 2018, 2017, and 2016, our largest customer accounted for 5%, 5%, and 5% of our revenue, respectively. Revenue from our top ten clients accounted for 27%, 28%, and 28% of our revenue in 2018, 2017, and 2016, respectively.
 
We generate revenue by procuring and purchasing marketing materials from our suppliers and selling those products to our clients. Our services are provided under long-term contracts, purchase orders, or other contractual arrangements, and the scope and terms of these contracts vary by client.
 
Our Products and Services
 
We offer a full range of solutions to support the marketing execution needs of our clients. Our outsourced print management solution encompasses the design, sourcing and delivery of printed marketing materials such as direct mail, in-store signage and marketing collateral. We provide a similar outsourced solution for the design, sourcing and delivery of other categories in the marketing supply chain, such as branded merchandise and product packaging. We also assist clients with the management of events and promotions spending and related procurement needs. Our retail environments solution involves the design, sourcing and installation

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of point of sale displays, permanent retail fixtures and overall store design. We also offer on-site outsourced creative studio services and digital marketing services, including retail digital display solutions.
 
We offer comprehensive fulfillment and logistics services, such as kitting and assembly, inventory management and pre-sorting postage. These services are often essential to the completion of the finished product. For example, we assemble multi-level direct mailings, insurance benefits packages and coupons and promotional incentives that are included with credit card and bank statements. We also provide creative services, including copywriting, graphics and website design, identity work and marketing collateral development and pre-media services, such as image and print-ready page processing and proofing capabilities. Our e-commerce and online collaboration technology empowers our clients with branded self-service ecommerce websites that prompt quick and easy online ordering, fulfillment, tracking and reporting.

We agree to provide our clients with 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. The contracts we execute with our clients typically include customary provisions that limit the amount of our liability for product defects. To date, we have not experienced significant claims or liabilities relating to defective products.
 
Our Supplier Network
 
Our global network of more than 10,000 suppliers includes graphic designers, paper mills and merchants, digital imaging companies, specialty binders, finishing and engraving firms, fulfillment and distribution centers and manufacturers of displays and promotional items.
 
These suppliers have been selected from among thousands of potential suppliers worldwide on the basis of price, quality, delivery and customer service. We direct requests for quotations to potential suppliers based on historical pricing data, quality control rankings, and geographic proximity to a client or other criteria specified by our clients. In 2018, our top ten suppliers accounted for approximately 21% of our cost of goods sold and no supplier accounted for more than 3% of our cost of goods sold.
 
We have established a quality control program that is designed to ensure that we deliver high-quality products and services to our clients through the suppliers in our network.
 
Sales and Marketing
 
Our account executives sell our marketing execution solutions to corporate clients. As of December 31, 2018, we had approximately 325 sales and account executives. Our agreements with our account executives require them to market and sell our solutions on an exclusive basis and contain non-compete and non-solicitation provisions that apply during and for a specified period after the term of their service.
 
We expect to continue our growth by recruiting and retaining highly qualified account executives and providing them with the tools to be successful in the marketplace. There are a large number of experienced sales representatives globally and we believe that we will be able to identify additional qualified account executives from this pool of individuals. We also expect to augment our sales force through selective acquisitions of other businesses that offer marketing execution services, including brokers that employ experienced sales personnel with established client relationships.
  
We believe that we offer account executives an attractive opportunity because they can utilize our vast supplier network, proprietary pricing data and customized order management solution to sell virtually any type of marketing materials at a highly competitive price. In addition, the diverse production and service capabilities of the suppliers in our network provide our account executives the opportunity to deliver a more complete product and service offering to our clients. We believe we can better attract and retain experienced account executives than our competitors because of the breadth of products offered by our supplier network.
 
To date, we have been successful in attracting and retaining qualified account executives. The on-boarding process consists of training with our sales management, as well as access to a variety of sales and educational resources that are available on our intranet.
 
Competition
 
Our marketing execution solutions compete with in-house procurement departments in large marketing intensive companies, creative agencies that purchase marketing materials on behalf of their clients in connection with the agencies’ marketing campaign and brand strategy services and companies in several manufacturing industries, including design, graphics art, digital imaging and

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fulfillment and logistics. As a result, we compete on some level with virtually every company that is involved in printing, from graphic designers to pre-press firms and fulfillment companies.
 
Our competitors include manufacturers that employ traditional methods of marketing and selling their printed materials. The manufacturers with which we compete generally own and operate their own manufacturing equipment and typically serve clients only within the specific product categories that their equipment produces.
 
We also compete with manufacturing management firms and brokers. These competitors generally do not own or operate printing equipment and typically work with a limited number of suppliers and have minimal financial investment in the quality of the products produced for their clients. Our industry experience indicates that several of these competitors offer print procurement services or enterprise software applications for the print industry.
 
The principal elements of competition in marketing materials procurement are price, product quality, customer service, technology and reliability. Although we believe our business delivers products and services on competitive terms, our business and the marketing execution industry are relatively new and are evolving rapidly.
  
Intellectual Property
 
We rely primarily on a combination of copyright, patent, trademark and trade secret laws to protect our intellectual property rights. We also protect our proprietary technology through confidentiality and non-disclosure agreements with our employees and independent contractors.
 
Our IT infrastructure provides a high level of security for our proprietary database. The storage system for our proprietary data is designed to ensure that power and hardware failures do not result in the loss of critical data. The proprietary data is protected from unauthorized access through a combination of physical and logical security measures, including firewalls, antivirus software, intrusion detection software, password encryption and physical security, with access limited to authorized personnel. In addition to our security infrastructure, our system data is backed up and stored in a redundant facility on a daily basis to prevent the loss of our proprietary data due to catastrophic failures or natural disasters. We test our overall IT recovery ability and co-location facility semi-annually and test our back-up processes quarterly to verify that we can recover our business critical systems in a timely fashion.
 
Employees
 
As of December 31, 2018, we had approximately 2,100 employees and independent contractors in more than 27 countries. We consider our employee relations to be strong.
 
Our Website
 
Our website is http://www.inwk.com. We make available, free of charge through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, including exhibits and any amendments to those reports, filed with or furnished to the Securities Exchange Commission ("SEC"). We make these reports available through our website as soon as reasonably practicable after our electronic filing of such materials with or the furnishing of them to, the SEC. The information contained on our website is not a part of this Annual Report on Form 10-K and shall not be deemed incorporated by reference into this Annual Report on Form 10-K or any other public filing made by us to the SEC. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.

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Item 1A.
Risk Factors
 
Set forth below are certain risk factors that could harm our business, results of operations and financial condition. You should carefully read the following risk factors, together with the financial statements, related notes and other information contained in this Annual Report on Form 10-K. Our business, financial condition and operating results may suffer if any of the following risks are realized. If any of these risks or uncertainties occur, the trading price of our common stock could decline and you might lose all or part of your investment. This Annual Report on Form 10-K contains forward-looking statements that contain risks and uncertainties. Please refer to the discussion of “forward-looking statements” on page four of this Annual Report on Form 10-K in connection with your consideration of the risk factors and other important factors that may affect future results described below.
 
Risks Related to Our Business
 
Competition could substantially impair our business and our operating results. 

We compete with companies in the manufacturing of marketing related products, including printed materials, in-store displays, packaging materials, graphics art and digital imaging and fulfillment and logistics. Competition in these industries is intense. Our primary competitors are manufacturers that employ traditional methods of marketing and selling their marketing materials. Some of these manufacturers have larger client bases and significantly more resources than we do. Buyers may prefer to utilize the traditional services offered by the manufacturers with whom we compete. Alternatively, some of these manufacturers may elect to offer outsourced print procurement services or enterprise software applications and their well-established client relationships, industry knowledge, brand recognition, financial and marketing capabilities, technical resources and pricing flexibility may provide them with a competitive advantage over us.

We also compete with a number of management firms and brokers. Several of these competitors offer outsourced procurement services or enterprise software applications for the marketing industry. These competitors or new competitors that enter the market may also offer procurement services similar to and competitive with or superior to, our current or proposed offerings and may achieve greater market acceptance. In addition, a software solution and database similar to our proprietary technology could be created over time by a competitor with sufficient financial resources and comparable industry experience. If our competitors are able to offer comparable services, we could lose clients and our market share could decline.

Our competitors may also establish cooperative relationships to increase their ability to address client needs. Increased competition may lead to revenue reductions, reduced gross margins or a loss of market share, any one of which could harm our business and our operating results.
 
If our services do not achieve widespread commercial acceptance, our business will suffer.
 
Most companies currently coordinate the procurement and management of their marketing materials with their own employees using a combination of telephone, e-mail, their own technology platforms and the Internet. Growth in the demand for our services depends on the adoption of our outsourcing model for marketing related procurement services. We may not be able to persuade prospective clients to change their traditional procurement processes. Our business could suffer if our services are not accepted or are not perceived by the marketplace to be effective or valuable.
 
If our suppliers do not meet our needs or expectations or those of our clients, our business would suffer.

The success of our business depends to a large extent on our relationships with our clients and our reputation for high quality marketing materials and marketing execution services. We do not own manufacturing equipment. Instead, we rely on third-party suppliers to deliver the products and services that we provide to our clients. As a result, we do not directly control the products manufactured or the services provided by our suppliers. If our suppliers do not meet our needs or expectations or those of our clients, our professional reputation may be damaged, our business would be harmed and we could be subject to legal liability.

A significant portion of our revenue is derived from a relatively limited number of large clients and any loss or decrease in sales to these clients could harm our results of operations.
 
A significant portion of our revenue is derived from a relatively limited number of large clients. Revenue from our top ten clients accounted for 27%, 28%, and 28% of our revenue during the years ended December 31, 2018, 2017, and 2016, respectively. Our largest client accounted for 5%, 5%, and 5% of our revenue in 2018, 2017, and 2016, respectively. We are likely to continue to

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experience ongoing client concentration, particularly if we are successful in attracting large clients. Moreover, there may be a loss or reduction in business from one or more of our large clients. It is also possible that revenue from these clients, either individually or as a group, may not reach or exceed historical levels in any future period. The loss or significant reduction of business from our major clients would adversely affect our results of operations.

A significant or prolonged economic downturn or a dramatic decline in the demand for marketing materials, could adversely affect our revenue and results of operations.
 
Our results of operations are affected directly by the level of business activity of our clients, which in turn is affected by the level of economic activity and cyclicality in the industries and markets that they serve. Certain of our products are sold to industries, including the advertising, retail, consumer products, housing, financial and pharmaceutical industries, that experience significant fluctuations in demand based on general economic conditions, cyclicality and other factors beyond our control. Continued economic uncertainty or an economic downturn could result in a reduction of the marketing budgets of our clients or a decrease in the number of marketing materials that our clients order from us. Reduced demand from one of these industries or markets could negatively affect our revenues, operating income and profitability.
 
A significant decrease in the number of our suppliers could adversely affect our business.
 
Our suppliers are not contractually required to continue to accept orders from us. If production capacity at a significant number of our suppliers becomes unavailable, we will be required to use fewer suppliers, which could significantly limit our ability to serve our clients on competitive terms. In addition, we rely on price bids provided by our suppliers to populate our database. If the number of our suppliers decreases significantly, we may not be able to obtain sufficient pricing information for our database, which could adversely affect our ability to obtain favorable pricing for our clients and negatively impact our operating income and profitability.
 
We may face difficulties as we expand our operations into countries in which we have limited operating experience.
 
Aggregate revenue from outside of the United States represented 32%, 31%, and 33% of total revenue for the years ended December 31, 2018, 2017, and 2016, respectively. We intend to expand our global footprint, which may involve expanding into countries other than those in which we currently operate or increasing our operations in countries where we currently have limited operations and resources. Our business outside of the United States is subject to various risks, including:
 
changes in economic and political conditions;
changes in and compliance with international and domestic laws and regulations, including anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act and data privacy laws such as the General Data Protection Regulation;
wars, civil unrest, acts of terrorism and other conflicts;
natural disasters;
compliance with and changes in tariffs, trade restrictions, trade agreements and taxation;
difficulties in managing or overseeing foreign operations;
limitations on the repatriation of funds because of foreign exchange controls;
political and economic corruption;
less developed and less predictable legal systems than those in the United States; and
intellectual property laws of countries which do not protect our intellectual property rights to the same extent as the laws of the United States.

The occurrence or consequences of any of these factors may lead to significant legal or compliance expenses and may restrict our ability to operate in the affected region or result in the loss of clients in the affected region or other regions, which could adversely affect our revenue, operating income and profitability.
 
As we expand our business in foreign countries, we will become exposed to increased risk of loss from foreign currency fluctuations and exchange controls, particularly the strengthening of the U.S. dollar against major currencies, as well as longer accounts receivable payment cycles. We have limited control over these risks and if we do not correctly anticipate changes in international economic and political conditions, we may not alter our business practices in time to avoid adverse effects.

The European economy continues to experience overall weakness as a result of lingering high unemployment, sovereign debt issues and tightening of government budgets. Continued weak economic conditions in Europe could adversely affect our results of operations in the European countries in which we conduct business. Additionally, concerns persist regarding the debt burden of certain of the countries that have adopted the Euro currency (the “Euro zone”) and their ability to meet future financial obligations,

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as well as concerns regarding the overall stability of the Euro to function as a single currency among the diverse economic, social and political circumstances within the Euro zone. We conduct a portion of our business in Euro. Although it remains uncertain whether significant changes in the utilization of the Euro will occur or what the potential impact of such changes in the Euro zone or globally might be, a material shift in circulation of the Euro could result in disruptions to our business and negatively impact our results of operations.

Changes in the United Kingdom's economic and other relationships with the European Union could adversely affect us.

In June 2016, a majority of voters in a national referendum in the United Kingdom voted to withdraw from the European Union ("Brexit"). In March 2017, the United Kingdom formally notified the European Union of its intention to withdraw, and withdrawal negotiations began in June 2017. European Union rules provide for a two-year negotiation period, ending on March 29, 2019, unless an extension is agreed to by the parties. There remains significant uncertainty about the future relationship between the United Kingdom and the European Union, including the possibility of the United Kingdom leaving the European Union without a negotiated and bilaterally approved withdrawal plan. We conduct a portion of our business in both the United Kingdom and the European Union. In 2018, we generated 7.2% of our revenues in the United Kingdom and 8.4% in other countries within the European Union. Our supply chain depends on the free flow of goods in those regions. The ongoing uncertainty and potential re-imposition of border controls and customs duties on trade between the United Kingdom and European Union nations could negatively impact our competitive position, supplier and customer relationships and financial performance. The ultimate effects of Brexit on us will depend on the specific terms of any agreement the United Kingdom and the European Union reach to provide access to each other’s respective markets. If the United Kingdom leaves the European Union without a bilaterally approved agreement governing the United Kingdom’s relationship with the European Union, our supply chains for the United Kingdom and the European Union are likely to experience significant disruption and increased costs, which would adversely affect our business and results of operations.

Changes in U.S. administrative policy, including changes to existing trade agreements and any resulting changes in international relations, could adversely affect our financial performance and supply chain economics.
As a result of changes to U.S. administrative policy, among other possible changes, there may be (i) changes to existing trade agreements; (ii) greater restrictions on free trade generally; and (iii) significant increases in tariffs on goods imported into the United States, particularly those manufactured in China, Mexico and Canada. China is currently a leading global source of promotional marketing products, such as branded merchandise and barware, sold in the United States, and Canada supplies a substantial percentage of the pulp and paper used by the U.S. printing industry. In September 2018, the Office of the U.S. Trade Representative announced that the current U.S. administration would impose a 10% tariff on approximately $200 billion worth of imports from China into the United States, effective September 24, 2018, which is subject to increase if the United States and China are unable to reach a trade deal. Additionally, in November 2018, the United States, Mexico and Canada signed the United States-Mexico-Canada Agreement ("USMCA"), the successor agreement to the North American Free Trade Agreement ("NAFTA"). The USMCA has been ratified by the Mexican Congress. The U.S. Congress is not expected to vote on the agreement until the third quarter of 2019, and approval by the Canadian Parliament is expected to follow United States approval.

It remains unclear what the U.S. administration or foreign governments, including China, will or will not do with respect to tariffs, NAFTA, USMCA or other international trade agreements and policies. A trade war, other governmental action related to tariffs or international trade agreements, changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently do business or any resulting negative sentiments towards the United States could adversely affect our supply chain economics, consolidated revenue, earnings and cash flow.
 
We are subject to taxation related risks in multiple jurisdictions.
We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Significant judgment is required in determining our global provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis. While we believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible that these positions may be overturned by jurisdictional tax authorities, which may have a significant impact on our global provision for income taxes. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. We are also subject to ongoing tax audits. These audits can involve complex issues, which may require an extended period of time to resolve and can be highly subjective. Tax authorities may disagree with certain tax reporting positions taken by us and, as a result, assess additional taxes against us. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision.

In addition, governmental tax authorities are increasingly scrutinizing the tax positions of companies. Many countries in the European Union, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and

11



Development, are actively considering changes to existing tax laws that, if enacted, could increase our tax obligations in countries where we do business. The impact of tax reform in the U.S. or other foreign tax law changes could result in an overall tax rate increase to our business.

If we are unable to retain and expand the number of our account executives or if a significant number of our account executives leave InnerWorkings, our ability to increase our revenues could be negatively impacted.
 
Our ability to expand our business will depend largely on our ability to attract and retain account executives with established client relationships. We rely on our core team of approximately 12 lead sales executives to win business from new, large clients. Competition for qualified account executives can be challenging and we may be unable to hire such individuals. Any difficulties we experience in expanding or retaining the number of our account executives could have a negative impact on our ability to expand our client base, increase our revenue and continue our growth.

In addition, we must properly incentivize our account executives to obtain new clients and maintain existing client relationships. If a significant number of our account executives leave InnerWorkings and take their clients with them, our revenue could be negatively impacted. Although we have entered into non-competition agreements with our account executives, we may need to litigate to enforce our rights under these agreements, which could be time-consuming, expensive and ineffective. A significant increase in the turnover rate among our current account executives could also increase our recruiting costs and decrease our operating efficiency and productivity, which could lead to a decline in the demand for our services. In addition, if members of our core team of sales executives leave InnerWorkings, our ability to develop new clients and grow our business may be adversely affected.

If we are unable to expand our client base, our revenue growth rate may be negatively impacted.

As part of our growth strategy, we seek to attract new clients and expand relationships with existing clients. If we are unable to attract new clients or expand our relationships with our existing clients, our ability to grow our business will be hindered.
 
Most of our clients may terminate their relationships with us on short notice with no or limited penalties.

Many of our clients use our services on an order-by-order basis rather than under long-term contracts. These clients have no obligation to continue using our services and may stop purchasing from us at any time. We have entered into long-term contracts and contract renewals with many of our clients, which are generally for three to five year initial terms. Most of these contracts, however, permit the clients to terminate our engagements upon prior notice, typically ranging from 90 days to 12 months with limited or no penalties.
 
The volume and type of services we provide our clients may vary from year to year and could be reduced if a client were to change its outsourcing or procurement strategy. If a significant number of our clients elect to terminate or not to renew their engagements with us or if the volume of their orders decreases, our business, operating results and financial condition could suffer.
 
We may not be able to develop or implement new systems, procedures and controls that are required to support the continued growth in our operations.

Our business continues to grow in size and complexity, and continued growth could place a significant strain on our ability to: 
recruit, motivate and retain qualified account executives, production managers and management personnel;
preserve our culture, values and entrepreneurial environment;
develop and improve our internal administrative infrastructure and execution standards; and
maintain high levels of client satisfaction.

To manage our growth, we must implement and maintain proper operational and financial controls and systems. Further, we will need to manage our relationships with various clients and suppliers. We cannot give any assurance that we will be able to develop and implement, on a timely basis, the systems, procedures and controls required to support the growth in our operations or effectively manage our relationships with various clients and suppliers. If we are unable to manage our growth, our business, operating results and financial condition could be adversely affected.  
 
Our business and stock price may be adversely affected if our internal controls over financial reporting are not effective.
 
Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to conduct a comprehensive evaluation of their internal control over financial reporting. To comply with this statute, each year we are required to document and test our internal control over

12



financial reporting; our management is required to assess and issue a report concerning our internal control over financial reporting; and our independent registered public accounting firm is required to report on the effectiveness of our internal control over financial reporting. 

In this Annual Report on Form 10-K, we reported that management identified material weaknesses in our internal controls over financial reporting as of December 31, 2018. See “Item 9A. Controls and Procedures.” 

We cannot assure that we will not discover other material weaknesses in the future. The existence of one or more material weaknesses could result in errors to our financial statements and substantial costs and resources may be required to correct and remediate internal control deficiencies and to defend litigation. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our common stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business and our business and financial results could deteriorate.

The global integration of our technology platform may result in business interruptions.
 
We are currently implementing a common technology platform across our global operations. The implementation of and such changes to our technology platform and related software carry risks such as cost overruns, project delays and business interruptions and delays. If we experience a material business interruption as a result of this process, it could have a material adverse effect on our business, financial position and results of operations.
 
Security and privacy breaches may damage client relations and inhibit our growth.
 
The secure and uninterrupted operation of our information technology systems is critical to our business. Despite the security measures that we have implemented, including those measures related to cybersecurity, our systems, as well as those of our customers, suppliers and other service providers could be breached or damaged by computer viruses, malware, phishing attacks, denial-of-service attacks, natural or man-made incidents or disasters, or unauthorized physical or electronic access. These types of incidents have become more prevalent and pervasive across industries, including in our industry, and are expected to continue in the future. A breach could result in business disruption, theft of our intellectual property, trade secrets or customer information and unauthorized access to personnel information. Although cybersecurity and the continued development and enhancement of our controls, processes and practices designed to protect our information technology systems from attack, damage or unauthorized access are a high priority for us, our activities and investment may not be deployed quickly enough or successfully protect our systems against all vulnerabilities, including technologies developed to bypass our security measures. In addition, outside parties may attempt to fraudulently induce employees or customers to disclose access credentials or other sensitive information in order to gain access to our secure systems and networks. There are no assurances that our actions and investments to improve the maturity of our systems, processes and risk management framework or remediate vulnerabilities will be sufficient or completed quickly enough to prevent or limit the impact of any cyber intrusion. Moreover, because the techniques used to gain access to or sabotage systems often are not recognized until launched against a target, we may be unable to anticipate the methods necessary to defend against these types of attacks and we cannot predict the extent, frequency or impact these problems may have on us. To the extent that our business is interrupted or data is lost, destroyed or inappropriately used or disclosed, such disruptions could adversely affect our competitive position, relationships with our customers, financial condition, operating results and cash flows. In addition, we may be required to incur significant costs to protect against the damage caused by these disruptions or security breaches in the future.

We are also dependent on security measures that some of our third-party customers, suppliers and other service providers take to protect their own systems and infrastructures. Some of these third parties store or have access to certain of our sensitive data, as well as confidential information about their own operations, and as such are subject to their own cybersecurity threats.

Any security breach of any of these third-parties’ systems could result in unauthorized access to our information technology systems, cause us to be non-compliant with applicable laws or regulations, subject us to legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence in our products and services, any of which could adversely affect our financial performance.
 
A decrease in levels of excess capacity in the commercial print industry could have an adverse impact on our business.
 
We believe that for the past several years the U.S. commercial print industry has experienced significant levels of excess capacity. Our business seeks to capitalize on imbalances between supply and demand in the print industry by obtaining favorable pricing terms from suppliers in our network with excess capacity. Reduced excess capacity in the print industry generally and in our supplier network specifically, could have an adverse impact on our ability to execute our business strategy and on our business results and growth prospects.

13



 
Our inability to protect our intellectual property rights may impair our competitive position.
 
If we fail to protect our intellectual property rights adequately, our competitors could replicate our proprietary technology and processes and offer similar services, which would harm our competitive position. We rely primarily on a combination of copyright, patent, trademark and trade secret laws and confidentiality and nondisclosure agreements to protect our proprietary technology. We cannot be certain that the steps we have taken to protect our intellectual property rights will be adequate or that third parties will not infringe or misappropriate our rights or imitate or duplicate our services and methodologies. We may need to litigate to enforce our intellectual property rights or determine the validity and scope of the rights of others. Any such litigation could be time-consuming and costly.
 
If we are unable to maintain our proprietary technology, demand for our services and therefore our revenue could decrease.
 
We rely heavily on our proprietary technology to procure marketing materials for our clients. To keep pace with changing technologies and client demands, we must correctly interpret and address market trends and enhance the features and functionality of our technology in response to these trends, which may lead to significant research and development costs. We may be unable to accurately determine the needs of buyers or the trends in the marketing industry or to design and implement the appropriate features and functionality of our technology in a timely and cost-effective manner, which could result in decreased demand for our services and a corresponding decrease in our revenue.
 
In addition, we must protect our systems against physical damage from fire, earthquakes, power loss, telecommunications failures, computer viruses, hacker attacks, physical break-ins and similar events. Any software or hardware damage or failure that causes interruption or an increase in response time of our proprietary technology could reduce client satisfaction and decrease usage of our services.
 
If the key members of our management team do not remain with us in the future, our business, operating results and financial condition could be adversely affected.

Our future success will depend to a significant extent on the continued services of our current executive team, including Rich Stoddart our Chief Executive Officer, Don Pearson, our Chief Financial Officer, Oren Azar, our General Counsel, Renae Chorzempa, our Chief Human Resources Officer, and Ron Provenzano, our Head of Operations Excellence. The loss of the services of these individuals could adversely affect our business, operating results and financial condition and could divert other senior management time in searching for their replacements.

We may not be able to identify suitable acquisition candidates, effectively integrate newly acquired businesses or achieve expected profitability from acquisitions.

Part of our growth strategy is to increase our revenue and the markets that we serve through the acquisition of additional businesses. We are actively considering certain acquisitions and will likely consider others in the future. There can be no assurance that suitable candidates for acquisitions can be identified or, if suitable candidates are identified, that acquisitions can be completed on acceptable terms, if at all. Even if suitable candidates are identified, any future acquisitions may entail a number of risks that could adversely affect our business and the market price of our common stock, including the integration of the acquired operations, diversion of management’s attention, risks of entering markets in which we have limited experience, adverse short-term effects on our reported operating results, the potential loss of key employees of acquired businesses and risks associated with unanticipated liabilities.

We have used and expect to continue to use, shares of our common stock to pay for all or a portion of our acquisitions. If the owners of potential acquisition candidates are not willing to receive our common stock in exchange for their businesses, our acquisition prospects could be limited. Future acquisitions could also result in accounting charges, potentially dilutive issuances of equity securities and increased debt and contingent liabilities, including liabilities related to unknown or undisclosed circumstances, any of which could have a material adverse effect on our business and the market price of our common stock.

Our business is subject to seasonal sales fluctuations, which could result in volatility or have an adverse effect on the market price of our common stock.

Our business is subject to some degree of sales seasonality. Historically, the percentage of our annual revenue earned during the third and fourth fiscal quarters has been higher due, in part, to a greater number of orders for marketing materials in anticipation of the year-end holiday season. If our business continues to experience seasonality, we may incur significant additional expenses

14



during our third and fourth quarters, including additional staffing expenses. Consequently, if we were to experience lower than expected revenue during any future third or fourth quarter, whether from a general decline in economic conditions or other factors beyond our control, our expenses may not be offset, which would have a disproportionate impact on our operating results and financial condition for that year. Such fluctuations in our operating results could result in volatility or have an adverse effect on the market price of our common stock.

Price fluctuations in raw materials costs could adversely affect the margins on our orders.
 
Our business relies on a constant supply of various raw materials, including paper and ink. Prices within the print industry are directly affected by the cost of paper, which is purchased in a price sensitive market that has historically exhibited price and demand cyclicality. Prices are also affected by the cost of ink. Our profit margin and profitability are largely a function of the rates that our suppliers charge us compared to the rates that we charge our clients. If our suppliers increase the price of our orders and we are not able to find suitable or alternative suppliers, our profit margin may decline.
 
If any of our products cause damages or injuries, we may experience product liability claims.
 
Clients and third parties who claim to suffer damages or an injury caused by our products may bring lawsuits against us. Defending lawsuits arising out of any of the products we provide to our clients could be costly and absorb substantial amounts of management attention, which could adversely affect our financial performance. A significant product liability judgment against us could harm our reputation and business.
 
If any of our key clients fails to pay for our services, our profitability would be negatively impacted.
 
In general, we take full title and risk of loss for the products we procure from our suppliers. Our obligation to pay our suppliers is not contingent upon receipt of payment from our clients. In 2018, 2017, and 2016, our revenue was $1,121.6 million, $1,138.4 million, and $1,094.4 million, respectively, and our top ten clients accounted for 27%, 28%, and 28%, respectively, of such revenue. If any of our key clients fails to pay for our services, our profitability would be negatively impacted.
 
Our ability to obtain financing or raise capital in the future may be limited and our failure to raise capital when needed could prevent us from growing.
 
We may in the future be required to raise capital through public or private financing or other arrangements. We also expect to refinance our Credit Agreement (as hereinafter defined). Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. Furthermore, additional equity financing may dilute the interests of our common stockholders, and debt financing, if available, may involve restrictive covenants that could further restrict our business activities or our ability to execute our strategic objectives and could reduce our profitability. If we are unable to complete the refinancing of our Credit Agreement with a less restrictive leverage ratio, or to obtain additional amendments or waivers, we would likely exceed the maximum leverage ratio covenant within the next twelve months, in which case the lenders would have the ability to demand repayment of the outstanding debt at such time, which could adversely affect our financial condition, operating results and cash flows. Additionally, if we cannot raise or borrow funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures.

Our independent registered public accounting firm has expressed substantial doubt regarding our ability to continue as a going concern.

Our independent registered accounting firm’s report on our December 31, 2018 consolidated financial statements contains an emphasis of a matter regarding substantial doubt about our ability to continue as a going concern. The consolidated financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result if we do not continue as a going concern. Based on our current operating plan, without the successful refinancing of our debt, we would not be able to meet our covenants beginning in the second quarter of 2019. Although we and our existing lenders have reached agreement to amend our existing revolving credit facility to modify the covenants applicable through the first quarter of 2019, there is no assurance that they would be willing to do so with respect to additional future periods.  If we are unable to successfully refinance our debt, and cannot further amend our existing revolving credit facility to modify the covenants for future periods, then our existing lenders would have a right to require repayment of our revolving credit facility, which could have a material adverse effect on our operations and financial condition.

If LIBOR ceases to exist after 2021, it may result in higher interest rates, which could result in higher interest expense.

15




The interest rates under our Credit Agreement are calculated using the London Inter-bank Offered Rate (“LIBOR”). We would expect that any refinanced indebtedness would bear interest on similar terms. On July 27, 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021, and it is unclear whether new methods of calculating LIBOR will be established. If LIBOR ceases to exist after 2021, it may result in higher interest rates. To the extent that these interest rates increase, our interest expense will increase, which could adversely affect our financial condition, operating results and cash flows.

We may not be able to successfully implement initiatives, including our restructuring activities, that reduce our cost structure while driving returns for clients and stockholders.

Achieving our long-term profitability goals depends significantly on our ability to control or reduce our operating costs. If we are not able to identify and implement initiatives that control or reduce costs and increase operating efficiency, or if the cost savings initiatives we have implemented to date do not generate expected cost savings, our financial results could be adversely impacted. Our efforts to control or reduce costs may include restructuring activities involving workforce reductions, lease and contract terminations and other cost reduction initiatives. Some of the operational improvements we may make to reduce our cost structure are expected to involve significant change management and will require careful management to avoid disrupting client and employee relationships. If we do not successfully manage our current restructuring activities, or any other restructuring activities that we may undertake in the future, expected efficiencies and benefits may be delayed or not realized, and our operations and business could be disrupted.

 
Risks Related to Ownership of Our Common Stock
 
The trading price of our common stock has been and may continue to be volatile.
 
The trading prices of many small and mid-cap companies are highly volatile. Since our initial public offering in August 2006 through December 31, 2018, the closing sale price of our common stock as reported by the Nasdaq Global Market has ranged from a low of $1.92 on March 2, 2009 to a high of $18.69 on October 9, 2007.
 
Certain factors may continue to cause the market price of our common stock to fluctuate, including:
 
fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
changes in market valuations of similar companies;
changes in economic and political conditions in the United States or abroad;
success of competitive products or services;
changes in our capital structure, such as future issuances of debt or equity securities;
announcements by us, our competitors, our clients or our suppliers of significant products or services, contracts, acquisitions or strategic alliances;
regulatory developments in the United States or foreign countries;
litigation involving our company, our general industry or both;
additions or departures of key personnel;
investors’ general perception of us; and
changes in general industry and market conditions.

In addition, if the stock market experiences a loss of investor confidence, then the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to class action lawsuits that could be costly to defend and a distraction to management. As a result, you could lose all or part of your investment.

Our quarterly results are difficult to predict and may vary from quarter to quarter, which may result in our failure to meet the expectations of investors and increased volatility of our stock price.

The continued use of our services by our clients depends, in part, on the business activity of our clients and our ability to meet their cost saving needs, as well as their own changing business conditions. The time between our payment to the supplier and our receipt of payment from our clients varies with each job and client. In addition, a significant percentage of our revenue is subject to the discretion of our clients, who may stop using our services at any time, subject, in the case of most of our clients, to advance notice

16



requirements. Therefore, the number, size and profitability of jobs may vary significantly from quarter to quarter. As a result, our quarterly operating results are difficult to predict and may fall below the expectations of current or potential investors in some future quarters, which could lead to significant variations in the market price of our stock. The factors that are likely to cause these variations include:

the demand for our marketing execution solutions;
the use of outsourced enterprise solutions;
clients’ business decisions regarding the quantities of marketing materials they purchase;
the number, timing and profitability of our jobs, unanticipated contract terminations and job postponements;
new product introductions and enhancements by our competitors;
changes in our pricing policies;
our ability to manage costs, including personnel costs; and
costs related to possible acquisitions of other businesses.

We do not currently intend to pay dividends, which may limit the return on your investment.
 
We have not declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.
 
If our board of directors authorizes the issuance of preferred stock, holders of our common stock could be diluted and harmed.
 
Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock in one or more series and to establish the preferred stock’s voting powers, preferences and other rights and qualifications without any further vote or action by the stockholders. The issuance of preferred stock could adversely affect the voting power and dividend liquidation rights of the holders of common stock. In addition, the issuance of preferred stock could have the effect of making it more difficult for a third party to acquire or discouraging a third party from acquiring, a majority of our outstanding voting stock or otherwise adversely affect the market price of our common stock. It is possible that we may need to raise capital through the sale of preferred stock in the future.

17



 
Item 1B.
Unresolved Staff Comments
 
None.  

Item 2.
Properties
 
Properties
 
Our principal executive offices are located in Chicago, Illinois. We have 21 other office locations in the United States and 45 office locations in 26 other countries around the world. These other offices are located in Canada, Chile, Brazil, Peru, Mexico, Argentina, the United Kingdom, Spain, France, Czech Republic, Germany, Ireland, Russia, Dubai, China, Hong Kong, Japan, Australia and various other countries and are principally used for sales, operations, finance, administration and warehousing. We believe that our facilities are generally suitable to meet our needs for the foreseeable future; however, we will continue to seek additional space as needed to satisfy our growth. All of the properties where we conduct our business are leased. The terms of the leases vary and have expiration dates ranging from December 31, 2018 to October 31, 2028.

Item 3.
Legal Proceedings

We are party to various legal proceedings incidental to our business. Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against us. Based on facts now known, we believe all such matters are adequately provided for, covered by insurance, are without merit, and/or involve such amounts that would not materially adversely affect our consolidated results of operations, cash flows or financial position.

For information on our non-ordinary course legal proceedings, see Note 10 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Item 4.
Mine Safety Disclosures
 
Not applicable.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is listed and traded on the Nasdaq Global Select Market under the symbol "INWK."

Holders
 
As of March 11, 2019, there were 23 holders of record of our common stock, which does not include stockholders who held their shares through brokers or other nominees in "street name." The holders of our common stock are entitled to one vote per share.
   
Dividends
 
We currently do not and do not intend to pay any dividends on our common stock. We intend to retain all available funds and any future earnings for use in the operation and expansion of our business. Any determination in the future to pay dividends will depend upon our financial condition, capital requirements, operating results and other factors deemed relevant by our board of directors, including any contractual or statutory restrictions on our ability to pay dividends.
 
Recent Sales of Unregistered Securities

None.


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Issuer Purchases of Equity Securities
 
On February 12, 2015, we announced that our Board of Directors approved a share repurchase program providing us authorization to repurchase up to an aggregate of $20.0 million of our common stock through open market and privately negotiated transactions over a two-year period. On November 2, 2016, the Board of Directors approved a two-year extension to the share repurchase program through February 28, 2019.

Additionally, on May 4, 2017, the Board of Directors authorized the repurchase of up to an additional $30.0 million of our common stock through open market and privately negotiated transactions over a two-year period ending May 31, 2019. The timing and amount of any share repurchases will be determined based on market conditions, share price and other factors, and the program may be discontinued or suspended at any time. Repurchases will be made in compliance with SEC rules and other legal requirements.

During the twelve months ended December 31, 2018, the Company repurchased 2,667,732 shares of the Company's common stock for $25.6 million in the aggregate at an average cost of $9.60 per share under its repurchase program. An additional 36,178 shares of its common stock were withheld to satisfy the mandatory tax withholding requirements upon vesting of restricted stock for $0.2 million at an average cost of $6.38 per share.

The following table provides information relating to our purchase of shares of our common stock in the fourth quarter of 2018 (in thousands, except per share amounts): 
Period
Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1)
10/1/18-10/31/18
27

 
$
7.19

 

 
1,481

11/1/18-11/30/18
2

 
4.25

 

 
2,523

12/1/18-12/31/18
7

 
3.74

 

 
2,846

Total
36

 
$
6.38

 

 
 
(1)
The share repurchase plan authorized by our Board of Directors allows repurchases of up to $50 million of our common stock.  The maximum number of shares that may yet be repurchased under the plan is estimated using the closing share price on the last day of each period presented.

Stock Performance Graph 

The information contained in the following chart is not considered to be “soliciting material,” or “filed,” or incorporated by reference in any past or future filing by the Company under the Securities Act or Exchange Act unless and only to the extent that, the Company specifically incorporates it by reference.
 
The following graph assumes $100 was invested on December 31, 2013 in the common stock of the Company and each of the following indices and assumes reinvestment of any dividends. The stock price performance on the graph below is not necessarily indicative of future stock price performance.


19



http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12788895&doc=14
 
 
Dec 31, 2013
 
Dec 31, 2014
 
Dec 31, 2015
 
Dec 31, 2016
 
Dec 31, 2017
 
Dec 31, 2018
INWK
 
$
100

 
$
100

 
$
96

 
$
126

 
$
129

 
$
48

NASDAQ Market Index
 
$
100

 
$
113

 
$
120

 
$
129

 
$
165

 
$
159

Dow Jones Business Support Services Index
 
$
100

 
$
103

 
$
113

 
$
128

 
$
160

 
$
150


20




Item 6.
Selected Financial Data
 
The following table presents selected consolidated financial and other data as of and for the periods indicated. You should read the following information together with the more detailed information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes.

 
Year ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(in thousands, except per share amounts)
Consolidated statements of operations data:
 
 
 
 
 
 
 
 
 
Revenue
$
1,121,551

 
$
1,138,361

 
$
1,094,402

 
$
1,028,892

 
$
991,250

Cost of goods sold
866,453

 
862,903

 
831,838

 
788,862

 
761,465

Gross profit
255,098

 
275,458

 
262,564

 
240,030

 
229,785

Selling, general and administrative expenses
239,124

 
227,253

 
209,524

 
197,247

 
196,826

Depreciation and amortization
12,988

 
13,390

 
17,916

 
17,472

 
17,723

Change in fair value of contingent consideration

 
677

 
10,417

 
(270
)
 
(37,873
)
Goodwill impairment
46,319

 

 

 
37,539

 

Intangible and other asset impairments
18,121

 

 
70

 
202

 
2,710

Restructuring charges
6,031

 

 
5,615

 
1,053

 

(Loss) income from operations
(67,485
)
 
34,138

 
19,022

 
(13,213
)
 
50,399

Interest income
218

 
97

 
86

 
69

 
57

Interest expense
(7,749
)
 
(4,729
)
 
(4,171
)
 
(4,612
)
 
(4,428
)
Other, net
(1,616
)
 
(1,788
)
 
(154
)
 
(3,135
)
 
(747
)
Total other expense
(9,147
)
 
(6,420
)
 
(4,239
)
 
(7,678
)
 
(5,118
)
(Loss) income before taxes
(76,632
)
 
27,718

 
14,783

 
(20,891
)
 
45,281

(Benefit) provision for income tax
(461
)
 
11,288

 
10,834

 
11,498

 
3,020

Net (loss) income
$
(76,171
)
 
$
16,430

 
$
3,949

 
$
(32,389
)
 
$
42,261

Net (loss) income per share of common stock:
 
 
 

 
 
 
 
 
 

Basic
$
(1.46
)
 
$
0.31

 
$
0.07

 
$
(0.61
)
 
$
0.81

Diluted
$
(1.46
)
 
$
0.30

 
$
0.07

 
$
(0.61
)
 
$
0.80

Shares used in per share calculations:
 
 
 

 
 
 
 

 
 

Basic
52,230

 
53,851

 
53,607

 
52,791

 
52,096

Diluted
52,230

 
54,944

 
54,460

 
52,791

 
53,104

 
 
 
 
 
 
 
 
 
 
Consolidated balance sheet data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
26,770

 
30,562

 
30,924

 
30,755

 
22,578

Working capital(1)
109,048

 
135,273

 
101,739

 
77,357

 
87,905

Total assets
622,676

 
649,638

 
593,987

 
601,251

 
625,067

Revolving credit facility(2)
142,736

 
128,398

 
107,468

 
99,258

 
104,539

Total stockholders’ equity
183,091

 
284,545

 
262,161

 
252,432

 
290,260

(1)
Working capital represents accounts receivable, unbilled revenue, inventories, prepaid expenses and other current assets, offset by accounts payable, accrued expenses, deferred revenue and other current liabilities.
(2)
The Company entered into a Credit Agreement, dated as of August 2, 2010, subsequently amended most recently as of March 15, 2019, to fund acquisitions and for general working capital purposes.

21




Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes, which appear elsewhere in this Annual Report on Form 10-K. It contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Part I, Item 1A, “Risk Factors.”
 
Overview

We are a leading global marketing execution firm for some of the world's most marketing intensive companies, including those in the Fortune 1000. As a comprehensive outsourced global solution, we leverage proprietary technology, an extensive supplier network and deep domain expertise to streamline the creation, production and distribution of marketing and promotional materials, signage and displays, retail experiences, events and promotions and product packaging across every major market worldwide. The items we source generally are procured through the marketing supply chain and we refer to these items collectively as marketing materials. Through our network of more than 10,000 global suppliers, we offer a full range of fulfillment and logistics services that allow us to procure marketing materials of virtually any kind. The breadth of our product offerings and services and the depth of our supplier network enable us to fulfill the marketing materials procurement needs of our clients.

Our proprietary software applications and databases create a fully-integrated solution that stores, analyzes and tracks the production capabilities of our supplier network, as well as detailed pricing data. As a result, we believe we have one of the largest independent repositories of supplier capabilities and pricing data for suppliers of marketing materials around the world. Our technology and databases of product and supplier information are designed to capitalize on excess manufacturing capacity and other inefficiencies in the traditional marketing materials supply chain to obtain favorable pricing while delivering high-quality products and services for our clients.
 
We use our supplier capability and pricing data to match orders with suppliers that are optimally suited to meet the client's needs at a highly competitive price. By leveraging our technology 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 procurement activity on an enterprise-wide basis provides our clients with greater visibility and control of their marketing materials expenditures.
 
We generate revenue by procuring and purchasing marketing materials from our suppliers and selling those products to our clients. We procure products for clients across a wide range of industries, such as retail, financial services, hospitality, consumer packaged goods, non-profits, healthcare, pharmaceuticals, food and beverage, broadcasting and cable and transportation.
 
As of December 31, 2018, we had approximately 2,100 employees and independent contractors in more than 27 countries. We organize our operations into three operating segments based on geographic regions: North America, EMEA and LATAM. The North America segment includes operations in the United States and Canada; the EMEA segment includes operations in the United Kingdom, continental Europe, the Middle East, Africa, and Asia, and the LATAM segment includes operations in Mexico, Central America and South America. In 2018, we generated global revenue from third parties of $777.4 million in the North America segment, $261.0 million in the EMEA segment, and $83.2 million in the LATAM segment. During the third quarter of 2018, the Company changed its reportable segments to align with organizational changes made by our Chief Operating Decision Maker. Prior period results have been updated to conform.

We believe the opportunity exists to expand our business into new geographic markets. Our objective is to continue to increase our sales in the United States and internationally by adding new clients and increasing our sales to existing clients through additional marketing execution services or geographic markets. We intend to hire or acquire more account executives within close proximity to these large markets.
 
Revenue

We generate revenue through the procurement of marketing materials for our clients. Our annual revenue was $1,121.6 million $1,138.4 million, and $1,094.4 million in 2018, 2017, and 2016, respectively, reflecting growth rates of (1.5)% and 4.0% in 2018 and 2017, respectively.


22



Our revenue consists of the prices paid to us by our clients for marketing materials. These prices, in turn, reflect the amounts charged to us by our suppliers plus our gross profit. Our gross profit margin may be fixed by contract or may depend on prices negotiated on a job-by-job basis. Once the 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 generally 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 at our agreed purchase price, and we invoice our client.
 
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, may be established by contract based on a fixed gross profit as a percentage of revenue, which we refer to as gross margin, or may be determined at the discretion of the account executive or production manager within predetermined parameters. Our gross profit for years ended December 31, 2018, 2017, and 2016 was $255.1 million, $275.5 million, and $262.6 million or 22.7%, 24.2%, and 24.0% of revenue, respectively.
 
Operating Expenses and (Loss) Income from Operations
 
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 and corporate systems, legal and accounting, facilities and travel and entertainment expenses. Selling, general and administrative expenses as a percentage of revenue were 21.3%, 20.0%, and 19.1% in 2018, 2017, and 2016, respectively.
 
We accrue for commissions when we recognize the related revenue and gross profit. 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 from a net accrued commission amount of $(3.3) million as of December 31, 2017 to a net accrued commission amount of $(5.6) million as of December 31, 2018.

We agree to provide our clients with marketing materials 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 to date.
 
We are required to make payment to our suppliers for completed jobs regardless of whether our clients make payment to us. Our bad debt expense was approximately $3.6 million, $0.5 million, and $2.2 million in 2018, 2017, and 2016, respectively.
 
Our (loss) income from operations for 2018, 2017, and 2016 was $(67.5) million, $34.1 million, and $19.0 million, respectively.

23




Critical Accounting Policies

Revenue Recognition
 
Revenue is measured based on consideration specified in a contract with a customer and the Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer, which may be at a point in time or over time. Unbilled revenue represents shipments or deliveries that have been made to customers for which the related account receivable has not yet been invoiced.

Shipping and handling costs after control over a product has transferred to a customer are expensed as incurred and are included in cost of goods sold in the condensed consolidated statements of operations.
    
In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, we generally report revenue on a gross basis because we typically control the goods or services before transferring to the customer. Under these arrangements, we are primarily responsible for the fulfillment, including the acceptability, of the marketing materials and other products or services. In addition, we have reasonable discretion in establishing the price, and in some transactions, we also have inventory risk and are involved in the determination of the nature or characteristics of the marketing materials and products. In some arrangements, we are not primarily responsible for fulfilling the goods or services. In arrangements of this nature, we do not control the goods or services before they are transferred to the customer and such revenue is reported on a net basis.

A portion of our service revenue, including stand-alone creative and other services, may be earned over time; however, the difference from recognizing that revenue over time compared to a point in time (i.e., when the service is completed and accepted by the customer) is not material. Service revenue has not been material to our overall revenue to date.

The Company records taxes collected from customers and remitted to governmental authorities on a net basis.

Accounts Receivable and Allowance for Doubtful Accounts

The carrying amount of accounts receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. Management reviews all accounts receivable balances and based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. These estimates of balances that will not be collected are based on historical write offs and recoveries of accounts receivable. The estimates of recovery can change based on actual experience and therefore can affect the level of reserves we place on existing accounts receivable. Fully reserved receivables are reviewed on a monthly basis and uncollectible accounts are written off when all reasonable collection efforts have been exhausted. We believe our reserve level is appropriate considering the quality of the portfolio as of December 31, 2018. While credit losses have historically been within expectations and the provisions established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience.

Goodwill
 
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 tests for goodwill impairment as of the first day of its fourth fiscal quarter of each year.
 
Under ASC 350, an entity is permitted 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, the fair value for each reporting unit is compared to its book value including goodwill. In the case that the fair value of any reporting unit is less than the respective book value of such reporting unit(s) including goodwill, the difference is recognized as an impairment.

During the third quarter of 2018, we performed an interim impairment assessment and concluded that the EMEA and LATAM reporting units were impaired. As a result, impairment charges of $20.8 million and $7.1 million were recorded in the EMEA and LATAM reporting units, respectively.
 

24



We performed our annual goodwill impairment test as of October 1, 2018, our measurement date, and concluded there was no impairment in any of our reporting units.

During the fourth quarter of 2018, we performed an interim impairment assessment and concluded that the North America reporting unit was impaired. As a result, an impairment charge of $18.4 million was recorded. See Goodwill Impairment in the Results of Operations discussion below.

Other Intangible Assets

In accordance with ASC 350, the Company amortizes its intangible assets with finite lives over their respective estimated useful lives and reviews for impairment whenever impairment indicators exist. Impairment indicators could include significant under-performance relative to the historical or projected future operating results, significant changes in the manner of use of assets, significant negative industry or economic trends or significant changes in the Company’s market capitalization relative to net book value. Any changes in key assumptions used by the Company, including those set forth above, could result in an impairment charge and such a charge could have a material adverse effect on the Company’s consolidated results of operations. The Company’s intangible assets consist of customer lists, non-competition agreements, trade names and patents. The Company’s customer lists, which have an estimated weighted-average useful life of approximately fourteen years, are being amortized using the economic life method. The Company’s non-competition agreements, trade names and patents are being amortized on a straight-line basis over their estimated weighted-average useful lives of approximately four years, thirteen years, and nine years, respectively.
 
In the third quarter of 2018, the Company recognized a $13.8 million non-cash, intangible asset impairment charge related to certain customer lists. Of the total charge, $0.6 million related to the LATAM segment, and $13.2 million related to the EMEA segment and are included in the accumulated amortization balance.
    
In the fourth quarter of 2016, the Company recorded a non-cash, intangible asset impairment charge of $0.1 million related to a trade name acquired in a prior year business combination in the EMEA segment.

Income Taxes
 
We operate in numerous states and countries through our various subsidiaries and must allocate our income, expenses and earnings under the various laws and regulations of each of these taxing jurisdictions. Accordingly, our provision for income taxes represents our total estimate of the liability that we have incurred in doing business each year in all of our locations. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. In determining whether we need to record a valuation allowance against our deferred tax assets, management must make a number of estimates, assumptions and judgments. We establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. The determination to record or release valuation allowances requires significant judgment.


25



Results of Operations
 
The following table sets forth our consolidated statements of operations data for the periods presented as a percentage of our revenue:
 
Year ended December 31,
 
2018
 
2017
 
2016
Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
77.3
 %
 
75.8
 %
 
76.0
 %
Gross profit
22.7
 %
 
24.2
 %
 
24.0
 %
Operating expenses:
 
 
 
 
 
Selling, general and administrative expenses
21.3
 %
 
20.0
 %
 
19.1
 %
Depreciation and amortization
1.2
 %
 
1.2
 %
 
1.6
 %
Change in fair value of contingent consideration
 %
 
0.1
 %
 
1.0
 %
Goodwill impairment
4.1
 %
 
 %
 
 %
Intangible and other asset impairments
1.6
 %
 
 %
 
 %
Restructuring charges
0.5
 %
 
 %
 
0.5
 %
(Loss) income from operations
(6.0
)%
 
3.0
 %
 
1.7
 %
Other income (expense):
 
 
 
 
 
Interest income
 %
 
 %
 
 %
Interest expense
(0.7
)%
 
(0.4
)%
 
(0.4
)%
Other, net
(0.1
)%
 
(0.2
)%
 
 %
Total other expense
(0.8
)%
 
(0.6
)%
 
(0.4
)%
(Loss) income before taxes
(6.8
)%
 
2.4
 %
 
1.4
 %
(Benefit) provision for income taxes
 %
 
1.0
 %
 
1.0
 %
Net (loss) income
(6.8
)%
 
1.4
 %
 
0.4
 %

Comparison of years ended December 31, 2018, 2017, and 2016
 
Revenue
 
Our revenue by segment for each of the years presented was as follows (in thousands):
 
Year ended December 31,
 
2018
 
% of Total
 
2017
 
% of Total
 
2016
 
% of Total
North America
$
777,426

 
69.3
%
 
$
780,511

 
68.6
%
 
$
736,140

 
67.3
%
EMEA
260,950

 
23.3

 
265,669

 
23.3

 
267,168

 
24.4

LATAM
83,175

 
7.4

 
92,181

 
8.1

 
91,094

 
8.3

Revenue from third parties
$
1,121,551

 
100.0
%
 
$
1,138,361

 
100.0
%
 
$
1,094,402

 
100.0
%
 

2018 compared to 2017. Our revenue decreased by $16.8 million, or 1.5%, from $1,138.4 million in 2017 to $1,121.6 million in 2018.
 
North America 
North America revenue decreased by $3.1 million, or 0.4%, from $780.5 million in 2017 to $777.4 million in 2018. This decrease primarily relates to declines in revenue from certain of the Company's transactional and small customers, partially offset by growth from new and existing enterprise clients.
 
EMEA 
EMEA revenue decreased by $4.7 million, or 1.8%, from $265.7 million in 2017 to $261.0 million in 2018. This decrease was driven by a reduction in revenue from one large client, partially offset by organic growth from new accounts added during the last 12 to 18 months.
 

26



LATAM
LATAM revenue decreased by $9.0 million, or 9.8%, from $92.2 million in 2017 to $83.2 million in 2018. This decrease was driven primarily by a decline in marketing spend by a few existing customers as well as foreign currency impacts.

2017 compared to 2016. Our revenue increased by $44.0 million, or 4.0%, from $1,094.4 million in 2016 to $1,138.4 million in 2017.

North America
North America revenue increased by $44.4 million, or 6.0%, from $736.1 million in 2016 to $780.5 million in 2017. This increase was driven primarily by organic growth from new clients added during the last 12 to 24 months.
 
EMEA
EMEA revenue decreased by $1.5 million, or 0.6%, from $267.2 million in 2016 to $265.7 million in 2017.

LATAM
LATAM revenue increased by $1.1 million, or 1.2%, from $91.1 million in 2016 to $92.2 million in 2017.
   
Cost of goods sold
 
2018 compared to 2017. Our cost of goods sold increased by $3.6 million, or 0.4%, from $862.9 million in 2017 to $866.5 million in 2018. Our cost of goods sold as a percentage of revenue was 77.3% in 2018 and 75.8% in 2017

2017 compared to 2016. Our cost of goods sold increased by $31.1 million, or 3.7%, from $831.8 million in 2016 to $862.9 million in 2017. The increase is a result of higher revenue in 2017. Our cost of goods sold as a percentage of revenue was 75.8% in 2017 and 76.0% in 2016.
 
Gross Profit
 
2018 compared to 2017. Our gross profit as a percentage of revenue, which we refer to as gross margin, was 22.7% in 2018 and 24.2% in 2017. This decrease was primarily driven by client mix of revenue in 2018 compared to 2017 as well as short-term operational challenges in certain accounts in North America.
 
2017 compared to 2016. Our gross margin increased from 24.0% in 2016 to 24.2% in 2017. This increase was primarily driven by favorable product category and geographical mix in 2017 compared to 2016.
 
Selling, general and administrative expenses

2018 compared to 2017. Selling, general and administrative expenses increased by $11.9 million, or 5.2%, from $227.3 million in 2017 to $239.1 million in 2018. As a percentage of revenue, selling, general and administrative expenses increased from 20.0% in 2017 to 21.3% in 2018. The increase in selling, general and administrative expenses was primarily due to increased headcount to support the business and increased bad debt expense.
   
2017 compared to 2016. Selling, general and administrative expenses increased by $17.7 million, or 8.5%, from $209.5 million in 2016 to $227.3 million in 2017. As a percentage of revenue, selling, general and administrative expenses increased from 19.1% to 20.0% in 2016 and 2017, respectively. The increase in selling, general and administrative expenses is primarily due to incremental sales commission and cost of production staff to manage new accounts.
 
Depreciation and amortization
 
2018 compared to 2017. Depreciation and amortization expense decreased by $0.4 million, or 3.0%, from $13.4 million in 2017 to $13.0 million in 2018. As a percentage of revenue, depreciation and amortization expense was 1.2% in 2017 and 1.2% in 2018. The decrease in depreciation and amortization was primarily driven by lower capital expenditures during 2018 and 2017.

2017 compared to 2016. Depreciation and amortization expense decreased by $4.5 million, or 25.3%, from $17.9 million in 2016 to $13.4 million in 2017. As a percentage of revenue, depreciation and amortization expense decreased from 1.6% in 2016 to 1.2% in 2017. The decrease in depreciation and amortization was primarily driven by the full year impact of the increase in asset useful life made in 2016.


27



In accordance with the Company’s fixed asset policy, the Company reviews the estimated useful lives of all its fixed assets, including software assets, at least once a year or when there are indicators that a useful life has changed. The review during the fourth quarter of 2016 indicated that the estimated useful lives of certain proprietary software were longer than the previously estimated useful lives. As a result, effective October 1, 2016, the Company changed the estimated useful lives of a portion of its software assets. The estimated useful lives of such assets were increased by an average of approximately 4.5 years. These assets had a net book value of $20.8 million as of October 1, 2016. The effect of this change in estimate resulted in a reduction of depreciation expense by $1.4 million, increase in net income by $0.8 million and increase in basic and diluted earnings per share by $0.02 for the year ended December 31, 2016.
  
Change in fair value of contingent consideration
 
2018 compared to 2017. Expense from the change in fair value of contingent consideration decreased by $0.7 million from $0.7 million in 2017 to $0.0 million in 2018. The change in the fair value of the contingent liability during 2018 is driven by the final adjustment of the DB Studios liability during the first quarter of 2017 and the final adjustment of the EYELEVEL liability during the second and third quarters of 2017.
 
2017 compared to 2016. Expense from the change in fair value of contingent consideration decreased by $9.7 million from income of $10.4 million in 2016 to expense of $0.7 million in 2017. The change in the fair value of the contingent liability during 2017 is driven by the final adjustment of the DB Studios liability during the first quarter of 2017 and the final adjustment of the EYELEVEL liability during the second and third quarters of 2017.

Goodwill impairment charges

During the third quarter of 2018, the Company changed its segments (see Note 19 to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K) and re-evaluated its reporting units. This change required an interim impairment assessment of goodwill.

The Company determined the enterprise value for its North America reporting unit based on a discounted cash flow model. The Company determined the enterprise value for its EMEA and LATAM reporting units based on the adjusted book value method. The Company further compared the enterprise value of each reporting unit to their respective carrying value. The enterprise value for North America exceeded its carrying value, which indicated that there was no impairment, whereas enterprise values for the EMEA and LATAM reporting units were less than their respective carrying values and resulted in $20.8 million and $7.1 million goodwill impairment charges, respectively. In total, we recognized a $27.9 million non-cash, goodwill impairment charge during the third quarter of 2018. No tax benefit was recognized on such charge, and this charge had no impact on our cash flows or compliance with debt covenants.

As of December 31, 2018, the Company performed an interim impairment assessment due to a triggering event caused by a sustained decrease in the Company's stock price. The Company determined an enterprise value for its North America reporting unit that considered both the discounted cash flow and guideline public company methods. The Company further compared the enterprise value of the reporting unit to its respective carrying value. The enterprise value for the North America reporting unit was less than its carrying value and resulted in a $18.4 million non-cash goodwill impairment charge. No tax benefit was recognized on such charge, and this charge had no impact on the Company's cash flows or compliance with debt covenants.

No impairment charges were taken for the years ended December 31, 2017 and 2016.
 
Intangible and other asset impairment charges

In the third quarter of 2018, we changed our reporting units as part of a segment change, which required an interim impairment assessment. The intangible and long-lived assets associated with the reporting units assessed were also reviewed for impairment. It was determined that the fair value of intangible assets in EMEA and LATAM was less than the recorded book value of certain customer lists. Additionally, it was determined that the fair value of capitalized costs related to a legacy ERP system in EMEA was less than the recorded book value of such assets.

As a result, we recognized a $13.8 million non-cash, intangible asset impairment charge related to certain customer lists. Of the total charge, $0.6 million related to the LATAM segment, and $13.2 million related to the EMEA segment.

In addition, in the third quarter of 2018, we recognized a $3.0 million non-cash, long-lived asset impairment charge related to a legacy ERP system in EMEA.


28



In the fourth quarter of 2018, we recognized a $1.3 million non-cash, contract asset impairment charge related to costs to fulfill a contract that were deemed to be non recoverable in North America.
    
The Company did not record any intangible asset impairment charges in 2017.

In the fourth quarter of 2016, we recognized a $0.1 million non-cash, intangible asset impairment charge related to a trade name acquired in a prior year business combination within our EMEA segment.
 
Restructuring charges
 
On August 10, 2018, the Company approved a plan to reduce the Company's cost structure while driving returns for its clients and shareholders. The plan was adopted as a result of the Company's determination that its selling, general and administrative costs were disproportionately high in relation to its revenue and gross profit. In connection with these actions, the Company expects to incur pre-tax cash restructuring charges of $20.0 million to $25.0 million and pre-tax non-cash restructuring charges of $0.4 million. Cash charges are expected to include $12.0 million to $15.0 million for employee severance and related benefits and $8.0 million  and $10.0 million for lease and contract terminations and other associated costs. Where required by law, the Company will consult with each of the affected countries’ local Works Councils prior to implementing the plan. The plan was expected to be completed by the end of 2019. On February 21, 2019, the Board of Directors approved a two-year extension to the restructuring plan through the end of 2021.

For the twelve months ended December 31, 2018, we recognized $6.0 million in restructuring charges.

The Company did not record any restructuring charges in December 31, 2017.

During the year ended December 31, 2016, the Company recognized $5.6 million in restructuring charges related to the global realignment plan described within the Restructuring Activities and Charges footnote (see Note 7 to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K).

(Loss) income from operations

2018 compared to 2017. Income from operations decreased by $101.6 million from $34.1 million in 2017 to $(67.5) million in 2018. This decrease was primarily attributable to goodwill, intangibles and other asset impairments, decreased gross profit, increased sales, general and administrative expenses and restructuring charges discussed above.
 
2017 compared to 2016. Income from operations increased by $15.1 million, from $19.0 million in 2016 to $34.1 million in 2017. This increase was primarily attributable to an increase in gross profit and a decrease in expense from the change in fair value of contingent consideration and restructuring charges, which are discussed above. These changes partially offset the $17.8 million increase in selling, general and administrative expenses.

 Other income and expense
 
2018 compared to 2017. Other expense increased by $2.7 million, from $6.4 million in 2017 to $9.1 million in 2018. This increase was primarily attributable to a $3.0 million increase in interest expense.
   
2017 compared to 2016. Other expense increased by $2.2 million, from $4.2 million in 2016 to $6.4 million in 2017. This increase was primarily attributable to foreign exchange losses.
 
(Benefit) provision for income taxes  
 
2018 compared to 2017. Provision for income taxes decreased by $11.7 million from tax expense of $11.3 million in 2017 to a tax benefit of $(0.5) million in 2018. Our effective income tax rate was 0.6% and 40.7% in 2018 and 2017, respectively. Our 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, valuation allowances, discrete tax events 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 effective tax rate for 2018 was affected by the goodwill and intangible and other asset impairment charges. For the year ended December 31, 2018, $64.4 million was recognized as a non-cash expense for which the Company was not allowed an income tax deduction, resulting in a reduction to the effective tax rate benefit being recorded on the pretax loss for the period.


29




2017 compared to 2016. Provision for income taxes increased by $0.5 million from $10.8 million in 2016 to $11.3 million in 2017. Our effective income tax rate was 40.7% and 73.3% in 2017 and 2016, respectively. Our 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, valuation allowances, discrete tax events 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 effective tax rate for 2016 was affected by the fair value changes to contingent consideration and the goodwill impairment charge. Portions of the total gain recognized from fair value changes to contingent consideration relate to non-taxable acquisitions for which deferred taxes are not recognized, consistent with the treatment of goodwill and intangible assets for those acquisitions under U.S. GAAP. For the year ended December 31, 2016, $10.4 million was recognized as expense from changes to contingent consideration which did not result in recognition of a deferred tax liability, therefore increasing the effective tax rate.

Additionally, during the fourth quarter of 2016, we recognized a $1.2 million non-cash charge to record valuation allowances on deferred tax assets of certain foreign operations affected by the global realignment which have net operating loss carryforwards and other deferred tax assets for which it is considered more likely than not that those assets will not be realized. 

On December 22, 2017, the U.S. government enacted comprehensive Federal tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Act”). The Act makes changes to the corporate tax rate, business-related deductions and taxation of foreign earnings, among others, that will generally be effective for taxable years beginning after December 31, 2017.

Certain impacts of the new legislation would have generally required accounting to be completed and incorporate into our 2017 year-end financial statements, however in response to the complexities of this new legislation, the SEC issued guidance to provide companies with relief. The SEC provided up to a one-year window for companies to finalize the accounting for the impacts of this new legislation. We finalized our accounting for the new provisions during the fourth quarter of 2018. The 2018 impact from finalizing the accounting for the new provisions was a net tax benefit of $0.9 million.

We operate under a grant of income tax exemption in Puerto Rico that became effective for certain operations occurring during the period ending December 31, 2017 and should remain in effect for 20 years as long as specific requirements are satisfied. The impact of this income tax exemption grant decreased foreign taxes by $0.4 million for 2017. The benefit of the tax exemption on diluted earnings per share was less than $0.01.

Net (loss) income
 
2018 compared to 2017. Net income decreased by $92.6 million from $16.4 million in 2017 to $(76.2) million in 2018. Net (loss) income as a percentage of revenue was (6.8)% and 1.4% in 2018 and 2017, respectively.
 
2017 compared to 2016. Net income (loss) increased by $12.5 million from $3.9 million in 2016 to $16.4 million in 2017. Net income as a percentage of revenue was 1.4% and 0.4% in 2017 and 2016, respectively.

Diluted (loss) earnings per share
 
Year ended December 31,
 
2018
 
2017
 
2016
(in thousands, except per share data)
 
 
 
 
 
Net (loss) income
$
(76,171
)
 
$
16,430

 
$
3,949

Denominator for dilutive earnings per share
52,230

 
54,944

 
54,460

Diluted (loss) earnings per share
$
(1.46
)
 
$
0.30

 
$
0.07


2018 compared to 2017. Diluted (loss) earnings per share decreased by $(1.76) from diluted earnings per share of $0.30 in 2017 to diluted loss per share of $(1.46) in 2018. This decrease is primarily due to the decrease in net (loss) income discussed above.
 
2017 compared to 2016. Diluted earnings per share increased by $0.23 from a diluted earnings per share of $0.07 in 2016 to diluted earnings per share of $0.30 in 2017. This increase is primarily due to the increase in net income discussed above.


30



Adjusted EBITDA
 
Adjusted EBITDA, which represents income from operations with the addition of depreciation and amortization, stock-based compensation expense, change in the fair value of contingent consideration liabilities and other amounts itemized in the reconciliation table below, is considered a non-GAAP financial measure under SEC regulations. Net (loss) income is the most directly comparable financial measure calculated in accordance with U.S. GAAP. We present this measure as supplemental information to help our investors better understand trends in our business over time. Our management team uses Adjusted EBITDA to evaluate the performance of our 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 our overall financial performance and liquidity. Moreover, the Adjusted EBITDA definition we use may not be comparable to similarly titled measures reported by other companies. We also present segment Adjusted EBITDA as an important financial metric used by the Company to evaluate financial performance and allocate resources to segments in accordance with ASC 280, Segment Reporting (see Note 19 to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K). Our Adjusted EBITDA by segment for each of the years presented was as follows:
 
Year ended December 31,
 
2018
 
% of Total
 
2017
 
% of Total
 
2016
 
% of Total
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
North America
$
61,780

 
221.4
 %
 
$
74,230

 
128.2
 %
 
$
68,434

 
116.8
 %
EMEA
6,410

 
23.0

 
15,242

 
26.3

 
14,752

 
25.2

LATAM
3,082

 
11.0

 
4,278

 
7.4

 
6,818

 
11.6

Other(1)
(43,372
)
 
(155.5
)
 
(35,867
)
 
(62.0
)
 
(31,392
)
 
(53.6
)
Adjusted EBITDA
$
27,900

 
100.0
 %
 
$
57,883

 
100.0
 %
 
$
58,612

 
100.0
 %
(1) “Other” consists of intersegment eliminations, shared service activities and corporate expenses which are not allocated to the operating segments as management does not consider them in evaluating segment performance.

2018 compared to 2017. Adjusted EBITDA decreased by $30.0 million, or 51.8%, from $57.9 million in 2017 to $27.9 million in 2018. North America Adjusted EBITDA decreased by $12.5 million, or 16.8% from $74.2 million in 2017 to $61.8 million in 2018 due to decreased revenue and gross profit, mainly from transactional and small customers. EMEA Adjusted EBITDA decreased by $8.8 million, or 57.9% from $15.2 million in 2017 to $6.4 million in 2018 due to the decline in revenue and gross profit from one large client. LATAM Adjusted EBITDA decreased by $1.2 million, or 28.0% from $4.3 million in 2017 to $3.1 million in 2018 due to a decline in marketing spend by a few existing customers. Other Adjusted EBITDA decreased by $7.5 million, or 20.9%, from $(35.9) million in 2017 to $(43.4) million in 2018 primarily due to increased headcount to support the business.

2017 compared to 2016. Adjusted EBITDA decreased by $0.7 million, or 1.2%, from $58.6 million in 2016 to $57.9 million in 2017. North America Adjusted EBITDA increased by $5.8 million, or 8.5%, from $68.4 million in 2016 to $74.2 million in 2017 due to increased revenue and gross profit from organic growth of new customers. EMEA Adjusted EBITDA increased by $0.5 million, or 3.3%, from $14.8 million in 2016 to $15.2 million in 2017 due to client mix. LATAM Adjusted EBITDA decreased by $2.5 million, or 37.3%, from $6.8 million in 2016 to $4.3 million in 2017 due to client mix. Other Adjusted EBITDA decreased by $4.5 million, or 14.3%, from $(31.4) million in 2016 to $(35.9) million in 2017 due to increased headcount to support the business.
 

31



The table below provides a reconciliation of Adjusted EBITDA to net (loss) income for each of the years presented (in thousands):
 
Year ended December 31,
 
2018
 
2017
 
2016
Net (loss) income
$
(76,171
)
 
$
16,430

 
$
3,949

(Benefit) provision for income tax
(461
)
 
11,288

 
10,834

Interest income
(218
)
 
(97
)
 
(86
)
Interest expense
7,749

 
4,729

 
4,171

Other, net
1,616

 
1,788

 
154

Depreciation and amortization
12,988

 
13,390

 
17,916

Stock-based compensation expense
5,302

 
6,820

 
5,572

Goodwill impairment
46,319

 

 

Intangible and other asset impairments
18,121

 

 
70

Restructuring charges
6,031

 

 
5,615

Senior leadership transition and other employee-related costs
1,410

 

 

Business development realignment

 
715

 

Obsolete retail inventory
950

 

 

Change in fair value of contingent consideration

 
677

 
10,417

Professional fees related to ASC 606 implementation
1,092

 
829

 

Executive search costs
235

 
454

 

Restatement-related professional fees
2,430

 

 

Other professional fees
507

 

 

Czech currency impact on procurement margin

 
860

 

Adjusted EBITDA
$
27,900

 
$
57,883

 
$
58,612


Subsequent to the issuance of the Company's March 5, 2019 earnings release, the Company determined that its sales commission expense for the fourth quarter of 2018 should be approximately $1.2 million higher than the amount reflected in the unaudited results provided in such earnings release. This resulted in an increase of $1.2 million in selling, general and administrative expenses for the fourth quarter and full year 2018, and a corresponding decrease to Adjusted EBITDA. Due primarily to an offsetting decrease in goodwill impairment charges, the Company’s net loss for the fourth quarter and full year 2018 was unchanged from the net loss reported in the Company’s earnings release of $(29.3) million and $(76.2) million, respectively.


.



32



Adjusted Diluted (Loss) Earnings Per Share
 
Adjusted diluted (loss) earnings per share, which represents net (loss) income, with the addition of the change in the fair value of contingent consideration liabilities, impairment charges and other amounts itemized in the reconciliation table below, divided by the weighted average shares outstanding plus share equivalents that would arise from the exercise of stock options and restricted stock and other contingently issuable shares, is considered a non-GAAP financial measure under SEC regulations. Diluted (loss) earnings per share is the most directly comparable financial measure calculated in accordance with GAAP. We present this measure as supplemental information to help our investors better understand trends in our business over time. Our management team uses adjusted diluted earnings per share to evaluate the performance of our business. Adjusted diluted (loss) earnings per share is not equivalent to any measure of performance required to be reported under GAAP, nor should this data be considered an indicator of our overall financial performance and liquidity. Moreover, the adjusted diluted (loss) earnings per share definition we use may not be comparable to similarly titled measures reported by other companies. Our adjusted diluted (loss) earnings per share for each of the years presented was as follows (in thousands, except per share amounts):
 
Year Ended December 31,
 
2018
 
2017
 
2016
Net (loss) income
$
(76,171
)
 
$
16,430

 
$
3,949

Czech exit from exchange rate commitment, net of tax

 
294

 

Goodwill impairment
46,319

 

 

Intangible and other asset impairments, net of tax
15,014

 

 
56

Restructuring charges, net of tax
4,544

 

 
4,873

Senior leadership transition and other employee-related costs, net of tax
1,037

 

 

Realignment-related income tax charges

 

 
1,179

Business development realignment, net of tax

 
875

 

Change in fair value of contingent consideration

 
677

 
10,417

Obsolete retail inventory, net of tax
769

 

 

Professional fees related to ASC 606 implementation, net of tax
819

 
528

 

Executive search fees, net of tax
176

 
282

 

Restatement-related professional fees, net of tax
1,788

 

 

Other professional fees, net of tax
378

 

 

Czech currency impact on procurement margin, net of tax

 
697

 

Accelerated depreciation of internal use software, net of tax

 
246

 

Non-GAAP net (loss) income
(5,327
)
 
20,029

 
20,474

Weighted-average shares outstanding, diluted
52,230

 
54,944

 
54,460

Non-GAAP diluted (loss) earnings per share
$
(0.10
)
 
$
0.36

 
$
0.38



33



Quarterly Results of Operations

The following table presents unaudited statement of income data for our most recent eight fiscal quarters. You should read the following table in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The results of operations of any quarter are not necessarily indicative of the results that may be expected for any future period.
 
Three months ended
 
Mar 31, 2017
 
June 30, 2017
 
Sept 30, 2017
 
Dec 31, 2017
 
Mar 31, 2018
 
June 30, 2018
 
Sept 30, 2018
 
Dec 31, 2018
(in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
264,405

 
$
280,066

 
$
288,523

 
$
305,367

 
$
274,539

 
$
281,967

 
$
270,850

 
$
294,195

Gross profit
64,704

 
70,046

 
71,921

 
68,787

 
66,067

 
64,871

 
64,042

 
60,118

Net income (loss)
5,678

 
4,374

 
7,116

 
(738
)
 
(1,684
)
 
(299
)
 
(44,937
)
 
(29,251
)
Net income (loss) per share:
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
Basic
$
0.11

 
$
0.08

 
$
0.13

 
$
(0.01
)
 
$
(0.03
)
 
$
(0.01
)
 
$
(0.87
)
 
$
(0.56
)
Diluted
$
0.10

 
$
0.08

 
$
0.13

 
$
(0.01
)
 
$
(0.03
)
 
$
(0.01
)
 
$
(0.87
)
 
$
(0.56
)

Impact of Inflation
 
In the second quarter of 2018, the Argentinian economy was classified as highly inflationary under GAAP due to multiple years of increasing inflation, the devaluation of the Argentine peso ("ARS") and increasing borrowing rates. Effective July 1, 2018, the Company's Argentinian subsidiary is being accounted for under highly inflationary accounting rules, which principally means all transactions are recorded in U.S. dollars. The Company uses the official ARS exchange rate to translate the results of its Argentinian operations into U.S. dollars. As of December 31, 2018, the Company had a balance of net monetary assets denominated in ARS of approximately $50.7 million ARS, and the exchange rate was approximately $37.7 ARS per U.S. dollar.

For the year ended December 31, 2018, the Company recorded $0.1 million of favorable currency impacts recorded within Other income (expense), and the Company had revenue and gross margin of $4.1 million and $0.4 million, respectively at its Argentinian operations.

Inflation did not have a material impact on our operations in 2018, 2017, or 2016.
 
Liquidity and Capital Resources
 
At December 31, 2018, we had $26.8 million of cash and cash equivalents.
 
Operating Activities. Cash provided by operating activities primarily consists of net (loss) income adjusted for certain non-cash items, including depreciation and amortization, share based compensation, changes in the fair value of contingent consideration and the effect of changes in working capital and other activities. Cash provided by operating activities in 2018 was $23.1 million and primarily consisted of $82.6 million of non-cash items and $16.7 million provided by working capital offset by $76.2 million of a net loss during the year. The working capital changes consisted of a decrease in accounts receivable of $4.1 million, a decrease in prepaid expenses and other assets of $1.4 million, an increase in accounts payable of $22.0 million, and an increase in accrued expenses and other liabilities of $5.5 million, partially offset by an increase in inventories of $16.3 million.
 
Cash provided by operating activities in 2017 was $11.7 million and primarily consisted of $25.6 million of non-cash items and $16.4 million of net income during the year, offset by $30.4 million used to fund working capital. The working capital changes consisted of an increase in accounts receivable of $41.9 million, an increase in prepaid expenses and other assets of $13.5 million, an increase in inventories of $4.2 million, partially offset by an increase in accounts payable of $18.2 million, and an increase in accrued expenses and other liabilities of $11.2 million.

Cash provided by operating activities in 2016 was $9.7 million and primarily consisted of $36.6 million of non-cash items and $3.9 million of net income during the year, offset by $30.8 million used to fund working capital. The working capital changes consisted of an increase in accounts receivable of $2.7 million, an increase in prepaid expenses and other assets of $8.2 million, and a decrease in accounts payable of $38.4 million, partially offset by a decrease in inventories of $6.4 million and an increase in accrued expenses and other liabilities of $12.1 million.

34




Investing Activities. In 2018, cash used in investing activities of $11.1 million was attributable to capital expenditures, primarily consisting of software development.

In 2017, cash used in investing activities of $12.5 million was attributable to capital expenditures, primarily consisting of software development.
    
In 2016, cash used in investing activities of $13.3 million was attributable to capital expenditures, primarily consisting of software development.

Financing Activities. In 2018, cash used in financing activities of $13.7 million was primarily attributable to $25.7 million to acquire treasury stock offset by $14.5 million of net borrowings under our revolving credit facility.

In 2017, cash used in financing activities of $0.5 million was primarily attributable to $11.0 million of payments of contingent consideration and $10.9 million to acquire treasury stock, partially offset by $20.7 million of net borrowings under our revolving credit facility.

In 2016, cash provided by financing activities of $4.4 million was primarily attributable to $8.7 million of borrowings under our revolving credit facility and $4.0 million of excess tax benefits from the exercise of stock options, offset by $10.5 million of payments of contingent consideration.
 
Share Repurchase Program

On February 12, 2015, we announced that our Board of Directors approved a share repurchase program authorizing the repurchase of up to an aggregate of $20 million of its common stock through open market and privately negotiated transactions over a two-year period. On November 2, 2016, the Board of Directors approved a two-year extension to the share repurchase program through February 28, 2019. On May 4, 2017, the Board of Directors authorized the repurchase of up to an additional $30.0 million of our common stock through open market and privately negotiated transactions over a two-year period ending May 31, 2019. The timing and amount of any share repurchases will be determined based on market conditions, share price and other factors, and the program may be discontinued or suspended at any time. Repurchases will be made in compliance with SEC rules and other legal requirements.
    
During the twelve months ended December 31, 2018, we repurchased 2,667,732 shares of our common stock for $25.6 million in the aggregate at an average cost of $9.60 per share under this program. During the twelve months ended December 31, 2017, we repurchased 1,121,928 shares of our common stock for $11.0 million in the aggregate at an average cost of $9.78 per share under this program. Shares repurchased under this program are recorded at acquisition cost, including related expenses.

Revolving Credit Facilities

The Company entered into a Credit Agreement, dated as of August 2, 2010, subsequently amended most recently as of March 15, 2019, among the Company, the lenders party thereto and Bank of America, N.A., as Administrative Agent (the “Credit Agreement”). The Credit Agreement includes a revolving commitment amount of $175 million and $160 million in the aggregate through September 25, 2019 and September 25, 2020, respectively. The Credit Agreement also provides the Company the right to increase the aggregate commitment amount by an additional $50 million. Outstanding borrowings under the revolving credit facility are guaranteed by the Company’s material domestic subsidiaries, as defined in the Credit Agreement. The Company’s obligations under the Credit Agreement and such domestic subsidiaries’ guaranty obligations are secured by substantially all of their respective assets. The ranges of applicable rates charged for interest on outstanding loans and letters of credit are 50-225 basis point spread for loans based on the base rate and 150-325 basis point spread for letter of credit fees and loans based on the Eurodollar rate.

The most recent amendment (i) modifies the definition of the term "Consolidated EBITDA" as used in the covenant calculations, (ii) increases the maximum leverage ratio to which the Company is subject for the trailing twelve month periods ended December 31, 2018 and ending March 31, 2019, respectively, and (iii) decreases the minimum interest coverage ratio to which the Company is subject for the trailing twelve month periods ended December 31, 2018 and March 31, 2019, respectively. The Company is also currently in the process of refinancing its debt.

The previous amendment to the Credit Agreement, dated as of September 28, 2018, extended the maturity date from September 25, 2019 to September 25, 2020 and adjusted the applicable rate spreads charged for interest on outstanding loans and letters of credit. Additional modifications were subsequently superseded by the most recent amendment, dated as of March 15, 2019.

35




The terms of the Credit Agreement include various covenants, including covenants that require the Company to maintain a maximum leverage ratio and a minimum interest coverage ratio. The most recent amendment to the Credit Agreement modified the maximum leverage ratio from 3.50 to 1.00 to 4.50 to 1.00 for the trailing twelve months ended December 31, 2018, and from 3.00 to 1.00 to 4.75 to 1.00 for the trailing twelve months ending March 31, 2019. The maximum leverage ratio is 3.00 to 1.00 for the trailing twelve months ending June 30, 2019 and each period thereafter. The most recent amendment to the Credit Agreement also modified the minimum interest coverage ratio from 5.00 to 1.00 to 4.00 to 1.00 for the trailing twelve months ended December 31, 2018, and from 5.00 to 1.00 to 3.50 to 1.00 for the trailing twelve months ending March 31, 2019. The minimum interest coverage ratio is 5.00 to 1.00 for the trailing twelve months ending June 30, 2019 and each period thereafter.

At December 31, 2018, the Company's leverage ratio exceeded its 3.50 to 1.00 ratio and the Company's interest coverage ratio did not meet its minimum 5.00 to 1.00 ratio. As a result, the Company amended its Credit Facility on March 15, 2019 to amend its financial covenant ratios. The revised covenants only extend to the December 31, 2018 and March 31, 2019 periods, and therefore, without any additional changes, the Company would likely exceed the maximum leverage ratio covenant and/or not meet the minimum interest coverage ratio beyond the waiver periods, in which case the lenders would have the ability to demand repayment of the outstanding debt at such time. Accordingly, the outstanding balance of $142.7 million is presented as a current liability as of December 31, 2018 based on the guidance in ASC 470, Debt.

Additionally, under ASC 205, Presentation of Financial Statements, the Company is required to consider and has evaluated whether there is substantial doubt that it has the ability to meet its obligations within one year from the financial statement issuance date. This assessment also includes the Company’s consideration of any management plans to alleviate such doubts. As described above, the probable inability of the Company to meet its current covenant obligations beyond the covenant waiver periods casts substantial doubt on the Company’s ability to meet its obligations within one year from the financial statement issuance date.

The Company is in the process of negotiating changes to its debt structure with its existing lenders, which, based on discussions with lenders to-date and review of proposed negotiated conditions and financial covenants, the Company believes will be successfully completed in Q2 2019.

At December 31, 2018, the Company had $6.0 million of unused availability under the Credit Agreement and $0.7 million of letters of credit which have not been drawn upon. The outstanding revolving credit facility - noncurrent was $0.0 million and $128.4 million as of December 31, 2018 and 2017, respectively, and the revolving credit facility - current was $142.7 million and $0.0 million as of December 31, 2018 and 2017, respectively.

On February 22, 2016, the Company entered into a Revolving Credit Facility (the “Facility”) with Bank of America N.A. to support ongoing working capital needs of the Company's operations in China. The Facility includes a revolving commitment amount of $5.0 million whereby maturity dates vary based on each individual drawdown. Outstanding borrowings under the Facility are guaranteed by the Company’s assets. Borrowings and repayments are made in renminbi, the official Chinese currency. The applicable interest rate is 110% of the People’s Bank of China’s base rate. The terms of the Facility include limitations on use of funds for working capital purposes as well as customary representations and warranties made by the Company. At December 31, 2018, the Company had $4.5 million of unused availability under the Facility.

In addition, we will continue to utilize cash, in part, to invest in our innovative technology platform, fund acquisitions of or make strategic investments in complementary businesses and expand our sales force. Although we can provide no assurances, we believe that our available cash and cash equivalents and the $6.0 million currently available under our Credit Agreement will be sufficient to meet our working capital and operating expenditure requirements for the next 12 months. We may find it necessary to obtain additional equity or debt financing in the future.
 
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. Included in our cash and cash equivalents are amounts held by foreign subsidiaries. We had $23.7 million and $28.6 million foreign cash and cash equivalents as of December 31, 2018 and 2017, respectively, which are generally denominated in the local currency where the funds are held.


36



Contractual Obligations
 
As of December 31, 2018, we had the following contractual obligations:
 
Payments due by period
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
 
(in thousands)
Accounts payable
$
158,449

 
$
158,449

 
$

 
$

 
$

Operating lease obligations
23,101

 
6,383

 
9,439

 
5,313

 
1,966

Revolving credit facility
142,736

 
142,736

 

 

 

Total
$
324,286

 
$
307,568

 
$
9,439

 
$
5,313

 
$
1,966


Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements.

Item 7A.
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 the Company’s 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 $175.0 million revolving credit facility was fully drawn, a 1.0% increase in the interest rate would increase our annual interest expense by $1.75 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 considered cash equivalents.  The average duration of all of our investments as of December 31, 2018, 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, Czech koruna, Peruvian nuevo sol, Colombian peso, Brazilian real, Mexican peso and Chilean peso, which exposes us to foreign currency risk. For the year ended December 31, 2018, we derived approximately 31.7% 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 re-measurement of intercompany balances. Foreign exchange gains and losses recorded to date have been immaterial to our financial results. 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.


37



Item 8.
Financial Statements and Supplementary Data
 
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
 
INNERWORKINGS, INC.:
 
 
 
 

38



Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Stockholders of InnerWorkings, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of InnerWorkings Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, the related notes and the financial statement schedule listed in the Index at Item 15(a)2 (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 19, 2019 expressed an adverse opinion thereon.

The Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 9 to the financial statements, the Company’s debt covenant violation and likely inability to meet future covenants within one year from the financial statement issuance date raises substantial doubt about the Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 9. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company's auditor since 2005.

Chicago, Illinois
March 19, 2019

39



InnerWorkings, Inc. and subsidiaries 
Consolidated Statements of Operations 
(In thousands, except per share data)
 
Year Ended December 31,
 
2018
 
2017
 
2016
Revenue
$
1,121,551

 
$
1,138,361

 
$
1,094,402

Cost of goods sold
866,453

 
862,903

 
831,838

Gross profit
255,098

 
275,458

 
262,564

Operating expenses:
 
 
 
 
 
Selling, general and administrative expenses
239,124

 
227,253

 
209,524

Depreciation and amortization
12,988

 
13,390

 
17,916

Change in fair value of contingent consideration

 
677

 
10,417

Goodwill impairment
46,319

 

 

Intangible and other asset impairments
18,121

 

 
70

Restructuring charges
6,031

 

 
5,615

(Loss) income from operations
(67,485
)
 
34,138

 
19,022

Other income (expense):
 
 
 
 
 
Interest income
218

 
97

 
86

Interest expense
(7,749
)
 
(4,729
)
 
(4,171
)
Other, net
(1,616
)
 
(1,788
)
 
(154
)
Total other expense
(9,147
)
 
(6,420
)
 
(4,239
)
(Loss) income before taxes
(76,632
)
 
27,718

 
14,783

(Benefit) provision for income tax
(461
)
 
11,288

 
10,834

Net (loss) income
$
(76,171
)
 
$
16,430

 
$
3,949

 
 
 
 
 
 
Basic (loss) earnings per share
$
(1.46
)
 
$
0.31

 
$
0.07

Diluted (loss) earnings per share
$
(1.46
)
 
$
0.30

 
$
0.07

 
See accompanying notes to the consolidated financial statements.


40



InnerWorkings, Inc. and subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In thousands) 
 
Year Ended December 31,
 
2018
 
2017
 
2016
Net (loss) income
$
(76,171
)
 
$
16,430

 
$
3,949

Other comprehensive (loss) income, before tax:
 
 
 

 
 

Foreign currency translation adjustments
(5,234
)
 
1,732

 
(7,168
)
Other comprehensive (loss) income, before tax
(5,234
)
 
1,732

 
(7,168
)
Provision (benefit) for income tax related to components of other comprehensive (loss) income
154

 
12

 
(21
)
Other comprehensive (loss) income, net of tax
(5,080
)
 
1,720

 
(7,147
)
Comprehensive (loss) income
$
(81,251
)
 
$
18,150

 
$
(3,198
)
 
See accompanying notes to the consolidated financial statements.


41



InnerWorkings, Inc. and subsidiaries 
Consolidated Balance Sheets 
(In thousands, except per share data)
 
December 31,
 
2018
 
2017
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
26,770

 
$
30,562

Accounts receivable, net of allowance for doubtful accounts of $4,880 and $3,534, respectively
193,253

 
205,386

Unbilled revenue
46,474

 
50,016

Inventories
56,001

 
40,694

Prepaid expenses
16,982

 
18,565

Other current assets
34,106

 
37,865

Total current assets
373,586

 
383,088

Property and equipment, net
82,933

 
36,714

Intangibles and other assets:
 
 
 
Goodwill
152,158

 
199,946

Intangible assets, net
9,828

 
27,563

Deferred income taxes
1,195

 
691

Other assets
2,976

 
1,636

Total intangibles and other assets
166,157

 
229,836

Total assets
$
622,676

 
$
649,638

Liabilities and stockholders' equity
 
 
 

Current liabilities:
 
 
 

Accounts payable
$
158,449

 
$
141,164

Revolving credit facility - current
142,736

 

Other current liabilities
26,231

 
24,078

Deferred revenue
17,614

 
17,620

Accrued expenses
35,474

 
34,391

Total current liabilities
380,504

 
217,253

Revolving credit facility - noncurrent

 
128,398

Deferred income taxes
8,178

 
12,043

Other long-term liabilities
50,903

 
7,399

Total liabilities
439,585

 
365,093

Commitments and contingencies (See Note 10)
 
 
 
Stockholders' equity:
 

 
 
Common stock, par value $0.0001 per share, 200,000 and 200,000 shares authorized, 64,495 and 64,075 shares issued, 51,807 and 54,055 shares outstanding, respectively
6

 
6

Additional paid-in capital
239,960

 
235,199

Treasury stock at cost, 12,688 and 10,020 shares, respectively
(81,471
)
 
(55,873
)
Accumulated other comprehensive loss
(24,309
)
 
(19,229
)
Retained earnings
48,905

 
124,442

Total stockholders' equity
183,091

 
284,545

Total liabilities and stockholders' equity
$
622,676

 
$
649,638

 
See accompanying notes to the consolidated financial statements.

42



InnerWorkings, Inc. and subsidiaries 
Consolidated Statements of Stockholders' Equity
(In thousands)
 
Common Stock
 
Treasury Stock
 
Additional Paid-in-Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2015
62,645

 
$
6

 
9,547

 
$
(52,207
)
 
$
213,566

 
$
(13,802
)
 
$
104,869

 
$
252,432

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
3,949

 
3,949

Total other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
 
 
(7,147
)
 
 
 
(7,147
)
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(3,198
)
Issuance of common stock upon exercise of stock awards
746

 

 
 
 
 
 
1,770

 
 
 
 
 
1,770

Issuance of treasury shares as consideration for acquisition
 
 
 
 
(244
)
 
2,749

 
 
 
 
 
(737
)
 
2,012

Excess tax benefit derived from stock award exercises
 
 
 
 
 
 
 
 
3,572

 
 
 
 
 
3,572

Stock based compensation expense
 
 
 
 
 
 
 
 
5,572

 
 
 
 
 
5,572

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
63,391

 
6

 
9,303

 
(49,458
)
 
224,480

 
(20,949
)
 
108,082

 
262,161

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
16,430

 
16,430

Total other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
1,720

 
 
 
1,720

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
18,150

Issuance of common stock upon exercise of stock awards
648

 

 
 
 
 
 
1,421