Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - INNERWORKINGS INCFinancial_Report.xls
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR9.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR1.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR5.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR6.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR7.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR4.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR8.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR3.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR2.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR14.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR11.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR12.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR10.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR16.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR13.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR21.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR18.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR20.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR23.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR24.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR15.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR22.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR19.htm
EX-31.2 - EXHIBIT 31.2 - INNERWORKINGS INCv303700_ex31-2.htm
EX-23.1 - EXHIBIT 23.1 - INNERWORKINGS INCv303700_ex23-1.htm
EX-21.1 - EXHIBIT 21.1 - INNERWORKINGS INCv303700_ex21-1.htm
EX-32.1 - EXHIBIT 32.1 - INNERWORKINGS INCv303700_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - INNERWORKINGS INCv303700_ex31-1.htm
XML - IDEA: XBRL DOCUMENT - INNERWORKINGS INCR17.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934 

For the fiscal year ended December 31, 2011

Commission file number: 000-52170

 

INNERWORKINGS, INC.

(Exact name of registrant as specified in its charter)

     
Delaware   20-5997364

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

600 West Chicago Avenue, Suite 850

Chicago, Illinois 60654

Phone: (312) 642-3700

(Address (including zip code) and telephone number (including area code) of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

     
Title of each class   Name of each exchange on which registered
Common Stock, $0.0001 par value   Nasdaq Global Market

  

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   ¨     No   x

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

 

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

 

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):

 

Large accelerated filer   ¨   Accelerated filer   x   Non-accelerated filer   ¨   Smaller reporting company   ¨
        (Do not check if a smaller
reporting company)
   

 

The aggregate market value of the common equity held by non-affiliates of the registrant as of June 30, 2011, the last business day of the registrant’s most recent completed second quarter, was $235,312,516 (based on the closing sale price of the registrant’s common stock on that date as reported on the Nasdaq Global Market).

 

As of February 17, 2012, the registrant had 47,041,707 shares of common stock, par value $0.0001 per share, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The registrant intends to file with the Securities and Exchange Commission a proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2011. Portions of such proxy statement are incorporated by reference into Part III of this Annual Report on Form 10-K. 

 

 
 

 

 TABLE OF CONTENTS

 

       
PART I      
     
Item 1.   Business  1  
Item 1A.   Risk Factors 7  
Item 1B.   Unresolved Staff Comments   12  
Item 2.   Properties   13  
Item 3.   Legal Proceedings   14  
Item 4.   Mine Safety Disclosures   14  
     
PART II      
     
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   15  
Item 6.   Selected Financial Data   16  
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   17  
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk   27  
Item 8.   Financial Statements and Supplementary Data   28  
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   57  
Item 9A.   Controls and Procedures   57  
Item 9B.   Other Information   57  
     
PART III      
     
Item 10.   Directors, Executive Officers and Corporate Governance   58  
Item 11.   Executive Compensation   58  
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   58  
Item 13.   Certain Relationships and Related Transactions, and Director Independence   59  
Item 14.   Principal Accountant Fees and Services   59  
     
PART IV      
     
Item 15.   Exhibits, Financial Statement Schedules   60  
   
Signatures   61  

 

 

 
 

 

PART I

 

Item 1.Business

 

Unless otherwise indicated or the context otherwise requires, references in this Annual Report on Form 10-K to “InnerWorkings, Inc.,” “InnerWorkings,” the “Company,” “we,” “us” or “our” are to InnerWorkings, Inc., a Delaware corporation, and its subsidiaries.

 

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

 

Our Company

 

We are a leading provider of global print management and promotional solutions to corporate clients across a wide range of industries. With proprietary technology, an extensive supplier network and deep domain expertise, the Company procures, manages and delivers printed materials and promotional products as part of a comprehensive outsourced enterprise solution. Our technology and database of information 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. Since 2002, we have expanded from a regional focus to a national and then international focus with the acquisitions in 2011 of CPRO, a leading provider of print solutions in Latin America, and Productions Graphics, a leading print management firm with a particular strength in continental Europe.

 

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 print jobs. 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 our print jobs with suppliers that are optimally suited to meet the client’s needs at a highly competitive price.

 

Through our supplier network of approximately 9,000 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 and data, our clients are able to reduce overhead costs, redeploy internal resources and obtain favorable pricing and service terms. In addition, our ability to track individual transactions and provide customized reports detailing print procurement activity on an enterprise-wide-basis provides our clients with greater visibility and control of their print expenditures.

 

We generate revenue by procuring and purchasing printed products from our suppliers and selling those products to our clients. We procure printed products for clients across a wide range of industries, such as retail, financial services, hospitality, non-profits, healthcare, food and beverage, broadcasting and cable, education, transportation and utilities. Our clients fall into two categories, enterprise and transactional. We enter into arrangements with our enterprise clients to provide some, or substantially all, of their printed products, typically on a recurring basis. We provide printed products to our transactional clients on an order-by-order basis.  

 

We were formed in 2001, commenced operations in 2002 and converted from a limited liability company to a Delaware corporation in January 2006. Our corporate headquarters are located in Chicago, Illinois. For the year ended December 31, 2011, we served over 6,000 clients. We have increased our revenue from $5.0 million in 2002 to $633.8 million in 2011, representing a compound annual growth rate of 71.3%.

 

As of December 31, 2011, we operated in 44 different countries. In the fourth quarter of 2011, we reorganized our operations into two segments based on geographic regions: United States and International. This change was the result of the international expansion into Latin America and continental Europe discussed above. The United States segment includes operations in the United States, and the International segment includes operations in the United Kingdom, continental Europe and Latin America. In 2011, we generated revenues of $540.3 million in the United States segment and $93.5 million in the International segment.

 

1
 

 

Industry Overview

 

     Our business of providing print procurement solutions intersects two large and growing industries, commercial printing and business process outsourcing, or BPO. According to Pira International, the global commercial print markets have estimated revenues of approximately $520.6 billion each year. The print industry includes the following product categories:

 

direct mail and other direct marketing materials;

 

basic business printing, including business forms, stationery and business cards;

 

promotional printing, which includes brochures, direct mail and catalogs;

 

publications, including magazines, books and directories;

 

bill of material printing, which consists of customized packaging, labels and other shipping materials;

 

promotional products, such as t-shirts, calendars and advertisements;

 

warehousing, pick and pack distribution and print on demand; and

 

multimedia, including CDs and DVDs.

 

In addition, the global print industry is highly fragmented. The traditional process of procuring, designing and producing a print order requires extensive collaboration by printers, designers, brokers and other middlemen and is often highly inefficient for the customer, who typically pays a mark-up at each intermediate stage of the supply chain. Print procurement is often dispersed across several areas of a business enterprise, including sales, marketing, communications and finance.

 

To become more competitive, many businesses seek to focus on core competencies and outsource non-core business functions, such as print procurement. The National Association of Procurement Managers ranked print procurement as the third most significant resource procurement outsourcing opportunity for U.S. businesses.  Consolidating all print activities across the organization represents an opportunity to reduce total print expenditure and decrease the number of vendors in the print supply chain. Applying software and database technology to manage the print procurement process also provides for enhanced tracking and auditing capabilities.

 

In recent years, the print industry has been impacted by developments in technology, including enhanced output capacity of printing presses and increased utilization of Internet-based communications and digital printing. These developments have lowered barriers to entry and reduced the utilization of printing presses. As a result, the print industry has historically experienced significant excess manufacturing capacity and the market for printed products has become increasingly commoditized. As developments in technology enable more print companies to provide a broad range of products and services, there are fewer opportunities for print vendors to charge premium prices based on product and service differentiation.

 

We seek to capitalize on the trends impacting the commercial print industry and the movement towards increased outsourcing of non-core business functions by leveraging our propriety technology, expansive database, extensive supplier network and purchasing power.

 

Our Solution

 

Utilizing our proprietary technology and database, we are able to provide a global solution for our clients that creates a competitive bid process to procure, purchase and deliver printed products to our clients. Our supplier network of approximately 9,000 suppliers offers a wide variety of printed products and a full range of print, fulfillment and logistics services.

 

Our print procurement software and database seeks to capitalize on excess manufacturing capacity and other inefficiencies in the traditional print supply chain. We believe that the most competitive price bids we obtain from our suppliers are submitted by the suppliers with the most unused capacity. We utilize our technology and a competitive bid process to:

 

greatly increase the number of suppliers that our clients can efficiently access;

 

obtain favorable pricing and deliver high quality products and services for our clients; and

 

aggregate our purchasing power.

 

2
 

 

Our proprietary software applications and database, PPM4™, streamline the print procurement process for our clients by eliminating inefficiencies within the traditional print supply chain and expediting production. However, our technology cannot manage all of the variables associated with procuring a print job, which often involves extensive collaboration among numerous parties. Effective management of the procurement process requires that dedicated and experienced personnel work closely with both clients and print suppliers. Our account executives and procurement managers perform that critical function.

 

Account executives act as the primary sales staff to our clients. Procurement managers manage the entire print procurement process for our clients to ensure timely and accurate delivery of the finished product. For each print job we receive, a procurement manager uses our technology to gather print specifications, solicit bids from the optimal suppliers, establish pricing with the client, manage print production and purchase and coordinate the delivery of the finished product.

 

Each client is assigned an account executive and procurement manager, who develop contacts with client personnel responsible for authorizing and making print purchases. Our largest clients often are assigned multiple procurement managers. In certain cases, our procurement managers function on-site at the client. In other cases, we designate an employee of the client to function as our procurement manager and reimburse the client for the employee’s compensation costs. Whether on-site or off-site, a procurement manager functions as a virtual employee of the client. As of December 31, 2011, we had approximately 500 procurement managers, including 180 procurement managers working on-site at our clients. Although our clients fall into two categories, enterprise and transactional, the procurement process for each client category is substantially similar.

 

Our Proprietary Technology

 

PPM4™ is a fully-integrated, proprietary solution that stores equipment profiles for our supplier network and price data for jobs we quote and execute, which allows us to match print jobs with the suppliers in our network that are optimally suited to produce the job at a highly competitive price. Our technology also allows us to efficiently manage the critical aspects of the print procurement process, including gathering job specifications, identifying suppliers, establishing pricing, managing print production and coordinating purchase and delivery of the finished product.

 

Our database stores the production capabilities of our supplier network, as well as price and quote data for bids we receive and transactions we execute. As a result, we believe PPM4™ contains one of the largest independent repositories of equipment profiles and price data for print suppliers in the United States. Our procurement managers use this data to discover excess print manufacturing capacity, select optimal suppliers, negotiate favorable pricing and efficiently procure high-quality products and services for our clients.  In addition, we regularly request that our clients complete a customer scorecard, which allows them to rate us and our suppliers based on product quality, customer service and overall satisfaction. The data contained in these scorecards is stored in our database and used by our procurement managers during the supplier selection process.

 

With each new print job process, we collect and store additional data in our proprietary database. As the number of print jobs we complete increases, our database further enhances our competitive position and our ability to obtain favorable pricing for our clients.

 

We believe PPM4™ allows us to procure print more efficiently than traditional manual or semi-automated systems used by many printers and print brokers in the marketplace. PPM4™ includes the following features:

 

Customized order management.     PPM4™ automatically generates customized data entry screens based on product type and guides the procurement manager to enter the required job specifications. For example, if a procurement manager selects “envelope” in the product field, the screen will automatically prompt the procurement manager to specify the size, paper type, window size and placement and display style.

 

Cost management.     PPM4™ reconciles supplier invoices to executed print orders to ensure the supplier adhered to the pricing and other terms contained in the print order. In addition, it includes checks and balances that allow us to monitor important financial indicators relating to a print order, such as projected gross margin and significant job alterations.

 

Standardized reporting.     Our solution generates transaction reports that contain quote, supplier capability, price and customer service information regarding the print jobs the client has completed with us. These reports can be customized, sorted and searched based on a specified time period or the type of printed product, price or supplier. In addition, the reports give our clients insight into their print spend for each individual print job and on an enterprise-wide basis, which allows the client to track the amounts it spends on printed paper, print, productions and logistics.

  

Task-tracking.     Our solution creates a work order checklist that sends e-mail reminders to our procurement managers regarding the time elapsed between certain milestones and the completion of specified deliverables. These automated notifications enable our procurement managers to focus on more critical aspects of the print process and eliminate delays.

 

3
 

  

Open architecture.     PPM4™ allows us to integrate clients and suppliers into our solution. Some of our larger clients have limited, secure access to our database, which they can use to directly access their transaction data.

 

Historical price baseline.     Some of our larger clients have provided us with pricing data for print jobs they completed before they began to use our solution. For these clients, PPM4™ automatically compares our current price for a print job to the price obtained by the client for a comparable historical job, which enables us to demonstrate on an ongoing basis the cost savings we provide.

 

We have also created customized Internet-based stores, which we refer to as IW eStores, for certain of our clients that allow them to order pre-selected products, such as personalized business stationery, marketing brochures and promotional products, through an automated ordering process with viewable and variable PDF capabilities.

 

Our Clients

 

We procure printed products for corporate clients across a wide range of industries, such as retail, financial services, hospitality, non-profits, healthcare, food & beverage, broadcasting & cable, education, transportation and utilities. Our clients also include printers that outsource jobs to us because they do not have the requisite capabilities or capacity to complete an order. For the year ended December 31, 2011, we served over 6,000 clients through approximately 6,000 suppliers. For the years ended December 31, 2010 and 2011, our largest customer accounted for 6% and 4% of our revenue, respectively. Revenue from our top-ten clients accounted for 31% and 28% of our revenue in 2010 and 2011, respectively.

 

We generate revenue by procuring and purchasing printed products from our suppliers and selling those products to our clients. Our clients fall into two categories, enterprise and transactional. We enter into contracts with our enterprise clients to provide some or substantially all of their printed products, typically on a recurring basis. Our contracts with our enterprise clients are generally for a three to five year term with a termination right upon advance notice ranging from 90 days to twelve months. For the years ended December 31, 2009, 2010 and 2011, enterprise clients accounted for 66%, 71% and 74% of our revenue, respectively. We provide printed products to our transactional clients on an order-by-order basis. For the years ended December 31, 2009, 2010 and 2011, transactional clients accounted for 34%, 29% and 26% of our revenue, respectively.

 

As part of our growth strategy, we seek to expand our base of transactional clients by selling printed material over the phone via an outbound call center, over the Internet and by hiring account executives, or acquiring groups of them, with established client relationships.

 

Our Products and Services

 

We offer a full range of print, fulfillment and logistics services in over 60 different print categories, which allows us to procure printed products on virtually any substrate. The printed products we procure for our clients may be printed with any of the eight major types of printing, which include offset sheet-fed, web offset, digital offset, letterpress, screen printing, waterless, flexography and gravure, as well as several forms of specialty printing.

 

Our major products include:

 

direct mail pieces   promotional products annual   newsletters   stickers
brochures   reports   billboards   bags
catalogues   envelopes   playing cards   magnets
point-of-purchase   labels   binders   warehousing
displays   calendars   apparel   pick and pack
magazines   folders   games   distribution 
packaging   gift cards   stationery   print on demand 
store fixtures   signage    business and automobile wraps    
CDs/DVDs   posters   postcards    

  

We offer a comprehensive range of fulfillment and logistics services, such as kitting and assembly, inventory management and pre-sorting postage. These services are often essential to the completion of the finished product. For example, we assemble multi-level direct mailings, insurance benefits packages and coupons and promotional incentives that are included with credit card and bank statements. We also provide creative services, including copywriting, graphics and website design, identity work and marketing collateral development, and pre-media services, such as image and print-ready page processing and proofing capabilities. Our eStores empower our clients with branded self-service ecommerce websites that prompt quick and easy online ordering, fulfillment, tracking, and reporting.

 

4
 

We agree to provide our clients with products that conform to the industry standard of a “commercially reasonable quality” and our suppliers in turn agree to provide us with products of the same quality. The quotes we execute with our clients include customary provisions that limit the amount of our liability for product defects. To date, we have not experienced significant claims or liabilities relating to defective products.

 

Our Supplier Network

 

Our supplier network of approximately 9,000 suppliers includes printers, graphic designers, paper mills and merchants, digital imaging companies, specialty binders, finishing and engraving firms and fulfillment and distribution centers.

 

These suppliers have been selected from among thousands of potential suppliers worldwide based on their ability to effectively serve our clients on the basis of price, quality and customer service. We direct requests for proposal from our clients to potential suppliers based on historical pricing data, quality control rankings and geographic proximity to a client or other criteria specified by our clients.

 

In 2011, our top-ten suppliers accounted for approximately 14% of our cost of goods sold and no supplier accounted for over 2% of our cost of goods sold. As of December 31, 2011, a majority of our top-100 suppliers had executed supply and service agreements with us. These agreements have an open-ended term with a termination right on 60 days prior written notice and contain non-solicitation provisions that prohibit the supplier from soliciting any client for which the supplier has executed a print order for a specified period, generally 24 months, after the expiration of the agreement. Our contractual relationship with the remaining suppliers in our network is governed solely by any print orders we execute with those suppliers on an order-by-order basis.

 

We have established a quality control program that is designed to ensure that we deliver high-quality printed products and services to our clients through the suppliers in our network. As part of this program, we train our procurement managers to accurately gather job specifications and create a checklist to ensure that each item in the print order has been approved by the client. In addition, we regularly request that our clients complete customer scorecards, which are stored in our database and converted into quality control reports. These quality control reports are accessible to our procurement managers through PPM4™ and are used during the supplier selection process. Our quality control standards are designed to ensure that our clients receive high quality printed products regardless of the supplier that prints the product.

 

Sales and Marketing

 

Our account executives sell our print procurement services to corporate clients. As of December 31, 2011, we had approximately 400 account executives. Our agreements with our account executives require them to market and sell print procurement services for us on an exclusive basis and contain non-compete and non-solicitation provisions that apply during and for a specified period after the term of their service.

 

We expect to continue our growth by recruiting and retaining highly qualified account executives and providing them with the tools to be successful in the marketplace. There are a large number of print sales representatives globally and we believe that we will be able to identify qualified account executives from this pool of individuals. Candidates are recruited through Internet postings, advertisements in industry publications, industry event attendance, Internet research, referrals and word-of-mouth networking. We also expect to augment our sales force through selective acquisitions of print service businesses, including print brokers that include experienced sales personnel with established client relationships.

 

We believe that we offer account executives an attractive opportunity in the print industry because they can utilize our vast supplier network, proprietary pricing data and customized order management solution to sell to their clients virtually any printed product at a highly competitive price. In addition, the diverse production and service capabilities of the suppliers in our network provide our account executives the opportunity to deliver a more complete product and service offering to their clients. We believe we can better attract and retain experienced account executives than our competitors because of the breadth of products offered by our supplier network.

 

To date, we have been successful in attracting and retaining qualified account executives. The integration process consists of training with our sales management, as well as access to a variety of sales and educational resources that are available on our Intranet. Because the account executives we hire generally have significant sales experience, they can begin marketing our services after limited training on our model and systems.

 

Competition

 

We operate in the print industry and several print-related industries, including paper and pulp, graphics art and digital imaging and fulfillment and logistics. As a result, we compete on some level with virtually every company that is involved in printing, from printers to graphic designers, pre-press firms, paper manufacturers and fulfillment companies.

 

Our primary competitors are printers that employ traditional methods of marketing and selling their printed materials. The printers with which we compete generally own and operate their own printing equipment and typically serve clients only within the specific product categories and print types that their equipment produces.  Some of these printers, such as Quad/Graphics and R.R. Donnelley, have larger client bases and significantly more resources than we do.

5
 

  

We also compete with print distributors and brokers. These competitors generally do not own or operate printing equipment, and typically work with a limited number of suppliers and have minimal financial investment in the quality of the products produced for their clients. Our industry experience indicates that several of these competitors, such as Williams Lea, Logisource, Cirqit and NewlineNoosh, offer print procurement services or enterprise software applications for the print industry.

 

The principal elements of competition in print procurement are price, product quality, customer service and reliability. Although we believe our business delivers products and services on competitive terms, our business and the print procurement industry are relatively new and are evolving rapidly. Print buyers may prefer to utilize the traditional services offered by the printers with whom we compete. Alternatively, some of these printers may elect to compete with us directly by offering print procurement services or enterprise software applications, and their well-established client relationships industry knowledge, brand recognition, financial and marketing capabilities, technical resources and pricing flexibility may provide them with a competitive advantage over us.

 

Intellectual Property

 

We rely primarily on a combination of copyright, trademark and trade secret laws as well as restrictions and patents to protect our intellectual property rights. As of December 31, 2011, we have been issued one US Patent and have seven patent applications pending related to our proprietary sourcing methods. We expect to apply for additional patents in the future. We also protect our proprietary technology through confidentiality and non-disclosure agreements with our employees and independent contractors.

 

Our IT infrastructure provides a high level of security for our proprietary database. The storage system for our proprietary data is designed to ensure that power and hardware failures do not result in the loss of critical data. The proprietary data is protected from unauthorized access through a combination of physical and logical security measures, including firewalls, antivirus software, anti-spy software, password encryption and physical security, with access limited to authorized IT personnel. In addition to our security infrastructure, our system is backed up and stored in a redundant location daily to prevent the loss of our proprietary data due to catastrophic failures or natural disasters. We test our overall IT recovery ability semi-annually and test our back up process quarterly to verify that we can recover our business critical systems in a timely fashion.

 

Employees

 

As of December 31, 2011, we had 1,034 employees and independent contractors.  We consider our employee relations to be strong.

 

Our Website

 

Our website is http://www.inwk.com . We make available, free of charge through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits and any amendments to those reports, filed with or furnished to the Securities and Exchange Commission. We make these reports available through our website as soon as reasonably practicable after our electronic filing of such materials with, or the furnishing of them to, the Securities and Exchange Commission.  The information contained on our website is not a part of this report and shall not be deemed incorporated by reference into this Annual Report on Form 10-K or any other public filing made by us with the Securities and Exchange Commission.

 

6
 

  

Item 1A.       Risk Factors

 

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

 

Risks Related to Our Business

 

Competition could substantially impair our business and our operating results.

 

We operate in the print industry and several print-related industries, including paper and pulp, graphics art and digital imaging and fulfillment and logistics. Competition in these industries is intense. Our primary competitors are printers that employ traditional methods of marketing and selling their printed materials. Many of these printers, such as Quad/Graphics and R.R. Donnelley, have larger client bases and significantly more resources than we do. Print buyers may prefer to utilize the traditional services offered by the printers with whom we compete. Alternatively, some of these printers may elect to offer outsourced print procurement services or enterprise software applications, and their well-established client relationships, industry knowledge, brand recognition, financial and marketing capabilities, technical resources and pricing flexibility may provide them with a competitive advantage over us.

 

We also compete with a number of print suppliers, distributors and brokers. Several of these competitors, such as Williams Lea, Logisource, Cirqit and Newline/Noosh, offer outsourced print procurement services or enterprise software applications for the print industry. These competitors, or new competitors that enter the market, may also offer print procurement services similar to and competitive  with or superior to our current or proposed offerings and achieve greater market acceptance. In addition, a software solution and database similar to PPM4™ could be created over time by a competitor with sufficient financial resources and comparable experience in the print industry. If our competitors are able to offer comparable services, we could lose clients, and our market share could decline.

 

Our competitors may also establish cooperative relationships to increase their ability to address client needs. Increased competition may lead to revenue reductions, reduced gross margins or a loss of market share, any one of which could harm our business and our operating results.

 

If our services do not achieve widespread commercial acceptance, our business will suffer.

 

Most companies currently coordinate the procurement and management of their print orders with their own employees using a combination of telephone, facsimile, e-mail and the Internet. Growth in the demand for our services depends on the adoption of our outsourcing model for print procurement services. We may not be able to persuade prospective clients to change their traditional print management processes. Our business could suffer if our services are not accepted or are not perceived by the marketplace to be effective or valuable.

 

If our suppliers do not meet our needs or expectations, or those of our clients, our business would suffer.

 

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

 

A significant portion of our revenue is derived from a relatively limited number of large clients and any loss of, or decrease in sales to, these clients could harm our results of operations.

 

A significant portion of our revenue is derived from a relatively limited number of large clients. Revenue from our top-ten clients accounted for 30%, 31% and 28% of our revenue during the years ended December 31, 2009, 2010 and 2011, respectively. Our largest client accounted for 8%, 6% and 4% of our revenue in 2009, 2010 and 2011, respectively. We are likely to continue to experience ongoing client concentration, particularly if we are successful in attracting large enterprise clients. Moreover, there may be a loss or reduction in business from one or more of our large clients. It is also possible that revenue from these clients, either individually or as a group, may not reach or exceed historical levels in any future period. The loss or significant reduction of business from our major clients would adversely affect our results of operations.

 

7
 

  

A significant or prolonged economic downturn, or a dramatic decline in the demand for printed products, could adversely affect our revenues and results of operations.

 

Our results of operations are affected directly by the level of business activity of our clients, which in turn is affected by the level of economic activity and cyclicality in the industries and markets that they serve. Certain of our products are sold to industries, including the advertising, retail, housing, financial and pharmaceutical industries, that experience significant fluctuations in demand based on general economic conditions, cyclicality and other factors beyond our control. Continued economic uncertainty or an economic downturn could result in a reduction of the marketing budgets of our clients or a decrease in the number of print jobs that our clients order from us. Reduced demand from one of these industries or markets could adversely affect our revenues, operating income and profitability.

 

A decrease in the number of our suppliers could adversely affect our business.

 

Our suppliers are not contractually required to continue to accept orders from us. If production capacity at a significant number of our suppliers becomes unavailable, we will be required to use fewer suppliers, which could significantly limit our ability to serve our clients on competitive terms. In addition, we rely on price bids provided by our suppliers to populate our database. If the number of our suppliers decreases significantly, we will not be able to obtain sufficient pricing information for PPM4™, which could affect our ability to obtain favorable pricing for our clients.

 

We may face difficulties as we expand our operations into countries in which we have limited operating experience.

 

International revenues represented 8%, 8% and 15% of total revenues for 2009, 2010 and 2011, respectively. We intend to expand our global footprint, which may involve expanding into countries other than those in which we currently operate or increasing our operations in countries which we currently have limited operations. Our business outside of the United States is subject to various risks, including:

 

changes in economic and political conditions in the United States and abroad;
changes in compliance with international and domestic laws and regulations;
wars, civil unrest, acts of terrorism and other conflicts;
natural disasters;
changes in tariffs, trade restrictions, trade agreements and taxations;
difficulties in managing or overseeing foreign operations;
limitations on the repatriation of funds because of foreign exchange controls;
less developed and less predictable legal systems than those in the United States; and
intellectual property laws of countries which do not protect our intellectual property rights to the same extent as the laws of the United States.

  

The occurrence or consequences of any of these factors may restrict our ability to operate in the affected region and/or decrease the profitability of our operations in that region.

 

As we expand our business in foreign countries, we will become exposed to increased risk of loss from foreign currency fluctuations and exchange controls as well as longer accounts receivable payment cycles. We have limited control over these risks, and if we do not correctly anticipate changes in international economic and political conditions, we may not alter our business practices in time to avoid adverse effects.

 

If we are unable to expand the number of our account executives, or if a significant number of our account executives leave InnerWorkings, our ability to increase our revenues could be negatively impacted.

 

Our ability to expand our business will depend largely on our ability to attract additional account executives with established client relationships. Competition for qualified account executives can be intense and we may be unable to hire such persons. Any difficulties we experience in expanding the number of our account executives could have a negative impact on our ability to expand our client base, increase our revenue and continue our growth.

 

In addition, we must retain our current account executives and properly incentivize them to obtain new clients and maintain existing client relationships. If a significant number of our account executives leave InnerWorkings and take their clients with them, our revenue could be negatively impacted. We have entered into non-compete agreements with our account executives to mitigate this risk, but we may need to litigate to enforce our rights under these agreements, which could be time-consuming, expensive and ineffective. A significant increase in the turnover rate among our current account executives could also increase our recruiting costs and decrease our operating efficiency and productivity, which could lead to a decline in the demand for our services.

 

8
 

  

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

 

As part of our growth strategy, we seek to attract new enterprise clients and expand relationships with existing and new transactional clients. If we are unable to attract new enterprise clients or expand our relationships with our existing transactional clients, our ability to grow our business will be hindered.

 

Many of our clients may terminate their relationship with us on short notice and with no penalties or limited penalties.

 

Our transactional clients, which accounted for approximately 34%, 29% and 26% of our revenue in 2009, 2010 and 2011, respectively, typically use our services on an order-by-order basis rather than under long-term contracts. These clients have no obligation to continue using our services and may stop purchasing from us at any time. We have entered into contracts with our enterprise clients, which accounted for approximately 66%, 71% and 74% of our revenue in 2009, 2010 and 2011, respectively, that are generally for three to five year terms. Most of these contracts signed prior to 2009, however, do not impose minimum purchase or volume requirements, and typically permit the clients to terminate our engagements on prior notice ranging from 90 days to 12 months with limited or no penalties.

 

The volume and type of services we provide our clients may vary from year to year and could be reduced if a client were to change its outsourcing or print procurement strategy. If a significant number of our transactional or enterprise clients elect to terminate or not to renew their engagements with us, or if the volume of their print orders decreases, our business, operating results and financial condition could suffer.

 

We may not be able to develop or implement new systems, procedures and controls that are required to support the anticipated growth in our operations.

 

Our revenues increased from $5.0 million in 2002 to $633.8 million in 2011, representing a compound annual growth rate of 71.3%. Between January 1, 2002 and December 31, 2011, the number of our employees and independent contractors increased from 21 to 1,034. Continued growth could place a significant strain on our ability to:

 

recruit, motivate and retain qualified account executives, procurement managers and management personnel;
preserve our culture, values and entrepreneurial environment;
develop and improve our internal administrative infrastructure and execution standards; and
maintain high levels of client satisfaction.

  

     To manage our growth, we must implement and maintain proper operational and financial controls and systems. Further, we will need to manage our relationships with various clients and suppliers. We cannot give any assurance that we will be able to develop and implement, on a timely basis, the systems, procedures and controls required to support the growth in our operations or effectively manage our relationships with various clients and suppliers. If we are unable to manage our growth, our business, operating results and financial condition could be adversely affected.

 

A decrease in levels of excess capacity in the commercial print industry could have an adverse impact on our business.

 

     We believe that for the past several years the U.S. commercial print industry has experienced significant levels of excess capacity. Our business seeks to capitalize on imbalances between supply and demand in the print industry by obtaining favorable pricing terms from suppliers in our network through a competitive bid process. Reduced excess capacity in the print industry generally and in our supplier network specifically could have an adverse impact on our ability to execute our business strategy and on our business results and growth prospects.

 

Our inability to protect our intellectual property rights may impair our competitive position.

 

If we fail to protect our intellectual property rights adequately, our competitors could replicate our proprietary technology in order to offer similar services and harm our competitive position. We rely on a combination of patent, trademark and trade secret laws and confidentiality and nondisclosure agreements to protect our proprietary technology. We cannot be certain that the steps we have taken to protect our intellectual property rights will be adequate or that third parties will not infringe or misappropriate our rights or imitate or duplicate our services or methodologies, including PPM4™. We may need to litigate to enforce our intellectual property rights or determine the validity and scope of the rights of others. Any such litigation could be time-consuming and costly.

 

9
 

If we are unable to maintain PPM4™, demand for our services and our revenues could decrease.

 

We rely heavily on PPM4™ to procure printed products for our clients. To keep pace with changing technologies and client demands, we must correctly interpret and address market trends and enhance the features and functionality of our technology in response to these trends, which may lead to significant research and development costs. We may be unable to accurately determine the needs of print buyers or the trends in the print industry or to design and implement the appropriate features and functionality of our technology in a timely and cost-effective manner, which could result in decreased demand for our services and a corresponding decrease in our revenue.

 

In addition, we must protect our systems against physical damage from fire, earthquakes, power loss, telecommunications failures, computer viruses, hacker attacks, physical break-ins and similar events. Any software or hardware damage or failure that causes interruption or an increase in response time of PPM4™ could reduce client satisfaction and decrease usage of our services.

 

If the key members of our management team do not remain with us in the future, our business, operating results and financial condition could be adversely affected.

 

Our future success will depend to a significant extent on the continued services of Eric Belcher, our Chief Executive Officer, Joseph Busky, our Chief Financial Officer, and John Eisel, our Chief Operating Officer. The loss of the services of these individuals could adversely affect our business, operating results and financial condition and could divert other senior management time in searching for their replacements.

 

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

 

Our business is subject to some degree of sales seasonality. Historically, the percentage of our annual revenue earned during the third and fourth fiscal quarters has been higher due, in part, to a greater number of print orders in anticipation of the year-end holiday season. If our business continues to experience seasonality, we may incur significant additional expenses during our third and fourth quarters, including additional staffing expenses. Consequently, if we were to experience lower than expected revenue during any future third or fourth quarter, whether from a general decline in economic conditions or other factors beyond our control, our expenses may not be offset, which would have a disproportionate impact on our operating results and financial condition for that year.

 

Price fluctuations in raw materials costs could adversely affect the margins on our print orders.

 

The print industry relies on a constant supply of various raw materials, including paper and ink. Prices within the print industry are directly affected by the cost of paper, which is purchased in a price sensitive market that has historically exhibited price and demand cyclicality. Prices are also affected by the cost of ink. Our profit margin and profitability are largely a function of the rates that our suppliers charge us compared to the rates that we charge our clients. If our suppliers increase the price of our print orders, and we are not able to find suitable or alternative suppliers, our profit margin may decline.

 

If any of our products causes damages or injuries, we may experience product liability claims.

 

Clients and third parties who claim to suffer damages or an injury caused by our products may bring lawsuits against us. Defending lawsuits arising out of any of the products we provide to our clients could be costly and absorb substantial amounts of management attention, which could adversely affect our financial performance. A significant product liability judgment against us could harm our reputation and business.

 

If any of our key clients fails to pay for our services, our profitability would be negatively impacted.

 

We take full title and risk of loss for the printed products we procure from our suppliers. Our obligation to pay our suppliers is not contingent upon receipt of payment from our clients. In 2009, 2010 and 2011, our revenue was $400.4 million, $482.2 million and $633.8 million, respectively, and our top-ten clients accounted for 30%, 31% and 28%, respectively, of such revenue. If any of our key clients fails to pay for our services, our profitability would be negatively impacted.

 

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

 

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

10
 

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

 

Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing.

 

We may in the future be required to raise capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. Additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve restrictive covenants and could reduce our profitability. If we cannot raise funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures.

 

Risks Related to Ownership of Our Common Stock

 

The trading price of our common stock has been and may continue to be volatile.

 

The trading prices of many small, mid-cap companies are highly volatile. Since our initial public offering in August 2006 through March 4, 2011, the closing sale price of our common stock as reported by the Nasdaq Global Market has ranged from a low of $1.92 on March 2, 2009 to a high of $18.69 on October 9, 2007.

 

Certain factors may continue to cause the market price of our common stock to fluctuate, including:

 

fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
changes in market valuations of similar companies;• changes in economic and political conditions in the United States and abroad;
success of competitive products or services;
changes in our capital structure, such as future issuances of debt or equity securities;
announcements by us, our competitors, our clients or our suppliers of significant products or services, contracts, acquisitions or strategic alliances;
regulatory developments in the United States or foreign countries;
litigation involving our company, our general industry or both;
additions or departures of key personnel;
 •investors’ general perception of us; and
changes in general economic, industry and market conditions.

  

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

 

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

 

The continued use of our services by our clients depends, in part, on the business activity of our clients and our ability to meet their cost saving needs, as well as their own changing business conditions. The time between our payment to the supplier of a print job and our receipt of payment from our clients varies with each print job and client. In addition, a significant percentage of our revenue is subject to the discretion of our enterprise and transactional clients, who may stop using our services at any time, subject, in the case of most of our enterprise clients, to advance notice requirements. Therefore, the number, size and profitability of print jobs may vary significantly from quarter to quarter. As a result, our quarterly operating results are difficult to predict and may fall below the expectations of current or potential investors in some future quarters, which could lead to a significant decline in the market price of our stock. This may lead to volatility in our stock price. The factors that are likely to cause these variations include:

 

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

11
 

  

Because a limited number of stockholders control a significant amount of the voting power of our common stock, investors in the Company may not be able to determine the outcome of stockholder votes.

 

Orange Media, LLC, the sole member of which is Elizabeth Kramer Lefkofsky, the wife of Eric P. Lefkofsky, and Richard A. Heise, Jr. beneficially owned and had the ability to exercise voting control over, in the aggregate, 20.4% of our outstanding common stock as of December 31, 2011. In addition, New Enterprise Associates 11, Limited Partnership and various affiliates of New Enterprise Associates 11 beneficially owned, and had the ability to exercise voting control over, in the aggregate, 15.3% of our outstanding common stock as of December 31, 2011. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors, any amendments to our certificate of incorporation and significant corporate transactions. Without the consent of these stockholders, we could be delayed or prevented from entering into transactions (including the acquisition of our company by third parties) that may be viewed as beneficial to us or our other stockholders. In addition, this significant concentration of stock ownership may adversely affect the trading price of our common stock if investors perceive disadvantages in owning stock in a company with controlling stockholders.

 

We do not currently intend to pay dividends, which may limit the return on your investment in us.

 

We have not declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

 

If our board of directors authorizes the issuance of preferred stock, holders of our common stock could be diluted and harmed.

 

Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock in one or more series and to establish the preferred stock’s voting powers, preferences and other rights and qualifications without any further vote or action by the stockholders. The issuance of preferred stock could adversely affect the voting power and dividend liquidation rights of the holders of common stock. In addition, the issuance of preferred stock could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from acquiring, a majority of our outstanding voting stock or otherwise adversely affect the market price of our common stock. It is possible that we may need to raise capital through the sale of preferred stock in the future.

 

Item 1B.      Unresolved Staff Comments

 

None.

 

12
 

 

Item 2.      Properties

 

Properties

 

Our principal executive offices are located in Chicago, Illinois. We also have operations in 44 different countries. We believe that our facilities are generally suitable to meet our needs for the foreseeable future, however, we will continue to seek additional space as needed to satisfy our growth. We conduct our business from the properties listed below, all of which are leased. The terms of the leases vary and have expiration dates ranging from July 31, 2012 to November 21, 2021.

 

As of December 31, 2011, we conducted our business from the following properties:

 

Location   Operating Segment   Use
Chicago, Illinois   HQ, United States   Corporate Headquarters and Business Development
Aurora, Illinois   United States   Business Development and Warehousing
New York, New York   United States   Business Development and Warehousing
East Brunswick, New Jersey   United States   Business Development and Warehousing
San Francisco, California   United States   Business Development
Roseville, California   United States   Business Development
Monterey, California   United States   Business Development and Warehousing
Grover Beach, California   United States   Business Development
Anaheim, California   United States   Business Development and Warehousing
Santa Clara, California   United States   Business Development
San Rafael, California   United States   Business Development and Warehousing
Honolulu, Hawaii   United States   Business Development
Grand Rapids, Michigan   United States   Business Development
Medina, Minnesota   United States   Business Development and Warehousing
Cincinnati, Ohio   United States   Business Development and Warehousing
Plano, Texas   United States   Business Development and Warehousing
Blue Bell, Pennsylvania   United States   Business Development and Warehousing
Atlanta, Georgia   United States   Business Development
Thomaston, Georgia   United States   Business Development
Greenville, Wisconsin   United States   Business Development and Warehousing
Kansas City, Missouri   United States   Business Development
Branford, Connecticut   United States   Business Development
Buffalo, New York   United States   Business Development
Murfreesboro, Tennessee   United States   Business Development
Las Vegas, Nevada   United States   Business Development
Wailuku, Hawaii   United States   Business Development
Birmingham, United Kingdom   International   Business Development
London, United Kingdom   International   Business Development
Paris, France   International   Business Development
Athens, Greece   International   Business Development
Barcelona, Spain   International   Business Development
Budapest, Hungary   International   Business Development
Dubai, United Arab Emirates   International   Business Development
Mannheim, Germany   International   Business Development
Milan, Italy   International   Business Development
Veauches, France   International   Business Development
Venelles, France   International   Business Development
Warsaw, Poland   International   Business Development
Santiago, Chile   International   Business Development
Bogota, Columbia   International   Business Development
Lima, Peru   International   Business Development
Mexico City, Mexico   International   Business Development
Sao Paulo, Brazil   International   Business Development

 

13
 

 

 Item 3.     Legal Proceedings

 

In 2011, in connection with the Circuit City Stores, Inc. (“Circuit City”) bankruptcy proceedings, the Trustee of the Circuit City Liquidating Trust, filed a lawsuit against us in United States Bankruptcy Court in the Eastern District of Virginia for the avoidance of payments as allegedly preferential transfers of $3.2 million were paid to us during the 90 days preceding the filing of the bankruptcy petition of Circuit City on November 10, 2008. We have accrued a loss reserve of $950,000 related to this claim. Management believes that we have an adequate reserve for this liability and the ultimate resolution of this matter will not have a material adverse effect on our financial statements. 

 

In May of 2011, Her Majesty’s Revenue and Customs (“HMRC”) contacted our U.K. subsidiary, Etrinsic, to request information relating to their position that certain printed matter and direct mail services are exempts under the U.K.’s VAT guidelines. Etrinsic has exchanged information with the HMRC and the HMRC has indicated that it disagrees with Etrinsic’s position and may render an assessment for certain VAT taxes against Etrinsic. If such an assessment were to occur, Etrinsic intends on challenging the assessment. As of December 31, 2011, we believe that an unfavorable outcome is reasonably possible but not probable, and therefore, no reserve has been recorded for this potential loss. Further, the possible range of loss can not be reasonably estimated as of December 31, 2011 as the discussions with the HMRC are currently ongoing and no assessment has been levied against Etrinsic.

 

 Item 4.     Mine Safety Disclosures

 

Not applicable.

  

14
 

  

PART II

 

 Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Our common stock is listed and traded on the Nasdaq Global Market under the symbol “INWK”. The following table sets forth the high and low sales prices for our common stock as reported by the Nasdaq Global Market for each of the periods listed.

 

   High   Low 
2010          
First Quarter  $7.45   $4.95 
Second Quarter  $7.73   $5.07 
Third Quarter  $7.58   $5.31 
Fourth Quarter  $7.15   $6.88 
           
2011          
First Quarter  $8.76   $6.24 
Second Quarter  $9.17   $7.33 
Third Quarter  $9.05   $6.52 
Fourth Quarter  $10.06   $7.28 

 

Holders

 

As of February 17, 2012, there were 70 holders of record of our common stock. The holders of our common stock are entitled to one vote per share.

 

Dividends

 

We currently do not intend to pay any dividends on our common stock. We intend to retain all available funds and any future earnings for use in the operation and expansion of our business. Any determination in the future to pay dividends will depend upon our financial condition, capital requirements, operating results and other factors deemed relevant by our board of directors, including any contractual or statutory restrictions on our ability to pay dividends.

 

Recent Sales of Unregistered Securities

 

As partial consideration in connection with our acquisition of Productions Graphics, a leading international print management firm that we acquired on October 24, 2011, on December 19, 2011, we issued 238,572 shares of common stock to the sellers of Productions Graphics. We relied on Section 4(2) of the Securities Act of 1933, as amended for an exemption from registration of these shares.

 

Issuer Purchases of Equity Securities

 

None.

  

15
 

 

Item 6.     Selected Financial Data

 

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

 

   Years ended December 31,  
    2007    2008    2009    2010    2011 
    (in thousands, except per share and headcount amounts)
Consolidated statements of operations data:                    
Revenue  $288,431   $419,017   $400,447   $482,212   $ 633,846 
Cost of goods sold   215,043    314,996    301,672    366,200    484,483 
Gross profit   73,388    104,021    98,775    116,012    149,363 
Selling, general and administrative expenses   47,982    79,655    81,288    91,796    115,624 
Depreciation and amortization   2,216    4,761    8,031    9,009    10,172 
Preference claim charge                   950 
Income from operations   23,190    19,605    9,456    15,207    22,617 
Gain on sale of investments       6,098    746    3,578    3,948 
Interest income   2,267    854    412    151    182 
Interest expense   (56)   (683)   (1,478)   (1,928)   (2,251)
Other, net   460    176    (119)   (49)    
Total other income (expense)   2,671    6,445    (439)   1,752    1,879 
Income before income taxes   25,861    26,050    9,017    16,959    24,496 
Income tax expense   (3,357)   (10,097)   (2,708)   (5,749)   (8,103)
Net income  $22,504   $15,953   $6,309    11,210   $16,393 
Net income per share of common stock:                         
Basic  $0.47   $0.34   $0.14   $0.25   $ 0.35 
Diluted  $0.45   $0.32   $0.13   $0.24   $ 0.35 
Shares used in per share calculations:                         
Basic   47,459    47,137    45,535    45,704    46,428 
Diluted   49,964    49,141    47,157    47,582    48,827 
Employees and independent contractors(1)   567    761    667    743    1,034 

 

    As of December 31,
    2007   2008   2009   2010   2011
 Consolidated balance sheet data:   (in thousands)
Cash and cash equivalents(2)   $ 26,716   $ 4,012   $ 2,904   $ 5,259   $ 13,219
Working capital(2)(3)     50,694     54,172     56,157     64,982     65,815
Total assets(2)     206,833     253,822     267,158     279,925     457,653
Revolving credit facility(4)     —       42,590     46,385     47,400     60,000
Capital leases     215     268     137     28     65
Total stockholders’ equity(2)     147,445     133,738     147,050     160,184     181,502

 

 

 

(1) Reflects the number of employees and independent contractors as of the last day of the applicable period.
(2) In connection with our follow-on offering in January 2007, we raised approximately $37.8 million, net of underwriting discounts, commissions and offering related expenses.
(3) Working capital represents accounts receivable, unbilled revenue, inventories and prepaid expenses, offset by accounts payable and accrued expenses.
(4) In 2008, we entered into a credit agreement with JPMorgan Chase Bank, N.A. to fund acquisitions and for general working capital purposes.  This credit agreement was replaced by a new credit agreement entered into on August 2, 2010 with Bank of America, N.A.

 

16
 

 

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes, which appear elsewhere in this Annual Report on Form 10-K. It contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly under the heading “Risk Factors.”

 

Overview

 

We are a leading provider of global print management and promotional solutions to corporate clients across a wide range of industries. With proprietary technology, an extensive supplier network and deep domain expertise, the Company procures, manages and delivers printed materials and promotional 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 network of approximately 9,000 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.

 

Since 2002, we have expanded from a regional focus to a national and then international focus with the acquisitions of CPRO, a leading provider of print solutions in Latin America, and Productions Graphics, a leading print management firm with a particular strength in continental Europe, in 2011. We operate in 44 different countries. In the fourth quarter of 2011, we reorganized our operations into two segments based on geographic regions: United States and International. The United States segment includes operations in the United States, and the International segment includes operations in the United Kingdom, continental Europe and Latin America. In 2011, we generated revenues of $540.3 million in the United States segment and $93.5 million in the International segment. 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 internationally. We intend to hire or acquire more account executives within close proximity to these large markets.

 

Revenue

 

We generate revenue through the sale of printed products to our clients. Our revenue was $400.4 million, $482.2 million and $633.8 million in 2009, 2010 and 2011, respectively, reflecting growth rates of 20.4% and 31.4% in 2010 and 2011, respectively, as compared to the corresponding prior year. Our revenue is generated from two different types of clients: enterprise and transactional. Enterprise jobs usually involve higher dollar amounts and volume than our 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 specific portion of their printed products on a recurring basis. Our contracts with enterprise clients are generally three to five years subject to termination by either party upon prior notice ranging from 90 days to twelve months.

 

Several of our 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.  For the years ended December 31, 2009, 2010 and 2011, enterprise clients accounted for 66%, 71% and 74% of our revenue, respectively, while transactional clients accounted for 34%, 29% and 26% of our revenue, respectively.

 

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 our supplier to a destination specified by our client. Upon shipment, our supplier invoices us for its production costs and we invoice our client.

 

17
 

 

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. Although our enterprise revenue generates lower gross profit margins, our enterprise business tends to be as profitable as our transactional business on an operating profit basis because the commission expense associated with enterprise jobs is generally lower.

 

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 those for our transactional jobs. Our gross profit for 2009, 2010 and 2011 was $98.8 million, $116.0 million and $149.4 million, 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, and corporate systems, legal and accounting, facilities and travel and entertainment expenses. Selling, general and administrative expenses as a percentage of revenue were 20.3%, 19.0% and 18.2% in 2009, 2010 and 2011, 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 was $3.5 million and $3.6 million as of December 31, 2010 and 2011, respectively.

 

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 execute with our clients include customary industry terms and conditions that limit the amount of our liability for product defects. Product defects have not had a material adverse effect on our results of operations.

 

We are required to make payment to our suppliers for completed print jobs regardless of whether our clients make payment to us. Our bad debt expense was approximately $1.3 million, $2.9 million and $2.4 million in 2009, 2010 and 2011, respectively.

 

Our income from operations for 2009, 2010 and 2011 was $9.5 million, $15.2 million and $22.6 million, respectively.

 

Critical Accounting Policies

 

Revenue Recognition

 

Revenue is recognized when title transfers, which occurs when the product is shipped either from a third party to the customer or shipped directly from our warehouse to the customer. Unbilled revenue relates to shipments that have been made to customers for which the related account receivable has not yet been billed.

 

In accordance with ASC 605-45-45, Revenue Recognition, Principal Agent Considerations and Other Presentation Matters, we recognize revenue on a gross basis, as opposed to a net basis similar to a commission arrangement, because it bears the risks and benefits associated with revenue-generated activities by: (1) acting as a principal in the transaction; (2) establishing prices; (3) being responsible for fulfillment of the order; (4) taking the risk of loss for collection, delivery and returns; and (5) marketing the products, among other things.

 

18
 

  

Accounts Receivable 

 

The carrying amount of accounts receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected.   Fully reserved receivables are reviewed on a monthly basis and uncollectible accounts are written off when all reasonable collection efforts have been exhausted.  At December 31, 2011, the gross accounts receivable balance includes approximately 5.1% of customer balances that are in excess of one year.  Management believes any uncollectible amounts are adequately reserved for at December 31, 2011.

 

Goodwill and Other Intangibles

 

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identified assets of businesses acquired. In accordance with ASC 350, Intangibles—Goodwill and Other, goodwill and other intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually, or if certain circumstances indicate a possible impairment may exist. We evaluate recoverability of goodwill using a two-step impairment test approach at the reporting unit level. For goodwill impairment test purposes, we have two reporting units, United States and International.  In the first step, the fair value for the reporting unit is compared to its book value, including goodwill. If the fair value of the reporting unit is less than the book value, a second step is performed, which compares the implied fair value of the reporting unit’s goodwill to the book value of the goodwill. The fair value for the goodwill is determined based on the difference between the fair values of the reporting unit and the net fair values of the identifiable assets and liabilities of such reporting unit. If the fair value of the goodwill is less than the book value, the difference is recognized as an impairment. As a result of the 2011 analysis performed, no impairment charges were required. As of December 31, 2011, our consolidated goodwill balance was $205.3 million.

 

ASC 350 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to the estimated residual values, and reviewed for impairment when impairment indicators exist. Our intangible assets consist of customer lists, trade names, noncompete agreements and patents. Our customer lists are being amortized using the economic useful life method over their estimated weighted-average useful lives of approximately fourteen years. Our noncompete agreements, trade names and patents are being amortized on the straight-line basis over their estimated weighted-average useful lives. As of December 31, 2011, the net balance of our intangible assets was $26.6 million.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation awards in accordance with ASC 718, Compensation-Stock Compensation. Compensation expense is measured by determining the fair value using the Black-Scholes option valuation model and is then recognized over the requisite service period of the awards, which is generally the vesting period, on a straight-line basis for the entire award. This valuation model requires assumptions, which impact the assumed fair value, including the expected life of the stock option, the risk-free interest rate, expected volatility of the Company's stock over the expected life and the expected dividend yield. The Company uses historical data to determine these assumptions and if these assumptions change significantly for future grants, share-based compensation expense will fluctuate in future years.

 

Stock-based compensation cost recognized during the period is based on the portion of the share-based payment awards that are ultimately expected to vest. Accordingly, stock-based compensation cost recognized has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

The Company recorded $2.5 million, $3.1 million and $4.0 million in compensation expense related to stock-based compensation, for the years ended December 31, 2009, 2010 and 2011, respectively. 

 

Income Taxes

 

We account for income taxes in accordance with ASC 740, Income Taxes, under which deferred tax assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and their respective tax bases. A valuation allowance is established to reduce the carrying value of deferred tax assets if it is considered more likely than not that such assets will not be realized. Any change in the valuation allowance would be charged to income in the period such determination was made.

 

In connection with the purchase of CoreVision, Inc. in September 2006, we acquired $880,518 in net operating loss carryforwards that will expire in 2026. At December 31, 2011, $636,438 of losses remain outstanding for future use. In connection with the purchasing of Marketing-Out-of-the-Box in July 2008, we acquired $1,644,746 in net operating loss carryforwards that will expire in 2024. At December 31, 2011, $895,466 of losses remain outstanding for future use. No valuation allowance on our net operating loss carryforwards is considered necessary as the amounts are more likely than not to be realized.

 

19
 

 

Results of Operations

 

The following table sets forth our consolidated statements of income data for the periods presented as a percentage of our revenue:

 

   Years ended December 31, 
   2009   2010   2011 
Consolidated statements of income data:               
Revenue   100.0%   100.0%   100.0%
Cost of goods sold   75.3    75.9    76.4 
                
Gross profit   24.7    24.1    23.6 
Selling, general and administrative expenses   20.3    19.0    18.2 
Depreciation and amortization   2.0    1.9    1.6 
 Preference claim charge           0.1 
                
Income from operations   2.4    3.2    3.6 
Other income (expense)   (0.1)   0.3    0.3 
                
Income before income taxes   2.3    3.5    3.9 
Income tax expense   (0.7)   (1.2)   (1.3)
                
 Net income   1.6%   2.3%   2.6%

 

 

Comparison of years ended December 31, 2009, 2010 and 2011

 

Revenue

 

Our revenue by segment for each of the years presented was as follows:

 

   Years ended December 31, 
   2009   % of Total   2010   % of Total   2011   % of Total 
   (dollars in thousands) 
United States  $369,404    92.2%  $444,477    92.2%  $540,303    85.2%
International   31,043    7.8    37,735    7.8    93,543    14.8 
                               
Revenue  $400,447    100.0%  $482,212    100.0%  $633,846    100.0%

 

2011 compared to 2010. Our revenue increased by $151.6 million, or 31.4%, from $482.2 million in 2010 to $633.8 million in 2011.

 

United States

 

United States revenue increased by $95.8 million, or 21.6%, from $444.5 million in 2010 to $540.3 million in 2011. This increase in revenue is driven primarily by organic new enterprise and transactional account growth, as well as several tuck-in acquisitions of independent brokers.

 

International

 

International revenue increased by $55.8 million, or 147.9%, from $37.7 million in 2010 to $93.5 million in 2011. This increase is due to our expansion into Latin America and continental Europe through the acquisitions of CPRO and Productions Graphics, respectively, during 2011.

 

2010 compared to 2009. Our revenue increased by $81.8 million, or 20.4%, from $400.4 million in 2009 to $482.2 million in 2010.

 

20
 

  

United States

 

United States revenue increased by $75.1 million, or 20.3%, from $369.4 million in 2009 to $444.5 in 2010. This increase in revenue is driven primarily by organic new enterprise account growth, as well as several tuck-in acquisitions of independent brokers.

 

International

 

International revenue increased by $6.7 million, or 21.6%, from $31.0 million in 2009 to $37.7 million in 2010. This increase was largely driven by organic new enterprise account growth in the United Kingdom.

 

Cost of goods sold

 

2011 compared to 2010. Our cost of goods sold increased by $118.3 million, or 32.3%, from $366.2 million in 2010 to $484.5 million in 2011. The increase reflects the revenue growth during 2011.  Our cost of goods sold as a percentage of revenue increased from 75.9% in 2010 to 76.4% in 2011.  The increase in cost of goods sold as a percentage of revenue is a result of our expansion into Latin America, where we generally generate lower gross profit margins.

 

2010 compared to 2009. Our cost of goods sold increased by $64.5 million, or 21.4%, from $301.7 million in 2009 to $366.2 million in 2010. The increase reflects the revenue growth during 2010. Our cost of goods sold as a percentage of revenue increased from 75.3% in 2009 to 75.9% in 2010. The increase in cost of goods sold as a percentage of revenue is a result of our enterprise business generating lower gross profit margins as 71% of our revenue was generated through enterprise revenue in 2010 compared to 66% in 2009.

 

Gross Profit

 

2011 compared to 2010. Our gross profit as a percentage of revenue which we refer to as gross margin decreased from 24.1% in 2010 to 23.6% in 2011. United States gross margin remained relatively consistent with an increase from 23.9% in 2010 to 24.0% in 2011. International gross margin decreased from 25.5% in 2010 to 20.8% in 2011. The decrease is primarily the result of our expansion into Latin America where, as noted above, we generally generate lower gross profit margins.

 

2010 compared to 2009. Our gross profit as a percentage of revenue decreased from 24.7% in 2009 to 24.1% in 2010. United States gross margin decreased from 24.4% in 2009 to 23.9% in 2010. International gross margin decreased from 27.3% in 2009 to 25.5% in 2010. The decrease for both segments 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

 

2011 compared to 2010. Selling, general and administrative expenses increased by $23.8 million, or 26.0%, from $91.8 million in 2010 to $115.6 million in 2011. As a percentage of revenue, selling, general and administrative expenses decreased from 19.0% in 2010 to 18.2% in 2011. The increase in selling, general and administrative expenses is primarily due to incremental sales commission and cost of procurement staff to secure new enterprise accounts. The decrease in sales, general and administrative expenses as a percentage of revenue is primarily the result of increased leverage from higher revenue.

 

2010 compared to 2009. Selling, general and administrative expenses increased by $10.5 million, or 12.9%, from $81.3 million in 2009 to $91.8 million in 2010. As a percentage of revenue, selling, general and administrative expenses decreased from 20.3% in 2009 to 19.0% in 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 increase in bad debt expense, offset by changes to the contingent consideration obligation related to acquisitions made subsequent to December 31, 2008. The decrease in sales, general and administrative expenses as a percentage of revenue is primarily the result of increased leverage from higher revenue.

 

Depreciation and amortization

 

2011 compared to 2010. Depreciation and amortization expense increased by $1.2 million, or 12.9%, from $9.0 million in 2010 to $10.2 million in 2011. The increase in depreciation expense is primarily attributable to purchases of computer hardware and software, equipment and furniture and fixtures as well as amortization of capitalized costs of computer software for internal use. The increase in amortization expense is a result of the amortization of the intangible assets acquired in connection with our acquisitions. As a percentage of revenue, depreciation and amortization expense decreased from 1.9% in 2010 to 1.6% in 2011.

 

2010 compared to 2009. Depreciation and amortization expense increased by $1.0 million, or 12.2%, from $8.0 million in 2009 to $9.0 million in 2010. The increase in depreciation expense is primarily attributable to purchases of computer hardware and software, equipment and furniture and fixtures as well as amortization of capitalized costs of computer software for internal use. The increase in amortization expense is a result of the amortization of the intangible assets acquired in connection with our acquisitions. As a percentage of revenue, depreciation and amortization expense decreased from 2.0% in 2009 to 1.9% in 2010.

 

21
 

 

Income from operations

 

2011 compared to 2010. Income from operations increased by $7.4 million, or 48.7%, from $15.2 million in 2010 to $22.6 million in 2011. As a percentage of revenue, income from operations increased from 3.2% in 2010 to 3.6% in 2011. The increase in income from operations as a percentage of revenue is primarily a result of the decrease in our selling, general and administrative expenses as a percentage of revenue.

 

2010 compared to 2009. Income from operations increased by $5.8 million, or 60.8%, from $9.5 million in 2009 to $15.2 million in 2010. As a percentage of revenue, income from operations increased from 2.4% in 2009 to 3.2% in 2010. The increase in income from operations as a percentage of revenue is primarily a result of the decrease in our selling, general and administrative expenses as a percentage of revenue.

 

Other income and expense

 

2011 compared to 2010. Other income and expense increased by $0.1 million, from income of $1.8 million in 2010 to $1.9 million in 2011. The increase is due to the gain on the sale in 2011 of a portion of the shares we hold in Echo Global Logistics, Inc., a related party and Nasdaq-listed company. The gain on the sale was $3.9 million in 2011 and $3.6 million in 2010. This was partially offset by an increase in interest expense of $0.3 million.

 

2010 compared to 2009. Other income and expense increased by $2.2 million, from other expense of $0.4 million in 2009 to other income of $1.8 million in 2010. The increase is due to the gain on the sale in 2010 of a portion of the shares we hold in Echo Global Logistics, Inc., a related party and Nasdaq-listed company. The gain on the sale was $3.6 million in 2010 and $0.7 million in 2009. This was partially offset by an increase in interest expense of $0.5 million and a decrease in interest income of $0.3 million.

 

Provision for income taxes

 

2011 compared to 2010. Provision for income taxes increased by $2.4 million, or 40.9%, from $5.7 million in 2010 to $8.1 million in 2011. In 2010, the provision for federal and state income taxes was $5.7 million, resulting in an effective tax rate of 33.9%. In 2011, the provision for federal and state income taxes was $8.1 million, resulting in an effective tax rate of 33.1%. The decrease in the effective tax rate for the year ended December 31, 2011 is due to the growth of our business internationally into jurisdictions with lower statutory tax rates.

 

2010 compared to 2009. Provision for income taxes increased by $3.0 million, or 112.3%, from $2.7 million in 2009 to $5.7 million in 2010. In 2009, the provision for federal and state income taxes was $2.7 million, resulting in an effective tax rate of 30.0%. In 2010, the provision for federal and state income taxes was $5.7 million, resulting in an effective tax rate of 33.9%. The increase in the effective tax rate for the year ended December 31, 2010 is due to a reduction in the research and development (R&D) tax credit resulting from our capitalized internally developed software costs offset by the recognition of a domestic production activities deduction.

 

Net income

 

2011 compared to 2010. Net income increased by $5.2 million, or 46.2%, from $11.2 million in 2010 to $16.4 million in 2011. Net income as a percentage of revenue increased from 2.3% in 2010 to 2.6% in 2011. The increase in net income as a percentage of revenue is primarily the result of a decrease in our selling, general and administrative expenses as a percentage of revenue.

 

2010 compared to 2009. Net income increased by $4.9 million, or 77.7%, from $6.3 million in 2009 to $11.2 million in 2010. Net income as a percentage of revenue increased from 1.6% in 2009 to 2.3% in 2010. The increase in net income as a percentage of revenue is primarily the result of a decrease in our selling, general and administrative expenses as a percentage of revenue. 

 

22
 

 

 Adjusted EBITDA

 

Adjusted EBITDA, which represents income from operations with the addition of depreciation and amortization, stock-based compensation expense, and the preference claim charge discussed in Note 6 “Commitments and Contingencies” to the financial statements, is considered a non-GAAP financial measure under SEC regulations. Income from operations is the most directly comparable financial measure calculated in accordance with GAAP. We present this measure as supplemental information to help our investors better understand trends in our business over time. Our management team uses Adjusted EBITDA to evaluate the performance of our business. Adjusted EBITDA is not equivalent to any measure of performance required to be reported under GAAP, nor should this data be considered an indicator of our overall financial performance and liquidity. Moreover, the Adjusted EBITDA definition we use may not be comparable to similarly titled measures reported by other companies. Our Adjusted EBITDA by segment for each of the years presented was as follows:

 

   Years ended December 31, 
   2009   % of Total   2010   % of Total   2011   % of Total 
   (dollars in thousands) 
United States  $28,428    142.4%  $37,644    137.6%  $48,198    127.8%
International   2,806    14.1    3,620    13.2    6,576    17.4 
Other(1)   (11,265)   (56.5)   (13,900)   (50.8)   (17,060)   (45.2)
                               
Adjusted EBITDA  $19,969    100.0%  $27,364    100.0%  $37,714    100.0%

  

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

 

2011 compared to 2010. Adjusted EBITDA increased by $10.4 million, or 37.8%, from $27.4 million in 2010 to $37.7 million in 2011. United States Adjusted EBITDA increased by $10.6 million, or 28.0%, from $37.6 million in 2010 to $48.2 million in 2011. International Adjusted EBITDA increased by $3.0 million, or 82%, from $3.6 million in 2010 to $6.6 million in 2011. The increases in both segments were due to increased gross profit, as discussed above, offset by increased selling, general and administrative expenses resulting from domestic and international acquisitions and support costs from organic growth. Other Adjusted EBITDA decreased by $3.2 million, or 22.7%, from expense of $13.9 million to expense of $17.1 million due to increased selling, general and administrative expenses to support revenue growth.

 

2010 compared to 2009. Adjusted EBITDA increased by $7.4 million, or 37.0%, from $20.0 million in 2009 to $27.4 million in 2010. United States Adjusted EBITDA increased by $9.2 million, or 32.4%, from $28.4 million in 2009 to $37.6 million in 2010. International Adjusted EBITDA increased by $0.8 million, or 29.0%, from $2.8 million in 2009 to $3.6 million in 2010. The increases in both segments were due to increased gross profit, as discussed above, offset by increased selling, general and administrative expenses resulting from acquisitions (both in the domestically and internationally) and support costs from organic growth. Other Adjusted EBITDA decreased by $2.6 million, or 23.4%, from expense of $11.3 million to expense of $13.9 million due to increased selling, general and administrative expenses to support revenue growth.

 

The table below provides a reconciliation of Adjusted EBITDA to income from operations for each of the years presented:

 

   Years ended December 31, 
   2009   2010   2011 
  (dollars in thousands)  
Income from operations  $9,457   $15,207   $22,616 
Depreciation and amortization   8,031    9,009    10,172 
Stock-based compensation expense   2,481    3,148    3,976 
Preference claim charge           950 
Adjusted EBITDA  $19,969   $27,364   $37,714 

 

23
 

 

Quarterly Results of Operations

 

The following table represents unaudited statement of income data for our most recent eight fiscal quarters. You should read the following table in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The results of operations of any quarter are not necessarily indicative of the results that may be expected for any future period.

 

   Three months ended 
   Mar. 31,
2010
   Jun. 30,
2010(1)
   Sept. 30,
2010(2)
   Dec. 31,
2010(3)
   Mar. 31,
2011(4)
   Jun. 30,
2011(5)
   Sept. 30,
2011(6)
   Dec. 31,
2011(7)
 
   (unaudited) 
   (in thousands, except per share amounts) 
Revenue  $112,213   $120,471   $119,131   $130,397   $145,181   $155,612   $157,819   $175,234 
Gross profit   26,933    29,040    28,509    31,530    33,328    36,342    37,093    42,600 
Net income   2,168    3,142    2,365    3,535    2,790    3,700    4,138    5,765 
Net income per share:                                        
Basic  $0.05   $0.07   $0.05   $0.08   $0.06   $0.08   $0.09   $0.12 
Diluted  $0.05   $0.07   $0.05   $0.07   $0.06   $0.08   $0.09   $0.12 

 

(1)The Company made an acquisition during the second quarter of 2010 which was not material to the Company’s operations. Financial results from this acquisition are included in the Consolidated Financial Statements beginning April of 2010.
(2)The Company made acquisitions during the third quarter of 2010 which were not material to the Company’s operations individually or in the aggregate. Financial results for these acquisitions are included in the Consolidated Financial Statements beginning August of 2010.
(3)The Company made acquisitions during the fourth quarter of 2010 which were not material to the Company’s operations individually or in the aggregate. Financial results for these acquisitions are included in the Consolidated Financial Statements beginning October of 2010.
(4)The Company made acquisitions during the first quarter of 2011 which were not material individually or in the aggregate. Financial results from these acquisitions are included in the Consolidated Financial Statements beginning January of 2011.
(5)The Company made acquisitions during the second quarter of 2011 which were not material to the Company’s operations individually or in the aggregate. Financial results for these acquisitions are included in the Consolidated Financial Statements beginning April of 2011.
(6)The Company made acquisitions during the third quarter of 2011 which were not material to the Company’s operations individually or in the aggregate. Financial results for these acquisitions are included in the Consolidated Financial Statements beginning July of 2011.
(7)The Company acquired Productions Graphics on October 24, 2011 as well as another company which was not material to the Company’s operations. Financial results for these acquisitions are included in the Consolidated Financial Statements beginning October of 2011.

 

Impact of Inflation

 

We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and changing prices did not have a material impact on our operations in 2009, 2010 or 2011.

 

Liquidity and Capital Resources

 

At December 31, 2011, we had $13.2 million of cash and cash equivalents and $1.1 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 in 2011 was $27.8 million and primarily reflected net income of $16.4 million and $12.8 million of non-cash items offset by $1.4 million used to fund 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 $24.8 million, offset by an increase in accounts payable of $25.7 million.

 

In 2010, 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 in 2010 was $8.4 million and primarily reflected net income of $11.2 million and $9.7 million of non-cash items offset by $12.5 million used to fund 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 $21.4 million and decrease in customer deposits of 2.7 million, offset by a decrease in prepaid and other of $5.4 million and increase in income taxes payable of $3.6 million.

 

In 2009, cash provided by operating activities was $14.2 million and primarily reflected net income of $6.3 million and $14.3 million of non-cash items offset by $6.4 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 and unbilled revenue of $10.4 million, offset by a decrease in income tax payable of $9.0 million, a decrease in customer deposits of $3.6 million and an increase in prepaid and other of $3.6 million.

 

24
 

 

Investing Activities.     Cash used in investing activities of $33.6 million was attributable to $29.3 million in payments made in connection with acquisitions and capital expenditures of $8.2 million, offset by proceeds of $4.0 million from the sale of Echo shares.

 

In 2010, cash used in investing activities of $4.2 million was attributable to $16.7 million in payments made in connection with acquisitions and capital expenditures of $4.9 million, offset by proceeds of $13.8 million attributable to the proceeds on sale of marketable securities and proceeds on sale of Echo shares of $3.6 million.

 

In 2009, cash used in investing activities in 2009 of $18.9 million was attributable to $12.8 million of earn-out payments made in connection with our acquisitions and capital expenditures of $7.2 million, offset by proceeds of $850,000 from the sale of a portion of our Echo investment.

 

Financing Activities.     Cash used in financing activities in 2011 of $14.1 million was primarily attributable to the $12.6 million of additional borrowings under our revolving credit facility, offset by the excess tax benefit of stock award exercises of $1.1 million.

 

In 2010, cash used in financing activities of $1.8 million was primarily attributable to the $2.1 million of additional borrowings under our revolving credit facility and $0.6 million in deferred financing costs for the new revolving credit facility entered into in August 2010, offset by the excess tax benefit of stock awards exercised of $0.9 million.

 

In 2009, cash provided by financing activities in 2009 of $3.8 million was primarily attributable to the $3.8 million of additional borrowings under our revolving credit facility.

 

On August 2, 2010, we entered into a credit agreement with a syndicate of lenders that matures on August 2, 2014. This agreement replaced our former credit agreement with the same lenders and provides for a senior secured revolving credit facility in an initial aggregate principal amount of up to $100.0 million.  We had $60.0 million in outstanding borrowings under this facility as of December 31, 2011.  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 agreement.  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 require us to maintain a maximum leverage ratio, a minimum interest coverage ratio and a minimum net worth.  As of December 31, 2011, we were in compliance with these various covenants.

 

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.

 

We earn a significant amount of our operating income outside the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. We do not currently foresee a need to repatriate funds, however, should we require more capital in the U.S. than is generated by our operations locally or through debt or equity issuances, we could elect to repatriate funds held in foreign jurisdictions. If foreign earnings were to be remitted to the U.S., foreign tax credits would be available to reduce any U.S. tax due upon repatriation. Included in our cash and cash equivalents are amounts held by foreign subsidiaries. We had $2.5 million and $7.5 million foreign cash and cash equivalents as of December 31, 2010 and 2011, respectively, which are generally denominated in the local currency where the funds are held.

 

25
 

   

Contractual Obligations

 

As of December 31, 2011, we had the following contractual obligations:

 

   Payments due by period 
   Total   Less than
1 year
   1-3 years   3-5
years
   More than
5 years
 
   (in thousands) 
Accounts payable  $102,246   $102,246   $   $   $ 
Operating lease obligations   28,472    5,371    9,211    5,691    8,199 
Revolving credit facility   60,000        60,000         
Due to seller   7,554    7,554             
                          
Total  $198,272   $115,171   $69,211   $5,691   $8,199 

 

This table does not include contingent consideration obligations related to any acquisitions as these payments are payable contingent upon the achievement of future performance measures not known at this time. As of December 31, 2011, the maximum payments potentially due on these contingent consideration obligations is $111.7 million. See Note 3 “Acquisitions.”

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Recent Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (FASB) amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. While the new guidance changes the presentation of comprehensive income, there are no changes to components that are recognized in net income or other comprehensive income under current accounting guidance.

 

In September 2011, the FASB amended its standards related to goodwill impairment testing with the objective being to simplify the annual goodwill impairment process by allowing entities to use qualitative factors first before performing the traditional two-step goodwill impairment test. The two-step impairment test is now only required if an entity determines through this qualitative analysis that it is more likely than not that the fair value of the reporting unit is less than its carrying value. Adoption of the new standard was permitted for the Company’s fourth quarter 2011 impairment test, but we elected to perform the traditional two-step test until a further assessment could be made. We have not yet determined if this standard will be adopted in 2012. Because the measurement of a potential impairment has not changed, the standard will not have an impact on our consolidated results of operations, financial position or cash flows.

 

Related Party Transactions

 

Investment in Echo Global Logistics, Inc.

 

In February 2005, we 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 us as a majority of the members of our 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 September 25, 2009, we owned 627,778 shares of Echo’s common stock after the effects of the one-for-two reverse stock split.

 

26
 

  

We sold 271,913 and 285,911 of its shares of Echo common stock for $3,595,426 and $3,945,392 and recorded a gain on sale of investment of $3,578,431 and $3,909,678 for the years ended December 31, 2010 and 2011, respectively. We have 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 8 for additional information on these securities). The gain on sale of investment is included in other income. Our investment in Echo was recorded at cost prior to the completion of Echo’s initial public offering. At December 31, 2011, we owned 69,954 shares of Echo’s common stock.

 

Agreements and Services with Related Parties

 

In the ordinary course, we also provide print procurement services to Echo. The total amount billed for such print procurement services during the years ended December 31, 2009, 2010 and 2011 were approximately $68,000, $60,000 and $83,000, respectively. In addition, Echo has provided transportation services to us. As consideration for these services, Echo billed us approximately $3.6 million, $5.7 million and $8.7 million for the years ended December 31, 2009, 2010 and 2011, respectively. The net amounts payable to Echo at December 31, 2010 and 2011 were $73,068 and $122,355, respectively.

 

We have a supplier rebate program with Echo pursuant to which we receive 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, we received approximately $20,000 and $36,723 in rebates for the years ended December 31, 2010 and 2011, respectively.

 

In April 2010, we entered into an agreement with Echo pursuant to which it sub-leases a portion of our office space in Chicago, and pays $12,000 per month of our lease payment and overhead expenses related to the space. Echo paid us $108,000 and $45,800 under this agreement for the years ended December 31, 2010 and 2011, respectively. This agreement was terminated on April 30, 2011.

 

In August 2009, we entered into an agreement with Groupon, Inc. ("Groupon") pursuant to which Groupon sub-leases a portion of our office space in Chicago, and pays $18,000 per month of our lease payment and overhead expenses related to the space. Two members of our Board of Directors, Eric P. Lefkofsky 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 us $54,000 under this agreement for the three months ended March 31, 2010. The agreement was terminated on March 31, 2010.

 

During the second quarter of 2010, we entered into an agreement with Groupon related to corporate procurement cards. The agreement allows Groupon to obtain corporate procurement cards under our existing credit arrangement. Under the agreement, we billed Groupon $64,000 and $88,000 during the years ended December 31, 2010 and 2011. The net amount receivable from Groupon was $40,000 at December 31, 2011.

 

During 2011, we provided promotional product procurement services to Groupon. The total amount billed for such services during the year ended December 31, 2011 was approximately $1.6 million. The net amount receivable from Groupon for these services was $61,186 at December 31, 2011.

 

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

 

Commodity Risk

 

We are dependent upon the availability of paper, and paper prices represent a substantial portion of the cost of our products. The supply and price of paper depend on a variety of factors over which we have no control, including environmental and conservation regulations, natural disasters and weather. We believe a 10% increase in the price of paper would not have a significant effect on the Company’s consolidated statements of income or cash flows, as these costs are generally passed through to our clients.

 

Interest Rate Risk

 

We have exposure to changes in interest rates on our revolving credit facility. Interest is payable at the adjusted LIBOR rate or the alternate base. 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.

 

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.  The average duration of all of our investments as of December 31, 2011 was less than one year.  Due to the short-term nature of our investments, we believe that there is no material risk exposure.

 

Foreign Currency Risk

 

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 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.

 

27
 

 

Item 8.Financial Statements and Supplementary Data

 

INDEX TO FINANCIAL STATEMENTS AND

FINANCIAL STATEMENT SCHEDULE

 

     
INNERWORKINGS, INC.:    
   
Management’s Assessment of Internal Control over Financial Reporting 29  
Report of Independent Registered Public Accounting Firm 30  
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting 31  
Consolidated Balance Sheets 32  
Consolidated Statements of Income 33  
Consolidated Statements of Stockholders’ Equity 34  
Consolidated Statements of Cash Flows 35  
Notes To Consolidated Financial Statements 36  

 

 

28
 

 

MANAGEMENT’S ASSESSMENT OF

INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The financial statements were prepared by management, which is responsible for their integrity and objectivity and for establishing and maintaining adequate internal controls over financial reporting.

 

The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

 

i.pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

ii.provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

iii.provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal controls may vary over time.

 

Management assessed the design and effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework. We have excluded from our assessment the internal control over financial reporting at CPRO and Productions Graphics, which were acquired on February 4, 2011 and October 24, 2011, respectively, and whose financial statements reflect total assets and total revenue constituting 23% and 8%, respectively, of our consolidated financial statement amounts as of and for the year ended December 31, 2011.

 

Based on management’s assessment using those criteria, as of December 31, 2011, management believes that the Company’s internal controls over financial reporting are effective.

 

Ernst & Young, LLP, independent registered public accounting firm, has audited the financial statements of the Company for the fiscal years ended December 31, 2011, 2010 and 2009 and the Company’s internal control over financial reporting as of December 31, 2011. Their reports are presented on the following pages.

 

InnerWorkings, Inc.

March 7, 2012

 

29
 

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

of InnerWorkings, Inc.

 

We have audited the accompanying consolidated balance sheets of InnerWorkings, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of InnerWorkings, Inc. at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), InnerWorkings, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2012, expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

Chicago, Illinois

March 7, 2012

 

30
 

 

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

 

The Board of Directors and Stockholders

of InnerWorkings, Inc.

 

We have audited InnerWorkings, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). InnerWorkings, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As indicated in the accompanying Management’s Assessment of Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Production Graphics and CPRO, which are included in the 2011 consolidated financial statements of InnerWorkings, Inc., and constituted $105 million and $17 million of total and net assets, respectively, as of December 31, 2011 and $54 million and $2 million of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of InnerWorkings, Inc. also did not include an evaluation of the internal control over financial reporting for these entities.

 

In our opinion, InnerWorkings, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Innerworkings, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011, and our report dated March 7, 2012 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

Chicago, Illinois

March 7, 2012

 

31
 

 

InnerWorkings, Inc.

 

Consolidated Balance Sheets

 

    December 31,     December 31,  
    2010     2011  
Assets            
Current assets:                
Cash and cash equivalents   $ 5,259,272     $ 13,219,385  
Short-term investments     4,284,614       1,129,757  
Accounts receivable, net of allowance for doubtful accounts of $3,610,977 and $3,293,241, respectively     85,110,289       124,678,502  
Unbilled revenue     24,626,558       28,318,751  
Inventories     9,674,961       14,201,606  
Prepaid expenses     9,836,486       11,066,451  
Advances to related parties     93,191       268,119  
Deferred income taxes     307,396       1,729,349  
Other current assets     7,283,207       13,875,918  
Total current assets     146,475,974       208,487,838  
Property and equipment, net     9,887,004       12,086,627  
Intangibles and other assets:                
Goodwill     93,476,206       205,282,587  
Intangible assets, net of accumulated amortization of $9,789,144 and $13,503,735, respectively     23,058,774       26,565,315  
Deferred income taxes     5,899,620       4,246,592  
Other assets     1,127,202       984,227  
      123,561,802       237,078,721  
Total assets   $ 279,924,780     $ 457,653,186  
Liabilities and stockholders' equity                
Current liabilities:                
Accounts payable-trade   $ 55,604,566     $ 102,245,865  
Advances from related parties     166,259       44,578  
Current portion of contingent consideration     1,462,095       14,232,980  
Due to seller     560,000       7,554,000  
Other liabilities     4,354,016       6,979,516  
Accrued expenses     6,791,259       17,324,598  
Total current liabilities     68,938,195       148,381,537  
Revolving credit facility     47,400,000       60,000,000  
Contingent consideration, net of current portion     3,395,346       67,769,862  
Other long-term liabilities     7,140       -  
Total liabilities     119,740,681       276,151,399  
Stockholders' equity:                
Common stock, par value $0.0001 per share, 57,269,604 and 57,903,418 shares issued, 46,092,291 and 46,998,011 shares outstanding as of December 31, 2010 and 2011, respectively     461       470  
Additional paid-in capital     174,537,524       179,692,823  
Treasury stock at cost, 11,177,313 and 10,905,407 shares as of December 31, 2010 and 2011, respectively     (74,307,200 )     (71,241,947 )
Accumulated other comprehensive income     2,934,381       268,331  
Retained earnings     57,018,933       72,782,110  
Total stockholders' equity     160,184,099       181,501,787  
Total liabilities and stockholders' equity   $ 279,924,780     $ 457,653,186  

 

See accompanying notes to the consolidated financial statements.

 

32
 

 

InnerWorkings, Inc. 

 

Consolidated Statements of Income

 

    Years Ended December 31,  
    2009     2010     2011  
Revenue   $ 400,447,044     $ 482,212,101     $ 633,846,120  
Cost of goods sold     301,671,851       366,199,728       484,483,592  
Gross profit     98,775,193       116,012,373       149,362,528  
Operating expenses:                        
Selling, general, and administrative expenses     81,287,702       91,796,566       115,624,276  
Depreciation and amortization     8,030,772       9,008,514       10,171,758  
Preference claim charge     -       -       950,000  
Income from operations     9,456,719       15,207,293       22,616,494  
Other income (expense):                        
Gain on sale of investment     746,259       3,578,431       3,948,082  
Interest income     411,688       150,506       182,050  
Interest expense     (1,478,019 )     (1,928,210 )     (2,251,010 )
Other, net     (119,132 )     (48,725 )     -  
Total other income (expense)     (439,204 )     1,752,002       1,879,122  
Income before taxes     9,017,515       16,959,295       24,495,616  
Income tax expense     2,708,057       5,748,806       8,102,609  
Net income   $ 6,309,458     $ 11,210,489     $ 16,393,007  
                         
Basic earnings per share   $ 0.14     $ 0.25     $ 0.35  
Diluted earnings per share   $ 0.13     $ 0.24     $ 0.34  

 

See accompanying notes to the consolidated financial statements.

 

 

33
 

 

InnerWorkings, Inc.

 

Consolidated Statements of Stockholders’ Equity

 

                                  Accumulated              
    Common Stock     Treasury Stock           Other              
                            Additional     Comprehensive     Retained        
    Shares     Amount     Shares     Amount     Paid-in-Capital     (Loss)     Earnings     Total  
                                                 
Balance at December 31, 2008     45,344,448      $ 453      $ 11,177,313      $ (74,307,200 )    $ 167,729,745     816,045      $ 39,498,986      $ 133,738,029  
                                                                 
Net income                                                     6,309,458       6,309,458  
Other comprehensive income:                                                                
Foreign currency translation adjustment                                             (593,663 )             (593,663 )
Change in unrealized gain on marketable securities, net of tax of $2,918,571                                             4,995,043               4,995,043  
Total other comprehensive income                                             4,401,380               4,401,380  
Total comprehensive income                                                             10,710,838  
Issuance of common stock upon exercise of stock awards     284,237       3                       98,907                       98,910  
Excess tax benefit derived from stock award exercises                                     21,080                       21,080  
Stock based compensation expense                                     2,481,159                       2,481,159  
                                                                 
Balance at December 31, 2009     45,628,685       456       11,177,313       (74,307,200 )     170,330,891       5,217,425       45,808,444       147,050,016  
                                                                 
Net income                                                     11,210,489       11,210,489  
Other comprehensive income:                                                                
Foreign currency translation adjustment                                             (112,622 )             (112,622 )
Change in unrealized gain on marketable securities, net of tax of $1,494,475                                             (2,170,422 )             (2,170,422 )
Total other comprehensive income                                             (2,283,044 )             (2,283,044 )
Total comprehensive income                                                             8,927,445  
Issuance of common stock upon exercise of stock awards     463,606       5                       195,556                       195,561  
Excess tax benefit derived from stock award exercises                                     862,458                       862,458  
Stock based compensation expense                                     3,148,619                       3,148,619  
                                                                 
Balance at December 31, 2010     46,092,291       461       11,177,313       (74,307,200 )     174,537,524       2,934,381       57,018,933       160,184,099  
                                                                 
Net income                                                     16,393,007       16,393,007  
Other comprehensive income:                                                                
Foreign currency translation adjustment                                             (540,032 )             (540,032 )
Change in unrealized gain on marketable securities, net of tax of $976,103                                             (2,126,018 )             (2,126,018 )
Total other comprehensive income                                             (2,666,050 )             (2,666,050 )
Total comprehensive income                                                             13,726,957  
Issuance of common stock upon exercise of stock awards     633,814       6                       354,578                       354,584  
Issuance of treasury shares as consideration for acquisitions     271,906       3       (271,906 )     3,065,253       (200,004 )             (629,830 )     2,235,422  
Excess tax benefit derived from stock award exercises                                     1,024,538                       1,024,538  
Stock based compensation expense                                     3,976,187                       3,976,187  
                                                                 
Balance at December 31, 2011     46,998,011      $ 470      $ 10,905,407      $ (71,241,947 )    $ 179,692,823      $ 268,331      $ 72,782,110      $ 181,501,787  

 

 See accompanying notes to consolidated financial statements.

 

34
 

  

 InnerWorkings, Inc.

 

Consolidated Statements of Cash Flows

 

    Years Ended December 31,  
    2009     2010     2011  
Cash flows from operating activities                        
Net income   $ 6,309,458     $ 11,210,489     $ 16,393,007  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:                        
Depreciation and amortization     8,030,772       9,008,514       10,171,758  
Deferred income taxes     3,100,696       801,406       1,228,443  
Stock compensation expense     2,481,159       3,148,619       3,976,187  
Excess tax benefit of stock options exercised     (21,080 )     (862,458 )     (1,144,344 )
Deferred financing amortization     196,365       259,806       255,949  
Reduction in contingent consideration     -       (1,987,042 )     (147,529 )
Gain on sale of investment     (746,259 )     (3,578,431 )     (3,948,082 )
Bad debt provision     1,291,727       2,901,216       2,414,710  
Change in assets, net of acquisitions:                        
Accounts receivable and unbilled revenue     10,379,817       (21,385,688 )     (24,785,185 )
Inventories     (1,201,320 )     368,909       (3,326,116 )
Prepaid expenses and other     (3,639,560 )     5,360,326       (2,715,853 )
Change in liabilities, net of acquisitions:                        
Accounts payable     (1,619,641 )     1,027,234       25,729,420  
Advances to/from related parties     (4,411 )     52,586       (296,609 )
Customer deposits     (3,631,936 )     (2,731,279 )     (14,993 )
Income tax payable     (9,007,997 )     3,586,841       161,009  
Accrued expenses and other     2,284,071       1,171,476       3,878,764  
Net cash provided by operating activities     14,201,861       8,352,524       27,830,536  
                         
Cash flows from investing activities                        
Purchases of property and equipment     (7,165,423 )     (4,897,251 )     (8,182,832 )
Proceeds from sale of marketable securities     850,000       3,595,427       3,952,172  
Proceeds from sale of short-term investments     196,651       13,818,771       -  
Payments for acquisitions, net of cash acquired     (12,829,238 )     (16,699,623 )     (29,344,692 )
Net cash used in investing activities     (18,948,010 )     (4,182,676 )     (33,575,352 )
                         
Cash flows from financing activities                        
Net borrowings (repayments) from revolving credit facility and short-term debt     3,794,907       (2,098,107 )     12,600,000  
Issuance of shares     98,910       195,561       354,584  
Deferred financing expense     -       (633,600 )     -  
Tax benefit of stock options exercised     21,080       862,458       1,144,345  
Principal payments on capital lease obligations     (144,432 )     (106,693 )     (31,217 )
Net cash provided by (used in) financing activities     3,770,465       (1,780,381 )     14,067,712  
                         
Effect of exchange rate changes on cash and cash equivalents     (132,265 )     (34,101 )     (362,783 )
Increase (decrease) in cash and cash equivalents     (1,107,949 )     2,355,366       7,960,113  
Cash and cash equivalents, beginning of period     4,011,855       2,903,906       5,259,272  
Cash and cash equivalents, end of period   $ 2,903,906     $ 5,259,272     $ 13,219,385  
                         
Supplemental disclosure of cash flow information                        
Cash paid during the year for interest     1,281,654       1,668,404       1,995,060  
Cash paid for income taxes     9,372,807       573,773       4,068,966  

 

 See accompanying notes to consolidated financial statements.

 

35
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements

 

1. Description of the Business

 

InnerWorkings, Inc. (the Company) is a leading provider of global print management and promotional solutions to corporate clients across a wide range of industries. With proprietary technology, an extensive supplier network and deep domain expertise, the Company procures, manages and delivers printed materials and promotional products as part of a comprehensive outsourced enterprise solution.

 

The Company is organized and managed as two business segments, United States and International, and is viewed as two operating segments by the chief operating decision maker for purposes of resource allocation and assessing performance. See Note 15 for further information about the Company’s reportable segments.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of InnerWorkings, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Preparation of Financial Statements and Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results can differ from those estimates.

 

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.

 

Revenue Recognition

 

Revenue is recognized when title transfers, which occurs when the product is shipped either from a third party to the customer or shipped directly from our warehouse to the customer. Unbilled revenue relates to shipments that have been made to customers for which the related account receivable has not yet been billed.

 

In accordance with Accounting Standards Codification (“ASC”) 605-45-45, Revenue Recognition, Principal Agent Considerations and Other Presentation Matters, the Company recognizes revenue on a gross basis, as opposed to a net basis similar to a commission arrangement, because it bears the risks and benefits associated with revenue-generated activities by: (1) acting as a principal in the transaction; (2) establishing prices; (3) being responsible for fulfillment of the order; (4) taking the risk of loss for collection, delivery and returns; and (5) marketing the products, among other things.

 

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

 

Cash and Cash Equivalents

  

The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.

  

36
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

2. Summary of Significant Accounting Policies (Continued)

 

Accounts Receivable

 

Accounts receivable are uncollateralized customer obligations due under normal trade terms. Invoices require payment within 30 to 90 days from the invoice date. Accounts receivable are stated at the amount billed to the customer. Customer account balances with invoices past due 90 days are considered delinquent. Interest is not accrued on outstanding balances.

 

The carrying amount of accounts receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. Fully reserved receivables are reviewed on a monthly basis and uncollectible accounts are written off when all reasonable collection efforts have been exhausted.

 

Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method, and represents the lower of replacement cost or estimated realizable value. Inventories consist of purchased finished goods.

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. The estimated useful lives, by asset class, are as follows:

 

Computer equipment and software   3 to 5 years
Furniture and fixtures   5 years

 

Leasehold improvements are depreciated using the straight-line method over the shorter of their estimated useful lives or the terms of the related leases.

 

Internal Use Software

 

In accordance with ASC 350-40, Intangibles—Goodwill and Other, Internal-Use Software, certain costs incurred in the planning and evaluation stage of internal use computer software are expensed as incurred. Costs incurred during the application development stage are capitalized and included in property and equipment. Capitalized internal use software costs are depreciated over the expected economic life of three to five years using the straight-line method. Capitalized internal use software asset depreciation expense for the years ended December 31, 2009, 2010 and 2011 was $3,427,460, $4,696,075 and $5,091,669, respectively. At December 31, 2010 and 2011, the net book value of internal use software costs were $7,536,534 and $7,089,106, 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 two reporting units, United States and International. In the first step, the fair value for each reporting unit 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 reporting unit 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 of the goodwill, 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 2011 analysis performed, no impairment charges were required.

  

37
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

2. Summary of Significant Accounting Policies (Continued)

 

The following is a summary of the goodwill balance for each operating segment as of December 31:

 

   United States   International   Total 
Balance as of December 31, 2009  $72,368,485   $5,537,218   $77,905,703 
Goodwill acquired related to 2010 acquisitions   6,067,554        6,067,554 
Finalization of purchase accounting for prior year acquisitions   8,212,319    1,322,014    9,534,333 
Foreign exchange impact       (31,384)   (31,384)
                
Balance as of December 31, 2010   86,648,358    6,827,848    93,476,206 
Goodwill acquired related to 2011 acquisitions   16,831,883    80,034,819    96,866,702 
Finalization of purchase accounting for prior year acquisitions   11,128,049    3,854,860    14,982,909 
Foreign exchange impact       (43,230)   (43,230)
                
Balance as of December 31, 2011  $114,608,290   $90,674,297   $205,282,587 

 

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 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, twelve years and ten years, respectively.

 

The following is a summary of the intangible assets as of December 31:

 

   2010   2011   Weighted-
Average Life
 
Customer lists  $28,548,856   $35,485,590    14.1 years 
Noncompete agreements   1,000,016    1,077,349    3.9 years 
Trade names   3,260,590    3,467,655    12.4 years 
Patents   38,456    38,456    10.0 years 
                
    32,847,918    40,069,050      
Less accumulated amortization   (9,789,144)   (13,503,735)     
                
Intangible assets, net  $23,058,774   $26,565,315      

 

Amortization expense related to these intangible assets was $3,527,792, $3,140,059 and $3,730,102 for the years ended December 31, 2009, 2010 and 2011, respectively.

 

The estimated amortization expense for the next five years is as follows:

 

2012  $3,191,129 
2013   2,812,266 
2014   2,535,052 
2015   2,409,986 
2016   2,325,692 
Thereafter   13,291,191 
      
   $26,565,315 

 

Shipping and Handling Costs

 

Shipping and handling costs are classified in cost of goods sold in the consolidated statements of income.

 

38
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

2. Summary of Significant Accounting Policies (Continued)

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, under which deferred tax assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and their respective tax bases. A valuation allowance is established to reduce the carrying value of deferred tax assets if it is considered more likely than not that such assets will not be realized. Any change in the valuation allowance would be charged to income in the period such determination was made.

 

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. There was no interest or penalties related to unrecognized tax benefits for the years ended December 31, 2009, 2010 and 2011.

 

Based on the Company’s evaluation, it was concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. The evaluation was performed for the tax years ended December 31, 2009, 2010 and 2011, the tax years which remain subject to examination by major tax jurisdictions as of December 31, 2011.

 

Advertising

 

Costs of advertising, which are expensed as incurred by the Company, were $133,458, $266,661 and $305,558 for each of the years ended December 31, 2009, 2010 and 2011, respectively.

 

Comprehensive Income

 

The components of accumulated comprehensive income included in the Consolidated Balance Sheets at December 31, 2010 and 2011 are as follows:

 

   Year ended December 31, 
   2010   2011 
Unrealized gain on marketable securities          
Gross  $4,223,134   $1,121,013 
Income tax expense   (1,424,096)   (447,993)
Net   2,799,038    673,020 
Foreign currency translation adjustment   135,343    (404,689)
           
Total accumulated other comprehensive income  $2,934,381   $268,331 

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation awards in accordance with ASC 718, Compensation-Stock Compensation. Compensation expense is measured by determining the fair value using the Black-Scholes option valuation model and is then recognized over the requisite service period of the awards, which is generally the vesting period, on a straight-line basis for the entire award.

 

Stock-based compensation cost recognized during the period is based on the portion of the share-based payment awards that are ultimately expected to vest. Accordingly, stock-based compensation cost recognized has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

39
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

3. Acquisitions

 

Productions Graphics

 

On October 24, 2011, the Company acquired Productions Graphics, a leading international print management firm, headquartered in Paris, France, with offices in countries throughout Continental Europe, including France, Hungary, Germany, Spain and Italy. The aggregate purchase price for this acquisition is an amount up to €67,911,000 (the “Consideration”). The Consideration will be payable as follows: (A) €4,191,000 paid in cash at closing, subject to a working capital adjustment; (B) €1,620,000 composed of 238,572 shares of common stock issued on December 19, 2011; and (C) up to €62,100,000 to be paid seventy percent (70%) in cash and thirty percent (30%) in shares of Company Common Stock if certain financial milestones are achieved during certain measurement periods between October 1, 2011 and December 31, 2015. As a result of this acquisition, the Company continues to broaden its global geographic resources throughout Continental Europe and has added over 70 employees, including sales executives and their corresponding production teams.

 

Productions Graphics contributed revenues and net income which comprised approximately 2% and 9%, respectively, of the Company’s consolidated results for the year ended December 31, 2011. The following unaudited pro forma summary presents consolidated financial information of the Company as if the business combination had occurred on January 1, 2010.

 

   Year ended December 31, 
   2010   2011 
         
Revenue  $504,587,048   $652,535,278 
Gross profit   122,112,700    155,366,088 
Net income   11,886,385    16,465,952 

 

The following table summarizes the consideration transferred to acquire Productions Graphics and the amount of identified assets acquired and liabilities assumed at the acquisition date. At December 31, 2011, the purchase price allocation is preliminary and subject to change as more detailed analyses are completed and additional information about their fair value of assets and liabilities becomes available. Specifically, the Company is in the process of determining the fair values of the intangible assets acquired and the contingent consideration liability. Changes to these fair values will also impact the amount of goodwill recorded in connection with this acquisition. The valuations of these items will be completed during 2012.

 

Cash  $5,066,072 
Common stock   2,235,422 
Contingent consideration   64,035,811 
      
Total consideration transferred  $71,337,305 
      
Cash and cash equivalents  $654,959 
Accounts receivable   9,162,618 
Inventory   28,820 
Other assets   3,971,475 
Goodwill   70,833,939 
Accounts payable   (6,657,865)
Other current liabilities   (6,034,374)
Other noncurrent liabilities   (622,267)
      
Total identifiable net assets and goodwill  $71,337,305 

 

On December 19, 2011, the Company issued 238,572 treasury shares for component (B) of the Consideration discussed above. The number of shares issued was determined using the December 19, 2011 closing stock price of $9.37 and the October 21, 2011 foreign exchange rate of €0.7247 per $1.00.

 

The $70,833,939 of goodwill was assigned to the International segment. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of Productions Graphics. None of the goodwill is expected to be deductible for income tax purposes.

 

40
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

3. Acquisitions (Continued)

 

Other 2011 Acquisitions

 

During 2011, the Company made eight other acquisitions including a Latin American business and other domestic companies with experienced sales executives, or groups of sales executives, with established books of business.  None of these acquisitions were individually material.

 

These acquisitions contributed revenues and net income which comprised approximately 10% and 18%, respectively, of the Company’s consolidated results for the year ended December 31, 2011. Pro forma results of these acquisitions are not disclosed as these acquisitions would not have a material impact on the Company's financial statements.

 

The following table summarizes the total consideration transferred to acquire these companies and the amount of identified assets acquired and liabilities assumed at the acquisition dates. At December 31, 2011, the purchase price allocations are preliminary and subject to change as more detailed analyses are completed and additional information about their fair value of assets and liabilities becomes available. Specifically, the Company is finalizing the determination of the fair values of the intangible assets acquired and the contingent consideration liability for certain acquisitions. Changes to these fair values will also impact the amount of goodwill recorded in connection with these acquisitions. All valuations will be completed within one year of the related acquisition date.

 

Cash  $10,643,162 
Contingent consideration   20,365,480 
      
Total consideration transferred  $31,008,642 
      
Cash and cash equivalents  $682,935 
Accounts receivable   11,727,313 
Inventory   1,171,710 
Other assets   992,373 
Customer list   7,224,301 
Goodwill   26,032,763 
Accounts payable   (14,254,014)
Other current liabilities   (2,568,739)
      
Total identifiable net assets and goodwill  $31,008,642 

 

Prior Year Acquisitions

 

During 2011, the finalization of purchase accounting for 2010 acquisitions and contingent earn-out payments related to acquisitions made prior to 2011 resulted in an increase in goodwill of $14,982,909. The increase is the result of earn-out payments either made or due to seller of $14,747,533, which related to acquisitions made prior to 2009 and $235,376 of purchase price adjustments.

 

Contingent Consideration

 

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 January 1, 2009, contingent consideration payments will be recorded as additional purchase price. The Company paid $10,877,835 and $12,247,533 related to these agreements in the year ended December 31, 2010 and 2011, respectively. Total remaining potential contingent payments under these agreements amount to $3,000,000 as of December 31, 2011. For the acquisitions occurring subsequent to January 1, 2009, the Company has estimated and recorded potential contingent consideration as an increase in purchase price as of the acquisition date.  The Company has recorded $4,857,441 and $82,002,842 in contingent consideration at December 31, 2010 and 2011, respectively, related to these arrangements.  Any future adjustments related to the acquisitions occurring after January 1, 2009 to the valuation of contingent consideration will be recorded in the Company’s results from operations.

 

41
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

3. Acquisitions (Continued)

 

As of December 31, 2011, the potential maximum contingent payments are payable as follows:

 

2012  $24,020,305 
2013   16,493,333 
2014   24,548,333 
2015   46,677,500 
      
   $111,739,471 

 

4. Property and Equipment

 

Property and equipment at December 31, 2010 and 2011 consisted of the following:

 

   2010   2011 
Computer equipment  $2,492,784   $4,467,672 
Software, including internal use software   18,589,408    23,574,958 
Furniture and fixtures   2,493,210    3,899,875 
Leasehold improvements   959,425    1,684,817 
           
    24,534,827    33,627,322 
Less accumulated depreciation   (14,647,823)   (21,540,695)
           
   $9,887,004   $12,086,627 

 

Depreciation expense was $4,617,724, $5,868,455 and $6,441,656, for the years ended December 31, 2009, 2010, and 2011, respectively.

 

5. Revolving Credit Facility

 

On August 2, 2010, the Company entered into a credit agreement with a syndicate of lenders that matures on August 2, 2014. This agreement replaces the Company’s previous credit agreement with the same lenders 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 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, a minimum interest coverage ratio and a minimum net worth. As of December 31, 2011, the Company was in compliance with 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.  At December 31, 2010 and 2011, the Company had outstanding borrowings of $47.4 million and $60.0 million, respectively.

  

42
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

6. Commitments and Contingencies

 

Lease Commitments

 

The Company recognizes rental expense on a straight-line basis over the term of the lease. The total rent expense for the years ended December 31, 2009, 2010 and 2011 was $5,703,343, $6,646,213 and $6,340,723, respectively.

 

Minimum annual rental payments are as follows:

 

   Operating
Leases
 
2012  $5,370,651 
2013   4,649,089 
2014   4,561,537 
2015   3,408,667 
2016   2,282,940 
Thereafter   8,199,141 
      
Total minimum lease payments  $28,472,025 

 

Legal Contingencies

 

In 2011, in connection with the Circuit City Stores, Inc. (“Circuit City”) bankruptcy proceedings, the Trustee of the Circuit City Liquidating Trust, filed a lawsuit against the Company in United States Bankruptcy Court in the Eastern District of Virginia for the avoidance of payments as allegedly preferential transfers of $3.2 million were paid to the Company during the 90 days preceding the filing of the bankruptcy petition of Circuit City on November 10, 2008. The Company has accrued a loss reserve of $950,000 related to this claim. Management believes that the Company has an adequate reserve for this liability and the ultimate resolution of this matter will not have a material adverse effect on its financial statements. 

 

In May of 2011, Her Majesty’s Revenue and Customs (“HMRC”) contacted the Company’s U.K. subsidiary, Etrinsic, to request information relating to Etrinsic’s position that certain printed matter and direct mail services are exempts under the U.K.’s VAT guidelines. Etrinsic has exchanged information with the HMRC and the HMRC has indicated that it disagrees with Etrinsic’s position and may render an assessment for certain VAT taxes against Etrinsic. If such an assessment were to occur, Etrinsic intends on challenging the assessment. As of December 31, 2011, the Company believes that an unfavorable outcome is reasonably possible but not probable, and therefore, no reserve has been recorded for this potential loss. Further, the possible range of loss can not be reasonably estimated as of December 31, 2011 as the discussions with the HMRC are currently ongoing and no assessment has been levied against Etrinsic.

 

43
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

7. Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, under which deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and their respective tax bases.

 

The provision for income taxes consisted of the following components for the years ended December 31, 2009, 2010 and 2011:

 

   Year Ended December 31, 
   2009   2010   2011 
Current               
Federal  $(1,141,099)  $2,923,693   $4,726,045 
State   (310,040)   1,094,581    532,841 
Foreign   750,869    964,367    1,615,280 
                
Total current   (700,270)   4,982,641    6,874,166 
Deferred               
Federal   2,862,659    813,015    741,346 
State   561,459    (65,583)   459,475 
Foreign   (15,791)   18,733    27,622 
                
Total deferred   3,408,327    766,165    1,228,443 
                
Income tax expense  $2,708,057   $5,748,806   $8,102,609 

 

The provision for income taxes for the years ended December 31, 2009, 2010 and 2011 differs from the amount computed by applying the U.S. federal income tax rate of 35% to pretax income because of the effect of the following items:

 

   Year Ended December 31, 
   2009   2010   2011 
Tax expense at U.S. federal income tax rate  $3,156,130   $5,935,753   $8,573,462 
State income taxes, net of federal income tax effect   456,439    844,131    1,028,376 
Effect of non-US operations       (394,087    (852,297)
Research and development credit   (671,970)   (295,736)   (396,691)
199 Domestic production activities deduction       (202,313)   (109,171)
Nondeductible (benefit) and other   (232,542)   (138,942)   (141,070)
                
Income tax expense  $2,708,057   $5,748,806   $8,102,609 

 

44
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

7. Income Taxes (Continued)

 

At December 31, 2010 and 2011, the Company’s deferred tax assets and liabilities consisted of the following:

 

   December 31, 
   2010   2011 
Current deferred tax assets:          
Reserves and allowances  $2,288,808   $2,186,586 
Other   25,452    15,880 
          
Total current deferred tax assets   2,314,260    2,202,466 
Noncurrent deferred tax assets:          
Income tax basis in excess of financial statement basis in intangible assets   8,948,629    7,868,683 
Stock options   2,968,540    3,190,289 
Net operating loss carryforward   716,891    536,166 
Tax credit carryforwards   276,421    91,091 
Other   25,143    24,175 
           
Total noncurrent deferred tax assets   12,935,624    11,710,404 
           
Total deferred tax assets   15,249,884    13,912,870 
           
Total current deferred tax liability:          
Prepaid & other expenses   (582,768)   (25,124)
Unrealized gain on available for sale securities   (1,424,096)   (447,993)
           
Total current deferred tax liability   (2,006,864)   (473,117)
Noncurrent deferred tax liabilities:          
Fixed assets   (3,217,589)   (2,744,889)
Intangible assets   (3,805,815)   (4,663,108)
Other   (12,600)   (55,815)
           
Total noncurrent deferred tax liabilities   (7,036,004)   (7,463,812)
           
Total deferred tax liabilities   (9,042,868)   (7,936,929)
           
Net deferred tax asset  $6,207,016   $5,975,941 
           
Net current deferred tax asset  $307,396   $1,729,349 
Net noncurrent deferred tax asset   5,899,620    4,246,592 
           
Net deferred tax asset  $6,207,016   $5,975,941 

 

In connection with the purchase of CoreVision, Inc. in September 2006, the Company acquired $880,518 in net operating loss carryforwards that will expire in 2026. At December 31, 2011, $636,438 of losses remain outstanding for future use. In connection with the purchasing of Marketing-Out-of-the-Box in July 2008, the Company acquired $1,644,746 in net operating loss carryforwards that will expire in 2024. At December 31, 2011, $895,466 of losses remain outstanding for future use.  No valuation allowance on the Company's net operating loss carryforwards is considered necessary as the amounts are more likely than not to be realized.

  

45
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

7. Income Taxes (Continued)

 

The Company's intention is to permanently reinvest the undistributed earnings of its foreign subsidiary in accordance with ASC740.  Deferred income taxes were not calculated on undistributed earnings of foreign subsidiaries, which were $329,547 and $6,695,139 at December 31, 2010 and 2011.  If the undistributed earnings were to be remitted to the Company, foreign tax credits would be available to reduce any U.S. tax due upon repatriation.

 

The Company's income before taxes on foreign operations was $2,576,355, $3,473,074 and $6,365,592 for the years ended December 31, 2009, 2010 and 2011, respectively.

 

8. Valuation of Equity Investments

 

As discussed in Note 9, Fair Value of Financial Instruments, the Company applies ASC 820, Fair Value Measurement and Disclosure (ASC 820), to its financial assets and. At December 31, 2011, the Company’s financial assets primarily relate to their 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 as a separate component of stockholders’ equity. Any realized gains and losses and interest and dividends will be determined using the specific identification method and included in other income. At December 31, 2011, the Company held 69,954 shares of Echo, which have a cost basis of $8,744, and were carried at fair value of $1,129,757. The unrealized gain of $1,121,013 was included in other comprehensive income, net of tax of $447,993.

 

9. 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.

  

46
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

9. Fair Value Measurement (Continued)

 

The Company's potential contingent consideration payments relating to acquisitions occurring subsequent to January 1, 2009 are its only Level 3 liabilities as of December 31, 2011.  The fair values of these liabilities are estimated using a present value analysis as of December 31, 2011.  This analysis considers, among other items, the financial forecasts of future operating results of the seller, the probability of reaching the forecast and the associated discount rate.

 

The following tables set forth the Company’s financial assets and financial liabilities measured at fair value on a recurring basis and the basis of measurement at December 31, 2010 and 2011, respectively:

 

At December 31, 2010  Total Fair Value
Measurement
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)
 
Assets:                    
Money market funds(1)  $1,662,162   $1,662,162   $   $ 
Available for sale securities(2)   4,284,614    4,284,614         
                     
Total assets  $5,946,776   $5,946,776   $   $ 
                     
Liabilities:                    
Contingent consideration  $(4,857,441)  $   $   $(4,857,441)

 

At December 31, 2011  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)  $1,664,916   $1,664,916   $   $ 
Available for sale securities(2)   1,129,757    1,129,757         
                     
Total assets  $2,794,673   $2,794,673   $   $ 
                     
Liabilities:                    
Contingent consideration  $(82,002,842)  $   $   $(82,002,842)

 

(1)Included in cash and cash equivalents on the balance sheet.
(2)Included in short-term investments on the balance sheet.

  

47
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

9. Fair Value Measurement (Continued)

 

The following table provides a reconciliation of the beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3):

 

   Fair Value Measurements
 at  Reporting Date
Using Significant 
Unobservable Inputs
(Level 3)
 
   Contingent Consideration 
Balance at December 31, 2009  $(4,618,217)
Contingent consideration - acquisitions   (2,226,266)
Contingent consideration - change in fair value (1)   1,987,042 
Balance at December 31, 2010  $(4,857,441)
Contingent consideration – new acquisitions   (84,161,292)
Reclassified to Due to Seller   4,554,000 
Contingent consideration payments on acquisitions since January 1, 2009   2,314,362 
Contingent consideration - change in fair value (1)   147,529 
Balance as of December 31, 2011  $(82,002,842)

 

(1)Adjustments to original contingent consideration obligations recorded were the result of using revised financial forecasts and updated fair value measurements. These changes are recognized within selling, general and administrative expenses on the consolidated statements of income.

 

48
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

10. 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. For the years ended December 31, 2009, 2010 and 2011, respectively, 2,881,108, 1,785,077 and 1,576,582 options and restricted common shares were excluded from the calculation as these options and restricted common shares were anti-dilutive.

 

The computation of basic and diluted earnings per common share for the years ended December 31, 2009, 2010, and 2011, is as follows:

 

   Years Ended December 31, 
   2009   2010   2011 
Numerator:               
Net Income  $6,309,458   $11,210,489   $16,393,007 
                
Denominator:               
Denominator for basic earnings per share—weighted-average shares   45,535,357    45,703,699    46,428,443 
Effect of dilutive securities:               
Employee stock options and restricted common shares   1,621,348    1,878,638    2,398,515 
                
Denominator for dilutive earnings per share   47,156,705    47,582,337    48,826,958 
                
Basic earnings per share  $0.14   $0.25   $0.35 
Diluted earnings per share  $0.13   $0.24   $0.34 

 

11. Stock-Based Compensation Plans

 

In 2006, the Company adopted the 2006 Stock Incentive Plan (the Plan). Upon adoption, the 2004 Unit Option Plan was merged into the Stock Incentive Plan and ceased to separately exist. Outstanding awards under the Unit Option Plan are now subject to the Stock Incentive Plan and no additional awards may be made under the Unit Option Plan on or after the effective date of the Stock Incentive Plan. The Plan was amended and restated effective June 2009 resulting in an increase in the maximum number of shares of common stock that may be issued under the plan by 1,250,000, from 2,000,000 to 3,250,000.

 

The Company recorded $2,481,159, $3,148,619 and $3,976,187 in compensation expense related to stock-based compensation, for the years ended December 31, 2009, 2010 and 2011, respectively. All stock-based compensation expense is recorded net of an estimated forfeiture rate.  The estimated forfeiture rate was 8% at December 31, 2011.

  

49
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

11. Stock-Based Compensation Plans (Continued)

 

Stock Options

 

The Company issued 251,542, 381,623 and 917,552 options during the years ended December 31, 2009, 2010 and 2011, respectively. A summary of stock option activity is as follows:

 

   Outstanding
Options
   Weighted-
Average
Exercise
Price
   Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2008   5,484,366   $4.19   $19,153,470 
Granted   251,542    4.54     
Exercised   (142,500)   0.70    740,490 
Forfeited   (148,934)   11.31     
                
Outstanding at December 31, 2009   5,444,474   $4.11   $15,893,388 
Granted   381,623    5.63     
Exercised   (391,115)   0.50    2,366,246 
Forfeited   (91,345)   11.72     
                
Outstanding at December 31, 2010   5,343,637   $4.33   $16,638,131 
Granted   917,552    8.05     
Exercised   (298,770)   1.18    2,301,618 
Forfeited   (11,938)   10.23     
                
Outstanding at December 31, 2011   5,950,481   $5.07   $28,048,306 
                
Options vested at December 31, 2011   4,133,373   $4.05   $24,068,254 

  

As of December 31, 2009, 2010 and 2011, there were 5,444,474, 5,343,637 and 5,950,481 options outstanding pursuant to the Plan, respectively. The options issued during 2009 have exercise prices ranging from $2.36 to $6.86 and vest ratably from immediate to five years.  The options issued during 2010 have exercise prices ranging from $5.39 to $6.50 and vest ratably from four to five years. The options issued during 2011 have exercise prices ranging from $6.36 to $8.66 and vest ratably from one to five years.

 

Vested options totaled 3,830,927, 3,872,433 and 4,133,373 shares as of December 31, 2009, 2010 and 2011, respectively.

 

The aggregate intrinsic value of options outstanding for 2009, 2010 and 2011 was $15,893,388, $16,638,131 and $28,048,306, respectively. The aggregate intrinsic value of options exercisable for 2009, 2010, and 2011 was $15,092,668, $15,368,000 and $24,068,254, respectively.

 

The aggregate intrinsic value of options outstanding and exercisable represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of each fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options in 2009, 2010 and 2011, respectively. These amounts change based on the fair market value of the Company’s stock which was $5.90, $6.55 and $9.31 on the last business day of the years ended December 31, 2009, 2010, and 2011, respectively.

 

50
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

11. Stock-Based Compensation Plans (Continued)

 

Using the Black-Scholes option valuation model and the assumptions listed below, the Company recorded $1,483,574, $1,531,266 and $1,944,585 in compensation expense related to stock options. The following assumptions were utilized in the valuation for options granted in 2009, 2010 and 2011:

 

   2009   2010   2011 
Dividend yield   %   %   %
Risk-free interest rate   2.92%-3.77%   1.85%-3.25%   1.33%-2.90%
Expected life   7 years    7 years    7 years 
Volatility   47.5%   47.5%   47.5%

 

There was $3,484,787, $2,713,589 and $3,509,215 of unrecognized compensation costs related to the stock options granted under the Plan as of December 31, 2009, 2010 and 2011, respectively. This cost was expected to be recognized over a weighted average period of 2.87, 2.36 and 2.82 years, respectively.

 

The following table summarizes information about all stock options outstanding for the Company as of December 31, 2011:

 

Options Outstanding  Options Vested 
Exercise Price  Number
Outstanding
   Weighted
Average
Life
   Weighted
Average
Exercise
Price
   Number
Exercisable
   Weighted
Average
Exercise
Price
 
$0.50 - $0.65   2,001,500    2.77   $0.53    2,001,500   $0.53 
$2.36 - $4.92   874,177    4.74   $4.63    732,448   $4.59 
$5.19 - $9.00   2,433,552    7.69   $6.69    897,998   $5.93 
$11.38 - $16.41   641,252    6.01   $13.72    501,427   $13.83 
                          
    5,950,481    5.42   $5.07    4,133,373   $4.05 

 

Restricted Common Shares

 

Eligible employees receive restricted common shares as a portion of their total compensation. The restricted common shares vest over various time periods depending upon the grant, but generally vest from zero to five years and convert to common stock at the conclusion of the vesting period. The Company measures the compensation cost based on the closing market price of the Company’s common stock at the grant date. The stock-based compensation expense for the year ended December 31, 2009, 2010 and 2011 was $997,585, $1,617,353 and $2,031,602, respectively.

 

51
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

11. Stock-Based Compensation Plans (Continued)

 

The Company granted 112,433, 569,181 and 490,074 of restricted common shares to employees during the years ended December 31, 2009, 2010 and 2011, respectively. A summary of restricted share activity is as follows: 

 

   Outstanding
Restricted Common
Shares
   Weighted-Average
Grant Date Fair
Value
 
Nonvested Restricted Common Shares December 31, 2008   312,266   $12.82 
Granted   112,433   $4.53 
Vested and transferred to unrestricted common stock   (149,238)  $9.00 
Forfeited   (49,370)  $11.25 
           
Nonvested Restricted Common Shares December 31, 2009   226,091   $11.56 
Granted   569,181   $5.48 
Vested and transferred to unrestricted common stock   (72,491)  $12.17 
Forfeited   (32,404)  $6.43 
           
Nonvested Restricted Common Shares December 31, 2010   690,377   $6.72 
Granted   490,074   $8.09 
Vested and transferred to unrestricted common stock   (368,879)  $6.93 
Forfeited   (27,756)  $5.71 
           
Nonvested Restricted Common Shares December 31, 2011   783,816   $7.52 

 

There was $1,775,466, $2,698,393 and $3,297,495 of total unrecognized compensation costs related to the restricted common shares as of December 31, 2009, 2010 and 2011, respectively. This cost was expected to be recognized over a weighted average period of 2.92, 1.83 and 2.85 years, as of December 31, 2009, 2010 and 2011, respectively.

 

12. Benefit Plans

 

The Company adopted a 401(k) savings plan effective February 1, 2005, covering all of the Company’s employees upon completion of 90 days of service. Employees may contribute a percentage of eligible compensation on both a before-tax basis and after-tax basis. The Company has the right to make discretionary contributions to the plan.  For the years ended December 31, 2009 and 2010, the Company did not make any contributions to the plan. For the year-ended December 31, 2011, total costs incurred from the Company’s contributions to the 401(k) plan were $749,544.

 

13. New Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (FASB) amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. While the new guidance changes the presentation of comprehensive income, there are no changes to components that are recognized in net income or other comprehensive income under current accounting guidance. The Company will adopt this guidance in the first quarter of 2012.

 

52
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

13. New Accounting Pronouncements (Continued)

 

In September 2011, the FASB amended its standards related to goodwill impairment testing with the objective being to simplify the annual goodwill impairment process by allowing entities to use qualitative factors first before performing the traditional two-step goodwill impairment test. The two-step impairment test is now only required if an entity determines through this qualitative analysis that it is more likely than not that the fair value of the reporting unit is less than its carrying value. Adoption of the new standard was permitted for the Company’s fourth quarter 2011 impairment test, but the Company elected to perform the traditional two-step test until a further assessment could be made. The Company has not yet determined if this standard will be adopted in 2012. Because the measurement of a potential impairment has not changed, the standard will not have an impact on the Company’s consolidated results of operations, financial position or cash flows. 

 

14. Related Party Transactions

 

Investment in Echo Global Logistics, Inc.

 

In February 2005, the Company acquired 2,000,000 shares of common stock of Echo Global Logistics, Inc. (Echo), a technology enabled transportation and logistics business process outsourcing firm, for $125,000. Echo is a related party to the Company as a majority of the members of the Company’s Board of Directors have a direct and/or indirect ownership interest in Echo.

 

On September 25, 2009, Echo completed a one-for-two reverse stock split of all outstanding shares of its capital stock and immediately following, recapitalized all outstanding shares into newly issued shares of common stock on approximately a one-for-one basis. Echo recapitalized its outstanding capital stock in connection with its initial public offering. At September 25, 2009, the Company owned 627,778 shares of Echo’s common stock after the effects of the one-for-two reverse stock split.

 

The Company sold 271,913 and 285,911 of its shares of Echo common stock for $3,595,426 and $3,945,392 and recorded a gain on sale of investment of $3,578,431 and $3,909,678 for the years ended December 31, 2010 and 2011, respectively.  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 8 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. At December 31, 2011, the Company owned 69,954 shares of Echo’s common stock.

 

Agreements and Services with Related Parties

 

In the ordinary course, the Company also provides print procurement services to Echo. The total amount billed for such print procurement services during the years ended December 31, 2009, 2010 and 2011 were approximately $68,000, $60,000 and $83,000, respectively. In addition, Echo has provided transportation services to the Company. As consideration for these services, Echo billed the Company approximately $3.6 million, $5.7 million and $8.7 million for the years ended December 31, 2009, 2010 and 2011, respectively. The net amounts payable to Echo at December 31, 2010 and 2011 were $73,068 and $122,355, respectively.

 

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 $20,000 and $36,723 in rebates for the years ended December 31, 2010 and 2011, 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 $108,000 and $45,800 under this agreement for the years ended December 31, 2010 and 2011, respectively. This agreement was terminated on April 30, 2011.

 

In August 2009, the Company entered into an agreement with Groupon, Inc. (“Groupon”) pursuant to which Groupon 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. Two members of the Company’s Board of Directors, Eric P. Lefkofsky 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.

  

53
 

 

InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

14. Related Party Transactions (Continued)

 

During the second quarter of 2010, the Company entered into an agreement with Groupon related to corporate procurement cards. The agreement allows Groupon to obtain corporate procurement cards under the Company’s existing credit arrangement. Under the agreement, the Company billed Groupon $64,000 and $88,000 during the years ended December 31, 2010 and 2011. The net amount receivable from Groupon was $40,000 at December 31, 2011.

 

During 2011, the Company provided promotional product procurement services to Groupon. The total amount billed for such services during the year ended December 31, 2011 was approximately $1.6 million. The net amount receivable from Groupon for these services was $61,186 at December 31, 2011.

 

15. Business Segments

 

In 2011, the Company changed the composition of its operating segments from a single segment to two segments based on geographic regions, United States and International. This change was made to align operating segments with the basis that the chief operating decision maker is reviewing financial information to make operating decisions and assess performance. “Other” consists of shared service activities and unallocated corporate expenses.

 

Management evaluates the performance of its operating segments based on net revenues and Adjusted EBITDA. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in Note 2. Adjusted EBITDA represents income from operations with the addition of depreciation and amortization, stock compensation expense and the preference claim charge in 2011. Management does not evaluate the performance of its operating segments using asset measures. The identifiable assets by segment disclosed in this note are those assets specifically identifiable within each segment and include cash, accounts receivable, inventory, goodwill, and other intangible assets. Shared service assets are primarily comprised of short-term investments, capitalized internal-use software and net property, plant and equipment of the corporate headquarters.

 

The table below presents financial information for our reportable operating segments and Other for the fiscal years noted (in thousands):

 

   United States   International   Other   Total 
Fiscal 2011:                    
Total net revenues  $540,303   $93,543   $   $633,846 
Adjusted EBITDA (1)   48,198    6,576    (17,060)   37,714 
Total assets   320,940    126,308    10,405    457,653 
Fiscal 2010:                    
Total net revenues  $444,477   $37,735   $   $482,212 
Adjusted EBITDA (1)   37,644    3,620    (13,900)   27,364 
Total assets    244,560    22,316    13,049    279,925 
Fiscal 2009:                    
Total net revenues  $369,404   $31,043   $   $400,447 
Adjusted EBITDA (1)   28,428    2,806    (11,265)   19,969 
Total assets    215,624    18,572    32,962    267,158 

 

(1) Adjusted EBITDA, which represents income from operations with the addition of depreciation and amortization, stock compensation expense and the preference claim charge in 2011, is considered a non-GAAP financial measure under SEC regulations. Income from operations is the most directly comparable financial measure calculated in accordance with GAAP.  We present this measure as supplemental information to help investors better understand trends in our business results over time. Our management team uses adjusted EBITDA to evaluate the performance of our business. Adjusted EBITDA is not equivalent to any measure of performance required to be reported under GAAP, nor should this data be considered an indicator of our overall financial performance and liquidity. Moreover, the adjusted EBITDA definition we use may not be comparable to similarly titled measures reported by other companies.

  

54
 

  

 InnerWorkings, Inc.

 

Notes to Consolidated Financial Statements (Continued)

 

15. Business Segments (Continued)

  

The table below reconciles the total of the reportable segments' Adjusted EBITDA and the Adjusted EBITDA included in Other to consolidated earnings before income taxes (in thousands):

 

   Year Ended December 31, 
   2009   2010   2011 
             
Adjusted EBITDA  $19,969   $27,364   $37,714 
Preference claim charge           (950)
Stock-based compensation   (2,481)   (3,149)   (3,976)
Depreciation and amortization   (8,031)   (9,008)   (10,171)
Total other income (expense)   (439)   1,752    1,879 
                
Income before income taxes  $9,018   $16,959   $24,496 

 

The Company had long-lived assets, consisting of net property, plant and equipment, in the United States of $10,606,698, $9,480,398, and $10,346,711 at December 31, 2009, 2010, and 2011, respectively.  Long-lived assets in foreign countries were $227,014, $406,606, and $1,739,916 at December 31, 2009, 2010, and 2011, respectively.

 

16. Quarterly Financial Data (Unaudited)

 

   Year Ended December 31, 2011 
   First
Quarter(1)
   Second
Quarter(2)
   Third
Quarter(3)
   Fourth
Quarter(4)
 
   (In thousands, except per share data) 
Net sales  $145,181   $155,612   $157,819   $175,234 
Gross profit   33,328    36,342    37,093    42,600 
Net income   2,790    3,700    4,138    5,765 
Net income per share:                    
Basic  $0.06   $0.08   $0.09   $0.12 
Diluted  $0.06   $0.08   $0.09   $0.12 

 

(1)The Company made acquisitions during the first quarter of 2011 which were not material individually or in the aggregate. Financial results from these acquisitions are included in the Consolidated Financial Statements beginning January of 2011.
(2)The Company made acquisitions during the second quarter of 2011 which were not material to the Company’s operations. Financial results for these acquisitions are included in the Consolidated Financial Statements beginning April of 2011.
(3)The Company made acquisitions during the third quarter of 2011 which were not material to the Company’s operations. Financial results for these acquisitions are included in the Consolidated Financial Statements beginning July of 2011.
(4)The Company acquired Productions Graphics on October 24, 2011 as well as another company which was not material to the Company’s operations. Financial results for these acquisitions are included in the Consolidated Financial Statements beginning October of 2011.

  

   Year Ended December 31, 2010 
   First
Quarter
   Second
Quarter(1)
   Third
Quarter(2)
   Fourth
Quarter(3)
 
   (In thousands, except per share data) 
Net sales  $112,213   $120,471   $119,131   $130,397 
Gross profit   26,933    29,040    28,509    31,530 
Net income   2,168    3,142    2,365    3,535 
Net income per share:                    
Basic  $0.05   $0.07   $0.05   $0.08 
Diluted  $0.05   $0.07   $0.05   $0.07 

 

(1)The Company made an acquisition during the second quarter of 2010 which was not material individually or in the aggregate. Financial results from this acquisition are included in the Consolidated Financial Statements beginning April of 2010.
(2)The Company made acquisitions during the third quarter of 2010 which were not material to the Company’s operations. Financial results for these acquisitions are included in the Consolidated Financial Statements beginning August of 2010.
(3)The Company made acquisitions during the fourth quarter of 2010 which were not material to the Company’s operations. Financial results for these acquisitions are included in the Consolidated Financial Statements beginning October of 2010.

 

55
 

 

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

 

Valuation and Qualifying Accounts

 

Description  Balance at
Beginning of
Period
   Charged to
Expense
   (Uncollectible
Accounts
Written Off
net of
Recoveries)
   Other
Describe
   Balance at
End of
Period
 
Fiscal year ended December 31, 2011                         
Allowance for doubtful accounts  $3,610,977   $2,414,710   $(2,732,446)  $   $3,293,241 
Fiscal year ended December 31, 2010                         
Allowance for doubtful accounts  $4,634,848   $2,901,216   $(3,925,087)  $   $3,610,977 
Fiscal year ended December 31, 2009                         
Allowance for doubtful accounts  $5,045,059   $1,295,592   $(1,705,803)  $   $4,634,848 

  

56
 

 

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A.Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures.

 

Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with generally accepted accounting principles.  Based on its evaluation, management concluded that our internal controls over financial reporting was effective as of December 31, 2011.  As required under this Item 9A, the management's report titled "Management's Assessment of Control over Financial Reporting" is set forth in "Item 8 - Consolidated Financial Statements and Supplementary Data" and is incorporated herein by reference. 

 

Attestation Report of Registered Public Accounting Firm

 

As required under this Item 9A, the auditor’s attestation report titled “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting” is set forth in "Item 8 - Consolidated Financial Statements and Supplementary Data" and is incorporated herein by reference.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the quarterly period ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B.Other Information

 

On March 2, 2012, John Walter advised the Company’s Board of Directors that he was retiring from the Board of Directors and the Board of Directors of the Company accepted his resignation as a director of the Company effective immediately. The resignation was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. Also effective March 2, 2012, the Company entered into a consulting agreement with Mr. Walter pursuant to which he will provide consulting services to the Board of Directors and management of the Company through September 1, 2012. As compensation for such services, Mr. Walter will receive a grant of 2,100 unrestricted shares of common stock on April 2, 2012.

 

57
 

 

PART III

 

Item 10.Directors, Executive Officers and Corporate Governance

 

Certain information required by this Item 10 relating to our directors and executive officers is incorporated by reference herein from our 2012 proxy statement to be filed with the SEC not later than 120 days after the close of our fiscal year ended December 31, 2011.

 

We have adopted a code of ethics, which is posted in the Investor Relations section on our website at http://www.inwk.com. We intend to include on our website any amendments to, or waivers from, a provision of the code of ethics that applies to our principal executive officer, principal financial officer, or controller that relates to any element of the code of ethics definition contained in Item 406(b) of SEC Regulation S-K.

 

Item 11.Executive Compensation

 

Certain information required by this Item 11 relating to remuneration of directors and executive officers and other transactions involving management is incorporated by reference herein from our 2012 proxy statement to be filed with the SEC not later than 120 days after the close of our fiscal year ended December 31, 2011.

 

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Securities Authorized For Issuance Under Equity Compensation Plans

 

The following table sets forth information regarding securities authorized for issuance under our equity compensation plans as of December 31, 2011. 

 

   Number of Securities to be
Issued Upon Exercise of
Outstanding Options (a)
   Weighted Average
Exercise Price of
Outstanding Options
   Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (Excluding Securities
Reflected in Column (a))
 
Plan Category               
Equity compensation plans approved by security holders(1)   5,950,481   $5.07    621,147(2)
Equity compensation plans not approved by security holders(3)            
                
Total   5,950,481   $5.07    621,147 

 

(1)Includes our 2004 Unit Option Plan, which was merged with our 2006 Stock Incentive Plan.
(2)Includes shares remaining available for future issuance under our 2006 Stock Incentive Plan.
(3)There are no equity compensation plans in place not approved by our stockholders.

 

Certain information required by this Item 12 relating to security ownership of certain beneficial owners and management is incorporated by reference herein from our 2012 proxy statement to be filed with the SEC not later than 120 days after the close of our fiscal year ended December 31, 2011.

 

58
 

 

Item 13.Certain Relationships and Related Transactions, and Director Independence

 

Certain information required by this Item 13 relating to certain relationships and related transactions and director independence is incorporated by reference herein from our 2012 proxy statement to be filed with the SEC not later than 120 days after the close of our fiscal year ended December 31, 2011.

 

Item 14.Principal Accountant Fees and Services

 

Certain information required by this Item 14 regarding principal accounting fees and services is incorporated by reference herein from the section entitled “Matters Concerning Our Independent Registered Public Accounting Firm” in our 2012 proxy statement to be filed with the SEC not later than 120 days after the close of our fiscal year ended December 31, 2011.

 

59
 

 

PART IV

 

Item 15.Exhibits, Financial Statement Schedules

 

(a) (1)  Financial Statements:     Reference is made to the Index to Financial Statements and Financial Statement Schedule in the section entitled “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K.

 

(2) Financial Statement Schedule:     Reference is made to the Index to Financial Statements and Financial Statement Schedule in the section entitled “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K. Schedules not listed above are omitted because they are not required or because the required information is given in the consolidated financial statements or notes thereto.

 

(3) Exhibits:     Exhibits are as set forth in the section entitled “Exhibit Index” which follows the section entitled “Signatures” in this Annual Report on Form 10-K. Certain of the exhibits listed in the Exhibit Index have been previously filed with the Securities and Exchange Commission pursuant to the requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Such exhibits are identified by the parenthetical references following the listing of each such exhibit and are incorporated by reference.

 

Exhibits which are incorporated herein by reference can be inspected and copied at the public reference rooms maintained by the SEC in Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. SEC filings are also available to the public from commercial document retrieval services and at the Web site maintained by the SEC at http://www.sec.gov .

 

60
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  INNERWORKINGS, INC.
   
  By: / S /     ERIC D. BELCHER
    Eric D. Belcher
  Title: Chief Executive Officer and
    President

 

KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below hereby constitute and appoint Eric D. Belcher and Joseph M. Busky, and each of them severally, as his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubsitution for him or her and in his or her name, place and stead in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or substitutes, may lawfully do to cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 

 

Signature        Title        Date
    President, Chief Executive Officer and Director   March 7, 2012
/ S /    ERIC D. BELCHER   (principal executive officer)    
Eric D. Belcher        
         
    Chief Financial Officer (principal financial and   March 7, 2012
/ S /    JOSEPH M. BUSKY   accounting officer)    
Joseph M. Busky        
         
/ S /    JACK M. GREENBERG   Chairman of the Board   March 7, 2012
Jack M. Greenberg        
         
/ S /    JOHN R. WALTER   Director   March 7, 2012
John R. Walter        
         
/ S /    PETER J. BARRIS   Director   March 7, 2012
Peter J. Barris        
         
/ S /    SHARYAR BARADARAN   Director   March 7, 2012
Sharyar Baradaran        
         
/ S /    LINDA S. WOLF   Director   March 7, 2012
Linda S. Wolf        
         
/ S /    CHARLES K. BOBRINSKOY   Director   March 7, 2012
Charles K. Bobrinskoy        
         
/ S /    ERIC P. LEFKOFSKY   Director   March 7, 2012
Eric P. Lefkofsky        
         
/ S /    DAVID FISHER   Director   March 7, 2012
David Fisher        
         
/ S /    PATRICK GALLAGHER   Director   March 7, 2012
Patrick Gallagher        

 

61
 

 

EXHIBIT INDEX

 

Exhibit No.   Description
2.1     Share Purchase Agreement, dated as of October 24, 2011, by and between Etrinsic Limited, Winthrop Limited, Christophe Delaune and InnerWorkings, Inc., as amended on December 19, 2011(1)
       
3.1     Second Amended and Restated Certificate of Incorporation.(2)
       
3.2     Amended and Restated By-Laws.(2)
       
4.1     Specimen Common Stock Certificate.(3)
       
10.1     InnerWorkings, LLC 2004 Unit Option Plan.(3)†
       
10.2     InnerWorkings, Inc. 2006 Stock Incentive Plan, as amended and restated effective June 16, 2011.(5)†
       
10.3     Form of InnerWorkings Restricted Stock Award Agreement.(4)†
       
10.4     Form of Stock Option Award Agreement.(2)†
       
10.5     InnerWorkings, Inc. Annual Incentive Plan.(3)†
       
10.6     Agreement dated March 25, 2004 for John Walter to Become Chairman of InnerWorkings, LLC’s Board of Directors, as amended.(3)†
       
10.7     Stock Option Grant Agreement dated October 1, 2005 between InnerWorkings, Inc. and Jack M. Greenberg.(3)†
       
10.8     Agreement dated as of March 14, 2008 by and between InnerWorkings, Inc. and Eric P. Lefkofsky.(6)†
       
10.9     Form of Indemnification Agreement.(3)
       
10.10     Master Services Agreement dated September 1, 2005 by and between ServiceMaster Consumer Services, L.P. and InnerWorkings, LLC.(3)
       
10.11     Referral Agreement dated October 1, 2006 between Innerworkings, Inc. and Echo Global Logistics, Inc.(2)

 

62
 

 

Exhibit No.   Description
10.12   Amended and Restated Employment Agreement entered into as of November 14, 2008 by and between Eric D. Belcher and InnerWorkings, Inc.(7)†
     
10.13   Employment Agreement effective as of July 16, 2008 by and between Joseph Busky and InnerWorkings, Inc.(8)†
     
10.14   Credit Agreement, dated as of August 2, 2010, by and among InnerWorkings, Inc., as borrower, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., as syndication agent, PNC Bank, National Association, as documentation agent, and the other lenders party thereto. (9)
     
10.15   Separation and Independent Contractor Agreement, dated as of January 19, 2011, by and between InnerWorkings, Inc. and Jonathan Shean.(10)†
     
10.16   Employment Agreement entered into as of September 6, 2011 by and between InnerWorkings, Inc. and John Eisel.(11)†
     
21.1   Subsidiaries of InnerWorkings, Inc.
     
23.1   Consent of Ernst & Young LLP.
     
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act 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 and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(1)Incorporated by reference to Form S-3 Registration Statement (File No. 333-177535)
(2)Incorporated by reference to Form S-1 Registration Statement (File No. 333-139811).
(3)Incorporated by reference to Form S-1 Registration Statement (File No. 333-133950).
(4)Incorporated by reference to Current Report on Form 8-K filed on January 28, 2008.
(5)Incorporated by reference to 2011 Proxy Statement on Schedule 14A filed on April 29, 2011.
(6)Incorporated by reference to 2007 Annual Report on Form 10-K filed on March 17, 2008.
(7)Incorporated by reference to Current Report on Form 8-K filed on November 18, 2008.
(8)Incorporated by reference to Current Report on Form 8-K filed on July 8, 2008.
(9)Incorporated by reference to Quarterly Report on Form 10-Q filed on August 6, 2010.
(10)Incorporated by reference to Annual Report on Form 10-K filed on March 2, 2011.
(11)Incorporated by reference to Current Report on Form 8-K filed on September 23, 2011.
Management contract or compensatory plan or arrangement of the Company.

 

63