Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2008

 

¨ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to

Commission File Number 000-52170

 

 

INNERWORKINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   20-5997364
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)

600 West Chicago Avenue, Suite 850

Chicago, Illinois 60610

Phone: (312) 642-3700

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

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes:  x    No:  ¨

Indicate by check mark whether the Registrant is an a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check one:

Large accelerated filer:  ¨    Accelerated filer:  x    Non-accelerated filer:  ¨

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

As of May 9, 2008, the Registrant had 48,480,779 shares of Common Stock, par value $0.0001 per share, outstanding.

 

 

 


Table of Contents

INNERWORKINGS, INC.

TABLE OF CONTENTS

 

         Page
  PART I. FINANCIAL INFORMATION    1
Item 1.   Consolidated Financial Statements    1
  Consolidated Statements of Income for the three months ended March 31, 2007 and 2008 (Unaudited)    1
  Consolidated Balance Sheets as of December 31, 2007 and March 31, 2008 (Unaudited)    2
  Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2008 (Unaudited)    3
  Notes to Consolidated Financial Statements (Unaudited)    4
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    9
Item 3.   Quantitative and Qualitative Disclosures about Market Risk    14
Item 4.   Controls and Procedures    14
  PART II. OTHER INFORMATION    14
Item 1.   Legal Proceedings    14
Item 1A.   Risk Factors    14
Item 5.   Other Information    15
Item 6.   Exhibits    15
SIGNATURES    16
EXHIBIT INDEX    17


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

InnerWorkings, Inc.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three months ended March 31,
     2007     2008

Revenue

   $ 58,936,159     $ 87,191,586

Cost of goods sold

     44,530,102       65,623,360
              

Gross profit

     14,406,057       21,568,226

Operating expenses:

    

Selling, general, and administrative expenses

     10,178,331       15,050,555

Depreciation and amortization

     443,829       722,923
              

Income from operations

     3,783,897       5,794,748

Other income (expense):

    

Interest income

     485,041       405,658

Interest expense

     (1,128 )     —  

Other, net

     68,777       169,255
              

Total other income

     552,690       574,913
              

Income before taxes

     4,336,587       6,369,661

Income tax expense

     1,674,856       2,511,645
              

Net income

   $ 2,661,731     $ 3,858,016
              

Basic earnings per share

   $ 0.06     $ 0.08

Diluted earnings per share

   $ 0.05     $ 0.08

See accompanying notes.

 

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InnerWorkings, Inc.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     December 31,
2007
    March 31,
2008
 
           (unaudited)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 26,716,239     $ 29,514,661  

Marketable securities

     17,975,000       15,134,226  

Accounts receivable, net of allowance for doubtful accounts of $1,343,294 and $1,420,548 respectively

     77,280,954       69,586,644  

Unbilled revenue

     12,432,916       10,359,562  

Inventories

     5,455,083       5,303,408  

Prepaid expenses

     6,653,493       7,547,981  

Advances to related parties

     11,931       21,123  

Deferred income taxes

     266,625       —    

Other current assets

     2,621,990       3,252,418  
                

Total current assets

     149,414,231       140,720,023  

Property and equipment, net

     5,468,597       5,779,760  

Intangibles and other assets:

    

Goodwill

     30,522,709       32,468,085  

Intangible assets, net of accumulated amortization of $1,511,698 and $1,757,012, respectively

     10,632,761       10,387,447  

Deposits

     366,850       331,247  

Investment

     125,000       125,000  

Deferred income taxes

     10,278,685       9,615,091  

Other assets

     24,397       24,397  
                
     51,950,402       52,951,267  
                

Total assets

   $ 206,833,230     $ 199,451,050  
                

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable-trade

   $ 46,017,853     $ 39,746,900  

Amounts due to related parties

     103,322       265,703  

Current maturities of capital lease obligations

     67,503       68,854  

Customer deposits

     6,203,377       4,047,469  

Deferred income taxes

     —         444,015  

Other liabilities

     1,737,622       1,301,189  

Accrued expenses

     5,110,993       1,002,068  
                

Total current liabilities

     59,240,670       46,876,198  

Capital lease obligations, less current maturities

     147,481       136,109  
                

Total liabilities

     59,388,151       47,012,307  

Stockholders’ equity:

    

Common stock, par value $0.00001 per share, 47,982,760 and 48,223,034 shares were issued and outstanding as of December 31, 2007 and March 31, 2008, respectively

     480       482  

Additional paid-in capital

     163,854,365       165,459,331  

Treasury stock at cost

     (40,000,000 )     (40,000,000 )

Accumulated other comprehensive income (loss)-unrealized gain (loss) on marketable securities

     44,343       (424,977 )

Retained earnings

     23,545,891       27,403,907  
                

Total stockholders’ equity

     147,445,079       152,438,743  
                

Total liabilities and stockholders’ equity

   $ 206,833,230     $ 199,451,050  
                

See accompanying notes.

 

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Table of Contents

InnerWorkings, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

     Three Months Ended March 31,  
     2007     2008  

Cash flows from operating activities

    

Net income

   $ 2,661,731     $ 3,858,016  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Deferred income taxes

     48,995       1,374,234  

Noncash stock compensation expense

     266,324       574,817  

Depreciation and amortization

     443,829       722,923  

Bad debt recoveries

     (28,346 )     (116,233 )

Deferred financing expense

     2,396       —    

Change in assets, net of acquisitions:

    

Accounts receivable

     (1,875,429 )     7,686,475  

Inventories

     42,929       151,675  

Unbilled revenue

     173,284       2,073,354  

Prepaid expenses and other

     1,245,240       (1,489,315 )

Change in liabilities, net of acquisitions:

    

Accounts payable

     (635,383 )     (6,270,953 )

Advances to (from) related parties

     (113,672 )     153,189  

Customer deposits

     344,595       (2,155,908 )

Accrued expenses and other

     (1,566,088 )     (4,760,629 )
                

Net cash provided by operating activities

     1,010,405       1,801,645  

Cash flows from investing activities

    

Purchases of property and equipment

     (481,369 )     (1,170,387 )

Proceeds (purchase) of marketable securities

     (23,584,127 )     2,371,454  

Payments for acquisitions, net of cash acquired

     (4,982,933 )     (1,224,420 )
                

Net cash used in investing activities

     (29,048,429 )     (23,353 )

Cash flows from financing activities

    

Principal payments on capital lease obligations

     (23,478 )     (10,021 )

Issuance of shares

     37,662,478       122,800  

Tax benefit of stock options exercised

     2,181,830       907,351  
                

Net cash provided by financing activities

     39,820,830       1,020,130  
                

Increase in cash and cash equivalents

     11,782,806       2,798,422  

Cash and cash equivalents, beginning of period

     20,612,944       26,716,239  
                

Cash and cash equivalents, end of period

   $ 32,395,750     $ 29,514,661  
                

See accompanying notes.

 

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InnerWorkings, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Three Months Ended March 31, 2008

 

1. Summary of Significant Accounting Policies

Basis of Presentation of Interim Financial Statements

The accompanying unaudited consolidated financial statements of InnerWorkings, Inc. and subsidiaries (the Company) included herein have been prepared to conform to the rules and regulations of the Securities and Exchange Commission (SEC) and accounting principles generally accepted in the United States for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation of the accompanying unaudited financial statements have been included, and all adjustments are of a normal and recurring nature. The operating results for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the full year of 2008. These condensed interim consolidated financial statements and notes should be read in conjunction with our Consolidated Financial Statements and Notes thereto as of December 31, 2007 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 17, 2008.

Marketable Securities

The fair values of the Company’s marketable securities, which consist of auction-rate securities, are estimated utilizing a discounted cash flow analysis or other type of valuation model as of March 31, 2008. These analyses consider, among other things, the collateral underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security is expected to have a successful auction. These securities were also compared, when possible, to other observable market data with similar characteristics to the securities held by the Company. As a result of the temporary decline in fair value for the Company’s auction-rate securities, which the Company attributes to liquidity issues rather than credit issues, it has recorded an unrealized loss of approximately $740,000 to accumulated other comprehensive income (loss). Any future fluctuation in fair value related to these instruments that the Company deems to be temporary, including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive income (loss). If the Company determines that any future valuation adjustment is other than temporary, it would record a charge to earnings as appropriate.

Goodwill and Other Intangibles

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized, but instead is tested for impairment annually, or more frequently if circumstances indicate a possible impairment may exist. The Company evaluates the recoverability of goodwill using a two-step impairment test. For goodwill impairment test purposes, the Company has one reporting unit. In the first step, the fair value for the Company is compared to its book value including goodwill. In the case that the fair value is less than the book value, a second step is performed which compares the implied fair value of goodwill to the book value of goodwill. The fair value for the goodwill is determined based on the difference between the fair value of the Company and the net fair values of the identifiable assets and liabilities. If the implied fair value of the goodwill is less than the book value, the difference is recognized as an impairment. Absent any special circumstances, the Company has elected to test for goodwill impairment during the fourth quarter of each year and as a result of the 2007 analysis performed, no impairment charges were required.

The increase in goodwill for the three months ended March 31, 2008 is the result of an earn-out payment of $1,038,630, working capital adjustments of $185,790 and net asset adjustments of $720,956.

SFAS No. 142 also requires that intangible assets with finite lives be amortized over their respective estimated useful lives and reviewed for impairment whenever impairment indicators exist in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company’s intangible assets consist of customer lists, non-compete agreements and trade names, which are being amortized on the straight-line basis over their estimated weighted-average useful lives of approximately thirteen years, five years and four years, respectively.

The following is a summary of the intangible assets:

 

     December 31,
2007
    March 31,
2008
    Weighted-
Average Life

Customer lists

   $ 11,082,459     $ 11,082,459     13.4 years

Non-compete agreements

     672,000       672,000     4.5 years

Trade names

     390,000       390,000     4.0 years
                  
     12,144,459       12,144,459    

Less accumulated amortization

     (1,511,698 )     (1,757,012 )  
                  

Intangible assets, net

   $ 10,632,761     $ 10,387,447    
                  

Amortization expense related to these intangible assets was $190,308 and $245,314 for the three months ended March 31, 2007 and 2008, respectively.

 

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InnerWorkings, Inc.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

 

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

 

2008

   $ 1,068,447

2009

     1,010,963

2010

     962,213

2011

     895,863

2012

     872,263

Thereafter

     5,577,698
      
   $ 10,387,447
      

Fair Value of Financial Instruments

In September 2006, the Financial Accounting Standards Board (FASB) issued FAS 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. 157-b, “Effective Date of FASB Statement No. 157” (FSP 157-b), which provides a one-year deferral of the effective date of FAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. In accordance with this interpretation, the Company has only adopted FAS 157 with respect to its financial assets and liabilities that are measured at fair value within the financial statements as of January 1, 2008. The adoption of FAS 157 did not have a material impact on the Company’s fair value measurements. The provisions of FAS 157 have not been applied to non-financial assets and non-financial liabilities.

In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment to FASB Statement No. 115,” which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company adopted this statement as of January 1, 2008 and has elected not to apply the fair value option to any of its financial assets and financial instruments at this time.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FAS 123 (R), Share-Based Payments, using the prospective transition method and Black-Scholes as the option valuation model. Under the prospective transition method, the Company continues to account for non-vested equity awards outstanding at the date of adopting Statement 123 (R) in the same manner as they had been accounted for prior to adoption. As a result, under APB No. 25, compensation expense is based on the difference, if any, on the grant date between the estimated fair value of the Company’s stock and the exercise price of options to purchase that stock. The compensation expense is then amortized over the vesting period of the stock options.

During the three month period ended March 31, 2008, the Company issued 207,380 options to various employees of the Company. In addition, the Company granted 467,392 restricted common shares to employees. No options were granted during the three months ended March 31, 2007. The Company used the Black-Scholes option valuation model and the assumptions listed below to determine the fair value of options granted during the first quarter of 2008. The Company recorded $266,324 and $574,817 in compensation expense for the three month periods ended March 31, 2007 and 2008, respectively.

The following assumptions were utilized in the valuation for options granted in 2008:

 

Dividend yield

   %

Risk-free interest rate

   3.01%-3.54 %

Expected life

   7 years  

Volatility

   33.5 %

 

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Table of Contents

InnerWorkings, Inc.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

 

2. Earnings Per Share

Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted average shares outstanding plus share equivalents that would arise from the exercise of share options and restricted stock. During the three months ended March 31, 2007 and 2008, 100,000 and 798,772 options, respectively, were excluded from the calculation as these options were anti-dilutive. The computations of basic and diluted earnings per common share for the three months ended March 31, 2007 and 2008 are as follows:

 

     Three Months Ended March 31,
     2007    2008

Numerator:

     

Net income

   $ 2,661,731    $ 3,858,016
             

Denominator:

     

Denominator for basic earnings per share-weighted-average shares

     46,545,330      48,025,475

Effect of dilutive securities:

     

Employee stock options and restricted stock

     2,705,295      3,293,951
             

Denominator for dilutive earnings per share

     49,250,625      51,319,426
             

Basic earnings per share

   $ 0.06    $ 0.08
             

Diluted earnings per share

   $ 0.05    $ 0.08
             

 

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InnerWorkings, Inc.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

 

 

3. Accumulated Other Comprehensive Income

 

     Three months ended
March 31,
 
     2007    2008  

Net income

   $ 2,661,731    $ 3,858,016  

Other comprehensive income:

     

Unrealized gain (loss) on marketable securities, net of tax

     46,122      (469,320 )
               

Total comprehensive income

   $ 2,707,853    $ 3,388,696  
               

 

4. Related Parties

As of March 31, 2008, the Company owned 2,000,000 shares of common stock, or 5.5%, of Echo Global Logistics, Inc. (Echo), a technology enabled transportation and logistics business process outsourcing firm, which it acquired in February 2005 for $125,000. In November 2005, the Company entered into an agreement with Echo pursuant to which Echo sub-leased a portion of the Company’s office space in Chicago, and paid 20% of the Company’s lease payment (and 25% of its overhead expense) relating to this space. In January 2007, the Company amended the agreement and Echo agreed to pay 35% of the Company’s lease payments for this space. This agreement expired in April 2007. In June 2007, the Company entered into a new agreement with Echo pursuant to which it currently sub-leases a portion of the Company’s office space in Chicago, and pays 29% of the Company’s lease payment and overhead expense relating to this space. Echo paid the Company approximately $23,000 and $56,000 in lease payments for the three months ended March 31, 2007 and 2008, respectively. The Company has notified Echo that it intends to terminate the sub-lease agreement at the end of 2008.

In the ordinary course, the Company also provides print procurement services to Echo. The total amount billed for such print procurement services during the three months ended March 31, 2007 and 2008 was approximately $5,000 and $37,000, respectively. In addition, Echo has provided transportation services to the Company. As consideration for these services, Echo billed the Company approximately $196,000 and $485,000 for the three months ended March 31, 2007 and 2008, respectively. The net amount payable to Echo at March 31, 2008 was approximately $245,000.

Effective October 1, 2006, the Company entered into a referral agreement with Echo pursuant to which Echo agreed to pay the Company a fee equal to 5% of its gross profit on transactions generated through the Company’s referral of new customers, subject to a $75,000 cap per year client referred. Echo did not pay or owe the Company any amounts under the referral agreement for the three months ended March 31, 2007 and 2008. The referral agreement was terminated on February 18, 2008.

In June 2006, the Company entered into a supplier rebate program with Echo, pursuant to which Echo provides the Company with an annual rebate on all freight expenditures in an amount equal to 5%. In April 2008, the Company amended the terms of the supplier rebate program, such that it receives an annual rebate on all freight expenditures in an amount equal to 3%, plus an additional 2% if paid within 15 days. Under the supplier rebate program, the Company received approximately $4,000 and $3,000 in rebates for the three months ended March 31, 2007 and 2008, respectively.

The Company also sub-leased a portion of the Company’s office space to Incorp, LLC, the Company’s former largest stockholder. Effective January 1, 2006, the Company entered into a sub-lease agreement with Incorp, pursuant to which Incorp leased a portion of the Company’s office space in Chicago, and paid 20% of the Company’s monthly rent for approximately $7,500 per month. The sub-lease agreement expired in April 2007 and was not renewed.

 

5. Fair Value Measurement

As discussed in Note 1, Fair Value of Financial Instruments, the Company adopted Statement 157 on January 1, 2008 for their financial assets and financial liabilities. Statement 157 requires enhanced disclosures about assets and liabilities measured at fair value. The Company’s financial assets primarily relate to their marketable securities.

The Company utilizes the market approach to measure fair value for our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

        Statement 157 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on observable or unobservable inputs to valuation techniques that are used to measure fair value. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting 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, inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data.

 

   

Level 3: Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The Company’s investments in student loan auction-rate securities are its only Level 3 assets. The fair values of these securities are estimated utilizing a discounted cash flow analysis or other type of valuation model as of March 31, 2008. These analyses consider, among other items, the collateral underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security is expected to have a successful auction. These securities were also compared, when possible, to other observable market data with similar characteristics to the securities held by the Company.

The following table sets forth our financial assets and financial liabilities measured at fair value on a recurring basis and the basis of measurement at March 31, 2008:

 

     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)

Corporate commercial paper

   $ 4,195,278    $ —      $ 4,195,278    $ —  

Money market fund

   $ 12,500,000      —        12,500,000      —  

Marketable Securities

     15,134,226      —        —        15,134,226
                           

Total

   $ 31,829,504    $ —      $ 16,695,278    $ 15,134,226

The following table summarizes the change in fair values for Level 3 items for the quarter ended March 31, 2008.

 

     Level 3  

Changes in fair value during the period ended March 31, 2008 (pre-tax):

  

Beginning Balance

   $ —    

Transfer to Level 3

     15,875,000  

Unrealized loss - included in other comprehensive income

     (740,774 )
        

Ending Balance

   $ 15,134,226  
        

 

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InnerWorkings, Inc.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

 

 

6. Recently Issued Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) requires companies to continue to follow the guidance in SFAS No. 141 for certain aspects of business combinations, with additional guidance provided defining the acquirer, recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired, assets and liabilities arising from contingencies, defining a purchase and recognizing and measuring goodwill or a gain from a bargain purchase. This statement is effective for all business combinations for which the acquisition date is on or after the beginning of an entity’s first fiscal year that begins after December 15, 2008. The Company will implement SFAS No. 141(R) for any business combinations occurring at or subsequent to January 1, 2009. The Company is currently evaluating what impact, if any, SFAS 141(R) will have on its consolidated financial statements.

 

7. Subsequent Events

Partial Sale of Investment

As of March 31, 2008, the Company owned 2,000,000 shares of common stock in Echo Global Logistics (See note 4). The stock is currently valued based on the cost method for the February 2005 purchase price of $125,000. On May 7, 2008, the Company sold 500,000 shares of common stock in Echo, or 25% of its holdings, for $5 million in cash. The shares were purchased by Printworks Series E, LLC, an affiliate of the Nazarian family and a stockholder of the Company. On April 30, 2008, Echo filed its Registration Statement on Form S-1 with the SEC for a potential initial public offering.

Share Repurchase

On May 8, 2008, the Company announced that its Board of Directors approved the repurchase of shares of Common Stock for an aggregate purchase amount of up to $50 million, exclusive of any fees, commissions or other expenses related to such repurchases, either: (1) in the open market (including through block purchases or tender offers), (2) through transactions in certain instruments or agreements that may be characterized as derivatives or (3) through privately-negotiated transactions, through December 31, 2009, and the subsequent retirement of any such repurchased shares.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a leading provider of managed print and promotional procurement solutions to corporate clients in the United States. With proprietary technology, an extensive supplier network and domain expertise, the Company procures, manages and delivers printed products as part of a comprehensive outsourced enterprise solution. Our technology is designed to capitalize on excess manufacturing capacity and other inefficiencies in the traditional print supply chain to obtain favorable pricing and to deliver high-quality products and services for our clients.

Our proprietary software applications and database, PPM4™, create a fully-integrated solution that stores, analyzes and tracks the production capabilities of our supplier network, as well as quote and price data for 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. Our procurement managers use PPM4™ to manage the print procurement process from end-to-end.

Through our network of over 6,000 suppliers, we offer a full range of print, fulfillment and logistics services and are able 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 up to 100% of the print procurement needs of our clients. By leveraging our technology platform, our clients are able to reduce overhead costs, redeploy internal resources and obtain favorable pricing and service terms. In addition, our ability to track individual transactions and provide customized reports detailing print procurement activity on an enterprise-wide-basis provides our clients with greater visibility and control of their print expenditures.

We believe the opportunity exists to expand our business into new geographic markets. We also maintain offices in New York, New Jersey, California, Hawaii, Michigan, Missouri, Minnesota, Texas and Pennsylvania. Our objective is to continue to increase our sales in the major print markets in the United States. We intend to hire or acquire more account executives within close proximity to these large markets, which accounted for, in aggregate, $17.3 billion of print expenditures in 2006, according to Printing Industries of America/Graphic Arts Technical Foundation. In addition, given that the print industry is a global business, over time we intend to evaluate opportunities to access attractive markets outside the United States.

Revenue

We generate revenue through the sale of printed products to our clients. Our revenue was $87.2 million and $58.9 million during the three months ended March 31, 2008 and 2007, respectively, an increase of 47.9%. Our revenue is generated from two different types of clients: enterprise and transactional. Enterprise jobs usually involve higher dollar amounts and volume than transactional jobs. We categorize a client as an enterprise client if we have a contract with the client for the provision of printing services on a recurring basis; if the client has signed an open-ended purchase order, or a series of related purchase orders; or if the client has enrolled in our e-stores program, which enables the client to make online purchases of printing services on a recurring basis. We categorize all other clients as transactional. We enter into contracts with our enterprise clients to provide some or a substantial portion of their printed products on a recurring basis. Our contracts with enterprise clients generally have an open-ended term subject to termination by either party upon prior notice ranging from 90 days to twelve months. Several of our larger enterprise clients have outsourced substantially all of their recurring print needs to us. We provide printed products to our transactional clients on an order-by-order basis. As of March 31, 2008, we had 121 enterprise clients and, for the three months ended March 31, 2008, we have served over 2,900 transactional clients. During the three months ended March 31, 2008, enterprise clients accounted for 64% of our revenue, while transactional clients accounted for 36% of our revenue.

Our revenue consists of the prices paid by our clients for printed products. These prices, in turn, reflect the amounts charged to us by our suppliers plus our gross profit. Our gross profit margin, in the case of some of our enterprise clients, is fixed by contract or, in the case of transactional clients, is negotiated on a job-by-job basis. Once either type of client accepts our pricing terms, the selling price is established and we procure the product for our own account in order to re-sell it to the client. We take full title and risk of loss for the product upon shipment. The finished product is typically shipped directly from the supplier to a destination specified by the client. Upon shipment, our supplier invoices us for its production costs and we invoice our client.

Our revenue from enterprise clients tends to generate lower gross profit margins than our revenue from transactional clients because the gross profit margins established in our contracts with large enterprise clients are generally lower than the gross profit margins we typically realize in our transactional business. Although our enterprise revenue generates lower gross profit margins, our enterprise business tends to be more profitable than our transactional business on an operating profit basis because the commission expense associated with enterprise jobs is generally lower.

The print industry has historically been subject to seasonal sales fluctuations because a substantial number of print orders are placed for the year-end holiday season. We have historically experienced seasonal client buying patterns with a higher percentage of our revenue being earned in our third and fourth quarters. We expect these seasonal revenue patterns to continue.

 

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Cost of Goods Sold and Gross Profit

Our cost of goods sold consists primarily of the price at which we purchase products from our suppliers. Our selling price, including our gross profit, in the case of some of our enterprise jobs, is based on a fixed gross margin established by contract or, in the case of transactional jobs, is determined at the discretion of the account executive or procurement manager within predetermined parameters. Our gross margins on our enterprise jobs are typically lower than our gross margins on our transactional jobs. As a result, our cost of goods sold as a percentage of revenue for our enterprise jobs is typically higher than it is for our transactional jobs. We have early payment discount terms with several of our key suppliers. As we continue to take advantage of the early payment terms, it reduces our overall cost of goods sold. Our gross profit for the three months ended March 31, 2008 and 2007 was $21.6 million and $14.4 million, respectively.

Operating Expenses and Income from Operations

Commissions paid to our account executives are a significant component of our operating expenses. The commissions we pay to our account executives are based on the gross profit we collect from the clients for which they have responsibility. As a percentage of our gross profit, commissions were 19.2% and 27.2% during the three months ended March 31, 2008 and 2007, respectively. Commission expense generally fluctuates based on the percentage of revenue generated from enterprise clients compared to transactional clients. The decrease in commission expense as a percentage of revenue is the result of an increase in revenue from enterprise clients which tend to pay lower commission rates than our transactional clients. Revenue from enterprise clients increased from 60% for the three months ended March 31, 2007 to 64% for the three months ended March 31, 2008.

We accrue for commissions when we recognize the related revenue. Some of our account executives receive a monthly draw to provide them with a more consistent income stream. The cash paid to our account executives in advance of commissions earned is reflected as a prepaid expense on our balance sheet. As our account executives earn commissions, a portion of their commission payment is withheld and offset against their prepaid commission balance, if any. Our prepaid commission balance net of accrued earned commissions not yet paid increased to $1.9 million as of March 31, 2008 from $936,000 as of March 31, 2007.

Our general and administrative expenses consist mainly of compensation costs for our management team and procurement managers. Our general and administrative expenses also include compensation costs for our finance and support employees, public company expenses, corporate systems, legal and accounting, facilities and travel and entertainment expenses. General and administrative expenses as a percentage of revenue were 12.5% and 10.6% for the three months ended March 31, 2008 and 2007, respectively. The increase in general and administrative expenses as a percentage of revenue is primarily due to the incremental professional expenses associated with being a public company, which consist of increased legal and accounting fees, including costs associated with becoming Sarbanes-Oxley compliant. Additionally, as we continue to grow in size, both in workforce and geography, there has been a corresponding increase in salary, facility and office expense. Stock-based compensation expense also increased during the three months ended March 31, 2008 due to our senior management equity grants in January 2008.

We agree to provide our clients with printed products that conform to the industry standard of a “commercially reasonable quality,” and our suppliers in turn agree to provide us with products of the same quality. In addition, the quotes we 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. To date, the failure of our clients to make required payments has not had a material adverse effect on our results of operations. For the three months ended March 31, 2008 and 2007, our bad debt recovery was $116,233 and $28,346, respectively.

Our income from operations for the three months ended March 31, 2008 and 2007 was $5.8 million and $3.8 million, respectively.

Comparison of three months ended March 31, 2008 and 2007

Revenue

Our revenue increased by $28.3 million, or 47.9%, from $58.9 million during the three months ended March 31, 2007 to $87.2 million during the three months ended March 31, 2008. The revenue growth reflects an increase in both enterprise and transactional clients. Our revenue from enterprise clients increased by $20.4 million, or 58.0%, from $35.2 million during the three months ended March 31, 2007 to $55.6 million during the three months ended March 31, 2008. As of March 31, 2008, we had 121 enterprise clients compared to 99 enterprise clients under contract as of March 31, 2007. Additionally, revenue from transactional clients increased by $7.8 million, or 33.0%, from $23.8 million during the three months ended March 31, 2007 to $31.6 million during the three months ended March 31, 2008. The incremental transactional revenue is largely a result of increasing the number of experienced sales executives. We increased our number of sales executives by 68, or 41.7%, from 163 as of March 31, 2007 to 232 as of March 31, 2008.

Cost of goods sold

Our cost of goods sold increased by $21.1 million, or 47.4%, from $44.5 million during the three months ended March 31, 2007 to $65.6 million during the three months ended March 31, 2008. The increase reflects the revenue growth during the three months ended March 31, 2008. Our cost of goods sold as a percentage of revenue decreased from 75.6% during the three months ended March 31, 2007 to 75.3% during

 

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the three months ended March 31, 2008. The decrease is the result of our utilization of early payment terms with many of our key suppliers. As we continue to take advantage of the early payment terms, it reduces our overall cost of goods sold and increases our gross margin. Our gross profit for the three months ended March 31, 2007 and 2008 was $14.4 million, or 24.4% of revenue, and $21.6 million, or 24.7% of revenue, respectively.

Gross Profit

Our gross profit as a percentage of revenue, which we refer to as gross margin, increased from 24.4% during the three months ended March 31, 2007 to 24.7% during the three months ended March 31, 2008. The increase is primarily the result of utilizing the early payment discounts with several of our key suppliers.

Selling, general and administrative expenses

Commission expense increased by $226,000, or 5.8%, from $3.9 million during the three months ended March 31, 2007 to $4.1 million during the three months ended March 31, 2008. As a percentage of gross profit, commission expense decreased from 27.2% during the three months ended March 31, 2007 to 19.2% during the three months ended March 31, 2008. The decrease in commission expense is the result of an increase in revenue from enterprise clients, which tend to pay lower commission rates than our transactional clients. Revenue from enterprise clients increased from 60% for the three months ended March 31, 2007 to 64% for the three months ended March 31, 2008.

General and administrative expense increased by $4.6 million, or 74.2%, from $6.3 million during the three months ended March 31, 2007 to $10.9 million during the three months ended March 31, 2008. General and administrative expense increased as a percentage of revenue from 10.6% during the three months ended March 31, 2007 to 12.5% during the three months ended March 31, 2008. The increase in general and administrative expenses as a percentage of revenue is primarily due to the incremental professional expenses associated with being a public company, which consist of increased legal and accounting fees, including costs associated with becoming Sarbanes-Oxley compliant, as well as the additional stock-based compensation expense incurred during the three months ended March 31, 2008. Additionally, as we continue to grow in size, both in workforce and geography, there has been a corresponding increase in salary, facility and office expense.

Depreciation and amortization

Depreciation and amortization expense increased by $279,000, or 62.9%, from $444,000 during the three months ended March 31, 2007 to $723,000 during the three months ended March 31, 2008. The increase in depreciation expense is primarily attributable to purchases of computer hardware and software, equipment and furniture and fixtures as well as capitalization of costs of computer software for internal use in accordance with Statement of Position 98-1. The increase in amortization expense is a result of the amortization of the intangible assets acquired in connection with our 2007 acquisitions.

Income from operations

Income from operations increased by $2.0 million, or 53.1%, from $3.8 million during the three months ended March 31, 2007 to $5.8 million during the three months ended March 31, 2008. As a percentage of revenue, income from operations increased from 6.4% during the three months ended March 31, 2007 to 6.6% during the three months ended March 31, 2008. The increase in income from operations as a percentage of revenue is a result of an increase in our gross profit margin and a decrease in commission expense as a percentage of revenue.

Other income and expense

Other income and expense increased by $22,000 from $553,000 during the three months ended March 31, 2007 to $575,000 during the three months ended March 31, 2008. The increase is due to an increase of $100,000 in the gain on sale of investments from $69,000 to $169,000 for the three months ended March 31, 2007 and 2008, respectively, offset by a decrease in interest income of $79,000 from $485,000 to $406,000 for the three months ended March 31, 2007 and 2008, respectively.

Provision for income taxes

Provision for income taxes increased by $837,000 from $1.7 million during the three months ended March 31, 2007 to $2.5 million during the three months ended March 31, 2008. Our effective tax rate was 38.6% and 39.4% for the three month periods ended March 31, 2007 and 2008, respectively.

Net income

Net income increased by $1.2 million, or 44.9%, from $2.7 during the three months ended March 31, 2007 to $3.9 million during the three months ended March 31, 2008. Net income as a percentage of revenue decreased from 4.5% during the three months ended March 31, 2007 to 4.4% during the three months ended March 31, 2008.

Liquidity and Capital Resources

At March 31, 2008, we had $44.6 million of cash, cash equivalents and marketable securities. Our marketable securities include auction-rate securities, which are variable rate debt instruments, having long-term maturity dates (typically 15 to 40 years), but whose interest rates are reset through an auction process, most commonly at intervals of seven, 28 and 35 days. In mid-February 2008, liquidity issues in the global credit markets resulted in the failure of auctions, involving substantially all of the auction-rate securities we hold. Substantially all of our

 

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auction-rate securities are backed by pools of student loans guaranteed by the U.S. Department of Education, and all were rated AAA/Aaa as of March 31, 2008. We continue to believe that the credit quality of these securities is high. While the recent auction failures will limit our ability to liquidate these investments for some period of time, we do not believe the auction failures will materially impact our ability to fund our working capital needs, capital expenditures or other business requirements.

Operating Activities. Cash provided by operating activities primarily consists of net income adjusted for certain non-cash items, including depreciation and amortization, and the effect of changes in working capital and other activities. Cash provided by operating activities for the three months ended March 31, 2008 was $1.8 million and primarily consisted of net income of $3.9 million and $2.6 million of non-cash items, offset by $4.6 million used to fund working capital and other activities. The most significant impact on working capital and other activities consisted of a decrease in accounts receivable of $7.7 million resulting from cash collections with a decrease in accounts payable of $6.3 million due to early payments to vendors and accrued expenses and other of $4.8 million.

Cash provided by operating activities in the three months ended March 31, 2007 was $1.0 million and consisted of net income of $2.7 million and $733,000 of non-cash items, offset by $2.4 million used in working capital and other activities. The most significant impact on working capital and other activities consisted of an increase in accounts receivable of $1.9 million with a decrease in accrued expenses of $1.6 million, primarily due to the $1.1 million payment of 2006 income taxes.

Investing Activities. Cash used in investing activities in the three months ended March 31, 2008 of $23,000 was attributable to the proceeds on sale of marketable securities of $2.4 million, offset by $1.2 million in payments made in connection with our 2007 acquisitions and capital expenditures of $1.2 million.

Cash used in investing activities in the three months ended March 31, 2007 of $29.0 million was attributable to the purchase of marketable securities of $23.6 million with a portion of the net proceeds received from our follow-on offering, cash paid for the Spectrum acquisition of $3.3 million, additional purchase price payments of $1.6 million made in connection with the 2006 acquisitions of CoreVision and Applied Graphics and capital expenditures of $481,000.

Financing Activities. Cash provided by financing activities in the three months ended March 31, 2008 of $1.0 million was primarily attributable to a tax benefit of stock options exercised of $900,000 and the proceeds related to the exercise of stock options of $123,000.

Cash provided by financing activities in the three months ended March 31, 2007 of $39.7 million was primarily attributable to the net proceeds received from our follow-on offering, after underwriting discounts and commissions and offering related expenses, of approximately $37.7 million and a tax benefit of stock options exercised of approximately $2.2 million.

We have a $20.0 million line of credit with JPMorgan Chase Bank, N.A. The line of credit was unused as of March 31, 2008. The maximum amount outstanding under our line of credit cannot exceed 80% of the book value of our eligible accounts receivable. Our line of credit contains limitations on our ability to incur indebtedness, create liens and make certain investments. Advances made under our line of credit accrue interest at a per annum rate equal to the prime rate.

We anticipate that our operating expenses will constitute a material use of cash. In addition, we may continue to utilize cash to fund acquisitions of or strategic investments in complementary businesses and to expand our sales force. Although we can provide no assurances, we believe that the net proceeds from the follow-on public offering we closed in January 2007, together with our available cash and cash equivalents and amounts available under our line of credit, should be sufficient to meet our working capital and operating expenditure requirements for the foreseeable future. Thereafter, we may find it necessary to obtain additional equity or debt financing. In the event additional financing is required, we may not be able to raise it on acceptable terms or at all.

Off-Balance Sheet Obligations

We do not have any off-balance sheet arrangements.

Contractual Obligations

As of March 31, 2008, 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)

Capital lease obligations

     220      85      135      —        —  

Operating lease obligations

     15,187      3,363      5,755      3,546      2,523
                                  

Total

   $ 15,407    $ 3,448    $ 5,890    $ 3,546    $ 2,523
                                  

This table does not include any contingent obligations related to any acquisitions. For discussion of 2007 acquisitions, see “Management Discussion and Analysis – Recent Developments” in the Company’s Form 10-K for the year ended December 31, 2007.

Critical Accounting Policies and Estimates

As of March 31, 2008, there were no material changes to the Company’s critical accounting policies and estimates disclosed in its Form 10-K for the year ended December 31, 2007.

 

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Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) requires companies to continue to follow the guidance in SFAS No. 141 for certain aspects of business combinations, with additional guidance provided defining the acquirer, recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired, assets and liabilities arising from contingencies, defining a purchase and recognizing and measuring goodwill or a gain from a bargain purchase. This statement is effective for all business combinations for which the acquisition date is on or after the beginning of an entity’s first fiscal year that begins after December 15, 2008. The Company will implement SFAS No. 141(R) for any business combinations occurring at or subsequent to January 1, 2009. The Company is currently evaluating what impact, if any, SFAS 141(R) will have on its consolidated financial statements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains words such as “may,” “will,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “project,” “estimate” and “objective” or the negative thereof or similar terminology concerning the Company’s future financial performance, business strategy, plans, goals and objectives. These expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include information concerning the Company’s possible or assumed future performance or results of operations and are not guarantees. While these statements are based on assumptions and judgments that management has made in light of industry experience as well as perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances, they are subject to risks, uncertainties and other factors that may cause the Company’s actual results, performance or achievements to be materially different. Some of the factors that would cause future results to differ from the recent results or those projected in forward-looking statements include, but are not limited to, the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2007.

Additional Information

The Company makes its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, other reports and information filed with the SEC and amendments to those reports available, free of charge, through its Internet website (http://www.inwk.com) as soon as reasonably practical after it electronically files or furnishes such materials to the SEC. All of the Company’s filings may be read or copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on the operation of the Public Filing Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

 

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

Commodity Risk

We are dependent upon the availability of paper and paper prices represent a substantial portion of the cost of our products. The supply and price of paper depends on a variety of factors over which we have no control, including environmental and conservation regulations, natural disasters and weather. Assuming we were unable to pass along price increases in paper to our customers, there would be a risk of margin erosion on future business.

Interest Rate Risk

We have exposure to changes in interest rates on our line of credit. The interest rate on our line of credit fluctuates based on the prime rate. Assuming the $20.0 million line of credit was fully drawn, a 1.0% increase in the prime rate would increase our annual interest expense by $200,000. The $20 million line of credit, effective July 1, 2007, has a term of one year and will mature on June 30, 2008. The line of credit was unused as of March 31, 2008. The maximum amount outstanding under our line of credit cannot exceed 80% of the book value of our eligible accounts receivable. Our line of credit contains limitations on our ability to incur indebtedness, create liens and make certain investments. Advances made under our line of credit accrue interest at a per annum rate equal to the prime rate.

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.

We do not use derivative financial instruments for speculative trading purposes.

 

Item 4. Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2008. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2008, our chief executive officer and chief financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the first quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

We are not a party to any legal proceedings that we believe would have a material adverse effect on our business, financial condition or operating results.

 

Item 1A. Risk Factors

There have been no material changes in the risk factors described in Item 1A (“Risk Factors”) of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

 

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Item 5. Other Information

On May 7, 2008, we entered in a stock purchase agreement with Printworks Series E, LLC, one of our stockholders and an affiliate of the Nazarian family, pursuant to which we sold 500,000 shares of common stock of Echo Global Logistics, Inc. for a purchase price of $5 million. The agreement is filed as Exhibit 10.1 to this Form 10-Q.

 

Item 6. Exhibits

(a) The following is a list of exhibits filed as part of this Form 10-Q:

 

Exhibit No

 

Description of Exhibit

10.1

  Stock Purchase Agreement dated May 7, 2008 by and between InnerWorkings, Inc. and Printworks Series E, LLC.

31.1

  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

  Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

  Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  INNERWORKINGS, INC.
Date: May 12, 2008   By:  

/s/ Steven E. Zuccarini

    Steven E. Zuccarini
    Chief Executive Officer
Date: May 12, 2008   By:  

/s/ Nicholas J. Galassi

    Nicholas J. Galassi
    Chief Financial Officer

 

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EXHIBIT INDEX

 

Number

 

Description

10.1

  Stock Purchase Agreement dated May 7, 2008 by and between InnerWorkings, Inc. and Printworks Series E, LLC.

31.1

  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

  Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant­ to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

  Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant­ to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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Stock Purchase Agreement

Exhibit 10.1

STOCK PURCHASE AGREEMENT

This STOCK PURCHASE AGREEMENT (this “Agreement”), is made and entered into as of May 7, 2008, by and between InnerWorkings, Inc., a Delaware corporation (“Selling Stockholder”), and Printworks Series E, LLC, a Delaware limited liability company (“Purchaser”).

WHEREAS, Selling Stockholder wishes to sell to Purchaser, and Purchaser wishes to purchase from Selling Stockholder, 500,000 shares (the “Shares”) of common stock, $0.0001 par value, of Echo Global Logistics, Inc. (the “Company”), upon the terms and subject to the conditions set forth herein;

NOW, THEREFORE, the parties hereby agree as follows:

 

1. Purchase and Sale

(a) Upon the terms and subject to the conditions of this Agreement, Purchaser or one or more of its affiliates will purchase, and Selling Stockholder will sell to Purchaser or such affiliates, the Shares against payment of an aggregate purchase price of $5,000,000 (the “Purchase Price”) on May 7, 2008 or such other date as the parties may mutually agree (the “Closing Date”).

(b) On the Closing Date, Selling Stockholder shall deliver to Purchaser or its affiliate a stock certificate or certificates representing the Shares deliverable on the Closing Date against payment to Selling Stockholder by wire transfer of the Purchase Price in immediately available funds to an account designated by Selling Stockholder.

 

2. Representations and Covenants of Selling Stockholder

Selling Stockholder represents and warrants to, and covenants and agrees with, Purchaser as follows:

(a) The execution, delivery and performance of this Agreement by Selling Stockholder does not and shall not conflict with, violate or cause a breach of any agreement, contract or instrument to which Selling Stockholder is a party or any judgment, order or decree to which Selling Stockholder is subject.

(b) The execution, delivery and performance of this Agreement have been duly authorized by all necessary and appropriate corporate action on the part of Selling Stockholder. This Agreement has been duly executed by a duly authorized person on Selling Stockholder’s behalf and constitutes the legally binding obligation of Selling Stockholder, enforceable against Selling Stockholder in accordance with its terms (except to the extent that enforcement may be affected by laws relating to bankruptcy, reorganization, insolvency and creditors’ rights generally and by the availability of injunctive relief, specific performance and other equitable remedies).

(c) Selling Stockholder owns beneficially and of record and has good and marketable title to the Shares, free and clear of all liens, charges, claims, security agreements,


equities, options, pledges and encumbrances, other than the restrictions and limitations set forth in (i) that certain Right of First Refusal and Co-Sale Agreement dated as of June 7, 2006 by and among the Company and certain stockholders of the Company (the “ROFR and Co-Sale Agreement”) and (ii) that certain Voting Agreement dated as of June 7, 2006 by and among the Company and certain stockholders of the Company (the “Voting Agreement”). On the Closing Date, Purchaser will acquire good and marketable title to the Shares, free and clear of all liens, charges, claims, security agreements, equities, options, pledges and encumbrances, subject to the restrictions and limitations set forth in the ROFR and Co-Sale Agreement and the Voting Agreement. Selling Stockholder has full right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver the Shares, subject to the restrictions and limitations set forth in the ROFR and Co-Sale Agreement and the Voting Agreement.

(d) Selling Stockholder has such knowledge and experience in financial and business matters such that Selling Stockholder is capable of evaluating the merits of selling the Shares for the Purchase Price pursuant to this Agreement and of making an informed investment decision with respect thereto or has consulted with advisors who possess such knowledge and experience. Selling Stockholder acknowledges that it has completed to its satisfaction its own due diligence investigation with respect to the Company and the Shares and that Purchaser is not making any representation or warranty, expressed or implied, at law or in equity, to Selling Stockholder other than as expressly set forth in this Agreement.

 

3. Representations and Covenants of Purchaser

Purchaser represents and warrants to, and covenants and agrees with, Selling Stockholder as follows:

(a) The Shares are and shall be acquired solely for Purchaser’s own account, for investment purposes only and not with a present view toward the distribution thereof or with any present intention of distributing or reselling any such Shares in violation of the Securities Act of 1933, as amended (the “Securities Act”) or any state securities laws and that any transfer of such Shares shall be made only in compliance with all applicable federal and state securities laws, including, without limitation, the Securities Act.

(b) Purchaser has such knowledge and experience in financial and business matters such that Purchaser is capable of evaluating the merits and risks of an investment in the Shares and of making an informed investment decision with respect thereto or has consulted with advisors who possess such knowledge and experience.

(c) The execution, delivery and performance of this Agreement by Purchaser does not and shall not conflict with, violate or cause a breach of any agreement, contract or instrument to which Purchaser is a party or any judgment, order or decree to which Purchaser is subject.

(d) The execution, delivery and performance of this Agreement have been duly authorized by all necessary and appropriate limited liability company or other entity proceedings, as the case may be, on the part of Purchaser. This Agreement has been duly executed by a duly authorized person on Purchaser’s behalf and constitutes the legally binding

 

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obligation of Purchaser, enforceable against Purchaser in accordance with its terms (except to the extent that enforcement may be affected by laws relating to bankruptcy, reorganization, insolvency and creditors’ rights generally and by the availability of injunctive relief, specific performance and other equitable remedies).

(e) Purchaser acknowledges that it has completed to its satisfaction its own due diligence investigation with respect to the Company and the Shares and that, except for the representations and warranties of Selling Stockholder expressly set forth in Section 2, Selling Stockholder is not making any representation or warranty, expressed or implied, at law or in equity, to Purchaser.

 

4. Conditions to Obligations of Purchaser

The obligations of Purchaser to consummate the transactions contemplated by this Agreement are subject to the satisfaction at or prior to the Closing Date of the following conditions:

(a) No preliminary or permanent injunction or other binding order, decree or ruling issued by a court or governmental agency shall be in effect which shall have the effect of preventing the consummation of the transactions contemplated by this Agreement.

(b) All representations and warranties of Selling Stockholder contained in this Agreement shall be true in all material respects at and as of the Closing Date as though made at such time, and Selling Stockholder shall have performed and complied in all material respects with all covenants and conditions required by this Agreement to be performed or complied with by it prior to or on the Closing Date.

(c) All corporate and other proceedings required to carry out the transactions contemplated by this Agreement, and all instruments and other documents relating to such transactions, shall be reasonably satisfactory in form and substance to Purchaser and Purchaser shall have been furnished with such instruments and documents as such counsel shall have reasonably requested.

(d) On or prior to the Closing Date, Purchaser shall have received notice that the Investors, as defined in that certain Right of First Refusal and Co-Sale Agreement, (other than the Purchaser or any affiliate of the Purchaser) have waived or otherwise elected not to exercise their rights set forth in Sections 2.2 and 2.3 of the ROFR and Co-Sale Agreement.

 

5. Condition to Obligations of Selling Stockholder

The obligations of Selling Stockholder to consummate the transactions contemplated by this Agreement are subject to the satisfaction at or prior to the Closing Date of the following conditions:

(a) No preliminary or permanent injunction or other binding order, decree or ruling issued by a court or governmental agency shall be in effect which shall have the effect of preventing the consummation of the transactions contemplated by this Agreement.

 

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(b) On or prior to the Closing Date, Selling Stockholder shall have received from Duff & Phelps Corporation, or another comparable valuation firm, its opinion that the Purchase Price to be received by Selling Stockholder for the Shares is fair from a financial point of view to the Selling Stockholder.

(c) On or prior to the Closing Date, Selling Stockholder shall have received notice that the Investors, as defined in that certain Right of First Refusal and Co-Sale Agreement have waived or otherwise elected not to exercise their rights set froth in Sections 2.2 and 2.3 of the ROFR and Co-Sale Agreement.

(d) All representations and warranties of Purchaser contained in this Agreement shall be true in all material respects at and as of the Closing Date as though made at such time, and Purchaser shall have performed and complied in all material respects with all covenants and conditions required by this Agreement to be performed or complied with by it prior to or on the Closing Date.

 

6. ROFR and Co-Sale Agreement; Voting Agreement

(a) Prior to the Closing Date, Selling Stockholder and Purchaser agree to take all actions reasonably required to comply with the terms and conditions of the ROFR and Co-Sale Agreement and the Voting Agreement.

(b) On and after the Closing Date, Purchaser understands it will be subject to the terms and conditions of the ROFR and Co-Sale Agreement and the Voting Agreement.

(c) Legends. Purchaser understands that the certificates evidencing the Shares may bear the following legends:

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.

THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO, AND IN SOME CASES PROHIBITED BY, THE TERMS AND CONDITIONS OF A CERTAIN RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT BY AND AMONG THE STOCKHOLDER, THE CORPORATION AND CERTAIN HOLDERS OF STOCK OF THE CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION.

 

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THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A VOTING AGREEMENT WHICH PLACES CERTAIN RESTRICTIONS ON THE VOTING OF THE SHARES REPRESENTED HEREBY. ANY PERSON ACCEPTING ANY INTEREST IN SUCH SHARES SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF SUCH AGREEMENT. A COPY OF SUCH VOTING AGREEMENT WILL BE FURNISHED TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS.

 

7. Miscellaneous

(a) Fees and Expenses. Whether or not the transactions contemplated by this Agreement shall be consummated, each of the parties hereto shall pay the fees and expenses of its own counsel, accountants and other experts and all other expenses incurred by it in connection with the negotiation, preparation, execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and all other matters incident thereto.

(b) Modification and Waiver. No amendment or modification of the terms or provisions of this Agreement shall be binding unless the same shall be in writing and duly executed by the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed to or shall constitute a waiver of any other provision hereof. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof.

(c) Entire Agreement. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof. Any previous agreement or understandings between the parties regarding such subject matter are merged into and superseded by this Agreement.

(d) Severability. In case any provision in this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

(e) Notices. All notices, consents or other communications hereunder shall be in writing, and shall be deemed to have been duly given and delivered when delivered by hand, or when mailed by registered or certified mail, return receipt requested, postage prepaid, or when received via telecopy or other electronic transmission, in all cases addressed to the party for whom intended at its address set forth below:

 

If to PURCHASER:

Printworks Series E, LLC

1801 Century Park West, 5th Floor

Los Angeles, California 90067

Attention:

Telephone:

Facsimile:

 

 

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If to SELLING STOCKHOLDER:

InnerWorkings, Inc.

600 West Chicago Avenue, Suite 850

Chicago, Illinois 60610

Attention: Chief Financial Officer

Telephone:

   312-642-3700

Facsimile:

   312-642-3704

with a copy to:

Winston & Strawn LLP

35 West Wacker Drive

Chicago, Illinois 60601

Attention: Steven J. Gavin, Esq.

Telephone:

   (312) 558-5979

Facsimile:

   (312) 558-5700

or such other address as either party shall have designated by notice in writing to the other party given in the manner provided by this Section.

(f) Publicity. Purchaser and Selling Stockholder shall consult with each other before issuing any press release or otherwise making any public statement with respect to the transactions contemplated hereby, and shall not issue any such press release or make any such public statement prior to approval by the other party, except as may be required by law.

(g) No Implied Rights. Nothing herein express or implied, is intended to or shall be construed to confer upon or give to any person, firm, corporation or legal entity, other than the parties hereto and their affiliates, any interests, rights, remedies or other benefits with respect to or in connection with any agreement or provision contained herein or contemplated hereby.

(h) Assignment. This Agreement may be assigned by Purchaser to any of its wholly-owned affiliates provided such assignee agrees to be bound by the terms of this Agreement as though named as an original party hereto; and provided further that no such assignment shall release Purchaser from its obligations under this Agreement.

(i) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware.

 

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(j) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same instrument.

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written.

 

SELLING STOCKHOLDER:
INNERWORKINGS, INC.
By:  

/s/ Nicholas J. Galassi

Its:   Chief Financial Officer
PURCHASER:
PRINTWORKS SERIES E, LLC
By:  

/s/ Younes Nazarian

Its:   Authorized Person

 

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Section 302 CEO Certification

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

INNERWORKINGS, INC.

PURSUANT TO

SECTION 302 Of THE SARBANES-OXLEY ACT OF 2002

I, Steven E. Zuccarini, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of InnerWorkings, Inc.;

 

  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and we have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  b) designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

 

  d) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 12, 2008  

/s/ Steven E. Zuccarini

  Steven E. Zuccarini
  Chief Executive Officer

 

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Section 302 CFO Certification

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

INNERWORKINGS, INC.

PURSUANT TO

SECTION 302 Of THE SARBANES-OXLEY ACT OF 2002

I, Nicholas J. Galassi, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of InnerWorkings, Inc.;

 

  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and we have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  b) designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

 

  d) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 12, 2008  

/s/ Nicholas J. Galassi

  Nicholas J. Galassi
  Chief Financial Officer

 

19

Section 906 CEO Certification

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 Of THE SARBANES-OXLEY ACT OF 2002

I, Steven E. Zuccarini, Chief Executive Officer of InnerWorkings, Inc. (the “Company”), hereby certify, that:

(1) The Company’s quarterly report on Form 10-Q for the quarterly period ended March 31, 2008 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Form 10-Q fairly presents, in all material aspects, the financial condition and results of operations of the Company.

 

/s/ Steven E. Zuccarini

Steven E. Zuccarini
Chief Executive Officer
May 12, 2008

 

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Section 906 CFO Certification

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 Of THE SARBANES-OXLEY ACT OF 2002

I, Nicholas J. Galassi, Chief Financial Officer of InnerWorkings, Inc. (the “Company”), hereby certify, that:

(1) The Company’s quarterly report on Form 10-Q for the quarterly period ended March 31, 2008 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Form 10-Q fairly presents, in all material aspects, the financial condition and results of operations of the Company.

 

/s/ Nicholas J. Galassi

Nicholas J. Galassi
Chief Financial Officer
May 12, 2008

 

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