Attached files
file | filename |
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EX-31.2 - INNERWORKINGS INC | v200634_ex31-2.htm |
EX-32.2 - INNERWORKINGS INC | v200634_ex32-2.htm |
EX-32.1 - INNERWORKINGS INC | v200634_ex32-1.htm |
EX-31.1 - INNERWORKINGS INC | v200634_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
Quarterly
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the quarterly period ended September 30, 2010
¨
|
Transition Report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the transition period
from to
Commission
File Number 000-52170
(Exact
Name of Registrant as Specified in its Charter)
Delaware
|
20-5997364
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
No.)
|
600
West Chicago Avenue, Suite 850
Chicago,
Illinois 60654
Phone:
(312) 642-3700
(Address
(including zip code) and telephone number (including area code) of registrant’s
principal executive offices)
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes: x No: ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes: ¨ No: ¨
Indicate
by check mark whether the Registrant is an a large accelerated filer, an
accelerated filer, or non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check
one:
Large
accelerated filer: ¨
|
Accelerated
filer: x
|
|
Non-accelerated
filer: ¨ (Do not check if
a smaller
reporting
company)
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes: ¨ No: x
As of
November 5, 2010, the Registrant had 45,680,986 shares of Common Stock, par
value $0.0001 per share, outstanding.
TABLE
OF CONTENTS
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
|
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
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 |
See
accompanying notes.
2
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
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 |
See
accompanying notes.
3
InnerWorkings,
Inc.
CONSOLIDATED
STATEMENT OF CASH FLOWS
(Unaudited)
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 |
See
accompanying notes.
4
InnerWorkings,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three
and Nine Months Ended September 30, 2009 and 2010
1.
|
Summary of Significant Accounting
Policies
|
Basis
of Presentation of Interim Financial Statements
The
accompanying unaudited consolidated financial statements of InnerWorkings, Inc.
and subsidiaries (the Company) included herein have been prepared to conform to
the rules and regulations of the Securities and Exchange Commission (SEC) and
accounting principles generally accepted in the United States for interim
financial information. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
all adjustments considered necessary for a fair presentation of the accompanying
unaudited financial statements have been included, and all adjustments are of a
normal and recurring nature. The operating results for the three and nine months
ended September 30, 2010 are not necessarily indicative of the results to be
expected for the full year of 2010. These condensed interim consolidated
financial statements and notes should be read in conjunction with the Company’s
Consolidated Financial Statements and Notes thereto as of December 31, 2009
included in the Company’s Annual Report on Form 10-K filed with the SEC on March
9, 2010.
Foreign
Currency Translation
The
functional currency for the Company’s foreign operations is the local currency.
Assets and liabilities of these operations are translated into U.S. currency at
the rates of exchange at the balance sheet date. The resulting translation
adjustments are included in accumulated other comprehensive income, a separate
component of stockholders’ equity. Income and expense items are translated at
average monthly rates of exchange. Realized gains and losses from foreign
currency transactions were not material.
Accounting
Pronouncements Recently Adopted
In
January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair
Value Measurements, that amends existing disclosure requirements under
ASC 820 by adding required disclosures about items transferring into and out of
levels 1 and 2 in the fair value hierarchy; adding separate disclosures about
purchase, sales, issuances, and settlements relative to level 3 measurements;
and clarifying, among other things, the existing fair value disclosures about
the level of disaggregation. This ASU is effective for the first quarter of
2010, except for the requirement to provide level 3 activity of purchases,
sales, issuances, and settlements on a gross basis, which is effective beginning
the first quarter of 2011. Because this standard impacts disclosure requirements
only, its adoption did not have any impact on the Company’s consolidated results
of operations or financial condition.
Comparability
During the third quarter of 2009, the Company recorded an adjustment
to correct an error related to a revenue accrual for one customer that related
to the 2008 financial statements. The adjustment recorded in the prior year
period consolidated statement of income reduced revenue and gross profit by $5.7
million and $900,000, respectively.
Goodwill
and Other Intangibles
Goodwill
represents the excess of purchase price and related costs over the value
assigned to the net tangible and identifiable intangible assets of businesses
acquired. In accordance with ASC 350, Intangibles – Goodwill and
Other, goodwill is not amortized, but instead is tested for impairment
annually, or more frequently if circumstances indicate a possible impairment may
exist. The Company evaluates the recoverability of goodwill using a two-step
impairment test. For goodwill impairment test purposes, the Company has one
reporting unit. In the first step, the fair value for the Company is compared to
its book value including goodwill. In the case that the fair value is less than
the book value, a second step is performed which compares the implied fair value
of goodwill to the book value of goodwill. The fair value for the goodwill is
determined based on the difference between the fair value of the Company and the
net fair values of the identifiable assets and liabilities. If the implied fair
value of the goodwill is less than the book value, the difference is recognized
as an impairment. Absent any interim indicators of impairment, the Company has
elected to test for goodwill impairment during the fourth quarter of each year,
and as a result of the 2009 analysis performed, no impairment charges were
required.
5
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
The
increase in goodwill for the nine months ended September 30, 2010 is the result
of earn-out payments made or accrued less goodwill already recognized as of
December 31, 2009 of $13,134,419
and goodwill acquired as a result of business acquisitions completed during the
nine months ended September 30, 2010 of $3,002,929. The
increases were offset by $172,880 of foreign exchange effects, purchase price
adjustments and purchase price allocation adjustments.
In
connection with certain of the Company’s acquisitions, contingent consideration
is payable in cash upon the achievement of certain performance measures over
future periods. For acquisitions prior to December 31, 2008, contingent
consideration payments will be recorded as additional purchase price. The
Company paid $2,972,014 and $5,579,514 related to these agreements in the three
and nine month periods ended September 30, 2010, respectively. Total remaining
potential contingent payments under these agreements amount to $27,345,000 as of
September 30, 2010. For the acquisitions occurring subsequent to January 1,
2009, the Company has estimated and recorded potential contingent consideration
as an increase in purchase price. This amount is $4,220,184, of which $3,811,179
is included in other long-term liabilities on the balance
sheet. Pursuant to the adoption of ASC Topic 805 effective January 1,
2009, any changes to the contingent consideration obligation will be recorded in
operating income. The Company recorded a reduction of $792,807 and $1,888,540 to
the contingent consideration obligation as a result of reductions to forecasted
financial performance for the three and nine month periods ended September 30,
2010, respectively.
As of
September 30, 2010, the potential contingent payments are payable in the years
as follows:
2010
|
$
|
6,090,042
|
||
2011
|
13,604,590
|
|||
2012
|
11,070,552
|
|||
2013
|
800,000
|
|||
$
|
31,565,184
|
In
accordance with ASC 350,
Intangibles – Goodwill and Other, the Company amortizes its intangible
assets with finite lives over their respective estimated useful lives and
reviews for impairment whenever impairment indicators exist. The Company’s
intangible assets consist of customer lists, noncompete agreements, trade names
and patents. The Company’s customer lists, which have an estimated
weighted-average useful life of fourteen years, are being amortized using the
economic useful life method. The Company’s noncompete agreements, trade names
and patents are being amortized on the straight-line basis over their estimated
weighted-average useful lives of approximately four years, thirteen years and
ten years, respectively.
The
following is a summary of the intangible assets:
|
December 31,
2009
|
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
|
6
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
The
Company recorded amortization expense related to these intangible assets, net
of foreign exchange effects, of $789,039 and $2,271,299 for the three and
nine month periods ended September 30, 2010, respectively, and $869,621
and $2,474,233 for the three and nine month periods ended September 30, 2009,
respectively.
As of
September 30, 2010, the estimated future amortization expense is as
follows:
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
|
Fair
Value of Financial Instruments
The
Company accounts for its financial assets and liabilities that are measured at
fair value within the financial statements in accordance with ASC 820, Fair Value Measurements and
Disclosure (ASC 820). ASC 820 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles (GAAP) and
expands disclosures about fair value measurements. In accordance with this
interpretation, the Company has only applied ASC 820 with respect to its
financial assets and liabilities that are measured at fair value within the
financial statements. The Company’s investments in cash equivalents,
auction-rate securities and available-for-sale securities are carried at fair
value. See Notes 5 and 6 for additional information on fair value
measurements.
Stock-Based
Compensation
The Company accounts
for nonvested equity awards in accordance with ASC 718, Compensation Stock
Compensation. Compensation expense is measured using fair value methods
and is then amortized over the vesting period of the stock options. All
stock-based compensation expense is recorded net of an estimated forfeiture
rate. The forfeiture rate is based upon historical activity and is analyzed
annually and as actual forfeitures occur.
During
the nine month periods ended September 30, 2010 and 2009, the Company issued
332,877 and 177,872 options, respectively, to various employees of the Company.
In addition, during the nine month periods ended September 30, 2010 and 2009,
the Company granted 569,181 and 78,053 restricted common shares, respectively,
to employees. During
the nine month periods ended September 30, 2010 and 2009, a total of 52,301 and
266,287 of stock options were exercised and restricted common shares vested,
respectively. During the three month periods ended September 30, 2010
and 2009, a total of 20,439 and 55,339 stock options were exercised and
restricted common shares vested, respectively. Stock-based compensation
expense of $2,269,540 and $1,940,586 was recorded for the nine month periods
ended September 30, 2010 and 2009, respectively. The Company uses the
Black-Scholes valuation model with the assumptions listed
below.
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
|
%
|
7
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
2.
|
Earnings Per
Share
|
Basic
earnings per common share is calculated by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share is
calculated by dividing net income by the weighted average shares outstanding
plus share equivalents that would arise from the exercise of stock options and
vesting of restricted common shares. During the three and nine months ended
September 30, 2010, respectively, 1,764,421 and 1,858,508 options and restricted
common shares were excluded from the calculation as these options and restricted
common shares were anti-dilutive. During the three and nine months ended
September 30, 2009, respectively, 2,914,171 and 3,013,961 options and restricted
common shares were excluded from the calculation as these options and restricted
common shares were anti-dilutive. The computations of basic and
diluted earnings per common share for the three and nine months ended September
30, 2009 and 2010 are as follows:
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
|
8
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
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
|
Investment
in Echo Global Logistics, Inc.
In
February 2005, the Company acquired 2,000,000 shares of common stock of Echo
Global Logistics, Inc. (Echo), a technology enabled transportation and logistics
business process outsourcing firm, for $125,000. Echo is a related party to the
Company as several of the members of the Company’s Board of Directors have a
direct and/or indirect ownership interest in Echo.
On
September 25, 2009, Echo completed a one-for-two reverse stock split of all
outstanding shares of its capital stock and immediately following, recapitalized
all outstanding shares into newly issued shares of common stock on approximately
a one-for-one basis. Echo recapitalized its outstanding capital stock in
connection with its initial public offering. At December 31, 2009,
the Company owned 627,778 shares of Echo’s common stock after the effects of the
one-for-two reverse stock split and sales during the prior periods.
During
the three months ended September 30, 2010, the Company sold 77,603 of its shares
of Echo common stock for $1,006,929 and recorded a gain on sale of investment of
$1,002,079. During the nine months ended September 30, 2010, the
Company sold 192,603 of its shares of Echo common stock for $2,540,046
and recorded a gain on sale of investment of $2,528,008. Beginning
September 30, 2009, the Company has classified this investment as “available for
sale” and has recorded it at fair value, which is determined based on quoted
market prices (refer to Note 5 for additional information on these
securities). The gain on sale of investment is included in
other income. The Company’s investment in Echo was recorded at cost
prior to the completion of Echo’s initial public offering
Agreements
and Services with Related Parties
In the
ordinary course of business, the Company provides print procurement services to
Echo. The total amount billed for such print procurement services during the
three and nine months ended September 30, 2010 was approximately $17,000 and
$40,000, respectively. For the three and nine months ended September
30, 2009, the Company billed Echo approximately $10,000 and $41,000
respectively. In addition, Echo has provided transportation services
to the Company. As consideration for these services, Echo billed the Company
approximately $2.3 million and $5.5 million for the three and nine months ended
September 30, 2010, respectively. For the three and nine months ended
September 30, 2009, Echo billed the Company approximately $235,000 and $1.9
million, respectively. The net amount payable to Echo at September
30, 2010 was $394,493.
9
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
The
Company has a supplier rebate program with Echo pursuant to which the Company
receives an annual rebate on all freight expenditures in an amount equal to 3%,
plus an additional 2% if paid within 15 days. Under the supplier rebate program,
the Company received approximately $7,700 and $23,700 in rebates for the three
and nine months ended September 30, 2010, respectively, and approximately $3,800
and $15,000 in rebates for the three and nine months ended September 30, 2009,
respectively.
In April
2010, the Company entered into an agreement with Echo pursuant to which it
sub-leases a portion of the Company’s office space in Chicago, and pays $12,000
per month of the Company’s lease payment and overhead expenses related to the
space. Echo paid the Company $36,000 and $72,000 under this agreement for the
three and nine months ended September 30, 2010, respectively.
In August
2009, the Company entered into an agreement with Groupon pursuant to which it
sub-leases a portion of the Company’s office space in Chicago, and pays $18,000
per month of the Company’s lease payment and overhead expenses related to the
space. Three members of the Company’s Board of Directors, Eric P. Lefkofsky,
John R. Walter and Peter J. Barris, are also directors of Groupon. In addition,
these members have a direct and/or indirect ownership interest in Groupon.
Groupon paid the Company $54,000 under this agreement for the three months ended
March 31, 2010. The agreement was terminated on March 31,
2010.
During
the quarter, the Company entered into an agreement with Groupon related to
corporate procurement cards. The agreement will allow Groupon to obtain
corporate procurement cards under the Company’s existing credit arrangement.
Under the agreement, the Company will charge an annual commitment fee of
$64,000.
5.
|
Valuation of Equity
Investments
|
As
discussed in Note 1, Fair Value of Financial Instruments, the Company has
applied ASC 820, Fair Value
Measurement and Disclosure (ASC 820), to its financial assets and
liabilities as of January 1, 2008. At September 30, 2010, the Company’s
financial assets consist of available-for-sale securities and are included in
short-term investments.
The
Company has classified its investment in Echo Global Logistics (Echo) as
“available for sale” in accordance with ASC 320, Investments – Debt and Equity
Securities in connection with Echo’s initial public offering. The
investment is stated at fair value based on market prices, with any unrealized
gains and losses included within Other Comprehensive Income. Any realized gains
and losses and interest and dividends will be included in other income. For
the three and nine month periods ended September 30, 2010, the Company realized
$1,002,078 and $2,528,008, respectively, in other income related to its sale of
Echo common stock. See Note 4 for additional information on the sale of these
securities. At September 30, 2010, the Company’s investment in Echo, which
has a cost basis of $66,435, was carried at fair value of $5,557,185. The
unrealized gain of $5,490,750 was included in other comprehensive income, net of
tax of $1,931,845.
6.
|
Fair Value
Measurement
|
ASC 820
includes a fair value hierarchy that is intended to increase consistency and
comparability in fair value measurements and related disclosures. The fair value
hierarchy is based on observable or unobservable inputs to valuation techniques
that are used to measure fair value. Observable inputs reflect assumptions
market participants would use in pricing an asset or liability based on market
data obtained from independent sources while unobservable inputs reflect a
reporting entity’s pricing based upon its own market assumptions.
The fair
value hierarchy consists of the following three levels:
|
·
|
Level
1: Inputs are quoted
prices in active markets for identical assets or
liabilities.
|
|
·
|
Level
2: Inputs are quoted
prices for similar assets or liabilities in an active market, quoted
prices for identical or similar assets or liabilities in markets that are
not active, and inputs other than quoted prices that are observable and
market-corroborated inputs, which are derived principally from or
corroborated by observable market
data.
|
|
·
|
Level
3: Inputs that are
derived from valuation techniques in which one or more significant inputs
or value drivers are
unobservable.
|
10
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
The
following table sets forth the Company’s financial assets and financial
liabilities measured at fair value on a recurring basis and the basis of
measurement at September 30, 2010:
Total Fair Value
Measurement
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable Inputs
(Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
Money
market funds(1)
|
$
|
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.
|
Prior
to July 2010, the Company’s short-term investments included auction rate
securities and the related put option. These assets were its only
Level 3 assets. The fair values of these securities and related put option were
estimated utilizing a discounted cash flow analysis. This analysis considered,
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.
In July
2010, the Company sold its remaining auction-rate securities, which had a par
value of $5,425,000, and received proceeds of $5,374,696 related to the
redemption of these auction rate securities and settlement of the put
option.
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
|
|||||||
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
|
$
|
—
|
$
|
—
|
11
InnerWorkings,
Inc.
Notes
to Consolidated Financial Statements (Unaudited)—(Continued)
7.
|
Revolving Credit
Facility
|
On August
2, 2010, the Company entered into a new Credit Agreement with Bank of America,
N.A. that matures on August 2, 2014. The new agreement replaces the Company’s
previous credit agreement with JPMorgan Chase Bank N.A. and provides for a
senior secured revolving credit facility in an initial aggregate principal
amount of up to $100.0 million. Outstanding borrowings under the revolving
credit facility are guaranteed by the Company’s material domestic subsidiaries.
The Company’s obligations under the Credit Agreement and such domestic
subsidiaries’ guaranty obligations are secured by substantially all of their
respective assets. Interest is payable at the adjusted LIBOR 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, a minimum interest coverage ratio and a
minimum net worth. As of September 30, 2010, the Company was not in violation of
any of these various covenants. The borrowings may be used for general corporate
and working capital purposes of the Company and its subsidiaries in the ordinary
course of business, for permitted acquisitions, for capital expenditures and for
restricted payments, including the repurchase of shares of the Company’s common
stock, as permitted pursuant to the terms of the agreement. The
Company incurred $633,600 in financing costs associated with this agreement.
As of
September 30, 2010, the Company had outstanding borrowings of $49.4 million
under this facility.
8.
|
Income
Taxes
|
The
following table shows the Company’s effective income tax rate for the three and
nine months ended September 30, 2009 and 2010:
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
|
%
|
The
Company’s effective tax rate decreased from 36.1% to 35.1% and increased from
32.7% to 35.2% for the three and nine months ended September 30, 2009 and 2010,
respectively. The decrease in the effective tax rate for the three month period
ended September 30, 2010 is the result of a change in the Company’s mixture of
income between its United States and International operations. The
increase in the effective tax rate for the nine month period ended September 30,
2010 is due to a reduction in the research and development (R&D) tax credit
taken during the nine month period ended September 30, 2010. The Company
recognized a tax credit of approximately $528,000 and $249,000 for the nine
months ended September 30, 2009 and 2010, respectively.
12
Overview
We are a
leading provider of print and promotional procurement solutions to corporate
clients across a wide range of industries. We combine the talent of our
employees with our proprietary technology, extensive supplier base and domain
expertise to procure, manage and deliver printed products as part of a
comprehensive outsourced enterprise solution. Our technology is designed to
capitalize on excess manufacturing capacity and other inefficiencies in the
traditional print supply chain to obtain favorable pricing and to deliver
high-quality products and services for our clients.
Our
proprietary software applications and database, PPM4™, create a fully-integrated
solution that stores, analyzes and tracks the production capabilities of our
supplier network, as well as quote and price data for each bid we receive and
print job we execute. As a result, we believe PPM4™ contains one of the largest
independent repositories of equipment profiles and price data for print
suppliers in the United States. We leverage our technology to match each print
job with the supplier that is optimally suited to meet the client’s needs at a
highly competitive price. Our procurement managers use PPM4™ to manage the print
procurement process from end-to-end.
Through
our supplier base of over 8,000 suppliers, we offer a full range of print,
fulfillment and logistics services that allows us to procure printed products on
virtually any substrate. The breadth of our product offerings and services and
the depth of our supplier network enable us to fulfill all of the print
procurement needs of our clients. By leveraging our technology platform, our
clients are able to reduce overhead costs, redeploy internal resources and
obtain favorable pricing and service terms. In addition, our ability to track
individual transactions and provide customized reports detailing print
procurement activity on an enterprise-wide basis provides our clients with
greater visibility and control of their print expenditures.
We
maintain sales offices in Illinois, New York, New Jersey, California, Hawaii,
Michigan, Minnesota, Ohio, Texas, Pennsylvania, Georgia, Wisconsin, Missouri and
the United Kingdom. We believe the opportunity exists to expand our business
into new geographic markets. Our objective is to continue to increase our sales
in the major print markets in the United States and Europe. We intend to hire or
acquire more account executives within close proximity to these large markets.
In addition, given that the print industry is a global business, over time we
intend to evaluate opportunities to access attractive markets outside the United
States and Europe.
Revenue
We
generate revenue through the sale of printed products to our clients. Our
revenue was $351.8 million and $292.6 million during the nine months ended
September 30, 2010 and 2009, respectively. Our revenue is generated from two
different types of clients: enterprise and transactional. Enterprise jobs
usually involve higher dollar amounts and volume than transactional jobs. We
categorize a client as an enterprise client if we have a contract with the
client for the provision of printing services on a recurring basis; if the
client has signed an open-ended purchase order, or a series of related purchase
orders; or if the client has enrolled in our e-stores program, which enables the
client to make online purchases of printing services on a recurring basis. We
categorize all other clients as transactional. We enter into contracts with our
enterprise clients to provide some or a substantial portion of their printed
products on a recurring basis. Our contracts with enterprise clients generally
have an open-ended term subject to termination by either party upon prior notice
ranging from 90 days to twelve months. Several of our larger enterprise clients
have outsourced substantially all of their recurring print needs to us. We
provide printed products to our transactional clients on an order-by-order
basis. As of September 30, 2010, we had 190 enterprise
clients. During the nine months ended September 30, 2010, enterprise
clients accounted for 71% of our revenue, while transactional clients accounted
for 29% of our revenue
Our
revenue consists of the prices paid by our clients for printed products. These
prices, in turn, reflect the amounts charged to us by our suppliers plus our
gross profit. Our gross profit margin, in the case of some of our enterprise
clients, is fixed by contract or, in the case of transactional clients, is
negotiated on a job-by-job basis. Once either type of client accepts
our pricing terms, the selling price is established and we procure the product
for our own account in order to re-sell it to the client. We take full title and
risk of loss for the product upon shipment. The finished product is typically
shipped directly from the supplier to a destination specified by the client.
Upon shipment, our supplier invoices us for its production costs and we invoice
our client.
13
Our
revenue from enterprise clients tends to generate lower gross profit margins
than our revenue from transactional clients because the gross profit margins
established in our contracts with large enterprise clients are generally lower
than the gross profit margins we typically realize in our transactional
business.
The print
industry has historically been subject to seasonal sales fluctuations because a
substantial number of print orders are placed for the year-end holiday season.
We have historically experienced seasonal client buying patterns with a higher
percentage of our revenue being earned in our third and fourth
quarters. However, as a result of the recent addition of new
enterprise accounts that are expected to generate revenue concentrated during
the first half of the year, we expect to alter this historical seasonality such
that revenue will be more consistent across the quarters.
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 nine months ended September 30,
2010 and 2009 was $84.5 million, or 24.0% of revenue, and $72.7 million, or
24.8% of revenue, respectively. With the recent mix of enterprise and
transactional revenue, we expect our gross profit margins for the remainder of
the year to be consistent with the first nine months.
Operating
Expenses and Income from Operations
Our
selling, general and administrative expenses consist of commissions paid to our
account executives, compensation costs for our management team and procurement
managers as well as compensation costs for our finance and support employees,
public company expenses, corporate systems, legal and accounting, facilities and
travel and entertainment expenses. Selling, general and administrative expenses
as a percentage of revenue were 19.1% and 20.7% for the nine months ended
September 30, 2010 and 2009, respectively.
We accrue
for commissions when we recognize the related revenue. Some of our account
executives receive a monthly draw to provide them with a more consistent income
stream. The cash paid to our account executives in advance of commissions earned
is reflected as a prepaid expense on our balance sheet. As our account
executives earn commissions, a portion of their commission payment is withheld
and offset against their prepaid commission balance, if any. Our prepaid
commission balance, net of accrued earned commissions not yet
paid, remained constant at $4.3 million as of September 30, 2010 and
September 30, 2009.
We agree
to provide our clients with printed products that conform to the industry
standard of a “commercially reasonable quality,” and our suppliers in turn agree
to provide us with products of the same quality. In addition, the quotes we
provide our clients include customary industry terms and conditions that limit
the amount of our liability for product defects. Product defects have not had a
material adverse effect on our results of operations.
Our
income from operations for the nine months ended September 30, 2010 and 2009 was
$10.6 million and $6.2 million, respectively.
Comparison
of three months ended September 30, 2010 and 2009
Revenue
Our
revenue increased by $20.9 million, or 21.3%, from $98.2 million during the
three months ended September 30, 2009 to $119.1 million during the three months
ended September 30, 2010. Excluding the one time correction of an error
related to a revenue accrual for one customer recorded during the third quarter
of 2009, our revenue increased by $15.2 million, or 14.6%. See
Note 1 to our consolidated financial statements, Comparability, for more
information. The revenue growth reflects an increase in the number of enterprise
clients. Our revenue from enterprise clients increased by $21.9 million, or
34.5%, from $63.4 million during the three months ended September 30, 2009 to
$85.3 million during the three months ended September 30, 2010. As of September
30, 2010, we had 190 enterprise clients compared to 166 enterprise clients
under contract as of September 30, 2009.
14
Cost
of goods sold
Our cost
of goods sold increased by $17.3 million, or 23.6%, from $73.3 million during
the three months ended September 30, 2009 to $90.6 million during the three
months ended September 30, 2010. The increase is a result of the revenue growth
during the three months ended September 30, 2010. Our cost of goods sold as a
percentage of revenue increased slightly from 74.6% during the three months
ended September 30, 2009 to 76.1% during the three months ended September 30,
2010.
Gross
Profit
Our gross
profit as a percentage of revenue, which we refer to as gross margin, decreased
from 25.4% during the three months ended September 30, 2009 to 23.9% during the
three months ended September 30, 2010. Excluding the one time correction of
an error related to a revenue accrual for one customer recorded during the third
quarter of 2009, our gross margin decreased from 24.8% during the three months
ended September 30, 2009 to 23.9% for the three months ended September 30,
2010. See Note 1 to our consolidated financial statements, Comparability,
for more information. The decrease is primarily the result of a higher
concentration of our business coming from enterprise clients, which generate
lower gross margins.
Selling,
general and administrative expenses
Selling,
general and administrative expenses increased by $3.1 million, or 15.3%, from
$20.0 million during the three months ended September 30, 2009 to $23.1 million
during the three months ended September 30, 2010. As a percentage of revenue,
selling, general and administrative expenses decreased from 20.4% for the three
months ended September 30, 2009 to 19.4% for the three months ended September
30, 2010. The increase in selling, general and administrative expenses is
primarily due to incremental sales commission and investment in selling expense
for new strategic growth initiatives. The decrease in selling,
general and administrative expenses as a percentage of revenue is primarily the
result of increased leverage from higher revenue.
Depreciation
and amortization
Depreciation
and amortization expense increased by $217,000, or 10.6%, from $2.0 million
during the three months ended September 30, 2009 to $2.2 million during the
three months ended September 30, 2010. The increase in depreciation
expense is primarily attributable to additions of computer hardware and
software, equipment and furniture and fixtures as well as amortization of the
capitalized costs of internal use software.
Income
from operations
Income
from operations increased by $334,000, or 11.8%, from $2.8 million during the
three months ended September 30, 2009 to $3.2 million during the three months
ended September 30, 2010. As a percentage of revenue, income from operations
decreased from 2.9% during the three months ended September 30, 2009 to 2.7%
during the three months ended September 30, 2010.
Other
income and expense
Other
income increased by $603,000, or 506.4%, from other expense of $119,108 for the
three months ended September 30, 2009 to other income of $484,000 during the
three months ended September 30, 2010. The increase is the result of the sale of
Echo shares during the three months ended September 30, 2010, which resulted in
a gain of $1.0 million. We did not sell any Echo shares during the
three months ended September 30, 2009.
Income
tax expense
Income
tax expense increased by $302,000 from $977,000 during the three months ended
September 30, 2009 to $1.3 million during the three months ended September 30,
2010. Our effective tax rate was 36.1% and 35.1% for the three month periods
ended September 30, 2009 and 2010, respectively. The decrease in the effective
tax rate for the three month period ended September 30, 2010 is the result of a
change in the mixture of income between our United States and International
operations.
15
Net
income
Net
income increased by $636,000, or 36.7%, from $1.7 million during the three
months ended September 30, 2009 to $2.4 million during the three months ended
September 30, 2010. Net income as a percentage of revenue increased from 1.8%
during the three months ended September 30, 2009 to 2.0% during the three months
ended September 30, 2010.
Comparison
of nine months ended September 30, 2010 and 2009
Revenue
Our
revenue increased by $59.2 million, or 20.2%, from $292.6 million during the
nine months ended September 30, 2009 to $351.8 million during the nine months
ended September 30, 2010. Excluding the one time correction of an error
related to a revenue accrual for one customer recorded during the third quarter
of 2009, our revenue increased by $53.5 million, or 17.9%. See Note 1 to our
consolidated financial statements, Comparability, for more information. Our
revenue from enterprise clients increased by $60.9 million, or 32.2%, from
$189.3 million during the nine months ended September 30, 2009 to $250.2 million
during the nine months ended September 30, 2010. As of September 30, 2010 we
had 190 enterprise clients compared to 166 enterprise clients as of
September 30, 2009. Revenue from transactional clients decreased by $1.6
million, or 1.6%, from $103.2 million during the nine months ended September 30,
2009 to $101.6 million during the nine months ended September 30,
2010.
Cost
of goods sold
Our cost
of goods sold increased by $47.4 million, or 21.6%, from $219.9 million during
the nine months ended September 30, 2009 to $267.3 million during the nine
months ended September 30, 2010. The increase reflects the revenue growth during
the nine months ended September 30, 2010. Our cost of goods sold as a percentage
of revenue increased slightly from 75.2% during the nine months ended September
30, 2009 to 76.0% during the nine months ended September 30, 2010.
Gross
Profit
Our gross
profit as a percentage of revenue, which we refer to as gross margin, decreased
from 24.8% during the nine months ended September 30, 2009 to 24.0% during the
nine months ended September 30, 2010. Excluding the one time correction of
an error related to a revenue accrual for one customer recorded during the third
quarter of 2009, our gross margin decreased from 24.7% during the nine months
ended September 30, 2009 to 24.0% for the nine months ended September 30, 2010.
See Note 1 to our consolidated financial statements, Comparability, for more
information. The decrease is primarily the result of a higher concentration
of our business coming from enterprise clients, which generate lower gross
margins.
Selling,
general and administrative expenses
Selling,
general and administrative expenses increased by $6.6 million, or 10.9%, from
$60.7 million during the nine months ended September 30, 2009 to $67.3 million
during the nine months ended September 30, 2010. As a percentage of revenue,
selling, general and administrative expenses decreased from 20.7% for the nine
months ended September 30, 2009 to 19.1% for the nine months ended September 30,
2010. The increase in selling, general and administrative expenses is primarily
due to incremental sales commission, cost of procurement staff to secure
new enterprise accounts and increases in bad debt reserve, offset by changes to
the contingent consideration obligation related to acquisitions made subsequent
to December 31, 2008. The decrease in selling, general and administrative
expenses as a percentage of revenue is primarily the result of increased
leverage from higher revenue.
Depreciation
and amortization
Depreciation
and amortization expense increased by $836,000, or 14.5%, from $5.8 million
during the nine months ended September 30, 2009 to $6.6 million during the nine
months ended September 30, 2010. The increase in depreciation expense is
primarily attributable to additions of computer hardware and software, equipment
and furniture and fixtures as well as amortization of the capitalized costs of
internal use software.
Income
from operations
Income
from operations increased by $4.4 million, or 70.9%, from $6.2 million during
the nine months ended September 30, 2009 to $10.6 million during the nine months
ended September 30, 2010. As a percentage of revenue, income from operations
increased from 2.1% during the nine months ended September 30, 2009 to 3.0%
during the nine months ended September 30, 2010. The increase in income from
operations as a percentage of revenue is a result of a decrease in our selling,
general and administrative expenses as a percentage of revenue.
Other
income and expense
Other
income and expense increased by $1.3 million from $88,000 other expense during
the nine months ended September 30, 2009 to $1.2 million other income during the
nine months ended September 30, 2010. During both periods, we sold shares of
Echo common stock. The increase is due to a larger gain on sale of Echo shares
during the nine months ended September 30, 2010.
16
Income
tax expense
Income
tax expense increased by $2.2 million from $2.0 million during the nine months
ended September 30, 2009 to $4.2 million during the nine months ended September
30, 2010. Our effective tax rate was 32.7% and 35.2% for the nine month periods
ended September 30, 2009 and 2010, respectively. The increase in the effective
tax rate for the nine month period ended September 30, 2010 is due to a
reduction in the research and development tax credit taken during the nine
months period ended September 30, 2010.
Net
income
Net
income increased by $3.6 million, or 86.1%, from $4.1 million during the nine
months ended September 30, 2009 to $7.7 million during the nine months ended
September 30, 2010. Net income as a percentage of revenue increased from 1.4%
during the nine months ended September 30, 2009 to 2.2% during the nine months
ended September 30, 2010. The increase in net income as a percentage of revenue
is a result of a decrease in our selling, general and administrative expenses as
a percentage of revenue.
Liquidity
and Capital Resources
At
September 30, 2010, we had $5.5 million of cash and cash equivalents and $5.6
million in available-for-sale securities.
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 nine months ended September 30, 2010 was $2.1 million and
primarily consisted of net income of $7.7 million and $9.6 million of
non-cash items, offset by $15.2 million used by working capital and other
activities. The most significant impact on working capital and other activities
consisted of an increase in accounts receivable and unbilled revenue of $25.5
million, offset by an increase in accounts payable of $12.5
million.
Cash
provided by operating activities for the nine months ended September 30, 2009
was $10.1 million and primarily consisted of net income of $4.1 million
and $11.1 million of non-cash items, offset by $5.2 million used by working
capital and other activities. The most significant impact on working capital and
other activities consisted of an increase in accounts receivable and unbilled
revenue of $6.4 million and increase in accounts payable of $9.2 million, offset
by a decrease in customer deposits of $3.4 million, decrease in inventories of
$5.5 million and decrease in income tax payable of $9.0 million.
Investing Activities. Cash
provided by investing activities in the nine months ended September 30, 2010 of
$1.4 million was attributable to the proceeds on sale of marketable securities
of $13.8 million and proceeds on sale of Echo shares of $2.5 million, offset by
$11.1 million in payments made in connection with acquisitions and capital
expenditures of $3.9 million.
Cash used
in investing activities in the nine months ended September 30, 2009 of $12.6
million was attributable to capital expenditures of $5.8 million, $7.2 million
in payments made in connection with acquisitions and a $684,000 payment to
seller, offset by proceeds on sale of Echo shares of $850,000.
Financing Activities. Cash
used in financing activities in the nine months ended September 30, 2010 of
$837,000 was primarily attributable to the $634,000 in deferred financing costs
for the new revolving credit facility, $98,000 in repayments of borrowings under
the revolving credit facility and $100,000 in principal payments made on capital
leases.
Cash
used in financing activities in the nine months ended September 30, 2009 of
$62,000 was primarily attributable to the $290,000 of payments made on the
revolving credit facility, offset by $238,000 from the tax benefit of options
exercised.
On August
2, 2010, we entered into a new Credit Agreement with Bank of America, N.A. that
matures on August 2, 2014. The new agreement replaces our current credit
agreement with JPMorgan Chase Bank, N.A., and provides for a senior secured
revolving credit facility in an initial aggregate principal amount of up to
$100.0 million. We had $49.4 million in outstanding borrowings under
this facility as of September 30, 2010. Outstanding borrowings under
the revolving credit facility are guaranteed by our material domestic
subsidiaries. Our 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 or the alternate
base rate, as elected. The terms of the revolving credit facility include
various covenants, including covenants that requires us to maintain a maximum
leverage ratio, a minimum interest coverage ratio and a minimum net
worth. As of September 30, 2010, we were not in violation of any of
these various covenants.
Although
we can provide no assurances, we believe that our available cash and cash
equivalents, short-term investments and amounts available under our
revolving credit facility will be sufficient to meet our working capital and
operating expenditure requirements for the foreseeable future. Thereafter, we
may find it necessary to obtain additional 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.
17
Off-Balance
Sheet Obligations
We do not
have any off-balance sheet arrangements.
Contractual
Obligations
With the
exception of the contingent consideration in connection with our business
acquisitions discussed in Note 1 in the Notes to the Consolidated Financial
Statements, there have been no material changes outside the normal course of
business in the contractual obligations disclosed in Item 7 to our Annual Report
on Form 10-K for the fiscal year ended December 31, 2009, under the caption
“Contractual Obligations.”
Critical
Accounting Policies and Estimates
As of
September 30, 2010, there were no material changes to the Company’s critical
accounting policies and estimates disclosed in its Form 10-K for the year ended
December 31, 2009.
Recent
Accounting Pronouncements
In
January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair
Value Measurements, which amends existing disclosure requirements
under ASC 820 by adding required disclosures about items transferring into and
out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures
about purchase, sales, issuances, and settlements relative to level 3
measurements; and clarifying, among other things, the existing fair value
disclosures about the level of disaggregation. This ASU is effective for the
first quarter of 2010, except for the requirement to provide level 3 activity of
purchases, sales, issuances, and settlements on a gross basis, which is
effective beginning the first quarter of 2011. Because this standard impacts
disclosure requirements only, its adoption did not have any impact on our
consolidated results of operations or financial condition.
Forward-Looking
Statements
This
Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of
Financial Condition and Results of Operations, contains words such as “may,”
“will,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “project,”
“estimate” and “objective” or the negative thereof or similar terminology
concerning the Company’s future financial performance, business strategy, plans,
goals and objectives. These expressions are intended to identify forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements include information concerning our possible or
assumed future performance or results of operations and are not guarantees.
While these statements are based on assumptions and judgments that management
has made in light of industry experience as well as perceptions of historical
trends, current conditions, expected future developments and other factors
believed to be appropriate under the circumstances, they are subject to risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different. Some of the factors that would cause
future results to differ from the recent results or those projected in
forward-looking statements include, but are not limited to, the risk factors
described in our Annual Report on Form 10-K for the year ended December 31,
2009.
Additional
Information
We make
our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, other reports and information filed with the SEC and amendments to
those reports available, free of charge, through our Internet website (http://www.inwk.com) as soon
as reasonably practical after we electronically file or furnish such materials
to the SEC. All of our filings may be read or copied at the SEC’s Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on the
operation of the Public Filing Room can be obtained by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet website (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding issuers that file electronically.
18
Item 3.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
Commodity
Risk
We are
dependent upon the availability of paper, and paper prices represent a
substantial portion of the cost of our products. The supply and price of paper
depend on a variety of factors over which we have no control, including
environmental and conservation regulations, natural disasters and weather. We
believe a 10% increase in the price of paper would not have a significant effect
on our consolidated statements of income or cash flows, as these costs are
generally passed through to our clients.
Interest
Rate Risk
We have
exposure to changes in interest rates on our revolving credit facility. Interest
is payable at the adjusted LIBOR or the alternate base rate. Assuming our $100.0
million revolving credit facility was fully drawn, a 1.0% increase in the
interest rate would increase our annual interest expense by $1.0 million. The
terms of the revolving credit facility include various covenants, including
covenants that require us to maintain a maximum leverage ratio and a minimum
interest coverage ratio. Outstanding borrowings may be used for general
corporate and working capital purposes in the ordinary course of business, for
permitted acquisitions, for capital expenditures and for restricted payments,
including the repurchase of shares of our common stock, as permitted pursuant to
the terms of the revolving credit facility.
Our
interest income is sensitive to changes in the general level of US interest
rates, in particular because all of our investments are in cash equivalents and
marketable securities.
Foreign
Currency Risk
A portion
of our sales and earnings are attributable to operations conducted outside of
the US. The US dollar value of sales and earnings of these operations varies
with currency exchange rate fluctuations. We believe a 10% fluctuation in the
currency exchange rate would not have a significant effect on the Company’s
consolidated statements of income or cash flows.
We do not
use derivative financial instruments.
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 September 30, 2010. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
means controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”)
is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
company’s management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of
September 30, 2010, our chief executive officer and chief financial officer
concluded that, as of such date, the Company’s disclosure controls and
procedures were effective at the reasonable assurance level.
No
change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the third
quarter ended September 30, 2010 that has materially affected or is reasonably
likely to materially affect, our internal control over financial
reporting.
19
PART
II. OTHER INFORMATION
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 the Company’s Annual Report on Form 10-K for the year ended
December 31, 2009.
20
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.
|
21
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
INNERWORKINGS,
INC.
|
||
Date:
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
|
22
EXHIBIT
INDEX
Number
|
Description
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
23