FORM 10-Q
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2009
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number
000-52170
INNERWORKINGS, INC.
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
(State or Other Jurisdiction
of
Incorporation or Organization)
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20-5997364
(I.R.S. Employer
Identification No.)
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600 West Chicago Avenue, Suite 850
Chicago, Illinois 60654
Phone:
(312) 642-3700
(Address (including zip code)
and telephone number
(including area code) of registrants 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 þ No o
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). o Yes o No
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. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a 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 o No þ
As of May 8, 2009, the Registrant had
45,457,640 shares of Common Stock, par value $0.0001 per
share, outstanding.
INNERWORKINGS,
INC.
TABLE OF
CONTENTS
2
PART I.
FINANCIAL INFORMATION
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Item 1.
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Consolidated
Financial Statements
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InnerWorkings,
Inc.
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Three Months Ended March 31,
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2008
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2009
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(Unaudited)
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Revenue
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$
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87,191,586
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$
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94,277,433
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Cost of goods sold
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65,623,360
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71,267,277
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Gross profit
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21,568,226
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23,010,156
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Operating expenses:
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Selling, general, and administrative expenses
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15,050,555
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20,619,116
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Depreciation and amortization
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722,923
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1,495,375
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Income from operations
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5,794,748
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895,665
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Other income (expense):
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Interest income
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405,658
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94,439
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Interest expense
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(442,244
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)
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Other, net
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169,255
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(144,296
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)
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Total other income
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574,913
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(492,101
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)
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Income before taxes
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6,369,661
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403,564
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Income tax expense
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2,511,645
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155,153
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Net income
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3,858,016
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248,411
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Basic earnings per share
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$
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0.08
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$
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0.01
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Diluted earnings per share
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$
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0.08
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$
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0.01
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See accompanying notes.
3
InnerWorkings,
Inc.
(Unaudited)
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December 31,
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March 31,
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2008
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2009
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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4,011,855
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$
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4,911,317
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Accounts receivable, net of allowance for doubtful accounts of
$5,045,059 and $3,829,111, respectively
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73,628,112
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78,245,896
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Unbilled revenue
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27,802,667
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23,769,521
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Inventories
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7,539,870
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7,854,375
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Prepaid expenses
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9,257,086
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10,999,746
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Advances to related parties
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28,283
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27,817
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Deferred income taxes
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1,881,354
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1,191,848
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Other current assets
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6,171,916
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7,414,992
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Total current assets
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130,321,143
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134,415,512
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Property and equipment, net
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8,112,656
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9,556,019
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Intangibles and other assets:
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Goodwill
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68,176,168
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73,833,201
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Intangible assets, net of accumulated amortization of $3,274,425
and $3,721,285, respectively
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20,652,370
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21,039,510
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Auction-rate securities
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13,236,041
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13,989,838
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Deposits
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458,270
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407,035
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Investment
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84,375
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84,375
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Deferred income taxes
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9,664,474
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8,033,822
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Other assets
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3,116,819
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2,310,933
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115,388,517
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119,698,714
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Total assets
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$
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253,822,316
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$
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263,670,245
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable-trade
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$
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54,084,430
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68,758,423
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Advances from related parties
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53,176
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619,156
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Current maturities of capital lease obligations
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123,040
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124,772
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Revolving credit facility
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42,589,679
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41,999,618
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Due to seller
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684,178
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Customer deposits
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6,777,265
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6,880,944
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Other liabilities
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5,656,103
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5,192,673
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Accrued expenses
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9,971,423
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144,722
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Total current liabilities
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119,939,294
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123,720,308
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Capital lease obligations, less current maturities
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144,993
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106,711
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Other long-term liabilities
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4,900,000
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Total liabilities
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120,084,287
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128,727,019
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Stockholders equity:
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Common stock, par value $0.0001 per share, 45,344,448 and
45,457,640 shares were issued and outstanding as of
December 31, 2008 and March 31, 2009, respectively
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453
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454
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Additional paid-in capital
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167,729,745
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168,798,717
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Treasury stock at cost
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(74,307,200
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)
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(74,307,200
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)
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Accumulated other comprehensive income
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816,045
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703,858
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Retained earnings
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39,498,986
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39,747,397
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Total stockholders equity
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133,738,029
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134,943,226
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Total liabilities and stockholders equity
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$
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253,822,316
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$
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263,670,245
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See accompanying notes.
4
InnerWorkings,
Inc.
CONSOLIDATED
STATEMENT OF CASH FLOWS
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Three Months Ended March 31,
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2008
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2009
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(Unaudited)
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Cash flows from operating activities
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Net income
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$
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3,858,016
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$
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248,411
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Deferred income taxes
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1,374,234
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2,320,158
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Noncash stock compensation expense
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574,817
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919,755
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Deferred financing amortization
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52,087
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Depreciation and amortization
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722,923
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1,495,375
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Bad debt provision
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(116,233
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)
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(190,820
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)
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Change in assets, net of acquisitions:
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Accounts receivable
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7,686,475
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(2,182,806
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)
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Inventories
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151,675
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(309,597
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)
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Unbilled revenue
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2,073,354
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4,033,146
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Prepaid expenses and other
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(1,489,315
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)
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(2,811,352
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)
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Change in liabilities, net of acquisitions:
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Accounts payable
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(6,270,953
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)
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13,699,055
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Advances from related parties
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153,189
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566,446
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Customer deposits
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(2,155,908
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)
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103,679
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Income tax payable
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(1,622,497
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)
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(9,007,997
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)
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Accrued expenses and other
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(3,138,132
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)
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(1,282,135
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)
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Net cash provided by operating activities
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1,801,645
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7,653,405
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Cash flows from investing activities
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Purchases of property and equipment
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(1,170,387
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)
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(2,352,813
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)
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Proceeds of marketable securities
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2,371,454
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25,584
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Payments for acquisitions, net of cash acquired
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(1,224,420
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)
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(3,811,551
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)
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Net cash used in investing activities
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(23,353
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)
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(6,138,780
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)
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Cash flows from financing activities
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Principal payments on capital lease obligations
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(10,021
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)
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(36,550
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)
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Repayment of borrowings under revolving credit facility
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(590,061
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)
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Issuance of shares
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122,800
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49,000
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Tax benefit of stock options exercised
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907,351
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100,218
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Net cash provided by (used in) financing activities
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1,020,130
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(477,393
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)
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Effect of exchange rate changes on cash and cash equivalents
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(137,770
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)
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Increase in cash and cash equivalents
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2,798,422
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899,462
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Cash and cash equivalents, beginning of period
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26,716,239
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4,011,855
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Cash and cash equivalents, end of period
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$
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29,514,661
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$
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4,911,317
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See accompanying notes.
5
InnerWorkings,
Inc.
Three Months Ended March 31, 2009
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1.
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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, 2009 are not necessarily indicative of the
results to be expected for the full year of 2009. These
condensed interim consolidated financial statements and notes
should be read in conjunction with the Companys
Consolidated Financial Statements and Notes thereto as of
December 31, 2008 included in the Companys Annual
Report on
Form 10-K
filed with the SEC on March 5, 2009.
Foreign
Currency Translation
The functional currency for the Companys 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.
Recently
Adopted Accounting Pronouncements
In December 2007, the FASB issued SFAS 141(R), Business
Combinations. This standard significantly changes the
accounting for business acquisitions both during the period of
the acquisition and in subsequent periods. Among the more
significant changes in the accounting for acquisitions are the
following:
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Contingent consideration is recorded at fair value as an element
of purchase price with subsequent adjustments recognized in
operations. Contingent consideration was previously accounted
for as a subsequent adjustment of purchase price.
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Subsequent decreases in valuation allowances on acquired
deferred tax assets are recognized in operations after the
measurement period. Such changes were previously considered to
be subsequent changes in consideration and were recorded as
decreases in goodwill.
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Transaction costs are expensed. These costs were previously
treated as costs of the acquisition.
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In April 2009, the FASB issued FASB Staff Position (FSP)
FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies, which amends the accounting in
SFAS 141(R) for assets and liabilities arising from
contingencies in a business combination. The FSP is effective
January 1, 2009, and requires pre-acquisition contingencies
to be recognized at fair value, if fair value can be reasonably
determined during the measurement period. If fair value cannot
be reasonably determined, the FSP requires measurement based on
the recognition and measurement criteria of SFAS 5,
Accounting for Contingencies.
The Company adopted SFAS 141(R) and FSP FAS 141(R)-1
on January 1, 2009 and will account for all business
acquisitions made subsequent to January 1, 2009 in
accordance with these standards.
6
InnerWorkings,
Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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 Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets,
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 2008 analysis performed no impairment charges were
required.
The increase in goodwill for the three months ended
March 31, 2009 is the result of goodwill acquired as a
result of business acquisitions completed during the three
months ended March 31, 2009 of $5,670,518, which includes
goodwill recorded for a contingent earn-out payment of
$4,900,000, offset by a change in net assets acquired of $13,485.
SFAS No. 142 also requires that intangible assets with
finite lives be amortized over their respective estimated useful
lives and reviewed for impairment whenever impairment indicators
exist in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. The
Companys intangible assets consist of customer lists,
noncompete agreements and trade names, which are being amortized
on the straight-line basis over their estimated weighted-average
useful lives of approximately fourteen years, four years and
twelve years, respectively.
The following is a summary of the intangible assets:
|
|
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|
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December 31,
|
|
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March 31,
|
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Weighted-
|
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2008
|
|
|
2009
|
|
|
Average Life
|
|
|
Customer lists
|
|
$
|
19,431,484
|
|
|
$
|
20,265,484
|
|
|
|
14.1 years
|
|
Noncompete agreements
|
|
|
1,027,655
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|
1,027,655
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|
|
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3.9 years
|
|
Trade names
|
|
|
3,467,656
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|
|
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3,467,656
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12.4 years
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|
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|
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|
|
23,926,795
|
|
|
|
24,760,795
|
|
|
|
|
|
Less accumulated amortization
|
|
|
(3,274,425
|
)
|
|
|
(3,721,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
20,652,370
|
|
|
$
|
21,039,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to these intangible assets was
$245,314 and $446,860 for the three months ended March 31,
2008 and 2009, respectively.
The estimated amortization expense for the next five years is as
follows:
|
|
|
|
|
2009
|
|
$
|
1,980,432
|
|
2010
|
|
|
1,925,732
|
|
2011
|
|
|
1,750,096
|
|
2012
|
|
|
1,710,564
|
|
2013
|
|
|
1,698,564
|
|
Thereafter
|
|
|
11,974,122
|
|
|
|
|
|
|
|
|
$
|
21,039,510
|
|
|
|
|
|
|
7
InnerWorkings,
Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Fair
Value of Financial Instruments
In September 2006, the Financial Accounting Standards Board
(FASB) issued FAS 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP)
and expands disclosures about fair value measurements. In
February 2008, the FASB issued FASB Staff Position
No. 157-b,
Effective Date of FASB Statement No. 157
(FSP 157-b), which provides a one-year deferral of the
effective date of FAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or
disclosed in the financial statements at fair value at least
annually. In accordance with this interpretation, the Company
has only adopted FAS 157 with respect to its financial
assets and liabilities that are measured at fair value within
the financial statements as of January 1, 2008. The
adoption of FAS 157 did not have a material impact on the
Companys fair value measurements. The provisions of
FAS 157 have not been applied to non-financial assets and
non-financial liabilities.
In February 2007, the FASB issued FAS 159, The Fair
Value Option for Financial Assets and Financial
Liabilities including an amendment to FASB Statement
No. 115, 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 adopted this statement as of October 1, 2008
and has elected to apply the fair value option to a put option
relating to its auction-rate securities (refer to Note 6
for more information on auction-rate securities). See
Note 5 for additional information on fair value
measurements.
Stock-Based
Compensation
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of FAS 123(R), Share-Based
Payments, using the prospective transition method and
Black-Scholes as the option valuation model. Under the
prospective transition method, the Company continues to account
for non-vested equity awards outstanding at the date of adopting
Statement 123 (R) in the same manner as they had been accounted
for prior to adoption. As a result, under APB No. 25,
compensation expense is based on the difference, if any, on the
grant date between the estimated fair value of the
Companys stock and the exercise price of options to
purchase that stock. The compensation expense is then amortized
over the vesting period of the stock options.
During the three month period ended March 31, 2008 and
2009, the Company issued 207,380 and 94,087 options,
respectively to various employees of the Company. In addition,
during the three month period ended March 31, 2008 and
2009, the Company granted 467,392 and 47,079 common shares of
restricted stock, respectively, to employees. During the three
month period ended March 31, 2008 and 2009, 240,274 and
113,192 options were exercised and restricted common shares
vested, respectively. The Company used the Black-Scholes option
valuation model and the assumptions listed below to determine
the fair value of options granted during the first quarter of
2008 and 2009. The Company recorded $574,817 and $919,755 in
compensation expense for the three month periods ended
March 31, 2008 and 2009, respectively.
All stock-based compensation expense is recorded net of an
estimated forfeiture rate. The forfeiture rate is based upon
historical activity and is analyzed at least quarterly and as
actual forfeitures occur.
The following assumptions were utilized in the valuation for
options granted in 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Dividend yield
|
|
|
%
|
|
|
|
%
|
|
Risk-free interest rate
|
|
|
3.01%-3.54%
|
|
|
|
2.42%
|
|
Expected life
|
|
|
7 years
|
|
|
|
7 years
|
|
Volatility
|
|
|
33.5%
|
|
|
|
33.5%
|
|
8
InnerWorkings,
Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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
share options and the vesting of restricted common shares.
During the three months ended March 31, 2008 and 2009,
798,772 and 2,885,910 options, respectively, were excluded from
the calculation as these options were anti-dilutive. The
computations of basic and diluted earnings per common share for
the three months ended March 31, 2008 and 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,858,016
|
|
|
$
|
248,411
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share-weighted-average shares
|
|
|
48,025,475
|
|
|
|
45,399,786
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Employee stock options and restricted common shares
|
|
|
3,293,951
|
|
|
|
1,634,220
|
|
|
|
|
|
|
|
|
|
|
Denominator for dilutive earnings per share
|
|
|
51,319,426
|
|
|
|
47,034,006
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.08
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.08
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
Accumulated
Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Net income
|
|
$
|
3,858,016
|
|
|
$
|
248,411
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities, net of tax
|
|
|
(469,320
|
)
|
|
|
25,583
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
(137,770
|
)
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
3,388,696
|
|
|
$
|
136,224
|
|
|
|
|
|
|
|
|
|
|
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 Companys Board
of Directors have a direct
and/or
indirect ownership interest in Echo. In May 2008, the Company
sold 500,000 of its shares of common stock in Echo, or 25% of
its holdings, for $4.7 million in net cash to the Company.
The Company recorded a gain on sale of investment of
$4.6 million as the investment was recorded at cost of
$31,250. The shares were purchased by Printworks Series E,
LLC, an affiliate of the Nazarian family and a stockholder of
the Company. In September 2008, the Company sold 150,000 of its
shares of common stock in Echo for $1.5 million in cash to
the Company. The Company recorded a gain on sale of investment
of approximately $1.5 million as the investment was
recorded at a cost of $9,375. The shares were purchased by the
Y&S Nazarian Family Foundation, an affiliate of the
Nazarian family.
9
InnerWorkings,
Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
In June 2006, the Company entered into a supplier rebate program
with Echo, pursuant to which Echo provided the Company with an
annual rebate on all freight expenditures in an amount equal to
5%. In April 2008, the Company amended the terms of the supplier
rebate program, such that it 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 $3,000 and
$4,900 in rebates for the three months ended March 31, 2008
and 2009, respectively.
In the ordinary course, the Company also provides print
procurement services to Echo. The total amount billed for such
print procurement services during the three months ending
March 31, 2008 was approximately $37,000. The Company did
not provide any print procurement services to Echo during the
three months ending March 31, 2009. In addition, Echo has
provided transportation services to the Company. As
consideration for these services, Echo billed the Company
$485,000 and $842,000 for the three months ended March 31,
2008 and 2009, respectively. The net amount payable to Echo at
March 31, 2009 was $591,339.
In November 2008, the Company entered into an agreement with
MediaBank, LLC, pursuant to which it sub-leases a portion of the
Companys office space in Chicago, and pays 29% of the
Companys lease payment and overhead expense relating to
this space. Five members of the Companys Board of
Directors, Eric P. Lefkofsky, John R. Walter, Peter J. Barris,
Jack M. Greenberg and Linda S. Wolf, are also directors of
MediaBank. In addition, a majority of the members of the
Companys Board of Directors have a direct
and/or
indirect ownership interest in MediaBank. MediaBank paid the
Company approximately $67,000 in lease payments for the three
months ended March 31, 2009.
|
|
5.
|
Fair
Value Measurement
|
As discussed in Note 1, Fair Value of Financial
Instruments, the Company adopted Statement 157 on
January 1, 2008 for their financial assets and financial
liabilities. Statement 157 requires enhanced disclosures about
assets and liabilities measured at fair value. The
Companys financial assets primarily relate to their
auction-rate securities.
The Company utilizes the market approach to measure fair value
for its financial assets and liabilities. The market approach
uses prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities.
Statement 157 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 entitys 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 adopted SFAS No. 159, The Fair Value
Option for Financial Assets and Financial-Liabilities, as of
October 1, 2008 and has elected to apply the fair value
option to a put option relating to its auction-rate securities
(refer to Note 6 for more information on auction-rate
securities).
10
InnerWorkings,
Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The Companys 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, 2009. 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 Companys financial
assets and financial liabilities measured at fair value on a
recurring basis and the basis of measurement at March 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Total Fair Value
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
Measurement
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate commercial paper
|
|
$
|
328,270
|
|
|
$
|
|
|
|
$
|
328,270
|
|
|
$
|
|
|
Auction-rate securities(1)
|
|
|
15,824,697
|
|
|
|
|
|
|
|
|
|
|
|
15,824,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,152,967
|
|
|
$
|
|
|
|
$
|
328,270
|
|
|
$
|
15,824,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
328,270
|
|
|
$
|
|
|
|
$
|
328,270
|
|
|
$
|
|
|
Auction-rate securities
|
|
|
13,989,839
|
|
|
|
|
|
|
|
|
|
|
|
13,989,839
|
|
Other assets(1)
|
|
|
1,834,858
|
|
|
|
|
|
|
|
|
|
|
|
1,834,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,152,967
|
|
|
$
|
|
|
|
$
|
328,270
|
|
|
$
|
15,824,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes put option elected for the fair value measurement
option under SFAS No. 159 and classified as
Level 3. |
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, 2008
|
|
$
|
13,236,041
|
|
|
$
|
2,588,656
|
|
|
$
|
15,824,697
|
|
(Losses) gains in investments
|
|
|
753,797
|
|
|
|
(753,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
$
|
13,989,838
|
|
|
$
|
1,834,859
|
|
|
$
|
15,824,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Auction-Rate
Securities
|
At March 31, 2009, the Companys long-term investments
were composed of $13,989,838 in auction-rate securities
(ARS). While the underlying securities generally
have long-term nominal maturities that exceed one year, the
interest rates on these investments reset periodically in
scheduled auctions (generally every 7-35 days). The Company
has the opportunity to sell its investments during such periodic
auctions subject to buyer availability.
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
11
InnerWorkings,
Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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 SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities for the
year-ended December 31, 2008.
The Company has elected the fair value measurement option under
SFAS No. 159, The Fair Value Option for Financial
Assets and Liabilities, for this asset. At March 31,
2009, the Companys ARS portfolio which has a par value of
$15,875,000 was carried at fair value of $13,989,838, while the
related put option having a fair value of $1,834,858. 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, 2009. Refer to
Note 5 for additional information on the fair value of
auction-rate securities and related put option.
|
|
7.
|
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
Companys material domestic subsidiaries. The
Companys 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, 2009, 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 Companys common stock, as
permitted pursuant to the terms of the agreement. As of
March 31, 2009, the Company had outstanding borrowings of
$42.0 million and availability of approximately
$30.0 million under this facility.
|
|
8.
|
Recently
Issued Accounting Pronouncements
|
In April 2009, the FASB issued FASB Staff Position
FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial
Instruments
(FSP 107-1).
FSP 107-1
relates to fair value disclosures in public entity financial
statements for financial instruments that are within the scope
of Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial
Instruments (SFAS 107). This guidance
increases the frequency of those disclosures, requiring public
entities to provide the disclosures on a quarterly basis (rather
than annually). The quarterly disclosures are intended to
provide financial statement users with more timely information
about the effects of current market conditions on an
entitys financial instruments that are not otherwise
reported at fair value.
FSP 107-1
is effective for interim and annual periods ending after
June 15, 2009.
FSP 107-1
must be applied prospectively. The Company does not believe the
adoption of
FSP 107-1
will have a material impact on its consolidated financial
statements.
12
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We are a leading provider of managed 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,
PPM4tm,
create a fully-integrated solution that stores, analyzes and
tracks the production capabilities of our supplier network, as
well as quote and price data for print jobs. As a result, we
believe
PPM4tm
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 our print
jobs with suppliers that are optimally suited to meet the
clients needs at a highly competitive price.
Through our supplier base of over 7,000 suppliers, we offer a
full range of print, fulfillment and logistics services that
allow us to procure printed products on virtually any substrate.
The breadth of our product offerings and services and the depth
of our supplier network enable us to fulfill all of the print
procurement needs of our clients. By leveraging our technology
platform, 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 New York, New Jersey, California,
Hawaii, Michigan, Minnesota, Texas, Pennsylvania, Georgia,
Wisconsin, Missouri, Ohio 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 other attractive markets
outside the United States.
Revenue
We generate revenue through the sale of printed products to our
clients. Our revenue was $94.3 million and
$87.2 million during the three months ended March 31,
2009 and 2008, respectively, an increase of 8.1%. 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, 2009, we had 150 enterprise clients
and, for the three months ended March 31, 2009, we have
served over 3,000 transactional clients. During the three months
ended March 31, 2009, enterprise clients accounted for 65%
of our revenue, while transactional clients accounted for 35% 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.
13
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. We expect these seasonal revenue patterns to continue.
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, 2009 and 2008 was
$23.0 million, or 24.4% of revenue, and $21.6 million,
or 24.7% 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 21.9% and 17.3% for the three months ended March 31,
2009 and 2008, respectively. The increase in selling, general
and administrative expenses as a percentage of revenue is the
result of our 2008 acquisitions, which increased our selling,
general and administrative expenses, combined with sluggish
revenue growth from poor macroeconomic conditions in the first
quarter of 2009.
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 $3.8 million
as of March 31, 2009 from $1.9 million as of
March 31, 2008.
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, 2009 and 2008 was $896,000 and $5.8 million,
respectively.
Comparison
of three months ended March 31, 2009 and 2008
Revenue
Our revenue increased by $7.1 million, or 8.1%, from
$87.2 million during the three months ended March 31,
2008 to $94.3 million during the three months ended
March 31, 2009. The revenue growth reflects an increase in
both enterprise and transactional clients. Our revenue from
enterprise clients increased by $5.8 million, or 10.4%,
from $55.6 million during the three months ended
March 31, 2008 to $61.4 million during the three
months ended
14
March 31, 2009. As of March 31, 2009, we had 150
enterprise clients compared to 121 enterprise clients under
contract as of March 31, 2008. Additionally, revenue from
transactional clients increased by $1.3 million, or 4.2%,
from $31.6 million during the three months ended
March 31, 2008 to $32.9 million during the three
months ended March 31, 2009. The incremental transactional
revenue is largely a result of increasing the number of
experienced sales executives. We increased our number of sales
executives by 52, or 22.4%, from 232 as of March 31, 2008
to 284 as of March 31, 2009.
Our revenue for the three months ended March 31, 2009
includes an organic decline of 19%, which is the result of
growth from new enterprise accounts offset by a decrease in
revenue from our existing customers.
Cost
of goods sold
Our cost of goods sold increased by $5.6 million, or 8.6%,
from $65.6 million during the three months ended
March 31, 2008 to $71.3 million during the three
months ended March 31, 2009. The increase is a result of
the revenue growth during the three months ended March 31,
2009. Our cost of goods sold as a percentage of revenue
increased slightly from 75.3% during the three months ended
March 31, 2008 to 75.6% during the three months ended
March 31, 2009.
Gross
Profit
Our gross profit as a percentage of revenue, which we refer to
as gross margin, decreased from 24.7% during the three months
ended March 31, 2008 to 24.4% during the three months ended
March 31, 2009. The 30 basis point 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
$5.6 million, or 37.0%, from $15.1 million during the
three months ended March 31, 2008 to $20.6 million
during the three months ended March 31, 2009. As a
percentage of revenue, selling, general and administrative
expenses increased from 17.3% for the three months ended
March 31, 2008 to 21.9% for the three months ended
March 31, 2009. The increase in selling, general and
administrative expenses as a percentage of revenue is the result
of our 2008 acquisitions, which increased our selling, general
and administrative expenses, combined with sluggish revenue
growth from poor macroeconomic conditions in the first quarter
of 2009.
Depreciation
and amortization
Depreciation and amortization expense increased by $772,000, or
106.9%, from $723,000 during the three months ended
March 31, 2008 to $1.5 million during the three months
ended March 31, 2009. 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.
The increase in amortization expense is a result of the
amortization of the intangible assets acquired in our 2008
acquisitions.
Income
from operations
Income from operations decreased by $4.9 million, or 84.5%,
from $5.8 million during the three months ended
March 31, 2008 to $896,000 during the three months ended
March 31, 2009. As a percentage of revenue, income from
operations decreased from 6.6% during the three months ended
March 31, 2008 to 1.0% during the three months ended
March 31, 2009. The decrease in income from operations as a
percentage of revenue is a result of a decrease in our gross
profit margin as well as an increase in our selling, general and
administrative expenses and depreciation and amortization
expenses as a percentage of revenue.
15
Other
income and expense
Other expense increased by $1.1 million to $492,000 during
the three months ended March 31, 2009. The increase is due
to a decrease in interest income of $311,000 from $406,000 to
$94,000 for the three months ended March 31, 2008 and 2009,
respectively, and an increase in interest expense of $442,000
for the three months ended March 31, 2009.
Provision
for income taxes
Provision for income taxes decreased by $2.4 million from
$2.5 million during the three months ended March 31,
2008 to $155,000 during the three months ended March 31,
2009. Our effective tax rate was 39.4% and 38.4% for the three
month periods ended March 31, 2008 and 2009, respectively.
Net
income
Net income decreased by $3.6 million, or 93.6%, from
$3.9 million during the three months ended March 31,
2008 to $248,000 during the three months ended March 31,
2009. Net income as a percentage of revenue decreased from 4.4%
during the three months ended March 31, 2008 to 0.3% during
the three months ended March 31, 2009.
Liquidity
and Capital Resources
At March 31, 2009, we had $5.0 million of cash and
cash equivalents and $14.0 million in auction-rate
securities. The auction-rate securities are variable rate debt
instruments, having long-term maturity dates (typically 15 to
40 years), but whose interest rates are reset through an
auction process, most commonly at intervals of seven, 28 and
35 days. In mid-February 2008, liquidity issues in the
global credit markets resulted in the failure of auctions,
involving substantially all of the auction-rate securities we
hold. Substantially all of our auction-rate securities are
backed by pools of student loans guaranteed by the
U.S. Department of Education. 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 of 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 on
July 2, 2012. As a result of this agreement, our
auction-rate securities are classified as long-term investments.
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, 2009 was $7.7 million and
primarily consisted of $3.6 million of non-cash items 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.
Cash provided by operating activities for the three months ended
March 31, 2008 was $1.8 million and primarily
consisted of net income of $3.9 million and
$2.6 million of non-cash items, offset by $4.6 million
used to fund working capital and other activities. The most
significant impact on working capital and other activities
consisted of a decrease in accounts receivable of
$7.7 million resulting from cash collections offset by
decreases in accounts payable of $6.3 million due to early
payments to vendors and accrued expenses and other liabilities
of $4.8 million.
Investing Activities. 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.
Cash used in investing activities in the three months ended
March 31, 2008 of $23,000 was attributable to the proceeds
on sale of marketable securities of $2.4 million, offset by
$1.2 million in payments made in connection with our 2007
acquisitions and capital expenditures of $1.2 million.
16
Financing Activities. 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.
Cash provided by financing activities in the three months ended
March 31, 2008 of $1.0 million was primarily
attributable to a tax benefit of stock options exercised of
$900,000 and the proceeds related to the exercise of stock
options of $123,000.
We have a $75.0 million revolving credit facility with
JPMorgan Chase Bank, N.A that matures on May 21, 2011. As
of March 31, 2009, we had outstanding borrowings of
$42.0 million and availability of approximately $30.0
million under this facility. Outstanding borrowings under the
revolving credit facility are guaranteed by our material
domestic subsidiaries. Our obligations under the revolving
credit facility and our material domestic subsidiaries
guaranty obligations are secured by substantially all of our
respective assets. 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, 2009, 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
revolving credit facility.
We will continue to utilize cash to fund acquisitions of or make
strategic investments in complementary businesses and to expand
our sales force. Although we can provide no assurances, we
believe that our available cash and cash equivalents and 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
As of March 31, 2009, we had the following contractual
obligations:
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|
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Payments Due by Period
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Less than
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1-3
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3-5
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More than
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Total
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1 Year
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Years
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Years
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5 Years
|
|
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|
(In thousands)
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|
Capital lease obligations
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|
251
|
|
|
|
145
|
|
|
|
106
|
|
|
|
|
|
|
|
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Operating lease obligations
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18,191
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|
|
4,453
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|
|
6,940
|
|
|
|
4,471
|
|
|
|
2,327
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|
|
|
|
|
|
|
|
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Total
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$
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18,442
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$
|
4,598
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|
|
$
|
7,046
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|
$
|
4,471
|
|
|
$
|
2,327
|
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|
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This table includes capital lease obligations associated with
the May 2008 etrinsic acquisition. This table does not include
any contingent obligations related to any acquisitions. For
discussion of our 2006 and 2007 acquisitions, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Recent
Developments in the Companys
Form 10-K
for the year ended December 31, 2007. For discussion of our
2008 acquisitions, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Recent Developments in the
Companys
Form 10-K
for the year ended December 31, 2008.
Critical
Accounting Policies and Estimates
As of March 31, 2009, there were no material changes to the
Companys critical accounting policies and estimates
disclosed in its
Form 10-K
for the year ended December 31, 2008.
17
Recent
Accounting Pronouncements
In April 2009, the FASB issued FASB Staff Position
FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial
Instruments
(FSP 107-1).
FSP 107-1
relates to fair value disclosures in public entity financial
statements for financial instruments that are within the scope
of Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial
Instruments (SFAS 107). This guidance
increases the frequency of those disclosures, requiring public
entities to provide the disclosures on a quarterly basis (rather
than just annually). The quarterly disclosures are intended to
provide financial statement users with more timely information
about the effects of current market conditions on an
entitys financial instruments that are not otherwise
reported at fair value.
FSP 107-1
is effective for interim and annual periods ending after
June 15, 2009.
FSP 107-1
must be applied prospectively. We do not believe the adoption of
FSP 107-1
will have a material impact on our consolidated financial
statements.
Forward-Looking
Statements
This Quarterly Report on
Form 10-Q,
including Managements 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 Companys 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 the Companys 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
the Companys 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, 2008.
Additional
Information
The Company makes its 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 its Internet
website
(http://www.inwk.com)
as soon as reasonably practical after it electronically
files or furnishes such materials to the SEC. All of the
Companys filings may be read or copied at the SECs
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.
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Item 3.
|
Quantitative
and Qualitative Disclosure 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 Companys 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 the $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
18
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 U.S. 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 United States. The United
States dollar value of sales and earnings of these operations
varies with currency exchange rate fluctuations.
We do not use derivative financial instruments.
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Item 4.
|
Controls
and Procedures
|
Our management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness
of our disclosure controls and procedures as of March 31,
2009. 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 SECs
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 companys 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, 2009, our chief executive
officer and chief financial officer concluded that, as of such
date, the Companys 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, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting
PART II.
OTHER INFORMATION
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Item 1.
|
Legal
Proceedings
|
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.
There have been no material changes in the risk factors
described in Item 1A (Risk Factors) of our
Annual Report on
Form 10-K
for the year ended December 31, 2008.
19
(a) The following is a list of exhibits filed as part of
this
Form 10-Q:
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|
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.
|
20
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.
Eric D. Belcher
Chief Executive Officer and President
Date: May 11, 2009
Joseph M. Busky
Chief Financial Officer
Date: May 11, 2009
21
EXHIBIT INDEX
|
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|
|
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.
|
22