Attached files
file | filename |
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EX-31.2 - INNERWORKINGS INC | v183393_ex31-2.htm |
EX-32.2 - INNERWORKINGS INC | v183393_ex32-2.htm |
EX-10.2 - INNERWORKINGS INC | v183393_ex10-2.htm |
EX-31.1 - INNERWORKINGS INC | v183393_ex31-1.htm |
EX-10.1 - INNERWORKINGS INC | v183393_ex10-1.htm |
EX-32.1 - INNERWORKINGS INC | v183393_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
Quarterly
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
|
For
the quarterly period ended March 31, 2010
¨
|
Transition
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
|
For
the transition period from
to
Commission
File Number 000-52170
INNERWORKINGS,
INC.
(Exact
Name of Registrant as Specified in its Charter)
Delaware
|
20-5997364
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
No.)
|
600
West Chicago Avenue, Suite 850
Chicago,
Illinois 60654
Phone:
(312) 642-3700
(Address
(including zip code) and telephone number (including area code) of registrant’s
principal executive offices)
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes: x
No: ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes: ¨
No: ¨
Indicate
by check mark whether the Registrant is an a large accelerated filer, an
accelerated filer, or non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check
one:
Large
accelerated filer: ¨
|
|
Accelerated
filer: x
|
Non-accelerated
filer: ¨ (Do not check if
a smaller reporting company)
|
|
Smaller reporting company
¨
|
Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange
Act). Yes: ¨
No: x
As of May
7, 2010, the Registrant had 45,659,818 shares of Common Stock, par value $0.0001
per share, outstanding.
INNERWORKINGS,
INC.
TABLE
OF CONTENTS
Page
|
||
PART
I. FINANCIAL INFORMATION
|
3
|
|
Item 1.
|
Consolidated
Financial Statements
|
3
|
Consolidated
Statements of Income for the three months ended March 31, 2009 and 2010
(Unaudited)
|
3
|
|
Consolidated
Balance Sheets as of December 31, 2009 and March 31, 2010
(Unaudited)
|
4
|
|
Consolidated
Statements of Cash Flows for the three months ended March 31, 2009 and
2010 (Unaudited)
|
5
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
6
|
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
18
|
Item 4.
|
Controls
and Procedures
|
18
|
PART
II. OTHER INFORMATION
|
18
|
|
Item 1.
|
Legal
Proceedings
|
18
|
Item 1A.
|
Risk
Factors
|
19
|
Item 6.
|
Exhibits
|
19
|
SIGNATURES
|
20
|
|
EXHIBIT INDEX
|
21
|
2
PART
I. FINANCIAL INFORMATION
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
|
||||||||
2009
|
2010
|
|||||||
Revenue
|
$ | 94,277,433 | $ | 112,212,546 | ||||
Cost
of goods sold
|
71,267,277 | 85,280,016 | ||||||
Gross
profit
|
23,010,156 | 26,932,530 | ||||||
Operating
expenses:
|
||||||||
Selling,
general, and administrative expenses
|
20,619,116 | 22,004,424 | ||||||
Depreciation
and amortization
|
1,495,375 | 2,117,625 | ||||||
Income
from operations
|
895,665 | 2,810,481 | ||||||
Other
income (expense):
|
||||||||
Gain
on sale of investment
|
- | 723,382 | ||||||
Interest
income
|
94,439 | 70,917 | ||||||
Interest
expense
|
(442,244 | ) | (240,692 | ) | ||||
Other,
net
|
(144,296 | ) | (28,508 | ) | ||||
Total
other income (expense)
|
(492,101 | ) | 525,099 | |||||
Income
before taxes
|
403,564 | 3,335,580 | ||||||
Income
tax expense
|
155,153 | 1,167,453 | ||||||
Net
income
|
$ | 248,411 | $ | 2,168,127 | ||||
Basic
earnings per share
|
$ | 0.01 | $ | 0.05 | ||||
Diluted
earnings per share
|
$ | 0.01 | $ | 0.05 |
See
accompanying notes.
3
InnerWorkings,
Inc.
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
December 31,
|
March 31,
|
|||||||
2009
|
2010
|
|||||||
(Unaudited)
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 2,903,906 | $ | 7,368,974 | ||||
Short-term
investments
|
23,541,199 | 20,019,260 | ||||||
Accounts
receivable, net of allowance for doubtful accounts of $4,634,848 and
$1,903,479, respectively
|
72,565,814 | 82,293,183 | ||||||
Unbilled
revenue
|
20,189,900 | 21,428,365 | ||||||
Inventories
|
8,749,266 | 8,137,572 | ||||||
Prepaid
expenses
|
11,399,560 | 10,930,409 | ||||||
Advances
to related parties
|
36,458 | 43,018 | ||||||
Other
current assets
|
7,355,447 | 7,398,400 | ||||||
Total
current assets
|
146,741,550 | 157,619,181 | ||||||
Property
and equipment, net
|
10,833,712 | 10,856,786 | ||||||
Intangibles
and other assets:
|
||||||||
Goodwill
|
77,905,703 | 78,308,194 | ||||||
Intangible
assets, net of accumulated amortization of $6,802,217 and $7,341,203,
respectively
|
24,364,784 | 22,889,927 | ||||||
Deposits
|
445,575 | 422,996 | ||||||
Deferred
income taxes
|
6,540,933 | 6,086,829 | ||||||
Other
assets
|
325,799 | 267,496 | ||||||
109,582,794 | 107,975,442 | |||||||
Total
assets
|
$ | 267,158,056 | $ | 276,451,409 | ||||
Liabilities
and stockholders' equity
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable-trade
|
$ | 53,915,750 | $ | 64,080,970 | ||||
Advances
from related parties
|
56,940 | 287,669 | ||||||
Current
maturities of capital lease obligations
|
117,582 | 57,981 | ||||||
Due
to seller
|
1,725,000 | 2,215,833 | ||||||
Customer
deposits
|
3,145,329 | 1,008,463 | ||||||
Other
liabilities
|
7,826,441 | 5,856,951 | ||||||
Deferred
income taxes
|
1,014,372 | 1,711,873 | ||||||
Accrued
expenses
|
2,832,256 | 4,039,342 | ||||||
Total
current liabilities
|
70,633,670 | 79,259,082 | ||||||
Revolving
credit facility
|
46,384,586 | 46,476,689 | ||||||
Capital
lease obligations, less current maturities
|
19,506 | 59,369 | ||||||
Other
long-term liabilities
|
3,070,278 | 1,430,300 | ||||||
Total
liabilities
|
120,108,040 | 127,225,440 | ||||||
Stockholders'
equity:
|
||||||||
Common
stock, par value $0.0001 per share, 45,628,685 and 45,659,818 shares were
issued and outstanding as of December 31, 2009 and March 31, 2010,
respectively
|
456 | 459 | ||||||
Additional
paid-in capital
|
170,330,891 | 170,891,909 | ||||||
Treasury
stock at cost
|
(74,307,200 | ) | (74,307,200 | ) | ||||
Accumulated
other comprehensive income
|
5,217,425 | 4,664,230 | ||||||
Retained
earnings
|
45,808,444 | 47,976,571 | ||||||
Total
stockholders' equity
|
147,050,016 | 149,225,969 | ||||||
Total
liabilities and stockholders' equity
|
$ | 267,158,056 | $ | 276,451,409 |
See
accompanying notes.
4
InnerWorkings,
Inc.
CONSOLIDATED
STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
|
||||||||
2009
|
2010
|
|||||||
(Unaudited)
|
||||||||
Cash
flows from operating activities
|
||||||||
Net
income
|
$ | 248,411 | $ | 2,168,127 | ||||
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||
Deferred
income taxes
|
2,320,158 | 1,391,351 | ||||||
Noncash
stock compensation expense
|
919,755 | 561,018 | ||||||
Depreciation
and amortization
|
1,495,375 | 2,117,625 | ||||||
Deferred
financing amortization
|
52,087 | 55,302 | ||||||
Gain
on sale of investment
|
- | (723,382 | ) | |||||
Bad
debt provision
|
(190,820 | ) | 460,947 | |||||
Change
in assets, net of acquisitions:
|
||||||||
Accounts
receivable and unbilled revenue
|
1,850,340 | (11,842,342 | ) | |||||
Inventories
|
(309,597 | ) | 1,867,382 | |||||
Prepaid
expenses and other
|
(2,811,352 | ) | 712,558 | |||||
Change
in liabilities, net of acquisitions:
|
||||||||
Accounts
payable
|
13,699,055 | 10,441,481 | ||||||
Advances
from related parties
|
566,446 | 224,169 | ||||||
Customer
deposits
|
103,679 | (2,136,866 | ) | |||||
Income
tax payable
|
(9,007,997 | ) | - | |||||
Accrued
expenses and other
|
(1,282,135 | ) | (1,083,457 | ) | ||||
Net
cash provided by operating activities
|
7,653,405 | 4,213,913 | ||||||
Cash
flows from investing activities
|
||||||||
Purchases
of property and equipment
|
(2,352,813 | ) | (1,418,619 | ) | ||||
Proceeds
from sale of investment
|
- | 726,820 | ||||||
Proceeds
from sale of marketable securities
|
25,584 | 2,666,770 | ||||||
Payments
to seller
|
- | (1,725,000 | ) | |||||
Payments
for acquisitions, net of cash acquired
|
(3,811,551 | ) | (59,209 | ) | ||||
Net
cash provided by (used in) investing activities
|
(6,138,780 | ) | 190,762 | |||||
Cash
flows from financing activities
|
||||||||
Principal
payments on capital lease obligations
|
(36,550 | ) | (16,279 | ) | ||||
Net
borrowings (repayment) from revolving credit facilitiy
|
(590,061 | ) | 92,103 | |||||
Issuance
of shares
|
49,000 | 3 | ||||||
Tax
benefit of stock options exercised
|
100,218 | - | ||||||
Net
cash provided by (used in) financing activities
|
(477,393 | ) | 75,827 | |||||
Effect
of exchange rate changes on cash and cash equivalents
|
(137,770 | ) | (15,434 | ) | ||||
Increase
in cash and cash equivalents
|
899,462 | 4,465,068 | ||||||
Cash
and cash equivalents, beginning of period
|
4,011,855 | 2,903,906 | ||||||
Cash
and cash equivalents, end of period
|
$ | 4,911,317 | $ | 7,368,974 |
See
accompanying notes.
5
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three
Months Ended March 31, 2010
1.
|
Summary of Significant Accounting
Policies
|
Basis
of Presentation of Interim Financial Statements
The
accompanying unaudited consolidated financial statements of InnerWorkings, Inc.
and subsidiaries (the Company) included herein have been prepared to conform to
the rules and regulations of the Securities and Exchange Commission (SEC) and
accounting principles generally accepted in the United States for interim
financial information. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
all adjustments considered necessary for a fair presentation of the accompanying
unaudited financial statements have been included, and all adjustments are of a
normal and recurring nature. The operating results for the three months ended
March 31, 2010 are not necessarily indicative of the results to be expected
for the full year of 2010. These condensed interim consolidated financial
statements and notes should be read in conjunction with the Company’s
Consolidated Financial Statements and Notes thereto as of December 31, 2009
included in the Company’s Annual Report on Form 10-K filed with the SEC on
March 9, 2010.
Foreign
Currency Translation
The
functional currency for the Company’s foreign operations is the local currency.
Assets and liabilities of these operations are translated into
U.S. currency at the rates of exchange at the balance sheet date. The
resulting translation adjustments are included in accumulated other
comprehensive income, a separate component of stockholders’ equity. Income and
expense items are translated at average monthly rates of exchange. Realized
gains and losses from foreign currency transactions were not material.
Accounting
Pronouncements Recently Adopted
In
January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair
Value Measurements, that amends existing disclosure requirements under
ASC 820 by adding required disclosures about items transferring into and out of
levels 1 and 2 in the fair value hierarchy; adding separate disclosures about
purchase, sales, issuances, and settlements relative to level 3 measurements;
and clarifying, among other things, the existing fair value disclosures about
the level of disaggregation. This ASU is effective for the first quarter of
2010, except for the requirement to provide level 3 activity of purchases,
sales, issuances, and settlements on a gross basis, which is effective beginning
the first quarter of 2011. Because this standard impacts disclosure requirements
only, its adoption did not have any impact on the Company’s consolidated results
of operations or financial condition.
Goodwill
and Other Intangibles
Goodwill
represents the excess of purchase price and related costs over the value
assigned to the net tangible and identifiable intangible assets of businesses
acquired. In accordance with ASC 350, Intangibles – Goodwill and
Other, goodwill is not amortized, but instead is tested for impairment
annually, or more frequently if circumstances indicate a possible impairment may
exist. The Company evaluates the recoverability of goodwill using a two-step
impairment test. For goodwill impairment test purposes, the Company has one
reporting unit. In the first step, the fair value for the Company is compared to
its book value including goodwill. In the case that the fair value is less than
the book value, a second step is performed which compares the implied fair value
of goodwill to the book value of goodwill. The fair value for the goodwill is
determined based on the difference between the fair value of the Company and the
net fair values of the identifiable assets and liabilities. If the implied fair
value of the goodwill is less than the book value, the difference is recognized
as an impairment. Absent any interim indicators of impairment, the Company has
elected to test for goodwill impairment during the fourth quarter of each year,
and as a result of the 2009 analysis performed, no impairment charges were
required.
The
increase in goodwill for the three months ended March 31, 2010 is the result of
an increase in earn-out liabilities of $564,072, offset by the effect of foreign
exchange of $58,782, decrease in net assets of $59,206 and by adjustments made
to 2009 acquisition purchase price allocations based on updated valuation
reports which resulted in an additional $43,593 being allocated to intangibles,
with a corresponding reduction to goodwill.
6
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
In
connection with certain of the Company’s acquisitions, contingent consideration
is payable in cash upon the achievement of certain performance measures over
future periods. For acquisitions prior to December 31, 2008, contingent
consideration payments will be recorded as additional purchase price. The
Company paid $1,725,000 related to these agreements in the three month period
ended March 31, 2010, respectively. Total remaining potential contingent
payments under these agreements amount to $33,681,497 as of March 31, 2010. For
the acquisitions occurring subsequent to January 1, 2009, the Company has
estimated and recorded potential contingent consideration as an increase in
purchase price. This amount is $4,477,056, of which $1,430,300 is included in
other long-term liabilities on the balance sheet. Any future
adjustments related to the acquisitions occurring after January 1, 2009 to
the valuation of contingent consideration will be recorded in the Company’s
results from operations.
As of
March 31, 2010, the potential contingent payments are payable in the years
as follows:
2011
|
$ | 15,692,927 | ||
2012
|
13,411,204 | |||
2013
|
9,054,422 | |||
$ | 38,158,553 |
In
accordance with ASC 350,
Intangibles – Goodwill and Other, the Company amortizes its intangible
assets with finite lives over their respective estimated useful lives and
reviews for impairment whenever impairment indicators exist. The Company’s
intangible assets consist of customer lists, noncompete agreements, trade names
and patents. The Company’s customer lists, which have an estimated
weighted-average useful life of fourteen years, are being amortized using the
economic useful life method. The Company’s noncompete agreements, trade names
and patents are being amortized on the straight-line basis over their estimated
weighted-average useful lives of approximately four years, thirteen years and
ten years, respectively.
The
following is a summary of the intangible assets:
|
December 31,
2009
|
March 31,
2010
|
Weighted-
Average Life
|
||||||
Customer
lists
|
|
$
|
26,589,715
|
|
$
|
25,958,656
|
|
14.3 years
|
|
Noncompete
agreements
|
|
1,077,349
|
|
992,787
|
|
4.0
years
|
|||
Trade
names
|
|
3,467,656
|
|
3,241,232
|
|
12.5
years
|
|||
Patents
|
|
32,281
|
|
38,455
|
|
10.0
years
|
|||
|
|||||||||
|
31,167,001
|
|
30,231,130
|
|
|||||
Less
accumulated amortization
|
|
(6,802,217
|
)
|
(7,341,203
|
)
|
||||
|
|||||||||
Intangible
assets, net
|
|
$
|
24,364,784
|
|
$
|
22,889,927
|
|
Amortization
expense related to these intangible assets was $446,860 and $538,986 for the
three months ended March 31, 2009 and 2010, respectively.
The
estimated amortization expense for the next five years ended March 31, 2010 is
as follows:
2011
|
$ | 2,742,779 | ||
2012
|
2,423,361 | |||
2013
|
2,255,761 | |||
2014
|
2,130,408 | |||
2015
|
1,240,455 | |||
Thereafter
|
12,097,163 | |||
$ | 22,889,927 |
7
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
Fair
Value of Financial Instruments
The
Company accounts for its financial assets and liabilities that are measured at
fair value within the financial statements in accordance with ASC 820, Fair Value Measurements and
Disclosure (ASC 820). ASC 820 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles (GAAP) and
expands disclosures about fair value measurements. In accordance with this
interpretation, the Company has only applied ASC 820 with respect to its
financial assets and liabilities that are measured at fair value within the
financial statements. The Company’s investments in cash equivalents,
auction-rate securities and available-for-sale securities are carried at fair
value. See Notes 5 and 6 for additional information on fair value
measurements.
In
accordance with ASC 825, Financial Instruments (ASC
825), which permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured
at fair value, the Company has elected to apply the fair value option to a put
option relating to its auction-rate securities (refer to Note 7 for more
information on auction-rate securities).
Stock-Based
Compensation
Since
January 1, 2006, the Company has accounted for nonvested equity awards in
accordance with ASC 718, Compensation -Stock
Compensation. Compensation expense is based on the difference, if any, on
the grant date between the estimated fair value of the Company stock and the
exercise price of the options to purchase that stock. The compensation expense
is then amortized over the vesting period of the stock options. All stock-based
compensation expense is recorded net of an estimated forfeiture rate. The
forfeiture rate is based upon historical activity and is analyzed annually and
as actual forfeitures occur.
During
the three month periods ended March 31, 2009 and 2010, the Company issued 94,087
and 240,722 options, respectively, to various employees of the Company. In
addition, during the three month periods ended March 31, 2009 and 2010, the
Company granted 47,079 and 309,674 restricted common shares, respectively, to
employees. During the three month periods ended March 31, 2009 and 2010, 113,192
and 31,133 options were exercised and restricted common shares vested,
respectively. Using the Black-Scholes option valuation model and the assumptions
listed below, the Company recorded $919,755 and $561,018 in compensation expense
for the three month periods ended March 31, 2009 and 2010,
respectively.
The
following assumptions were utilized in the valuation for options granted in 2009
and 2010:
2009
|
2010
|
|||||||
Dividend
yield
|
— | % | — | % | ||||
Risk-free
interest rate
|
2.42 | % | 3.14 | % | ||||
Expected
life
|
7 years
|
7 years
|
||||||
Volatility
|
33.5 | % | 47.5 | % |
8
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
2.
|
Earnings Per
Share
|
Basic
earnings per common share is calculated by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share is
calculated by dividing net income by the weighted average shares outstanding
plus share equivalents that would arise from the exercise of stock options and
vesting of restricted common shares. During the three months ended March 31,
2009 and 2010, respectively, 2,885,910 and 3,026,040 options and restricted
common shares were excluded from the calculation as these options and restricted
common shares were anti-dilutive. The computations of basic and diluted earnings
per common share for the three months ended March 31, 2009 and 2010 are as
follows:
Three Months Ended
March 31,
|
||||||||
2009
|
2010
|
|||||||
Numerator:
|
||||||||
Net
income
|
$ | 248,411 | $ | 2,168,127 | ||||
Denominator:
|
||||||||
Denominator
for basic earnings per share—weighted-average shares
|
45,399,786 | 45,652,208 | ||||||
Effect
of dilutive securities:
|
||||||||
Employee
stock options and restricted common shares
|
1,634,220 | 1,754,528 | ||||||
Denominator
for dilutive earnings per share
|
47,034,006 | 47,406,736 | ||||||
Basic
earnings per share
|
$ | 0.01 | $ | 0.05 | ||||
Diluted
earnings per share
|
$ | 0.01 | $ | 0.05 |
3.
|
Comprehensive
Income
|
Three months ended
March 31,
|
||||||||
2009
|
2010
|
|||||||
Net
income
|
$ | 248,411 | $ | 2,168,127 | ||||
Other
comprehensive income:
|
||||||||
Unrealized
gain (loss) on available-for-sale securities, net of tax
|
25,583 | (314,443 | ) | |||||
Foreign
currency translation adjustment
|
(137,770 | ) | (238,752 | ) | ||||
Total
comprehensive income
|
$ | 136,224 | $ | 1,614,932 |
9
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
4.
|
Related
Party
|
Investment
in Echo Global Logistics, Inc.
In
February 2005, the Company acquired 2,000,000 shares of common stock of
Echo Global Logistics, Inc. (Echo), a technology enabled transportation and
logistics business process outsourcing firm, for $125,000. Echo is a related
party to the Company as a majority of the members of the Company’s Board of
Directors have a direct and/or indirect ownership interest in Echo.
On
September 25, 2009, Echo completed a one-for-two reverse stock split of all
outstanding shares of its capital stock and immediately following, recapitalized
all outstanding shares into newly issued shares of common stock on approximately
a one-for-one basis. Echo recapitalized its outstanding capital stock in
connection with its initial public offering. At December 31, 2009,
the Company owned 627,778 shares of Echo’s common stock after the effects of the
one-for-two reverse stock split and sales during the prior periods.
On March
31, 2010, the Company sold 55,000 of its shares Echo’s common stock for $726,820
and recorded a gain on sale of investment of $723,382. Beginning
September 30, 2009, the Company has classified this investment as
“available for sale” and has recorded it at fair value, which is determined
based on quoted market prices (refer to Note 5 for additional information on
these securities). The gain on sale of investment is included
in other income. The Company’s investment in Echo was recorded at
cost prior to the completion of Echo’s initial public offering
Agreements
and Services with Related Parties
In the
ordinary course, the Company provides print procurement services to Echo. The
total amount billed for such print procurement services during the three months
ended March 31, 2010 was approximately $7,500. The Company did not
provide any print procurement services during the three months ended March 31,
2009. In addition, Echo has provided transportation services to the Company. As
consideration for these services, Echo billed the Company approximately $842,000
and $1.6 million for the three months ended March 31, 2009 and 2010,
respectively. The net amount payable to Echo at March 31, 2010 was
$244,651.
The
Company has a supplier rebate program with Echo pursuant to which the
Company receives an annual rebate on all freight expenditures in an amount equal
to 3%, plus an additional 2% if paid within 15 days. Under the supplier
rebate program, the Company received approximately $4,900 and $3,400 in rebates
for the three months ended March 31, 2009 and 2010, respectively.
In August
2009, the Company entered into an agreement with Groupon pursuant to which it
sub-leases a portion of the Company’s office space in Chicago, and pays $18,000
per month of the Company’s lease payment and overhead expenses related to the
space. Three members of the Company’s Board of Directors, Eric P. Lefkofsky,
John R. Walter and Peter J. Barris, are also directors of Groupon. In addition,
these members have a direct and/or indirect ownership interest in Groupon.
Groupon paid the Company $54,000 under this agreement for the three months ended
March 31, 2010.
5.
|
Valuation of Equity
Investments
|
As
discussed in Note 1, Fair Value of Financial Instruments, the Company has
applied ASC 820, Fair Value
Measurement and Disclosure (ASC 820), to its financial assets and
liabilities as of January 1, 2008. At March 31, 2010, the Company’s
financial assets primarily relate to their auction-rate securities and
available-for-sale securities and are included in short-term investments. See
Note 6 and 7 for additional information on auction rate securities.
The
Company has classified its investment in Echo Global Logistics (Echo) as
“available for sale” in accordance with ASC 320, Investments – Debt and Equity
Securities in connection with Echo’s initial public offering. The
investment is stated at fair value based on market prices, with any unrealized
gains and losses included as a separate component of stockholders’ equity. Any
realized gains and losses and interest and dividends will be included in other
income. At March 31, 2010, the Company’s investment in Echo, which has a cost
basis of $35,799, was carried at fair value of $7,394,564. The unrealized gain
of $7,319,529 was included in other comprehensive income, net of tax of
$2,664,512.
10
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
6.
|
Fair Value
Measurement
|
ASC 820
includes a fair value hierarchy that is intended to increase consistency and
comparability in fair value measurements and related disclosures. The fair value
hierarchy is based on observable or unobservable inputs to valuation techniques
that are used to measure fair value. Observable inputs reflect assumptions
market participants would use in pricing an asset or liability based on market
data obtained from independent sources while unobservable inputs reflect a
reporting entity’s pricing based upon its own market assumptions.
The fair
value hierarchy consists of the following three levels:
|
•
|
Level 1: Inputs are quoted prices in
active markets for identical assets or
liabilities.
|
|
•
|
Level 2: Inputs are quoted prices for
similar assets or liabilities in an active market, quoted prices for
identical or similar assets or liabilities in markets that are not active,
and inputs other than quoted prices that are observable and
market-corroborated inputs, which are derived principally from or
corroborated by observable market
data.
|
|
•
|
Level 3: Inputs that are derived from
valuation techniques in which one or more significant inputs or value
drivers are unobservable.
|
The
Company has elected to apply the fair value guidance within ASC 825, Financial Instruments
(ASC 825), as of October 1, 2008 to a put option relating to its
auction-rate securities (refer to Note 7 for more information on
auction-rate securities). The Company’s investments in student loan auction-rate
securities and the related put option are its only Level 3 assets. The fair
values of these securities and related put option are estimated utilizing a
discounted cash flow analysis as of March 31, 2010. This analysis considers,
among other items, the collateral underlying the security investments, the
creditworthiness of the counterparty, the timing of expected future cash flows,
and the expectation of the next time the security is expected to have a
successful auction. These securities were also compared, when possible, to other
observable market data with similar characteristics to the securities held by
the Company.
The
following table sets forth the Company’s financial assets and financial
liabilities measured at fair value on a recurring basis and the basis of
measurement at March 31, 2010:
Total Fair Value
Measurement
|
Quoted Prices in
Active Markets for
Identical
Assets
(Level
1)
|
Significant Other
Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
|||||||||||||
Assets:
|
||||||||||||||||
Money
market funds(1)
|
$ | 3,158,639 | $ | 3,158,639 | $ | — | $ | — | ||||||||
Auction
rate securities(2)
|
11,152,001 | — | — | 11,152,001 | ||||||||||||
Put
option(2)
|
1,472,696 | — | — | 1,472,696 | ||||||||||||
Available
for sale securities(2)
|
7,394,563 | 7,394,563 | — | — | ||||||||||||
Total
assets
|
$ | 23,177,899 | $ | 10,553,202 | $ | — | $ | 12,624,697 |
(1)
|
Included in cash and cash
equivalents on the balance
sheet.
|
(2)
|
Included in short-term
investments on the balance
sheet.
|
11
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
The
following table provides a reconciliation of the beginning and ending balances
for the assets measured at fair value using significant unobservable inputs
(Level 3):
Fair Value Measurements at Reporting Date
Using Significant Unobservable Inputs
(Level 3)
|
||||||||||||
Auction-Rate
Securities
|
Put
Option
|
Total
|
||||||||||
Balance
at December 31, 2009
|
$ | 13,818,771 | $ | 1,755,926 | $ | 15,574,697 | ||||||
Gains
in investments
|
283,230 | (283,230 | ) | — | ||||||||
Securities
sold during the period (1)
|
(2,950,000 | ) | — | (2,950,000 | ) | |||||||
Balance
at March 31, 2010
|
$ | 11,152,001 | $ | 1,472,696 | $ | 12,624,697 |
(1)
|
During the first
quarter of 2010, $ 2,950,000 in auction - rate securities were transferred
out of Level 3 and into Level 1 as the securities were sold and the
proceeds were reinvested into money market
funds.
|
7.
|
Auction-Rate
Securities
|
At March
31 2010, the Company’s short-term investments included $11,152,001 in
auction-rate securities (“ARS”) and $1,472,696 of the related put
option.
During
February 2008, liquidity issues in the global credit markets resulted in the
failure of auctions, involving substantially all of the auction-rate securities
(ARS) the Company holds. In October 2008, the Company entered into an agreement
with UBS regarding its outstanding ARS. Under the agreement, the Company has the
right to sell all of its outstanding ARS back to UBS at par value. The agreement
allows the Company to exercise this non-transferable right starting
June 30, 2010 and the right will expire on July 2, 2012. UBS also has
the right to buy the ARS at par value from the Company at any time. By accepting
this put option, the Company demonstrated it no longer has the intent to hold
the related UBS-brokered ARS until they fully recover in value (including until
contractual maturity, if necessary). Therefore, the decline in the fair value of
the UBS-brokered ARS below their par value as of September 30, 2008 that
was previously considered a temporary unrealized loss and included in other
comprehensive income was considered other-than-temporary and was included in
earnings as a realized loss, in accordance with ASC 320, Investments—Debt and Equity
Securities, for the year ended December 31, 2008.
The
Company has elected the fair value measurement option under ASC 825, Financial Instruments
(ASC 825), for this asset. At March 31, 2010, the Company’s ARS portfolio,
which has a par value of $12,675,000, was carried at fair value of $11,152,001,
while the related put option was carried at fair value of $1,472,696. In the
absence of observable market data, the Company used a discounted cash flow model
to determine the estimated fair value of its ARS and related put option at March
31, 2010. Refer to Note 6 for additional information on the fair value of
auction-rate securities and related put option.
8.
|
Revolving Credit
Facility
|
On
May 21, 2008, the Company entered into a Credit Agreement with JPMorgan
Chase, N.A that matures on May 21, 2011. The Credit Agreement provides for
a senior secured revolving credit facility in an initial aggregate principal
amount of up to $75.0 million. Outstanding borrowings under the revolving
credit facility are guaranteed by the Company’s material domestic subsidiaries.
The Company’s obligations under the Credit Agreement and such domestic
subsidiaries’ guaranty obligations are secured by substantially all of their
respective assets. Interest is payable at the adjusted LIBOR rate or the
alternate base rate, as elected by the Company. The terms of the revolving
credit facility include various covenants, including covenants that require the
Company to maintain a maximum leverage ratio and a minimum interest coverage
ratio. As of March 31, 2010, the Company was not in violation of any of these
various covenants. The borrowings may be used for general corporate and working
capital purposes of the Company and its subsidiaries in the ordinary course of
business, for permitted acquisitions, for capital expenditures and for
restricted payments, including the repurchase of shares of the Company’s common
stock, as permitted pursuant to the terms of the agreement. As of March 31,
2010, the Company had outstanding borrowings of $46.5 million under this
facility.
12
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
9.
|
Income
Taxes
|
The
following table shows the Company’s effective income tax rate for the three
months ended March 31, 2009 and 2010:
Three months ended March 31,
|
||||||||
2009
|
2010
|
|||||||
Income
before taxes
|
$ |
403,564
|
$ |
3,335,580
|
||||
Income
tax expense
|
155,153
|
1,167,453
|
||||||
Effective
tax rate
|
38.4%
|
35.0%
|
The
Company’s effective tax rate decreased from 38.4% to 35.0% for the three and
months ended Mach 31, 2009 and 2010, respectively. The reduction in the
effective tax rate is primarily due to a change in the mix of earnings
and earnings generated by the Company’s foreign operations which are taxed
at a lower rate than the US statutory rate.
13
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We are a
leading provider of print and promotional procurement solutions to corporate
clients across a wide range of industries. We combine the talent of our
employees with our proprietary technology, extensive supplier base and domain
expertise to procure, manage and deliver printed products as part of a
comprehensive outsourced enterprise solution. Our technology is designed to
capitalize on excess manufacturing capacity and other inefficiencies in the
traditional print supply chain to obtain favorable pricing and to deliver
high-quality products and services for our clients.
Our
proprietary software applications and database, PPM4™, create a fully-integrated
solution that stores, analyzes and tracks the production capabilities of our
supplier network, as well as quote and price data for each bid we receive and
print job we execute. As a result, we believe PPM4™ contains one of the largest
independent repositories of equipment profiles and price data for print
suppliers in the United States. We leverage our technology to match each print
job with the supplier that is optimally suited to meet the client’s needs at a
highly competitive price. Our procurement managers use PPM4™ to manage the print
procurement process from end-to-end.
Through
our supplier base of over 8,000 suppliers, we offer a full range of print,
fulfillment and logistics services that allows us to procure printed products on
virtually any substrate. The breadth of our product offerings and services and
the depth of our supplier network enable us to fulfill all of the print
procurement needs of our clients. By leveraging our technology platform, our
clients are able to reduce overhead costs, redeploy internal resources and
obtain favorable pricing and service terms. In addition, our ability to track
individual transactions and provide customized reports detailing print
procurement activity on an enterprise-wide basis provides our clients with
greater visibility and control of their print expenditures.
We
maintain sales offices in Illinois, New York, New Jersey, California, Hawaii,
Michigan, Minnesota, Ohio, Texas, Pennsylvania, Georgia, Wisconsin, Missouri and
the United Kingdom. We believe the opportunity exists to expand our business
into new geographic markets. Our objective is to continue to increase our sales
in the major print markets in the United States and Europe. We intend to hire or
acquire more account executives within close proximity to these large markets.
In addition, given that the print industry is a global business, over time we
intend to evaluate opportunities to access attractive markets outside the United
States.
Revenue
We
generate revenue through the sale of printed products to our clients. Our
revenue was $112.2 million and $94.3 million during the three months ended March
31, 2010 and 2009, respectively. Our revenue is generated from two different
types of clients: enterprise and transactional. Enterprise jobs usually involve
higher dollar amounts and volume than transactional jobs. We categorize a client
as an enterprise client if we have a contract with the client for the provision
of printing services on a recurring basis; if the client has signed an
open-ended purchase order, or a series of related purchase orders; or if the
client has enrolled in our e-stores program, which enables the client to make
online purchases of printing services on a recurring basis. We categorize all
other clients as transactional. We enter into contracts with our enterprise
clients to provide some or a substantial portion of their printed products on a
recurring basis. Our contracts with enterprise clients generally have an
open-ended term subject to termination by either party upon prior notice ranging
from 90 days to twelve months. Several of our larger enterprise clients
have outsourced substantially all of their recurring print needs to us. We
provide printed products to our transactional clients on an order-by-order
basis. As of March 31, 2010, we had 179 enterprise clients. During
the three months ended March 31, 2010, enterprise clients accounted for 70% of
our revenue, while transactional clients accounted for 30% of our
revenue.
Our
revenue consists of the prices paid by our clients for printed products. These
prices, in turn, reflect the amounts charged to us by our suppliers plus our
gross profit. Our gross profit margin, in the case of some of our enterprise
clients, is fixed by contract or, in the case of transactional clients, is
negotiated on a job-by-job basis. Once either type of client accepts
our pricing terms, the selling price is established and we procure the product
for our own account in order to re-sell it to the client. We take full title and
risk of loss for the product upon shipment. The finished product is typically
shipped directly from the supplier to a destination specified by the client.
Upon shipment, our supplier invoices us for its production costs and we invoice
our client.
Our
revenue from enterprise clients tends to generate lower gross profit margins
than our revenue from transactional clients because the gross profit margins
established in our contracts with large enterprise clients are generally lower
than the gross profit margins we typically realize in our transactional
business.
The print
industry has historically been subject to seasonal sales fluctuations because a
substantial number of print orders are placed for the year-end holiday season.
We have historically experienced seasonal client buying patterns with a higher
percentage of our revenue being earned in our third and fourth
quarters. However, our recent new enterprise account wins, with more
revenue concentrated during the first half of the year, are expected to
alter this historical seasonality such that revenue will be more consistent
through the quarters.
14
Cost
of Goods Sold and Gross Profit
Our cost
of goods sold consists primarily of the price at which we purchase products from
our suppliers. Our selling price, including our gross profit, in the case of
some of our enterprise jobs, is based on a fixed gross margin established by
contract or, in the case of transactional jobs, is determined at the discretion
of the account executive or procurement manager within predetermined parameters.
Our gross margins on our enterprise jobs are typically lower than our gross
margins on our transactional jobs. As a result, our cost of goods sold as a
percentage of revenue for our enterprise jobs is typically higher than it is for
our transactional jobs. Our gross profit for the three months ended March 31,
2010 and 2009 was $26.9 million, or 24.0% of revenue, and $23.0 million, or
24.4% of revenue, respectively.
Operating
Expenses and Income from Operations
Our
selling, general and administrative expenses consist of commissions paid to our
account executives, compensation costs for our management team and procurement
managers as well as compensation costs for our finance and support employees,
public company expenses, corporate systems, legal and accounting, facilities and
travel and entertainment expenses. Selling, general and administrative expenses
as a percentage of revenue were 19.6% and 21.9% for the three months ended March
31, 2010 and 2009, respectively.
We accrue
for commissions when we recognize the related revenue. Some of our account
executives receive a monthly draw to provide them with a more consistent income
stream. The cash paid to our account executives in advance of commissions earned
is reflected as a prepaid expense on our balance sheet. As our account
executives earn commissions, a portion of their commission payment is withheld
and offset against their prepaid commission balance, if any. Our prepaid
commission balance, net of accrued earned commissions not yet paid, increased to
$5.1 million as of March 31, 2010 from $3.8 million as of March 31,
2009.
We agree
to provide our clients with printed products that conform to the industry
standard of a “commercially reasonable quality,” and our suppliers in turn agree
to provide us with products of the same quality. In addition, the quotes we
provide 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.
Our
income from operations for the three months ended March 31, 2010 and 2009 was
$2.8 million and $896,000, respectively.
Comparison
of three months ended March 31, 2010 and 2009
Revenue
Our
revenue increased by $17.9 million, or 19.0%, from $94.3 million during the
three months ended March 31, 2009 to $112.2 million during the three months
ended March 31, 2010. The revenue growth reflects an increase in both enterprise
and transactional clients. Our revenue from enterprise clients increased by
$17.1 million, or 27.9%, from $61.4 million during the three months ended March
31, 2009 to $78.5 million during the three months ended March 31, 2010. As of
March 31, 2010, we had 179 enterprise clients compared to 150 enterprise clients
under contract as of March 31, 2009. Additionally, revenue from transactional
clients increased by $838,000, or 2.5%, from $32.9 million during the three
months ended March 31, 2009 to $33.8 million during the three months ended March
31, 2010. The incremental transactional revenue is largely a result of improving
same customer spend due to the improving economic condition.
Cost
of goods sold
Our cost
of goods sold increased by $14.0 million, or 19.7%, from $71.3 million during
the three months ended March 31, 2009 to $85.3 million during the three months
ended March 31, 2010. The increase is a result of the revenue growth during the
three months ended March 31, 2010. Our cost of goods sold as a percentage of
revenue increased slightly from 75.6% during the three months ended March 31,
2009 to 76.0% during the three months ended March 31, 2010.
Gross
Profit
Our gross
profit as a percentage of revenue, which we refer to as gross margin, decreased
from 24.4% during the three months ended March 31, 2009 to 24.0% during the
three months ended March 31, 2010. The decrease is primarily the result of a
higher concentration of our business coming from enterprise clients, which
generate lower gross margins.
Selling,
general and administrative expenses
Selling,
general and administrative expenses increased by $1.4 million, or 6.7%, from
$20.6 million during the three months ended March 31, 2009 to $22.0 million
during the three months ended March 31, 2010. As a percentage of revenue,
selling, general and administrative expenses decreased from 21.9% for the three
months ended March 31, 2009 to 19.6% for the three months ended March 31, 2010.
The decrease in selling, general and administrative expenses as a percentage of
revenue is primarily the result of 2009 cost reduction actions.
Depreciation
and amortization
Depreciation
and amortization expense increased by $622,000, or 41.6%, from $1.5 million
during the three months ended March 31, 2009 to $2.1 million during the three
months ended March 31, 2010. The increase in depreciation expense is primarily
attributable to additions of computer hardware and software, equipment and
furniture and fixtures as well as amortization of the capitalized costs of
internal use software.
15
Income
from operations
Income
from operations increased by $1.9 million, or 213.8%, from $896,000 during the
three months ended March 31, 2009 to $2.8 million during the three months ended
March 31, 2010. As a percentage of revenue, income from operations increased
from 1.0% during the three months ended March 31, 2009 to 2.5% during the three
months ended March 31, 2010. The increase in income from operations as a
percentage of revenue is a result of our decrease in selling and administrative
expenses as a percentage of revenue.
Other
income and expense
Other
expense increased by $1.0 million, or 206.7%, from other expense of $492,000 for
the three months ended March 31, 2009 to other income of $525,000 during the
three months ended March 31, 2010. The increase is due to the gain on sale of
55,000 shares we hold in Echo Global Logistics, Inc., a related party, for a
gain of $723,000, offset by a decrease in interest income of $241,000. We did
not sell any Echo shares during the three months ended March 31,
2009.
Income
tax expense
Income
tax expense increased by $1.0 million from $155,000 during the three months
ended March 31, 2009 to $1.2 million during the three months ended March 31,
2010. Our effective tax rate was 38.4% and 35.0% for the three month periods
ended March 31, 2009 and 2010, respectively. The decrease in the effective tax
rate for the three month period ended March 31, 2010 is primarily due to a
change in the mix of earnings and earnings generated by the Company’s
foreign operations which are taxed at a lower rate than the US statutory
rate.
Net
income
Net
income increased by $1.9 million, or 772.8%, from $248,000 during the three
months ended March 31, 2009 to $2.2 million during the three months ended March
31, 2010. Net income as a percentage of revenue increased from 0.3% during the
three months ended March 31, 2009 to 1.9% during the three months ended March
31, 2010. The increase in net income as a percentage of revenue is due to our
decrease in selling, general and administrative expenses as a percentage of
revenue, decrease in our effective tax rate and gain on sale of Echo
shares.
Liquidity
and Capital Resources
At March
31, 2010, we had $7.4 million of cash and cash equivalents and $20.0 million in
short-term investments, which includes approximately $7.4 million in
available-for-sale securities and $12.6 million in auction-rate securities. In
October 2008, we entered into an agreement with UBS regarding our outstanding
auction-rate securities. Under the agreement, we have the right to sell all our
outstanding auction-rate securities back to UBS at their par value. The
agreement allows us to exercise this right starting June 30, 2010, and the right
will expire June 30, 2012. As a result of this agreement, our auction-rate
securities are classified as short-term investments at March 31,
2010.
Operating Activities. Cash
provided by operating activities primarily consists of net income adjusted for
certain non-cash items, including depreciation and amortization, and the effect
of changes in working capital and other activities. Cash provided by operating
activities for the three months ended March 31, 2010 was $4.2 million and
primarily consisted of higher earnings offset by $1.8 million used by working
capital and other activities. The most significant impact on working capital and
other activities consisted of an increase in accounts receivable and unbilled
revenue of $11.8 million and an increase in accounts payable of $10.4 million,
offset by a decrease in customer deposits of $2.1 million, a decrease in
inventories of $1.9 million and a decrease in accrued expenses and other of $1.1
million.
Cash
provided by operating activities for the three months ended March 31, 2009 was
$7.7 million and primarily consisted of earnings and $3.8 million provided by
working capital and other activities. The most significant impact on working
capital and other activities consisted of a decrease in unbilled revenue of $4.0
million and an increase in accounts payable of $13.7 million offset by a
decrease in accrued expenses and other liabilities of $10.3
million.
Investing Activities. Cash
provided by investing activities in the three months ended March 31, 2010 of
$191,000 was attributable to the proceeds on sale of marketable securities of
$2.7 million and proceeds on sale of Echo shares of $727,000, offset by
capital expenditures of $1.4 million, a $1,725,000 payment to seller and $59,000
in payments made in connection with acquisitions.
Cash used
in investing activities in the three months ended March 31, 2009 of $6.1 million
was attributable to the $3.8 million in payments made in connection with our
acquisitions completed during the three months ended March 31, 2009 and capital
expenditures of $2.4 million.
Financing Activities. Cash
provided by financing activities in the three months ended March 31, 2010 of
$76,000 was primarily attributable to the $92,000 of borrowings under the
revolving credit facility, offset by $16,000 in principal payments made on
capital leases.
Cash used
in financing activities in the three months ended March 31, 2009 of $477,000 was
primarily attributable to the repayment of $590,000 of borrowings under our
revolving credit facility, offset by $100,000 in tax benefit of stock options
exercised.
16
We have a
$75.0 million revolving credit facility with JPMorgan Chase Bank, N.A that
matures on May 21, 2011. We had $46.5 million in outstanding borrowings under
this facility as of March 31, 2010. Outstanding borrowings under the revolving
credit facility are guaranteed by our material domestic subsidiaries and
interest is payable at the adjusted LIBOR rate or the alternate base rate, as
elected by us. The terms of the revolving credit facility include various
covenants, including covenants that require us to maintain a maximum leverage
ratio and a minimum interest coverage ratio. As of March 31, 2010, we were not
in violation of any of these various covenants. Outstanding borrowings may be
used for general corporate and working capital purposes of the Company and our
subsidiaries in the ordinary course of business, for permitted acquisitions, for
capital expenditures and for restricted payments, including the repurchase of
shares of our common stock, as permitted pursuant to the terms of the
agreement.
Although
we can provide no assurances, we believe that our available cash and cash
equivalents and amounts available under our revolving credit facility should be
sufficient to meet our working capital and operating expenditure requirements
for the foreseeable future. Thereafter, we may find it necessary to obtain
additional equity or debt financing. In the event additional financing is
required, we may not be able to raise it on acceptable terms or at
all.
Off-Balance
Sheet Obligations
We do not
have any off-balance sheet arrangements.
Contractual
Obligations
With the
exception of the contingent consideration in connection with our business
acquisitions discussed in Note 1 in the Notes to the Consolidated Financial
Statements, there have been no material changes outside the normal course of
business in the contractual obligations disclosed in Item 7 to our Annual Report
on Form 10-K for the fiscal year ended December 31, 2009, under the caption
“Contractual Obligations.”
Critical
Accounting Policies and Estimates
As of
March 31, 2010, there were no material changes to the Company’s critical
accounting policies and estimates disclosed in its Form 10-K for the year ended
December 31, 2009.
Recent
Accounting Pronouncements
In
January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair
Value Measurements, that amends existing disclosure requirements under
ASC 820 by adding required disclosures about items transferring into and out of
levels 1 and 2 in the fair value hierarchy; adding separate disclosures about
purchase, sales, issuances, and settlements relative to level 3 measurements;
and clarifying, among other things, the existing fair value disclosures about
the level of disaggregation. This ASU is effective for the first quarter of
2010, except for the requirement to provide level 3 activity of purchases,
sales, issuances, and settlements on a gross basis, which is effective beginning
the first quarter of 2011. Because this standard impacts disclosure requirements
only, its adoption did not have any impact on the Company’s consolidated results
of operations or financial condition.
Forward-Looking
Statements
This
Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of
Financial Condition and Results of Operations, contains words such as “may,”
“will,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “project,”
“estimate” and “objective” or the negative thereof or similar terminology
concerning the Company’s future financial performance, business strategy, plans,
goals and objectives. These expressions are intended to identify forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements include information concerning our possible or
assumed future performance or results of operations and are not guarantees.
While these statements are based on assumptions and judgments that management
has made in light of industry experience as well as perceptions of historical
trends, current conditions, expected future developments and other factors
believed to be appropriate under the circumstances, they are subject to risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different. Some of the factors that would cause
future results to differ from the recent results or those projected in
forward-looking statements include, but are not limited to, the risk factors
described in our Annual Report on Form 10-K for the year ended December 31,
2009.
Additional
Information
We make
our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, other reports and information filed with the SEC and amendments to
those reports available, free of charge, through our Internet website (http://www.inwk.com) as soon
as reasonably practical after we electronically files or furnishes such
materials to the SEC. All of our filings may be read or copied at the SEC’s
Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information
on the operation of the Public Filing Room can be obtained by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet website (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding issuers that file electronically.
17
Commodity
Risk
We are
dependent upon the availability of paper, and paper prices represent a
substantial portion of the cost of our products. The supply and price of paper
depend on a variety of factors over which we have no control, including
environmental and conservation regulations, natural disasters and weather. We
believe a 10% increase in the price of paper would not have a significant effect
on our consolidated statements of income or cash flows, as these costs are
generally passed through to our clients.
Interest
Rate Risk
We have
exposure to changes in interest rates on our revolving credit facility. Interest
is payable at the adjusted LIBOR rate or the alternate base. Assuming our $75.0
million revolving credit facility was fully drawn, a 1.0% increase in the
interest rate would increase our annual interest expense by $750,000. The terms
of the revolving credit facility include various covenants, including covenants
that require us to maintain a maximum leverage ratio and a minimum interest
coverage ratio. Outstanding borrowings may be used for general corporate and
working capital purposes in the ordinary course of business, for permitted
acquisitions, for capital expenditures and for restricted payments, including
the repurchase of shares of our common stock, as permitted pursuant to the terms
of the revolving credit facility.
Our
interest income is sensitive to changes in the general level of US interest
rates, in particular because all of our investments are in cash equivalents and
marketable securities.
Foreign
Currency Risk
A portion
of our sales and earnings are attributable to operations conducted outside of
the US. The US dollar value of sales and earnings of these operations
varies with currency exchange rate fluctuations. We believe a 10% fluctuation in
the currency exchange rate would not have a significant effect on the Company’s
consolidated statements of income or cash flows.
We do not
use derivative financial instruments.
Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of March 31, 2010. The term “disclosure controls and procedures,”
as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of March 31, 2010, our
chief executive officer and chief financial officer concluded that, as of such
date, the Company’s disclosure controls and procedures were effective at the
reasonable assurance level.
No change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) occurred during the first quarter ended March 31, 2010 that has
materially affected or is reasonably likely to materially affect, our internal
control over financial reporting.
PART
II. OTHER INFORMATION
We are
not a party to any legal proceedings that we believe would have a material
adverse effect on our business, financial condition or operating
results.
18
There
have been no material changes in the risk factors described in Item 1A (“Risk
Factors”) of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2009.
Exhibit No
|
|
Description of Exhibit
|
10.1
|
Employment
Agreement dated July 5, 2007 by and between InnerWorkings, Inc. and Jan
Sevcik, as amended.
|
|
10.2
|
Employment
Agreement dated October 1, 2007 by and between InnerWorkings, Inc. and
Jonathan Shean.
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
19
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
INNERWORKINGS,
INC.
|
||
Date:
May 10, 2010
|
By:
|
/s/ Eric
D. Belcher
|
Eric
D. Belcher
Chief
Executive Officer
|
||
Date:
May 10, 2010
|
By:
|
/s/ Joseph
M. Busky
|
Joseph
M. Busky
Chief
Financial
Officer
|
20
EXHIBIT
INDEX
Number
|
|
Description
|
10.1
|
Employment
Agreement dated July 5, 2007 by and between InnerWorkings, Inc. and Jan
Sevcik, as amended.
|
|
10.2
|
Employment
Agreement dated October 1, 2007 by and between InnerWorkings, Inc. and
Jonathan Shean.
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
21