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, 2013
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, IL 60654
 
(312) 642-3700
(Address of principal executive offices) (Zip Code)
 
(Registrants’ telephone number, including area code)
 
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 28, 2013, the last business day of the registrant’s most recent completed second quarter, was $444,451,512 (based on the closing sale price of the registrant’s common stock on that date as reported on the Nasdaq Global Market).
 
As of March 11, 2014, the registrant had 51,363,906 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, 2013. 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
3
Item 1A.
Risk Factors
9
Item 1B.
Unresolved Staff Comments
14
Item 2.
Properties
15
Item 3.
Legal Proceedings
16
Item 4.
Mine Safety Disclosures
16
 
 
 
PART II
 
 
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
17
Item 6.
Selected Financial Data
19
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
33
Item 8.
Financial Statements and Supplementary Data
34
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
86
Item 9A.
Controls and Procedures
86
Item 9B.
Other Information
87
 
 
 
PART III
 
 
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
88
Item 11.
Executive Compensation
88
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
88
Item 13.
Certain Relationships and Related Transactions, and Director Independence
89
Item 14.
Principal Accountant Fees and Services
89
 
 
 
PART IV
 
 
 
 
 
Item 15.
Exhibits, Financial Statement Schedules
90
 
 
 
Signatures
 
91
 
 
2

 
PART I
 
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.
 
Forward-Looking Statements 
 
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 I, Item 1A and Part II, 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.
 
Explanatory Note
 
In our Current Report on Form 8-K filed on February 18, 2014, we disclosed our intention to restate certain historical financial statements based on information learned in a review we initiated into the conduct of the former owner of Productions Graphics, a French company we acquired in the fourth quarter of 2011. As we disclosed, the review led us to conclude that we were the victim of a fraud perpetrated by the former owner, who orchestrated transactions (the “Transactions”) that artificially inflated the results of the Productions Graphics business in order to induce the Company to make earn-out payments under the purchase agreement.  In this Annual Report on Form 10-K for the year ended December 31, 2013, we are restating our historical financial statements previously filed with the Securities and Exchange Commission (the “SEC”) for the periods beginning with the fourth quarter of 2011 and the year ended December 31, 2011 through the third quarter of 2013 (the “Restated Periods”). Our restated financial statements correct our accounting for (i) revenue recognized, cash collected and earn-out payments made in connection with the Transactions; (ii) the fair value of the contingent consideration liability associated with the acquisition of Productions Graphics in light of the Transactions; (iii) the income tax effects of the Transactions; (iv) other unrelated balance sheet reclassifications; and (v) other unrelated corrections which are immaterial individually and in the aggregate.
 
We believe that presenting all of the amended and restated information regarding the Restated Periods in this Form 10-K allows investors to review all pertinent data in a single presentation. In addition, the Company’s Quarterly Reports on Form 10-Q to be filed during 2014 will include the restated 2013 comparable prior quarter and year to date periods. We have not filed and do not intend to file amendments to (i) our Quarterly Reports on Form 10-Q for the first three quarterly periods in the years ended December 31, 2012 and December 31, 2013 or (ii) our Annual Reports on Form 10-K for the years ended December 31, 2011 and December 31, 2012. Accordingly, investors should rely only on the financial information and other disclosures regarding the Restated Periods in this Form 10-K or in future filings with the SEC (as applicable), and not on any previously issued or filed reports, earnings releases or similar communications relating to these periods.
 
The aggregate net impact of the corrections across all affected periods is a net decrease in income before taxes of $2.2 million.  The net impact includes a decrease in income before taxes of $0.5 million for the year ended December 31, 2011, an increase in income before taxes of $17.3 million for the year ended December 31, 2012, and a decrease in income before taxes of $19.1 million for the nine months ended September 30, 2013. For further detail on the financial statement impacts and the adjustments made as a result of the restatement, see Note 19 of the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data.”
 
In connection with this matter, we have re-evaluated our conclusions regarding the effectiveness of our internal controls over financial reporting for the affected periods and determined that a material weakness existed as of December 31, 2011 and continued to exist in all subsequent periods through and as of December 31, 2013 related to an inadequate control environment in our French-based Productions Graphics business. Specifically, this control environment did not prevent or detect the override of controls and misconduct by local management personnel resulting in the overstatement of revenue. In addition, there was a lack of awareness or willingness of some local personnel with knowledge of the overstatement to take other actions. We had previously concluded in our Annual Reports on Form 10-K for the years ended December 31, 2011 and 2012 and in our quarterly reports on Form 10-Q for all quarters in 2012 and 2013 that our controls were effective. As a result of the material weakness, we have now concluded that such controls were ineffective and we have, therefore, restated our disclosures in connection with the restated financial statements. For a description of the material weakness in our internal control over financial reporting and steps taken to remediate the material weakness, see Part II, Item 9A, “Controls and Procedures” of this report.
   
Item 1.
Business
 
Our Company
 
We are a leading global marketing supply chain company that provides 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, we procure, manage and deliver 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 marketing and print supply chain to obtain favorable pricing and to deliver high-quality products and services for our clients.   
 
Our proprietary software applications and database create a fully-integrated solution that stores, analyzes and tracks the production capabilities of our supplier network, as well as quote and price data. As a result, we have one of the largest independent repositories of equipment profiles and price data for print suppliers around the world. We leverage our technology to match our jobs with suppliers that are optimally suited to meet the client’s needs at a highly competitive price.
 
 
3

 
Through our network of more than 10,000 global suppliers, we offer a full range of print, fulfillment and logistics services that allow us to procure marketing materials and printed products of virtually any kind. The breadth of our product offerings and services and the depth of our supplier network enable us to fulfill the marketing and 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 marketing and print expenditures.
  
We generate revenue by procuring and purchasing products from our suppliers and selling those products to our clients. We procure 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 middle market. We enter into contracts 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 middle market 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, 2013, we served more than 7,000 clients. We have increased our annual revenue from $5.0 million in 2002 to $891.0 million in 2013, representing a compound annual growth rate of 60.2%.
 
As of December 31, 2013, we operated in 70 global office locations. We organize our operations into three segments based on geographic regions: North America, Latin America and EMEA. The North America segment includes operations in the United States and Canada; the Latin America segment includes operations in South America and Central America; and the EMEA segment includes operations in the United Kingdom, continental Europe, the Middle East, Africa and Asia. 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 markets in the United States and internationally. We intend to hire or acquire more account executives within close proximity to these large markets.
 
Industry Overview
 
Our business of providing marketing and print procurement solutions intersects two large industries, commercial printing and business process outsourcing, or BPO. According to Pira International, the global commercial print markets have estimated revenue exceeding $500 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.  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.
 
 
4

 
Our Solution 
 
Utilizing our proprietary technology and database, we provide our clients a global solution to procure and deliver printed products at favorable prices. Our network of more than 10,000 global 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 prices we obtain from our suppliers are offered by the suppliers with the most unused capacity. We utilize our technology 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.
 
Our proprietary software applications and database 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 production managers perform that critical function.
 
Account executives act as the primary sales staff to our clients. Production 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 production 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 one or more production managers, who develop contacts with client personnel responsible for authorizing and making print purchases. Our largest clients often are assigned multiple production managers. In certain cases, our production managers function on-site at the client. Whether on-site or off-site, a production manager functions as a virtual employee of the client. As of December 31, 2013, we had over 650 production managers, including 281 production managers working on-site at our clients. Although our clients fall into two categories, enterprise and middle market, the production process for each client category is substantially similar.
 
Our Proprietary Technology
 
Our proprietary technology is a fully-integrated solution that stores equipment profiles for our supplier network and price data for jobs we quote and execute. Our technology allows us to match print jobs with the suppliers in our network that are optimally suited to produce a 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 maintain one of the largest independent repositories of equipment profiles and price data for print suppliers. Our production 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 production managers during the supplier selection process.
 
With each new print job we 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 our proprietary technology allows us to procure print more efficiently than traditional manual or semi-automated systems used by many printers and print brokers in the marketplace. Our technology includes the following features:
 
 
Customized order management.     Our solution automatically generates customized data entry screens based on product type and guides the production manager to enter the required job specifications. For example, if a production manager selects “envelope” in the product field, the screen will automatically prompt the production manager to specify the size, paper type, window size and placement and display style.
 
 
 
 
Cost management.     Our solution 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.
 
 
5

 
 
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 paper, print, productions and logistics.
 
 
 
 
Task-tracking.      Our solution creates a work order checklist that sends e-mail reminders to our production managers regarding the time elapsed between certain milestones and the completion of specified deliverables. These automated notifications enable our production managers to focus on more critical aspects of the print process and eliminate delays.
 
 
 
 
Historical price baseline.      Some of our larger clients provide us with pricing data for print jobs they completed before they began to use our solution. For these clients, our solution 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 created customized eCommerce stores on our client and third party platforms to order pre-selected products, such as personalized stationery, marketing brochures, and promotional products. Automated order processes can send requests to our vendors for fulfillment or printing of variable print on demand products.
 
Our Clients
 
We procure printed products for corporate clients across a wide range of industries, such as retail, publishing, financial services, hospitality, non-profits, healthcare, food and beverage, broadcasting and 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, 2013, we served more than 7,000 clients through approximately 6,000 suppliers. For the years ended December 31, 2011, 2012 and 2013, our largest customer accounted for 4%, 8% and 5% of our revenue, respectively. Revenue from our top ten clients accounted for 28%, 32% and 30% of our revenue in 2011, 2012 and 2013, 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 middle market. 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, 2011, 2012 and 2013, enterprise clients accounted for 74%, 75% and 77% of our revenue, respectively. We provide printed products to our middle market clients on an order-by-order basis. For the years ended December 31, 2011, 2012 and 2013, middle market clients accounted for 26%, 25% and 23% of our revenue, respectively.
  
Our Products and Services
 
We offer a full range of print, fulfillment and logistics services in more than 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
 
newsletters
 
stickers
brochures
 
annual 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.
  
 
6

 
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 typically 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 network of more than 10,000 global 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 on the basis of price, quality and customer service. We direct requests for proposals 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 2013, our top ten suppliers accounted for approximately 10% of our cost of goods sold, and no supplier accounted for more than 2% of our cost of goods sold.
 
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 production 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 production managers through our proprietary technology 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, 2013, 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-competition 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 additional qualified account executives from this pool of individuals. We also expect to augment our sales force through selective acquisitions of print service businesses, including print brokers that employ 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.
  
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.
 
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, LogicSource, and HH Global, offer print procurement services or enterprise software applications for the print industry.
 
 
7

 
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 to protect our intellectual property rights. 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, 2013, we had approximately 1,500 employees and independent contractors in more than 30 countries.  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, and Current Reports on Form 8-K, including exhibits and any amendments to those reports, filed with or furnished to the SEC. 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 SEC.  The information contained on our website is not a part of this Annual Report on Form 10-K 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 SEC.
 
 
8

 
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, LogicSource, and HH Global, 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 may achieve greater market acceptance. In addition, a software solution and database similar to our proprietary technology 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 28%, 32% and 30% of our revenue during the years ended December 31, 2011, 2012 and 2013, respectively. Our largest client accounted for 4%, 8% and 5% of our revenue in 2011, 2012 and 2013, 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.
 
 
9

 
A significant or prolonged economic downturn, or a dramatic decline in the demand for printed products, could adversely affect our revenue 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, consumer products, 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 may not be able to obtain sufficient pricing information for our database, which could adversely affect our ability to obtain favorable pricing for our clients and adversely affect our operating income and profitability.
 
We may face difficulties as we expand our operations into countries in which we have limited operating experience.
 
Aggregate revenue from our Latin America and EMEA segments (collectively referred to as the International segment in prior years) represented 15%, 18% and 26% of total revenue during the years ended December 31, 2011, 2012 and 2013, 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 where we currently have limited operations and resources. Our business outside of the United States is subject to various risks, including:
 
 
changes in economic and political conditions;
 
changes in and compliance with international and domestic laws and regulations, including anti-corruption laws such as the U.S. Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act;
 
wars, civil unrest, acts of terrorism and other conflicts;
 
natural disasters;
 
compliance with and 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;
 
political and economic corruption;
 
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 lead to significant legal or compliance expenses and may restrict our ability to operate in the affected region or result in the loss of clients in the affected region or other regions, which could adversely affect our revenue, operating income and profitability.
 
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.
 
The European economy continues to experience overall weakness as a result of lingering high unemployment, sovereign debt issues and tightening of government budgets. Continued weak economic conditions in Europe could adversely affect our results of operations in the European countries in which we conduct business. Additionally, concerns persist regarding the debt burden of certain of the countries that have adopted the euro currency (the “euro zone”) and their ability to meet future financial obligations, as well as concerns regarding the overall stability of the euro to function as a single currency among the diverse economic, social and political circumstances within the euro zone. We conduct a portion of our business in euro. Although it remains uncertain whether significant changes in utilization of the euro will occur or what the potential impact of such changes in the euro zone or globally might be, a material shift in circulation of the euro could result in disruptions to our business and negatively impact our results of operations.
 
 
10

 
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 individuals. 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-competition 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.
  
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 middle market clients. If we are unable to attract new enterprise clients or expand our relationships with our existing middle market clients, our ability to grow our business will be hindered.
 
Most of our clients may terminate their relationships with us on short notice and with no penalties or limited penalties.
 
Our middle market clients, which accounted for approximately 26%, 25% and 23% of our revenue during the years ended December 31, 2011, 2012 and 2013, 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 74%, 75% and 77% of our revenue during the years ended December 31, 2011, 2012 and 2013, respectively, that are generally for three to five year terms. Most of these contracts, however, 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 middle market 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 revenue increased from $5.0 million in 2002 to $891.0 million in 2013, representing a compound annual growth rate of 60.2%. Between January 1, 2002 and December 31, 2013, the number of our employees and independent contractors increased from 21 to approximately 1,500. Continued growth could place a significant strain on our ability to:
 
 
recruit, motivate and retain qualified account executives, production 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. 
 
Our business and stock price may be adversely affected if our internal control over financial reporting is not effective.
 
Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to conduct a comprehensive evaluation of their internal control over financial reporting. To comply with this statute, each year we are required to document and test our internal control over financial reporting; our management is required to assess and issue a report concerning our internal control over financial reporting; and our independent registered public accounting firm is required to report on the effectiveness of our internal control over financial reporting.
 
In this Annual Report on Form 10-K, we reported that our internal control over financial reporting was not effective as of December 31, 2011 and continued to be ineffective in all subsequent periods through and as of December 31, 2013 due to the existence of a material weakness related to an inadequate control environment in our French based Productions Graphics business. Specifically, this control environment did not prevent or detect the override of controls and misconduct by local management personnel resulting in the overstatement of revenue. In addition, there was a lack of awareness or willingness of some local personnel with knowledge of the overstatement to take other actions. See “Item 9A. Controls and Procedures.”
  
Although we believe we are taking appropriate actions to remediate the control deficiencies we identified and to strengthen our internal control over financial reporting, we cannot assure you that we will not discover other material weaknesses in the future. The existence of one or more material weaknesses could result in errors in our financial statements, and substantial costs and resources may be required to rectify these or other internal control deficiencies, and may subject us to risk of litigation, for which we may incur substantial costs regardless of its outcome. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our common stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be harmed.
 
The global integration of our technology platform may result in business interruptions.
 
We are currently implementing a common technology platform across our global operations. The implementation of and such changes to our technology platform and related software carry risks such as cost overruns, project delays and business interruptions and delays.  If we experience a material business interruption as a result of this process, it could have a material adverse effect on our business, financial position and results of operations.
 
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 with excess capacity. 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.
 
 
11

 
  
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 and offer similar services, which would harm our competitive position. We rely primarily on a combination of 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. 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.
 
If we are unable to maintain our proprietary technology, demand for our services, and, therefore our revenue could decrease.
 
We rely heavily on our proprietary technology 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 our proprietary technology 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, John Eisel, our Chief Operating Officer, and Ron Provenzano, our General Counsel. 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.
 
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 in the future. 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.
  
We have used, and expect to continue to use, common stock to pay for all or a portion of our 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 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. Such fluctuations in our operating results could result in volatility or have an adverse effect on the market price of our common stock.
 
 
12

  
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 2011, 2012 and 2013, our revenue was $632.3 million, $789.6 million and $891.0 million, respectively, and our top ten clients accounted for 28%, 32% and 30%, respectively, of such revenue. If any of our key clients fails to pay for our services, our profitability would be negatively impacted.
 
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 December 31, 2013, 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 or 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 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.
 
 
13

    
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 middle market 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.
 
Concentration of ownership of our common stock among our executive officers, directors and principal stockholders may prevent investors from influencing significant corporate decisions.
 
As of December 31, 2013, our executive officers, directors and stockholders of more than 10% of our common stock beneficially owned or controlled approximately 28.0% of our common stock. 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. 
 
 
14

 
Item 2.
Properties
 
Properties
 
Our principal executive offices are located in Chicago, Illinois. We have 25 other office locations in the United States and 45 office locations in 30 other countries around the world.  These other offices are located in Canada, Chile, Brazil, Peru, Mexico, Argentina, the United Kingdom, France, Switzerland, Denmark, Czech Republic, Germany, Ireland, Russia, China, Hong Kong, and various other countries, and are principally used for sales, operations, finance, administration and warehousing. 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 December 31, 2013 to November 21, 2021. 
 
15

   
Item 3.
Legal Proceedings
 
For information on our legal proceedings, see Note 10 to the Consolidated Financial Statements included in this Form 10-K.
  
Item 4.
Mine Safety Disclosures
 
Not applicable.
 
 
16

 
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 Select 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 Select Market for each of the periods listed.
 
 
 
High
 
Low
 
2012
 
 
 
 
 
 
 
First Quarter
 
$
12.24
 
$
9.38
 
Second Quarter
 
$
13.67
 
$
10.04
 
Third Quarter
 
$
13.95
 
$
11.01
 
Fourth Quarter
 
$
15.06
 
$
11.86
 
 
 
 
 
 
 
 
 
2013
 
 
 
 
 
 
 
First Quarter
 
$
15.80
 
$
12.00
 
Second Quarter
 
$
15.16
 
$
9.35
 
Third Quarter
 
$
12.29
 
$
9.75
 
Fourth Quarter
 
$
10.46
 
$
5.54
 
 
Holders
 
As of March 17, 2014, there were 45 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
 
On July 9, 2013, we issued 203,043 unregistered shares of our common stock to the sellers of Xpando Media (Ireland) Limited, a private limited company incorporated in Ireland (“Xpando”). The shares were issued as partial consideration in connection with the acquisition of Xpando. All such shares of common stock were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, as the shares were issued to the owners of a business acquired in a privately negotiated transaction not involving a public offering or solicitation.
 
Issuer Purchases of Equity Securities
 
None.
 
 
17

 
Stock Performance Graph
 
The information contained in the following chart is not considered to be “soliciting material,” or “filed,” or incorporated by reference in any past or future filing by the Company under the Securities Act or Exchange Act unless and only to the extent that the Company specifically incorporates it by reference.
 
The following graph assumes $100 was invested on December 31, 2008 in the common stock of the Company, and each of the following indices and assumes reinvestment of any dividends.  The stock price performance on the graph below is not necessarily indicative of future stock price performance.
 
 
 
 
Dec. 31, 2008
 
 
Dec. 31, 2009
 
 
Dec. 31, 2010
 
 
Dec. 31, 2011
 
 
Dec. 31, 2012
 
 
Dec. 31, 2013
 
INWK
 
$
100
 
$
90
 
$
100
 
$
142
 
$
210
 
$
119
 
NASDAQ Market Index
 
$
100
 
$
144
 
$
168
 
$
165
 
$
191
 
$
265
 
Dow Jones Business Support Services Index
 
$
100
 
$
122
 
$
135
 
$
139
 
$
176
 
$
233
 
 
 
18

 
Item 6.
Selected Financial Data
 
As discussed further in Note 19 of the “Notes to Consolidated Financial Statements” contained in Item 8 of this Form 10-K, we have restated our consolidated financial statements to correct certain errors in our previously issued financial statements.
 
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,
 
 
 
2009
 
2010
 
2011
 
2012
 
2013
 
 
 
(in thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
(as restated)
 
(as restated)
 
 
 
 
Consolidated statements of operations data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
400,447
 
$
482,212
 
$
632,314
 
$
789,585
 
$
890,960
 
Cost of goods sold
 
 
301,672
 
 
366,200
 
 
484,932
 
 
612,026
 
 
688,934
 
Gross profit
 
 
98,775
 
 
116,012
 
 
147,382
 
 
177,559
 
 
202,026
 
Selling, general and administrative expenses
 
 
81,288
 
 
91,796
 
 
115,818
 
 
146,124
 
 
183,443
 
Depreciation and amortization
 
 
8,031
 
 
9,009
 
 
10,172
 
 
10,790
 
 
13,664
 
Change in fair value of contingent consideration
 
 
-
 
 
-
 
 
(1,702)
 
 
(27,689)
 
 
(31,331)
 
Preference claim settlement charge
 
 
-
 
 
-
 
 
950
 
 
1,099
 
 
-
 
VAT settlement charge
 
 
-
 
 
-
 
 
-
 
 
1,485
 
 
-
 
Goodwill impairment charge
 
 
-
 
 
-
 
 
-
 
 
-
 
 
37,908
 
Restructuring and other charges
 
 
-
 
 
-
 
 
-
 
 
-
 
 
4,322
 
Income (loss) from operations
 
 
9,456
 
 
15,207
 
 
22,144
 
 
45,750
 
 
(5,980)
 
Gain on sale of investments
 
 
746
 
 
3,578
 
 
3,948
 
 
1,196
 
 
-
 
Interest income
 
 
412
 
 
151
 
 
182
 
 
66
 
 
76
 
Interest expense
 
 
(1,478)
 
 
(1,928)
 
 
(2,251)
 
 
(2,438)
 
 
(2,954)
 
Other, net
 
 
(119)
 
 
(49)
 
 
-
 
 
94
 
 
(357)
 
Total other income (expense)
 
 
(439)
 
 
1,752
 
 
1,879
 
 
(1,082)
 
 
(3,235)
 
Income (loss) before income taxes
 
 
9,017
 
 
16,959
 
 
24,023
 
 
44,668
 
 
(9,215)
 
Income tax expense (benefit)
 
 
2,708
 
 
5,749
 
 
7,407
 
 
5,874
 
 
(556)
 
Net income (loss)
 
$
6,309
 
$
11,210
 
$
16,616
 
$
38,794
 
$
(8,659)
 
Net income (loss) per share of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.14
 
$
0.25
 
$
0.36
 
$
0.79
 
$
(0.17)
 
Diluted
 
$
0.13
 
$
0.24
 
$
0.34
 
$
0.76
 
$
(0.17)
 
Shares used in per share calculations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
45,535
 
 
45,704
 
 
46,428
 
 
48,811
 
 
50,875
 
Diluted
 
 
47,157
 
 
47,582
 
 
48,818
 
 
51,240
 
 
50,875
 
  
 
 
As of December 31,
 
 
 
2009
 
2010
 
2011
 
2012
 
2013
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
(as restated)
 
(as restated)
 
 
 
 
Consolidated balance sheet data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2,904
 
$
5,259
 
$
13,219
 
$
17,219
 
$
18,606
 
Working capital(1)
 
 
56,157
 
 
64,982
 
 
65,815
 
 
84,489
 
 
57,766
 
Total assets
 
 
267,158
 
 
279,925
 
 
457,653
 
 
514,780
 
 
614,667
 
Revolving credit facility(2)
 
 
46,385
 
 
47,400
 
 
60,000
 
 
65,000
 
 
69,000
 
Capital leases
 
 
137
 
 
28
 
 
65
 
 
-
 
 
-
 
Total stockholders’ equity
 
 
147,050
 
 
160,184
 
 
181,725
 
 
242,952
 
 
245,442
 
 

(1)
Working capital represents accounts receivable, unbilled revenue, inventories, prepaid expenses and other current assets, offset by accounts payable, accrued expenses and other current liabilities.
(2)
The Company entered into a Credit Agreement, dated as of August 2, 2010, subsequently amended most recently as of December 27, 2013 to fund acquisitions and for general working capital purposes.
 
 
19

 
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 global marketing supply chain company that provides 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 now global focus.
 
Our proprietary software applications and database 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 have 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 network of more than 10,000 global 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 marketing and printed products from our suppliers and selling those products to our clients. We procure marketing and 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 middle market. We enter into arrangements with our enterprise clients to provide some, or substantially all, of their marketing and printed products, typically on a recurring basis. We provide printed products to our middle market 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. As of December 31, 2013, we had approximately 1,500 employees and independent contractors in more than 30 countries. We organize our operations into three segments based on geographic regions: North America, Latin America and EMEA.  In 2013, we generated global revenue from third parties of $658.0 million in the North America segment, $88.0 million in the Latin America segment and $145.0 million in the EMEA 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.
 
Restatement of Previously Issued Financial Statements
 
As previously discussed in the Explanatory Note at the beginning of this Annual Report on Form 10-K and as further discussed in Note 19 of the Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data,” we have restated our consolidated financial statements for the periods beginning with the fourth quarter of 2011 and the year ended December 31, 2011 through the third quarter of 2013.
 
The impact of these errors to the applicable line items in the consolidated financial statements resulting from the restatement is set forth in Note 19 to the Notes to Consolidated Financial Statements. The restatement resulted in a net decrease in income before taxes of $2.2 million for all affected periods. The net impact includes a decrease in income before taxes of $0.5 million for the year ended December 31, 2011, an increase in income before taxes of $17.3 million for the year ended December 31, 2012, and a decrease in income before taxes of $19.1 million for the nine months ended September 30, 2013. For further detail on the financial statement impacts and the adjustments made as a result of the restatement, see Note 19 of the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data.”
 
Revenue
 
We generate revenue through the sale of printed products to our clients. Our annual revenue was $632.3 million, $789.6 million and $891.0 million in 2011, 2012 and 2013, respectively, reflecting growth rates of 24.9% and 12.8% in 2012 and 2013, respectively, as compared to the corresponding prior year. Our revenue is generated from two different types of clients: enterprise and middle market. Enterprise clients usually order printed products in higher dollar amounts and volume than our middle market clients. 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 middle market. 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.
  
 
20

 
Several of our enterprise clients have outsourced substantially all of their recurring print needs to us. We provide printed products to our middle market clients on an order-by-order basis. For the years ended December 31, 2011, 2012 and 2013, enterprise clients accounted for 74%, 75% and 77% of our revenue, respectively, while middle market clients accounted for 26%, 25% and 23% of our revenue, respectively.
 
Our revenue consists of the prices paid to us 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 middle market clients, is dependent on prices 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.
  
Our revenue from enterprise clients tends to generate lower gross profit margins than our revenue from middle market clients because the gross profit margins established in our contracts with large enterprise clients are generally lower than the gross profit margins typically realized in our middle market business. Although our enterprise revenue generates lower gross profit margins, our enterprise business tends to be as profitable as our middle market business on an operating profit basis because the commission expense associated with enterprise clients 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 clients, is based on a fixed gross margin established by contract or, in the case of middle market clients, is determined at the discretion of the account executive or production manager within predetermined parameters. Our gross margins on our enterprise clients are typically lower than our gross margins on our middle market clients. As a result, our cost of goods sold as a percentage of revenue for our enterprise clients is typically higher than those for our middle market clients. Our gross profit for years ended December 31, 2011, 2012 and 2013 was $147.4 million, $177.6 million and $202.0 million, or 23.3%, 22.5% and 22.7% of revenue, respectively.
 
Operating Expenses and Income (Loss) from Operations
 
Our selling, general and administrative expenses consist of commissions paid to our account executives, compensation costs for our management team and production 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 18.3%, 18.5% and 20.6% in 2011, 2012 and 2013, respectively.
 
We accrue for commissions when we recognize the related revenue. Some of our account executives receive a monthly draw to provide them with a more consistent income stream. The cash paid to our account executives in advance of commissions earned is reflected as a prepaid expense on our balance sheet. As our account executives earn commissions, a portion of their commission payment is withheld and offset against their prepaid commission balance, if any. Our prepaid commission balance, net of accrued earned commissions not yet paid, decreased to $4.1 million as of December 31, 2013 from $8.3 million as of December 31, 2012. This decrease was primarily due to restructuring activities during the third quarter of 2013 which resulted in a write off of the $2.6 million prepaid commission balances for the employees affected by the restructuring actions. For employees who had a balance and were affected by the restructuring actions, which primarily includes Small and Medium Business (“SMB”) account executives, the Company included these balances as part of the severance paid to these individuals. In addition to these restructuring charges, the Company changed its compensation structure during the third quarter so that remaining employees of SMB are paid a fixed salary. This change in compensation structure resulted in the recording of an additional charge of $1.3 million for these employees. See the discussion of restructuring and asset write-down charges below for additional details.
 
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 $2.4 million, $1.7 million and $1.3 million in 2011, 2012 and 2013, respectively.
 
Our income (loss) from operations for 2011, 2012 and 2013 was $22.1 million, $45.7 million and $(6.0) million, respectively.
 
 
21

 
Critical Accounting Policies
 
Revenue Recognition
 
We recognize revenue upon meeting all of the following revenue recognition criteria, which is typically met upon shipment or delivery of our products to customers: (i) persuasive evidence of an arrangement exists through customer contracts and orders, (ii) the customer takes title and assumes the risks and rewards of ownership, (iii) the sales price charged is fixed or determinable as evidenced by customer contracts and orders, and (iv) collectability is reasonably assured. 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, Revenue Recognition – Principal Agent Considerations, we generally report revenue on a gross basis because we are the primary obligor in our arrangements to procure printed materials and other products for our customers. Under these arrangements, we are responsible for the fulfillment, including the acceptability, of the printed materials and other products. In addition, we (i) determine which suppliers are included in our network, (ii) have discretion to select from among the suppliers within our network, (iii) are obligated to pay our suppliers regardless of whether we are paid by our customers, and (iv) have reasonable latitude to establish exchange price. In some transactions, we also have general inventory risk and are involved in the determination of the nature or characteristics of the printed materials and products. When we are not the primary obligor, revenues are reported net.
 
We recognize revenue for creative and other services provided to our customers which may be delivered in conjunction with the procurement of printed materials at the time when delivery and customer acceptance occur and all other revenue recognition criteria are met. We recognize revenue for creative and other services provided on a stand-alone basis upon completion of the service. Service revenue has not been material to our overall revenue to date.
 
Accounts Receivable and Allowance for Doubtful Accounts
 
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. These estimates of balances that will not be collected are based on historical write offs and recoveries of accounts receivables. The estimates of recovery can change based on actual experience and therefore can affect the level of reserves we place on existing accounts receivables. 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, 2013, the gross accounts receivable balance includes approximately 2.3% of customer balances that are in excess of one year. We believe our reserve level is appropriate considering the quality of the portfolio as of December 31, 2013. While credit losses have historically been within expectations and the provisions established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience.
 
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. Absent any interim indicators of impairment, we test for goodwill impairment as of December 31 of each year. The provisions of ASU 2011-08, “Testing Goodwill for Impairment,” were adopted in the fourth quarter of 2012. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. If the quantitative test is required, 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.
 
We define our reportable operating segments as North America, Latin America and EMEA. For purposes of testing goodwill for impairment, we define our reporting units as the same three units. This change in the reporting units along with a decline in forecasted financial performance in 2013 compelled management to perform an interim goodwill impairment test for these reporting units as of September 30, 2013. In the first step of the impairment test, we concluded that the carrying amount of the EMEA reporting unit exceeded its fair value, requiring us to perform the second step of the impairment test to measure the amount of impairment loss, if any. The fair values of the North America and Latin America reporting units exceeded their carrying values, and the second step was not necessary.
 
Based upon fair value estimates of long-lived assets and discounted cash flows of the EMEA reporting unit, we compared the implied fair value of the goodwill in this reporting unit with the carrying value. The test resulted in a $37.9 million non-cash, goodwill impairment charge which was recognized in the third quarter of 2013. No tax benefit is recognized on the goodwill impairment. This charge had no impact on our cash flows or compliance with debt covenants.
    
 
22

 
The fair value estimates used in the goodwill impairment analysis required significant judgment. Our fair value estimates for purposes of determining the goodwill impairment charge are considered Level 3 fair value measurements. The fair value estimates were based on assumptions that management believes to be reasonable, but that are inherently uncertain, including estimates of future revenues and operating margins and assumptions about the overall economic climate and the competitive environment for the business.
  
At December 31, 2013, we elected to perform the quantitative impairment test for each of our three reporting units. In performing this test, we determined the fair value of the reporting units based on the income approach. Under the income approach, we calculated the fair value of a reporting unit based on the present value of estimated future cash flows. No impairment was identified as of December 31, 2013 as a result of this test.
 
Intangible assets other than goodwill acquired in business combinations are recorded at fair value. We review each business acquisition to identify intangible assets other than goodwill acquired, which include customer lists, non-competition agreements, patents, trade names and trademarks. Our significant acquired intangible assets subject to estimation of fair value primarily include acquired customer lists. For customer list assets, the nature of the customer relationships makes an estimation of the reproduction or replacement costs highly subjective. As there is a specific earnings stream that can be associated exclusively with the customer relationships, we believe that the discounted cash flow method is the most appropriate valuation methodology to determine the fair value of the customer relationships.
 
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 14 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, 2013, the net balance of our intangible assets was $56.6 million.
 
Contingent Purchase Consideration
 
In connection with certain of the Company’s business acquisitions accounted for under ASC 805, contingent purchase consideration is payable in cash or stock upon the achievement of certain performance measures over future periods. For these acquisitions, the Company has estimated and recorded the fair value of the purchase consideration obligation, whereby fair value is determined based on the present value of the potential contingent purchase price. The Company has recorded $54.5 million and $87.3 million in contingent purchase consideration obligation at December 31, 2012 and 2013, respectively. Changes in estimated fair value of the contingent purchase consideration obligation are recorded in the Company’s results from operations. Adjustments to the estimated fair value of the contingent purchase consideration are based on estimates of probability of achievement of earnings targets based on actual results and forecasts of the earnings of the companies acquired. These forecast estimates can change based on macroeconomic conditions as well as the overall success of the business in retaining existing business and gaining new business.
 
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.
 
Expected term is estimated based on historical experience related to similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. We believe that historical experience provides the best estimate of future expected life. The risk-free interest rate is based on actual U.S. Treasury zero-coupon rates for bonds commensurate with the expected term. The expected volatility assumption is based on the historical volatility of our common stock over a period commensurate with the expected term.
 
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 $4.0 million, $6.2 million and $4.7 million in compensation expense related to stock-based compensation, for the years ended December 31, 2011, 2012 and 2013, respectively. 
 
 
23

 
Income Taxes
 
We operate in numerous states and countries through our various subsidiaries, and must allocate our income, expenses, and earnings under the various laws and regulations of each of these taxing jurisdictions. Accordingly, our provision for income taxes represents our total estimate of the liability that we have incurred in doing business each year in all of our locations. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. In determining whether we need to record a valuation allowance against our deferred tax assets, management must make a number of estimates, assumptions and judgments, including estimates of future earnings and taxable income. We establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. The determination to record or release valuation allowances requires significant judgment.
 
As a result of certain realization requirements of ASC 718, we have not recorded certain deferred tax assets that arose directly from tax deductions related to equity compensation that are greater than the compensation recognized for financial reporting. As of December 31, 2013, we have $3.1 million in tax deductions related to these stock option exercises which have not been recorded but are available to reduce taxable income in future periods. These deductions will be recorded to additional paid in capital in the period in which they are realized.
 
New Accounting Pronouncements
 
In February 2012, the FASB issued ASU 2013-02, which requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. These requirements are effective for public companies for reporting periods beginning after December 15, 2012. We adopted ASU 2013-02 in the first quarter of 2013.
 
  
24

 
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,
 
 
 
2011
 
2012
 
2013
 
 
 
(as restated)
 
(as restated)
 
 
 
Consolidated statements of income data:
 
 
 
 
 
 
 
Revenue
 
100.0
%
100.0
%
100.0
%
Cost of goods sold
 
76.7
 
77.5
 
77.3
 
 
 
 
 
 
 
 
 
Gross profit
 
23.3
 
22.5
 
22.7
 
Selling, general and administrative expenses
 
18.3
 
18.5
 
20.6
 
Depreciation and amortization
 
1.6
 
1.4
 
1.5
 
Change in fair value of contingent consideration
 
(0.3)
 
(3.5)
 
(3.5)
 
Preference claim settlement charge
 
0.2
 
0.1
 
-
 
VAT settlement charge
 
-
 
0.2
 
-
 
Goodwill impairment charge
 
-
 
-
 
4.3
 
Restructuring and other charges
 
-
 
-
 
0.5
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
3.5
 
5.8
 
(0.7)
 
Other income (expense)
 
0.3
 
(0.1)
 
(0.4)
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
3.8
 
5.7
 
(1.0)
 
Income tax expense (benefit)
 
1.2
 
0.7
 
(0.1)
 
 
 
 
 
 
 
 
 
Net income (loss)
 
2.6
%
4.9
%
(1.0)
%
 
Comparison of years ended December 31, 2011, 2012 and 2013
 
Revenue
 
Our revenue by segment for each of the years presented was as follows:
 
 
 
Years ended December 31,
 
 
 
2011
 
% of Total
 
 
2012
 
% of Total
 
 
2013
 
% of Total
 
 
 
(dollars in thousands)
 
 
 
(as restated)
 
(as restated)
 
 
(as restated)
 
(as restated)
 
 
 
 
 
 
 
North America
 
$
541,047
 
85.6
%
 
$
648,800
 
82.2
%
 
$
658,022
 
73.9
%
Latin America
 
 
42,979
 
6.8
 
 
 
59,200
 
7.5
 
 
 
89,286
 
10.0
 
EMEA
 
 
48,712
 
7.7
 
 
 
83,305
 
10.6
 
 
 
145,030
 
16.3
 
Other(1)
 
 
(424)
 
(0.1)
 
 
 
(1,720)
 
(0.2)
 
 
 
(1,378)
 
(0.2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
632,314
 
100.0
%
 
$
789,585
 
100.0
%
 
$
890,960
 
100.0
%
 
(1)
“Other” consists of intersegment eliminations, shared service activities and unallocated corporate expenses.
 
2013 compared to 2012. Our revenue increased by $101.4 million, or 12.8%, from $789.6 million in 2012 to $891.0 million in 2013.
 
North America
 
North America revenue increased by $9.2 million, or 1.4%, from $648.8 million in 2012 to $658.0 million in 2013. This increase is driven primarily by revenue from 2013 acquisitions of $23.4 million and organic new enterprise account growth, offset by the loss of a portion of a significant customer.
   
 
25

 
Latin America 
 
Latin America revenue increased by $30.1 million, or 50.8%, from $59.2 million in 2013 to $89.3 million in 2013. This increase is driven primarily by organic new enterprise account growth in the region.
 
EMEA
 
EMEA revenue increased by $61.7 million, or 74.1%, from $83.3 million in 2012 to $145.0 million in 2013. This increase is primarily due to $41.0 million contributed from European acquisitions in 2013 and 17% organic growth.
  
2012 compared to 2011. Our revenue increased by $157.3 million, or 24.9%, from $632.3 million in 2011 to $789.6 million in 2012.
  
North America
 
North America revenue increased by $107.8 million, or 19.9%, from $541.0 million in 2011 to $648.8 million in 2012. This increase in revenue is driven primarily by organic new enterprise and middle market account growth, as well as several tuck-in acquisitions of independent brokers.
 
 Latin America
 
Latin America revenue increased by $16.2 million, or 37.7%, from $43.0 million in 2011 to $59.2 million in 2012. This increase is driven primarily by organic new enterprise account growth in the region.
 
EMEA
 
EMEA revenue increased by $34.6 million, or 71.0%, from $48.7 million in 2011 to $83.3 million in 2012. This increase is primarily due to organic growth, $11.1 million contributed from 2012 European acquisitions, and $20.3 million of incremental revenue from full year contributions of 2011 acquisitions.
  
Cost of goods sold
 
2013 compared to 2012. Our cost of goods sold increased by $76.9 million, or 12.6%, from $612.0 million in 2012 to $688.9 million in 2013. The increase is a result of the revenue growth in 2013. Our cost of goods sold as a percentage of revenue was 77.5% in 2012 and 77.3% in 2013.
 
2012 compared to 2011. Our cost of goods sold increased by $127.1 million, or 26.2%, from $484.9 million in 2011 to $612.0 million in 2012. The increase reflects the revenue growth during 2012.  Our cost of goods sold as a percentage of revenue increased from 76.7% in 2011 to 77.5% in 2012.  The increase in cost of goods sold as a percentage of revenue is a result of a shift in customer mix towards enterprise customers which typically have lower gross margins.
 
 
 
26

 
Gross Profit
 
2013 compared to 2012. Our gross profit as a percentage of revenue, which we refer to as gross margin, was 22.5% in 2012 and 22.7% in 2013.
 
2012 compared to 2011. Our gross margin decreased from 23.3% in 2011 to 22.5% in 2012. This decrease is a result of a shift in customer mix towards enterprise customers which typically have lower gross margins.
  
Selling, general and administrative expenses
 
2013 compared to 2012. Selling, general and administrative expenses increased by $37.3 million, or 25.5%, from $146.1 million in 2012 to $183.4 million in 2013. As a percentage of revenue, selling, general and administrative expenses increased from 18.5% in 2012 to 20.6% in 2013. 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, increased professional fees incurred in connection with ongoing litigation and current year acquisitions. The increase in selling, general and administrative expenses as a percent of revenue is due to actual revenues being less than expected due to the loss of a portion of a significant customer and Europe revenues below forecast.
  
2012 compared to 2011. Selling, general and administrative expenses increased by $30.3 million, or 26.2%, from $115.8 million in 2011 to $146.1 million in 2012. As a percentage of revenue, selling, general and administrative expenses increased from 18.3% in 2011 to 18.5% in 2012. The increase in selling, general and administrative expenses is primarily due to incremental sales commissions and costs of procurement staff to secure new enterprise accounts. 
 
Depreciation and amortization
 
2013 compared to 2012. Depreciation and amortization expense increased by $2.9 million, or 26.8%, from $10.8 million in 2012 to $13.7 million in 2013. This increase is due to an increase in amortization of intangibles related to recent acquisitions as well as the scheduled amortization of certain intangible assets which are not consumed evenly over their useful life, often resulting in more expense in earlier periods compared to a straight-line amortization pattern. As a percentage of revenue, depreciation and amortization expense increased from 1.4% in 2012 to 1.5% in 2013.
 
2012 compared to 2011. Depreciation and amortization expense increased by $0.6 million, or 6.1%, from $10.2 million in 2011 to $10.8 million in 2012. The increase is driven primarily by additional amortization expense as a result of the intangible assets acquired in connection with our acquisitions. As a percentage of revenue, depreciation and amortization expense decreased from 1.6% in 2011 to 1.4% in 2012.
 
Change in fair value of contingent consideration
 
2013 compared to 2012. Income from the change in fair value of contingent consideration increased by $3.6 million, or 13.2%, from $27.7 million in 2012 to $31.3 million in 2013. Included in these amounts are $25.4 million and $26.6 million of reductions in the fair value of the contingent consideration liability related to the acquisition of Productions Graphics. These changes were due to declining financial performance in recent periods which resulted in revised forecasts for the acquired business and a decreased likelihood that the remaining performance targets, which extend through December 31, 2015, will be reached. See Note 9 of the Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data” for further information related to Productions Graphics. In addition to this decrease, the remaining $3.8 million contingent consideration liability for a prior year U.S. acquisition was reversed during 2013, as the final year targets were not achieved.
 
2012 compared to 2011. Income from the change in fair value of contingent consideration increased by $26.0 million from $1.7 million in 2011 to $27.7 million in 2012. Included in these amounts are $1.6 million and $26.6 million of reductions in the fair value of the contingent consideration liability related to the acquisition of Productions Graphics discussed above.
 
Preference claim settlement charge
 
In the fourth quarter of 2011, we accrued a loss reserve of $1.0 million related to a lawsuit filed against us by the Trustee of the Circuit City Liquidating Trust (the “Trust”) in connection with the Circuit City Stores, Inc. bankruptcy proceedings. In January 2013, we entered into a settlement agreement with the Trust resolving this preference claim as well our administrative and general unsecured claims against the Trust for a net payment to the Trust of $0.9 million. We recognized a $1.1 million charge relating to this settlement in the fourth quarter of 2012. See Note 10 of the Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data” for further information related to this matter.
 
VAT settlement charge
 
In the fourth quarter of 2012, we accrued a loss reserve of $1.5 million relating to a VAT assessment issued by Her Majesty’s Revenue and Customs (“HMRC”) to our United Kingdom subsidiary, InnerWorkings Europe Limited (formerly Etrinsic). In July 2013, the Company finalized settlement with the HMRC and received a refund of the amounts paid to HMRC in July 2012 less the settlement amount which was not materially different than the estimated reserve. See Note 10 of the Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data” for further information related to this matter.
 
Goodwill impairment charge
 
In the third quarter of 2013, we recorded a non-cash, goodwill impairment charge of $37.9 million. Goodwill is tested for impairment annually, or more frequently if circumstances indicate a possible impairment may exist. Absent any interim indicators of impairment, we test for goodwill impairment as of December 31 of each year. Effective as of the third quarter of 2013, we changed our reportable operating segments to North America, Latin America and EMEA. Concurrent with the operating segment change, we now define our reporting units as the same three units. This change in the reporting units along with a decline in forecasted financial performance in 2013 compelled management to re-perform the goodwill impairment test for these reporting units as of September 30, 2013.
 
In the first step of the impairment test, we concluded that the carrying amount of the EMEA reporting unit exceeded its fair value, requiring us to perform the second step of the impairment test to measure the amount of impairment loss, if any. The fair values of the North America and Latin America reporting units exceeded their carrying values, and the second step was not necessary. Based upon fair value estimates of long-lived assets and discounted cash flows of the EMEA reporting unit, the Company compared the implied fair value of the goodwill in this reporting unit with the carrying value. The test resulted in a $37.9 million non-cash, goodwill impairment charge which was recognized in the third quarter of 2013.
 
 
27

 
Restructuring and asset write down charges
 
During the third quarter of 2013, the Company commenced various restructuring actions which resulted in charges of $3.0 million during the quarter. These actions consisted of the termination of 49 employees who were provided with severance benefits in accordance with benefit plans previously communicated to the affected employee group or in accordance with local employment laws. The restructuring charges consisted of approximately $0.4 million of cash payments to the terminated employees and $2.6 million of prepaid commission balances written off. Prepaid commission balances represent cash paid to our account executives in advance of commissions earned and is recorded in prepaid expenses on the balance sheet. For employees who had a balance and were affected by the restructuring actions, which primarily includes Small and Medium Business (“SMB”) account executives, the Company included these balances as part of the severance paid to these individuals.
 
Our SMB division was one of the principal groups affected by the restructuring actions noted above. Recent performance below expectations led us to carry out these restructuring initiatives, which include the employee terminations described above as well as a planned change from an exclusive cold calling strategy to more of a warm lead customer acquisition strategy through a channel partner. In addition to these restructuring charges, we also recognized a charge during the third quarter for the write-off of the prepaid commission balances of the remaining account executives in SMB. While these employees were not directly affected by the restructuring, a change in their compensation structure resulted in an additional $1.3 million write off in the third quarter of 2013.
 
Income (loss) from operations
 
2013 compared to 2012. Income (loss) from operations decreased by $51.7 million, or 113.1%, from $45.7 million in 2012 to $(6.0) million in 2013. As a percentage of revenue, income from operations was 5.8% and (0.7)% in 2012 and 2013, respectively. This decrease is primarily attributable to the goodwill impairment charge and restructuring charges discussed above.
 
2012 compared to 2011. Income from operations increased by $23.6 million, or 106.6%, from $22.1 million in 2011 to $45.8 million in 2012 primarily due to increased sales and gross profit and income from changes in the fair value of the contingent consideration liability. As a percentage of revenue, income from operations increased from 3.5% to 5.8% during the years ended December 31, 2011 and 2012, respectively.
 
Other income and expense
 
2013 compared to 2012. Other expense increased by $2.1 million from $1.1 million for the year ended December 31, 2012 to $3.2 million in 2013. The increase is primarily attributable to a decrease in the gain on sale of shares of Echo Global Logistics, Inc., a Nasdaq-listed company (“Echo”), of $0.8 million and an increase in foreign currency losses of $0.4 million and an increase in net interest expense of $0.6 million.
 
2012 compared to 2011. Other income and expense decreased by $3.0 million, from income of $1.9 million in 2011 to expense of $1.1 million in 2012. This decrease is primarily due to a decrease in the gain on the sale of a portion of the shares we held in Echo. The gain on the sale was $3.9 million in 2011 and $1.2 million in 2012.
 
Provision for income taxes 
 
2013 compared to 2012.  Income tax expense decreased by $6.4 million, or 109.5%, from expense of $5.9 million in 2012 to tax benefit of $0.6 million in 2013. Our effective income tax rate was 13.1% and 6.0% in 2012 and 2013, respectively. Our effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted each period by discrete factors and events.
 
The effective tax rates for 2012 and 2013 were affected by the fair value changes to contingent consideration and the goodwill impairment charge. Portions of the total gain recognized from fair value changes to contingent consideration relate to non-taxable acquisitions for which deferred taxes are not recognized, consistent with the treatment of goodwill and intangible assets for those acquisitions under U.S. GAAP. For the years ended December 31, 2012 and 2013, $27.8 million and $27.1 million, respectively, was recognized as income from fair value changes to contingent consideration which did not result in recognition of a deferred tax liability, therefore, reducing the effective tax rate for these periods. This 2013 decrease was offset by the $37.9 million goodwill impairment charge since the goodwill was not deductible and the impairment does not result in a tax benefit.
 
The effective tax rate for the year ended December 31, 2013 was also reduced by recognition of the 2012 R&D tax credit in the first quarter of 2013. On January 2, 2013, the President signed the American Taxpayer Relief Act of 2012. The legislation retroactively extended the R&D tax credit for two years, from January 1, 2012 through December 31, 2013. Our effective income tax rate for the year ended December 31, 2013 reflected the 2012 R&D tax credit of $0.3 million.
  
 
28

 
2012 compared to 2011. Provision for income taxes decreased by $1.5 million, or 20.7%, from $7.4 million in 2011 to $5.9 million in 2012. In 2011, the provision for income taxes resulted in an effective tax rate of 30.8%. In 2012, the provision for income taxes resulted in an effective tax rate of 13.2%. The decrease in the effective tax rate for the year ended December 31, 2012 is primarily due to $27.8 million of income from changes in the fair value of the contingent consideration liability which are not taxable as well as growth of our business internationally into jurisdictions with lower statutory tax rates as well as prior year provision-to-return adjustments related to state and foreign income taxes, offset by the loss of the federal research and development tax credit which expired during 2012. This tax credit was renewed in January 2013 and was utilized on our 2012 federal return, but it is not reflected in the income tax provision for 2012 in accordance with ASC 740.
 
Net income (loss)
 
2013 compared to 2012. Net income (loss) decreased by $47.4 million, or 122.3%, from $38.8 million in 2012 to $(8.7) million in 2013. Net income as a percentage of revenue was 4.9% and (1.0)% in 2012 and 2013, respectively. This decrease is primarily attributable to the goodwill impairment charge and restructuring charges discussed above.
 
2012 compared to 2011. Net income increased by $22.2 million, or 133.5%, from $16.6 million in 2011 to $38.8 million in 2012. Net income as a percentage of revenue increased from 2.6% in 2011 to 4.9% in 2012. The increase in net income as a percentage of revenue is primarily the result of income from changes in the fair value of the contingent consideration liability discussed above.
 
Adjusted EBITDA
 
Adjusted EBITDA, which represents income from operations with the addition of depreciation and amortization, stock-based compensation expense, change in the fair value of contingent consideration liabilities and certain legal settlements discussed in Note 10 “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,
 
 
 
2011
 
% of Total
 
 
2012
 
% of Total
 
 
2013
 
% of Total
 
 
 
(dollars in thousands)
 
 
 
(as restated)
 
(as restated)
 
 
(as restated)
 
(as restated)
 
 
 
 
 
 
 
 
North America
 
$
47,945
 
 
136.4
%
 
$
61,890
 
 
166.3
%
 
$
51,873
 
 
192.8
%
Latin America
 
 
1,497
 
 
4.3
 
 
 
1,745
 
 
4.7
 
 
 
3,098
 
 
11.5
 
EMEA
 
 
3,061
 
 
8.7
 
 
 
(2,664)
 
 
(7.2)
 
 
 
764
 
 
2.8
 
Other(1)
 
 
(17,365)
 
 
(49.4)
 
 
 
(23,754)
 
 
(63.8)
 
 
 
(28,834)
 
 
(107.2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
 
$
35,138
 
 
100.0
%
 
$
37,217
 
 
100.0
%
 
$
26,901
 
 
100.0
%
 
(1)
“Other” consists of intersegment eliminations, shared service activities and corporate expenses which are not allocated to the operating segments as management does not consider them in evaluating segment performance.
 
2013 compared to 2012. Adjusted EBITDA decreased by $10.3 million, or 27.7%, from $37.2 million in 2012 to $26.9 million in 2013. North America Adjusted EBITDA decreased by $10.0 million, or 16.2%, from $61.9 million in 2012 to $51.9 million in 2013 due to the loss of a portion of a significant customer offset by gross profit from organic new enterprise account growth. Latin America Adjusted EBITDA increased by $1.4 million, or 77.5%, from $1.7 million in 2012 to $3.1 million in 2013 due to organic new enterprise account growth. EMEA Adjusted EBITDA increased by $3.4 million from $(2.7) million in 2012 to $0.8 million in 2013 due to gross margin from 2013 acquisitions in the EMEA region. Other Adjusted EBITDA decreased by $5.1 million, or 21.4%, from expense of $23.8 million in 2012 to expense of $28.8 million in 2013 due to increased selling, general and administrative expenses from increased professional fees incurred in connection with ongoing litigation and to support revenue growth.
 
2012 compared to 2011. Adjusted EBITDA increased by $2.1 million, or 5.9%, from $35.1 million in 2011 to $37.2 million in 2012. North America Adjusted EBITDA increased by $13.9 million, or 29.1%, from $47.9 million in 2011 to $61.9 million in 2012. Latin America Adjusted EBITDA increased by $0.2 million, or 16.6%, from $1.5 million in 2012 to $1.7 million in 2013. EMEA Adjusted EBITDA decreased by $5.7 million from $3.1 million in 2012 to $(2.7) million in 2013.The increases in the North America and Latin America segments were primarily due to increased gross profit from acquisitions and organic growth. The decrease in the EMEA segment is due to sales below forecast in France and the impacts of the fraud involving the former owner of Productions Graphics discussed in Note 9 of the Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data.” Other Adjusted EBITDA decreased by $6.4 million, or 36.8%, from expense of $17.4 million to expense of $23.8 million due to increased selling, general and administrative expenses to support revenue growth.
 
 
29

 
The table below provides a reconciliation of Adjusted EBITDA to income from operations for each of the years presented:
 
 
 
 
Years ended December 31,
 
 
 
 
2011
 
 
2012
 
 
2013
 
 
 
(dollars in thousands)
 
 
 
(as restated)
 
(as restated)
 
 
 
 
Income (loss) from operations
 
$
22,144
 
$
45,749
 
$
(5,981)
 
Depreciation and amortization
 
 
10,172
 
 
10,791
 
 
13,664
 
Stock-based compensation expense
 
 
3,976
 
 
6,193
 
 
4,733
 
Change in fair value of contingent consideration
 
 
(1,702)
 
 
(27,689)
 
 
(31,330)
 
Preference claim charge
 
 
950
 
 
1,099
 
 
-
 
VAT settlement charge
 
 
-
 
 
1,485
 
 
-
 
Payments to former owner of Productions Graphics, net of cash recovered
 
 
(402)
 
 
(411)
 
 
2,624
 
Goodwill impairment charge
 
 
-
 
 
-
 
 
37,908
 
Restructuring and other charges
 
 
-
 
 
-
 
 
4,322
 
Legal fees in connection with patent infringement
 
 
-
 
 
-
 
 
961
 
Adjusted EBITDA
 
$
35,138
 
$
37,217
 
$
26,901
 
 
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. See Note 19 of the Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data.”
 
 
 
Three months ended
 
 
 
Mar. 31,
 
Jun. 30,
 
Sept. 30,
 
Dec. 31,
 
Mar. 31,
 
Jun. 30,
 
Sept. 30,
 
Dec. 31,
 
 
 
2012
 
2012(1)
 
2012(2)
 
2012
 
2013(3)
 
2013(4)
 
2013(5)
 
2013
 
 
 
(in thousands, except per share amounts)
 
 
 
(as restated)
 
(as restated)
 
(as restated)
 
(as restated)
 
(as restated)
 
(as restated)
 
(as restated)
 
 
 
Revenue
 
$
187,576
 
$
201,321
 
$
198,844
 
$
201,844
 
$
204,577
 
$
210,876
 
$
232,630
 
$
242,877
 
Gross profit
 
 
40,707
 
 
47,797
 
 
45,957
 
 
43,098
 
 
46,350
 
 
48,177
 
 
53,181
 
 
54,318
 
Net income (loss)
 
 
4,430
 
 
3,773
 
 
4,303
 
 
26,287
 
 
(2,801)
 
 
3,675
 
 
(9,066)
 
 
(469)
 
Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.09
 
$
0.08
 
$
0.09
 
$
0.53
 
$
(0.06)
 
$
0.07
 
$
(0.18)
 
$
(0.01)
 
Diluted
 
$
0.09
 
$
0.07
 
$
0.08
 
$
0.51
 
$
(0.06)
 
$
0.07
 
$
(0.18)
 
$
(0.01)
 
 
(1)
The Company made acquisitions during the second quarter of 2012 which were not material to the Company’s operations. Financial results for these acquisitions are included in the Consolidated Financial Statements beginning in April 2012.
(2)
The Company made acquisitions during the second quarter of 2012 which were not material to the Company’s operations. Financial results for these acquisitions are included in the Consolidated Financial Statements beginning in August 2012.
(3)
The Company acquired DB Studios, Inc. in March 2013. Financial results for this acquisition are included in the Consolidated Financial Statements beginning in March 2013.
(4)
The Company made acquisitions during the second quarter of 2013 which were not material to the Company’s operations. Financial results for these acquisitions are included in the Consolidated Financial Statements beginning at the respective acquisition dates.
(5)
The Company acquired U.S. and international businesses of EYELEVEL in July 2013 as well as one other company which was not material to the Company’s operations. Financial results for these acquisitions are included in the Consolidated Financial Statements beginning at the respective acquisition dates.
 
 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 2011, 2012 or 2013.
 
Liquidity and Capital Resources
 
At December 31, 2013, we had $18.6 million of cash and cash equivalents.
 
 
30

 
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 2013 was $37.4 million and primarily reflected net loss of $8.7 million, offset by non-cash items of $32.4 million and $13.6 million provided by working capital changes. The most significant impact on working capital changes consisted of an increase in accounts payable of $29.6 million, offset by a decrease in accrued expenses and other liabilities of $12.1 million and an increase in accounts receivable and unbilled revenue of $4.8 million.
 
Cash provided by operating activities in 2012 was $9.4 million and primarily reflected net income of $38.8 million offset by $17.3 million of non-cash items and $12.0 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 $14.8 million and prepaid expenses and other of $13.1 million, offset by increases in accounts payable of $14.8 million.
 
Cash provided by operating activities in 2011 was $27.8 million and primarily reflected net income of $16.6 million and $10.8 million of non-cash items offset by $0.4 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 $25.4 million, offset by an increase in accounts payable of $27.5 million. 
  
Investing Activities.     In 2013, cash used in investing activities of $31.5 million was attributable to capital expenditures of $12.2 million and payments made in connection with acquisitions of $19.3 million.
 
In 2012, cash used in investing activities of $14.7 million was attributable to capital expenditures of $11.8 million and payments made in connection with acquisitions of $4.1 million, offset by proceeds of $1.2 million from the sale of Echo shares.
 
In 2011, cash used in investing activities of $31.3 million was attributable to $27.0 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.
 
Financing Activities.     In 2013, cash used in financing activities of $4.6 million was primarily attributable to $7.3 million of payments of contingent consideration and $2.6 million of excess tax benefits from stock-based award exercises, offset by $4.0 of additional borrowings under our revolving credit facility and $2.0 million of proceeds from stock option exercises.
 
In 2012, cash provided by financing activities of $9.6 million was primarily attributable to $6.7 million of excess tax benefits from stock-based award exercises, $5.5 million of proceeds from stock option exercises and $5.0 million of additional borrowings under our revolving credit facility, offset by $7.2 million of payments of contingent consideration.
 
In 2011, cash provided by financing activities of $11.8 million was primarily attributable to the $12.6 million of additional borrowings under our revolving credit facility and the excess tax benefit of stock-based award exercises of $1.1 million, offset by $2.3 million of payments of contingent consideration.
 
We will continue to utilize cash, in part, 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 the $33.3 million available under our revolving credit facility will be sufficient to meet our working capital and operating expenditure requirements for the foreseeable future. Thereafter, we may find it necessary to obtain additional equity or debt financing.
 
We earn a significant amount of our operating income outside the United States, 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 United States 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 United States, 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 $7.2 million and $12.7 million foreign cash and cash equivalents as of December 31, 2012 and 2013, respectively, which are generally denominated in the local currency where the funds are held.
  
 
31

 
Contractual Obligations
 
As of December 31, 2013, 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
 
166,155
 
166,155
 
-
 
-
 
-
 
Operating lease obligations
 
28,393
 
7,180
 
11,392
 
5,387
 
4,434
 
Revolving credit facility
 
69,000
 
-
 
69,000
 
-
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
263,548
 
173,335
 
80,392
 
5,387
 
4,434
 
 
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, 2013, the maximum payments potentially due on these contingent consideration obligations is $183.5 million. See Note 3 “Acquisitions” to our consolidated financial statements included in this Annual Report on Form 10-K.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements.
 
 
32

 
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 rate. Assuming our $150.0 million revolving credit facility was fully drawn, a 1.0% increase in the interest rate would increase our annual interest expense by $1.5 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.  The average duration of all of our investments as of December 31, 2013 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
 
We transact business in various foreign currencies other than the U.S. dollar, principally the euro, British pound sterling, Peruvian Nuevo Sol, Colombian peso, and Chilean peso, which exposes us to foreign currency risk. For the year ended December 31, 2013, we derived approximately 26.4% of our revenue from international customers, and we expect the percentage of revenue derived from outside the United States to increase in future periods as we continue to expand globally. Revenue and related expenses generated from our international operations are denominated in the functional currencies of the corresponding country. The functional currency of our subsidiaries that either operate or support these markets is generally the same as the corresponding local currency. The results of operations of, and certain of our intercompany balances associated with, our international operations are exposed to foreign exchange rate fluctuations. Changes in exchange rates could negatively affect our revenue and other operating results as expressed in U.S. dollars. We may record significant gains or losses on the re-measurement of intercompany balances. Foreign exchange gains and losses recorded to date have been immaterial to our financial results. At this time we do not, but in the future we may enter into derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the impact hedging activities would have on our results of operations.
 
 
33

 
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
35
Report of Independent Registered Public Accounting Firm
36
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
37
Consolidated Statements of Operations
38
Consolidated Statements of Comprehensive Income (Loss)
39
Consolidated Balance Sheets
40
Consolidated Statements of Stockholders’ Equity
41
Consolidated Statements of Cash Flows
42
Notes To Consolidated Financial Statements
43
 
 
34

  
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, 2013. 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 (1992 framework). Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2013 based on criteria in Internal Control –Integrated Framework issued by the COSO.
 
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
 
Management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2013 because of the identified material weakness related to an inadequate control environment in our French-based Productions Graphics business. Specifically, this control environment did not prevent or detect the override of controls and misconduct by local management personnel resulting in the overstatement of revenue. In addition, there was a lack of awareness or willingness of some local personnel with knowledge of the overstatement to take other actions. The circumvention of these controls affected the accounts in the restated Consolidated Financial Statements discussed in Note 19 to our Consolidated Financial Statements. We had previously concluded in our annual reports on Form 10-K for 2011 and 2012 and in our quarterly reports on Form 10-Q for all quarters in 2012 and 2013 that our controls were effective. As a result of the material weakness, we have now concluded that such controls were ineffective.
 
We have excluded from our assessment the internal controls over financial reporting at DB Studios, Inc., Lightning Golf and Promotions, Inc., Professional Packaging Services Limited, Xpando Media Limited and EYELEVEL, which were acquired on March 6, 2013, April 4, 2013, May 9, 2013, July 9, 2013 and July 25, 2013, respectively, and whose financial statements reflect combined total assets and total revenue constituting 4% and 7%, respectively, of our consolidated financial statement amounts as of and for the year ended December 31, 2013.
 
Ernst & Young LLP, independent registered public accounting firm, has audited the financial statements of the Company for the fiscal years ended December 31, 2011, 2012 and 2013 and the Company’s internal control over financial reporting as of December 31, 2013. Their reports are presented on the following pages.
 
InnerWorkings, Inc.
March 17, 2014
 
 
35

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders of InnerWorkings, Inc.
 
We have audited the accompanying consolidated balance sheets of InnerWorkings, Inc. as of December 31, 2012 and 2013 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule 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, 2012 and 2013 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
As discussed in Note 2 and 19 to the consolidated financial statements, the 2011 and 2012 financial statements have been restated to account for revenue recognition and certain other identified errors.
 
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, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 17, 2014 expressed an adverse opinion thereon.
 
/s/
Ernst & Young LLP
Chicago, Illinois
March 17, 2014
 
 
36

 
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, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (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 DB Studios, Inc., Lightning Golf and Promotions, Inc., Professional Packaging Services Limited, Xpando Media Limited and EYELEVEL, which are included in the 2013 consolidated financial statements of InnerWorkings, Inc. and constituted 4% total assets as of December 31, 2013 and 7% of revenues 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 of DB Studios, Inc., Lightning Golf and Promotions, Inc., Professional Packaging Services Limited, Xpando Media Limited and EYELEVEL.
 
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Management has identified a material weakness in controls relating to an inadequate control environment at its French based Productions Graphics business. 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, 2012 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of those financial statements, and this report does not affect our report dated March 17, 2014, which expressed an unqualified opinion on those financial statements.
 
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, InnerWorkings, Inc. has not maintained effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
 
Ernst & Young LLP
Chicago, Illinois
March 17, 2014
 
 
37

 
InnerWorkings, Inc.
 
Consolidated Statements of Operations
 
 
 
Years Ended December 31,
 
 
 
2011
 
2012
 
2013
 
 
 
(as restated)
 
(as restated)
 
 
 
 
Revenue
 
$
632,313,722
 
$
789,585,041
 
$
890,959,963
 
Cost of goods sold
 
 
484,931,838
 
 
612,026,494
 
 
688,933,899
 
Gross profit
 
 
147,381,884
 
 
177,558,547
 
 
202,026,064
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
 
115,818,065
 
 
146,123,614
 
 
183,443,438
 
Depreciation and amortization
 
 
10,171,758
 
 
10,790,452
 
 
13,663,859
 
Change in fair value of contingent consideration
 
 
(1,701,529)
 
 
(27,688,774)
 
 
(31,330,567)
 
Preference claim settlement charge
 
 
950,000
 
 
1,099,386
 
 
-
 
VAT settlement charge
 
 
-
 
 
1,485,088
 
 
-
 
Goodwill impairment charge
 
 
-
 
 
-
 
 
37,908,000
 
Restructuring and other charges
 
 
-
 
 
-
 
 
4,321,862
 
Income (loss) from operations
 
 
22,143,590
 
 
45,748,781
 
 
(5,980,528)
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
Gain on sale of investment
 
 
3,948,082
 
 
1,196,196
 
 
-
 
Interest income
 
 
182,050
 
 
66,489
 
 
75,931
 
Interest expense
 
 
(2,251,010)
 
 
(2,438,234)
 
 
(2,954,339)
 
Other, net
 
 
-
 
 
94,411
 
 
(357,341)
 
Total other income (expense)
 
 
1,879,122
 
 
(1,081,138)
 
 
(3,235,749)
 
Income (loss) before taxes
 
 
24,022,712
 
 
44,667,643
 
 
(9,216,277)
 
Income tax expense (benefit)
 
 
7,406,686
 
 
5,873,621
 
 
(555,928)
 
Net income (loss)
 
$
16,616,026
 
$
38,794,022
 
$
(8,660,349)
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
0.36
 
$
0.79
 
$
(0.17)
 
Diluted earnings (loss) per share
 
$
0.34
 
$
0.76
 
$
(0.17)
 
 
See accompanying notes to the consolidated financial statements.
 
 
38

 
InnerWorkings, Inc.
 
Consolidated Statements of Comprehensive Income (Loss)
 
 
 
Years Ended December 31,
 
 
 
2011
 
2012
 
2013
 
 
 
(as restated)
 
(as restated)
 
 
 
 
Net income (loss)
 
$
16,616,026
 
$
38,794,022
 
$
(8,660,349)
 
Other comprehensive income (loss), before tax
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
(540,032)
 
 
676,272
 
 
2,505,417
 
Unrealized gains on marketable securities
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains arising during the period
 
 
807,557
 
 
85,958
 
 
317
 
Less: Reclassification adjustments for gains included in net income
 
 
(3,909,678)
 
 
(1,196,196)
 
 
(2,518)
 
Unrealized losses on marketable securities, net
 
 
(3,102,121)
 
 
(1,110,238)
 
 
(2,201)
 
Other comprehensive income (loss), before tax
 
 
(3,642,153)
 
 
(433,966)
 
 
2,503,216
 
Income tax benefit related to components of other comprehensive loss
 
 
976,103
 
 
438,556
 
 
863
 
Other comprehensive income (loss), net of tax
 
 
(2,666,050)
 
 
4,590
 
 
2,504,079
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
$
13,949,976
 
$
38,798,612
 
$
(6,156,270)
 
 
See accompanying notes to the consolidated financial statements.
 
 
39

 
InnerWorkings, Inc.
 
Consolidated Balance Sheets
 
 
 
December 31,
 
 
 
2012
 
2013
 
 
 
(as restated)
 
 
 
 
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
17,218,899
 
$
18,606,030
 
Accounts receivable, net of allowance for doubtful accounts of $1,553,926 and $2,128,790, respectively
 
 
142,104,621
 
 
173,569,905
 
Unbilled revenue
 
 
30,798,230
 
 
25,746,546
 
Inventories
 
 
18,362,282
 
 
26,473,732
 
Prepaid expenses
 
 
16,028,013
 
 
11,746,965
 
Deferred income taxes
 
 
1,513,414
 
 
1,119,333
 
Other current assets
 
 
21,247,531
 
 
22,408,692
 
Total current assets
 
 
247,272,990
 
 
279,671,203
 
Property and equipment, net
 
 
17,078,384
 
 
23,724,750
 
Intangibles and other assets:
 
 
 
 
 
 
 
Goodwill
 
 
212,796,422
 
 
251,228,698
 
Intangible assets, net of accumulated amortization of $18,195,508 and $25,270,793, respectively
 
 
36,396,865
 
 
56,575,534
 
Deferred income taxes
 
 
413,244
 
 
2,319,515
 
Other assets
 
 
822,275
 
 
1,147,078
 
 
 
 
250,428,806
 
 
311,270,825
 
Total assets
 
$
514,780,180
 
$
614,666,778
 
Liabilities and stockholders' equity
 
 
 
 
 
 
 
Current liabilities: