x
|
Quarterly
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
¨
|
Transition Report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934
|
Delaware
|
20-5997364
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
No.)
|
Large
accelerated filer: ¨
|
Accelerated
filer: x
|
|
Non-accelerated
filer: ¨ (Do not check if
a smaller
reporting
company)
|
Smaller
reporting company ¨
|
Page
|
||||
PART
I. FINANCIAL INFORMATION
|
||||
Item
1.
|
Consolidated
Financial Statements
|
2
|
||
Consolidated
Statements of Income for the three and nine months ended September 30,
2009 and 2010 (Unaudited)
|
2
|
|||
Consolidated
Balance Sheets as of December 31, 2009 and September 30, 2010
(Unaudited)
|
3
|
|||
Consolidated
Statements of Cash Flows for the nine months ended September 30, 2009 and
2010 (Unaudited)
|
4
|
|||
Notes
to Consolidated Financial Statements (Unaudited)
|
5
|
|||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
19
|
||
Item
4.
|
Controls
and Procedures
|
19
|
||
PART
II. OTHER INFORMATION
|
||||
Item
1.
|
Legal
Proceedings
|
21
|
||
Item
1A.
|
Risk
Factors
|
21
|
||
Item
6.
|
Exhibits
|
21
|
||
SIGNATURES
|
22
|
|||
EXHIBIT
INDEX
|
23
|
Item 1.
|
Consolidated
Financial Statements
|
December
31,
|
September
30,
|
|||||||
2009
|
2010
|
|||||||
(Unaudited)
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 2,903,906 | $ | 5,543,845 | ||||
Short-term
investments
|
23,541,199 | 5,557,185 | ||||||
Accounts
receivable, net of allowance for doubtful accounts of $4,634,848 and
$2,829,559, respectively
|
72,565,814 | 90,357,336 | ||||||
Unbilled
revenue
|
20,189,900 | 25,175,058 | ||||||
Inventories
|
8,749,266 | 13,445,081 | ||||||
Prepaid
expenses
|
11,399,560 | 10,124,302 | ||||||
Advances
to related parties
|
36,458 | 72,998 | ||||||
Other
current assets
|
7,355,447 | 8,000,871 | ||||||
Total
current assets
|
146,741,550 | 158,276,676 | ||||||
Property
and equipment, net
|
10,833,712 | 10,420,148 | ||||||
Intangibles
and other assets:
|
||||||||
Goodwill
|
77,905,703 | 93,870,171 | ||||||
Intangible
assets, net of accumulated amortization of $6,802,217 and $8,938,815,
respectively
|
24,364,784 | 22,629,599 | ||||||
Deposits
|
445,575 | 422,996 | ||||||
Deferred
income taxes
|
6,540,933 | 5,627,805 | ||||||
Other
assets
|
325,799 | 760,641 | ||||||
109,582,794 | 123,311,212 | |||||||
Total
assets
|
$ | 267,158,056 | $ | 292,008,036 | ||||
Liabilities
and stockholders' equity
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable-trade
|
$ | 53,915,750 | $ | 66,943,671 | ||||
Advances
from related parties
|
56,940 | 467,491 | ||||||
Current
maturities of capital lease obligations
|
117,582 | 31,609 | ||||||
Due
to seller
|
1,725,000 | 6,033,333 | ||||||
Customer
deposits
|
3,145,329 | 345,218 | ||||||
Other
liabilities
|
7,826,441 | 3,157,115 | ||||||
Deferred
income taxes
|
1,014,372 | 365,332 | ||||||
Accrued
expenses
|
2,832,256 | 5,757,778 | ||||||
Total
current liabilities
|
70,633,670 | 83,101,547 | ||||||
Revolving
credit facility
|
46,384,586 | 49,400,000 | ||||||
Capital
lease obligations, less current maturities
|
19,506 | 4,162 | ||||||
Other
long-term liabilities
|
3,070,278 | 3,811,179 | ||||||
Total
liabilities
|
120,108,040 | 136,316,888 | ||||||
Stockholders'
equity:
|
||||||||
Common
stock, par value $0.0001 per share, 45,628,685 and 45,680,986 shares were
issued and outstanding as of December 31, 2009 and September 30, 2010,
respectively
|
456 | 457 | ||||||
Additional
paid-in capital
|
170,330,891 | 172,595,198 | ||||||
Treasury
stock at cost
|
(74,307,200 | ) | (74,307,200 | ) | ||||
Accumulated
other comprehensive income
|
5,217,425 | 3,918,916 | ||||||
Retained
earnings
|
45,808,444 | 53,483,777 | ||||||
Total
stockholders' equity
|
147,050,016 | 155,691,148 | ||||||
Total
liabilities and stockholders' equity
|
$ | 267,158,056 | $ | 292,008,036 |
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
2009
|
2010
|
2009
|
2010
|
|||||||||||||
Revenue
|
$ | 98,206,204 | $ | 119,130,589 | $ | 292,581,147 | $ | 351,814,421 | ||||||||
Cost
of goods sold
|
73,304,494 | 90,621,581 | 219,929,771 | 267,333,271 | ||||||||||||
Gross
profit
|
24,901,710 | 28,509,008 | 72,651,376 | 84,481,150 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling,
general, and administrative expenses
|
20,034,045 | 23,089,731 | 60,678,251 | 67,266,789 | ||||||||||||
Depreciation
and amortization
|
2,041,801 | 2,259,201 | 5,756,247 | 6,592,045 | ||||||||||||
Income
from operations
|
2,825,864 | 3,160,076 | 6,216,878 | 10,622,316 | ||||||||||||
Other
income (expense):
|
||||||||||||||||
Gain
on sale of investment
|
- | 1,002,078 | 844,097 | 2,528,008 | ||||||||||||
Interest
income
|
140,160 | 17,646 | 291,128 | 150,662 | ||||||||||||
Interest
expense
|
(219,597 | ) | (454,198 | ) | (966,386 | ) | (1,238,594 | ) | ||||||||
Other,
net
|
(39,671 | ) | (81,461 | ) | (257,553 | ) | (214,352 | ) | ||||||||
Total
other income
|
(119,108 | ) | 484,065 | (88,714 | ) | 1,225,724 | ||||||||||
Income
before taxes
|
2,706,756 | 3,644,141 | 6,128,164 | 11,848,040 | ||||||||||||
Income
tax expense
|
977,181 | 1,279,056 | 2,002,902 | 4,172,707 | ||||||||||||
Net
income
|
$ | 1,729,575 | $ | 2,365,085 | $ | 4,125,262 | $ | 7,675,333 | ||||||||
Basic
earnings per share
|
$ | 0.04 | $ | 0.05 | $ | 0.09 | $ | 0.17 | ||||||||
Diluted
earnings per share
|
$ | 0.04 | $ | 0.05 | $ | 0.09 | $ | 0.16 |
Nine
Months Ended September 30,
|
||||||||
2009
|
2010
|
|||||||
(Unaudited)
|
||||||||
Cash
flows from operating activities
|
||||||||
Net
income
|
$ | 4,125,262 | $ | 7,675,333 | ||||
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||
Deferred
income taxes
|
3,403,305 | 1,239,425 | ||||||
Stock
compensation expense
|
1,940,586 | 2,269,540 | ||||||
Depreciation
and amortization
|
5,756,051 | 6,592,045 | ||||||
Deferred
financing amortization
|
148,706 | 189,757 | ||||||
Gain
on sale of investment
|
(844,097 | ) | (2,528,009 | ) | ||||
Bad
debt provision
|
718,810 | 1,811,699 | ||||||
Change
in assets, net of acquisitions:
|
||||||||
Accounts
receivable and unbilled revenue
|
6,425,620 | (25,498,352 | ) | |||||
Inventories
|
(5,543,046 | ) | (3,350,843 | ) | ||||
Prepaid
expenses and other
|
(4,602,037 | ) | 3,546,420 | |||||
Change
in liabilities, net of acquisitions:
|
||||||||
Accounts
payable
|
9,164,018 | 12,494,483 | ||||||
Advances
from related parties
|
(2,512 | ) | 374,011 | |||||
Customer
deposits
|
(3,443,249 | ) | (2,800,111 | ) | ||||
Income
tax payable
|
(9,007,997 | ) | - | |||||
Accrued
expenses and other
|
1,843,510 | 59,262 | ||||||
Net
cash provided by operating activities
|
10,082,930 | 2,074,660 | ||||||
Cash
flows from investing activities
|
||||||||
Purchases
of property and equipment
|
(5,766,386 | ) | (3,880,815 | ) | ||||
Proceeds
from sale of marketable securities
|
850,000 | 2,540,047 | ||||||
Proceeds
from sale of short-term investments
|
204,096 | 13,818,771 | ||||||
Payments
for acquisitions, net of cash acquired
|
(7,889,042 | ) | (11,095,849 | ) | ||||
Net
cash provided by (used in) investing activities
|
(12,601,332 | ) | 1,382,154 | |||||
Cash
flows from financing activities
|
||||||||
Principal
payments on capital lease obligations
|
(109,333 | ) | (99,681 | ) | ||||
Deferred
financing expense
|
- | (633,600 | ) | |||||
Net
repayments from revolving credit facilitiy and short-term
debt
|
(289,679 | ) | (98,107 | ) | ||||
Issuance
of shares
|
98,908 | - | ||||||
Tax
benefit of stock options exercised
|
238,272 | (5,233 | ) | |||||
Net
cash used in financing activities
|
(61,832 | ) | (836,621 | ) | ||||
Effect
of exchange rate changes on cash and cash equivalents
|
(82,876 | ) | 19,746 | |||||
Increase
(decrease) in cash and cash equivalents
|
(2,663,110 | ) | 2,639,939 | |||||
Cash
and cash equivalents, beginning of period
|
4,011,855 | 2,903,906 | ||||||
Cash
and cash equivalents, end of period
|
$ | 1,348,745 | $ | 5,543,845 |
1.
|
Summary of Significant Accounting
Policies
|
2010
|
$
|
6,090,042
|
||
2011
|
13,604,590
|
|||
2012
|
11,070,552
|
|||
2013
|
800,000
|
|||
$
|
31,565,184
|
|
December 31,
2009
|
September 30,
2010
|
Weighted-
Average Life
|
||||||
Customer
lists
|
$
|
26,589,715
|
$
|
27,246,830
|
13.9
years
|
||||
Noncompete
agreements
|
1,077,349
|
1,006,140
|
4.0
years
|
||||||
Trade
names
|
3,467,656
|
3,276,989
|
12.5
years
|
||||||
Patents
|
32,281
|
38,455
|
10.0
years
|
||||||
31,167,001
|
31,568,414
|
||||||||
Less
accumulated amortization
|
(6,802,217
|
)
|
(8,938,815
|
)
|
|||||
Intangible
assets, net
|
$
|
24,364,784
|
$
|
22,629,599
|
2010
|
$
|
794,126
|
||
2011
|
2,877,809
|
|||
2012
|
2,671,199
|
|||
2013
|
2,308,817
|
|||
2014
|
1,998,960
|
|||
Thereafter
|
11,978,688
|
|||
$
|
22,629,599
|
2009
|
2010
|
|||||||
Dividend
yield
|
—
|
%
|
—
|
%
|
||||
Risk-free
interest rate
|
2.42%-3.25
|
%
|
2.0%-3.25
|
%
|
||||
Expected
life
|
7
years
|
7
years
|
||||||
Volatility
|
33.5
|
%
|
47.5
|
%
|
2.
|
Earnings Per
Share
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2009
|
2010
|
2009
|
2010
|
|||||||||||||
Numerator:
|
||||||||||||||||
Net
income
|
$
|
1,729,575
|
$
|
2,365,085
|
$
|
4,125,262
|
$
|
7,675,333
|
||||||||
Denominator:
|
||||||||||||||||
Denominator
for basic earnings per share—weighted-average shares
|
45,580,606
|
45,677,807
|
45,504,137
|
45,663,658
|
||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||
Employee
stock options and restricted common shares
|
1,594,988
|
1,960,185
|
1,618,362
|
1,869,318
|
||||||||||||
Denominator
for dilutive earnings per share
|
47,175,594
|
47,637,992
|
47,122,499
|
47,532,976
|
||||||||||||
Basic
earnings per share
|
$
|
0.04
|
$
|
0.05
|
$
|
0.09
|
$
|
0.17
|
||||||||
Diluted
earnings per share
|
$
|
0.04
|
$
|
0.05
|
$
|
0.09
|
$
|
0.16
|
3.
|
Comprehensive
Income
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
2009
|
2010
|
2009
|
2010
|
|||||||||||||
Net
income
|
$
|
1,729,575
|
$
|
2,365,085
|
$
|
4,125,262
|
$
|
7,675,333
|
||||||||
Other
comprehensive income:
|
||||||||||||||||
Unrealized
gain (loss) on marketable securities, net of tax
|
5,511,295
|
(418,871
|
)
|
5,536,878
|
(1,410,701
|
)
|
||||||||||
Foreign
currency translation adjustment
|
(263,539
|
)
|
354,017
|
(39,944
|
)
|
112,192
|
||||||||||
Total
comprehensive income
|
$
|
6,977,331
|
$
|
2,300,231
|
$
|
9,622,196
|
$
|
6,376,824
|
4.
|
Related
Party
|
5.
|
Valuation of Equity
Investments
|
6.
|
Fair Value
Measurement
|
|
·
|
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.
|
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)
|
$
|
1,661,346
|
$
|
1,661,346
|
$
|
—
|
$
|
—
|
||||||||
Available
for sale securities(2)
|
5,557,185
|
5,557,185
|
—
|
—
|
||||||||||||
Total
assets
|
$
|
7,218,531
|
$
|
7,218,531
|
$
|
—
|
$
|
—
|
(1)
|
Included in cash and cash
equivalents on the balance
sheet.
|
(2)
|
Included in short-term
investments on the balance
sheet.
|
Fair Value Measurements at Reporting Date
Using Significant Unobservable Inputs
(Level 3)
|
||||||||
Auction-
Rate
Securities
|
Put Option
|
|||||||
Balance
at December 31, 2009
|
$
|
13,818,771
|
$
|
1,755,925
|
||||
Change
in the value of securities and put option
|
1,806,229
|
(1,755,925
|
)
|
|||||
Securities
sold during the period
|
(15,625,000
|
)
|
—
|
|||||
Balance
at September 30, 2010
|
$
|
—
|
$
|
—
|
7.
|
Revolving Credit
Facility
|
8.
|
Income
Taxes
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
2009
|
2010
|
2009
|
2010
|
|||||||||||||
Income
before taxes
|
$
|
2,706,756
|
$
|
3,644,141
|
$
|
6,128,164
|
$
|
11,848,040
|
||||||||
Income
tax expense
|
977,181
|
1,279,056
|
2,002,902
|
4,172,707
|
||||||||||||
Effective
tax rate
|
36.1
|
%
|
35.1
|
%
|
32.7
|
%
|
35.2
|
%
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
Item 4.
|
Controls
and Procedures
|
Item 1.
|
Legal
Proceedings
|
Item 6.
|
Exhibits
|
Exhibit No
|
Description of Exhibit
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
INNERWORKINGS,
INC.
|
||
Date:
November 5, 2010
|
By:
|
/s/ Eric D.
Belcher
|
Eric
D. Belcher
Chief
Executive Officer
|
||
Date:
November 5, 2010
|
By:
|
/s/ Joseph M.
Busky
|
Joseph
M. Busky
Chief
Financial Officer
|
Number
|
Description
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|