Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________ 

FORM 10-Q
________________________________________ 
  
ý
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2019
  
¨
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from                              to
 
Commission File Number 000-52170
________________________________________ 
 
INNERWORKINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
________________________________________ 
Delaware
 
20-5997364
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
203 North LaSalle Street, Suite 1800
Chicago, Illinois 60601
Phone: (312) 642-3700
(Address, zip code and telephone number, including area code, of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
Title of Each Class
 
Trading Symbol
 
Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value
 
INWK
 
Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes:   ý    No:   ¨
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes:   ý      No:   ¨
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer:   ¨
Accelerated filer:   x
Non-accelerated filer:   ¨
Smaller reporting company:   ¨
Emerging growth company:   ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨



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

As of August 8, 2019, the Registrant had 51,941,478 shares of Common Stock, par value $0.0001 per share, outstanding.



INNERWORKINGS, INC.
 
TABLE OF CONTENTS
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2019 and 2018 (Unaudited)
 
 
 
 
Condensed Consolidated Balance Sheets as of June 30, 2019 (Unaudited) and December 31, 2018
 
 
 
 
Condensed Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2019 and 2018 (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (Unaudited)
 
 
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
Exhibits
 
 
 
SIGNATURES
 
 
 
 

3


PART I. FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

InnerWorkings, Inc. and subsidiaries
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
(in thousands, except per share data)
 
 
 
 
 
 
 
Revenue
$
284,053

 
$
281,967

 
$
551,291

 
$
556,506

Cost of goods sold
214,986

 
217,096

 
421,029

 
425,568

Gross profit
69,067

 
64,871

 
130,262

 
130,938

Operating expenses:
 

 
 

 
 
 
 
Selling, general and administrative expenses
58,661

 
59,002

 
114,466

 
120,169

Depreciation and amortization
3,233

 
3,514

 
5,849

 
7,173

Restructuring charges
3,698

 

 
7,632

 

Income from operations
3,475

 
2,355

 
2,315

 
3,596

Other income (expense):
 

 
 

 
 
 
 
Interest income
104

 
54

 
202

 
115

Interest expense
(2,486
)
 
(1,517
)
 
(5,232
)
 
(3,085
)
Other income (expense), net
279

 
(588
)
 
(460
)
 
(1,433
)
Total other expense
(2,103
)
 
(2,051
)
 
(5,490
)
 
(4,403
)
Income (loss) before income taxes
1,372

 
304

 
(3,175
)
 
(807
)
Income tax expense
2,541

 
603

 
456

 
1,176

Net loss
$
(1,169
)
 
$
(299
)
 
$
(3,631
)
 
$
(1,983
)
 
 
 
 
 
 
 
 
Basic loss per share
$
(0.02
)
 
$
(0.01
)
 
$
(0.07
)
 
$
(0.04
)
Diluted loss per share
$
(0.02
)
 
$
(0.01
)
 
$
(0.07
)
 
$
(0.04
)
 
 
 
 
 
 
 
 
Comprehensive loss
$
(916
)
 
$
(5,906
)
 
$
(2,631
)
 
$
(4,226
)


The accompanying notes form an integral part of the condensed consolidated financial statements.
 

4


InnerWorkings, Inc. and subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

(in thousands, except per share data)
June 30, 2019
 
December 31, 2018
Assets
(unaudited)
 

Current assets:
 

 
 

Cash and cash equivalents
$
33,999

 
$
26,770

Accounts receivable, net of allowance for doubtful accounts of $3,697 and $4,880, respectively
188,687

 
193,253

Unbilled revenue
60,911

 
46,474

Inventories
51,553

 
56,001

Prepaid expenses
15,132

 
16,982

Other current assets
28,707

 
34,106

Total current assets
378,989

 
373,586

Property and equipment, net
36,466

 
82,933

Intangibles and other assets:
 

 
 

Goodwill
152,203

 
152,158

Intangible assets, net
8,774

 
9,828

Right of use assets, net
50,460

 

Deferred income taxes
1,091

 
1,195

Other non-current assets
3,613

 
2,976

Total intangibles and other assets
216,141

 
166,157

Total assets
$
631,596

 
$
622,676

Liabilities and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
140,492

 
$
158,449

Accrued expenses
37,446

 
35,474

Deferred revenue
21,532

 
17,614

Revolving credit facility - current
157,675

 
142,736

Other current liabilities
34,877

 
26,231

Total current liabilities
392,022

 
380,504

Lease liabilities
46,615

 

Deferred income taxes
8,295

 
8,178

Other non-current liabilities
1,995

 
50,903

Total liabilities
448,927

 
439,585

Commitments and contingencies


 


Stockholders' equity:
 

 
 

Common stock, par value $0.0001 per share, 200,000 and 200,000 shares authorized, 64,629, and 64,495 shares issued, and 51,941 and 51,807 shares outstanding, respectively
6

 
6

Additional paid-in capital
242,010

 
239,960

Treasury stock at cost, 12,688 and 12,688 shares, respectively
(81,471
)
 
(81,471
)
Accumulated other comprehensive loss
(23,309
)
 
(24,309
)
Retained earnings
45,433

 
48,905

Total stockholders' equity
182,669

 
183,091

Total liabilities and stockholders' equity
$
631,596

 
$
622,676


The accompanying notes form an integral part of the condensed consolidated financial statements.


5


InnerWorkings, Inc. and subsidiaries 
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)

 
Common Stock
 
Treasury Stock
 
Additional Paid-in-Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total
(in thousands)
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance as of April 1, 2019
64,534

 
$
6

 
12,688

 
$
(81,471
)
 
$
240,734

 
$
(23,562
)
 
$
46,602

 
$
182,309

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
(1,169
)
 
(1,169
)
Total other comprehensive income - foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
253

 
 
 
253

Comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(916
)
Issuance of common stock upon exercise of stock awards, net of withheld shares
95

 


 
 
 
 
 
(126
)
 
 
 
 
 
(126
)
Stock-based compensation expense
 
 
 
 
 
 
 
 
1,402

 
 
 
 
 
1,402

Cumulative effect of change related to adoption of ASC 842
 
 
 
 
 
 
 
 
 
 
 
 


 

Balance as of June 30, 2019
64,629

 
$
6

 
12,688

 
$
(81,471
)
 
$
242,010

 
$
(23,309
)
 
$
45,433

 
$
182,669


 
Common Stock
 
Treasury Stock
 
Additional Paid-in-Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total
(in thousands)
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance as of December 31, 2018
64,495

 
$
6

 
12,688

 
$
(81,471
)
 
$
239,960

 
$
(24,309
)
 
$
48,905

 
$
183,091

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
(3,631
)
 
(3,631
)
Total other comprehensive income - foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
1,000

 
 
 
1,000

Comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,631
)
Issuance of common stock upon exercise of stock awards, net of withheld shares
134

 

 
 
 
 
 
(91
)
 
 
 
 
 
(91
)
Stock-based compensation expense
 
 
 
 
 
 
 
 
2,141

 
 
 
 
 
2,141

Cumulative effect of change related to adoption of ASC 842
 
 
 
 
 
 
 
 
 
 
 
 
159

 
159

Balance as of June 30, 2019
64,629

 
$
6

 
12,688

 
$
(81,471
)
 
$
242,010

 
$
(23,309
)
 
$
45,433

 
$
182,669



The accompanying notes form an integral part of the condensed consolidated financial statements.














6





InnerWorkings, Inc. and subsidiaries 
Condensed Consolidated Statements of Stockholders' Equity - (continued)
(Unaudited)

 
Common Stock
 
Treasury Stock
 
Additional Paid-in-Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total
(in thousands)
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance as of April 1, 2018
64,103

 
$
6

 
10,952

 
$
(64,544
)
 
$
236,664

 
$
(15,865
)
 
$
123,393

 
$
279,654

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
(299
)
 
(299
)
Total other comprehensive loss - foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
(5,607
)
 
 
 
(5,607
)
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(5,906
)
Issuance of common stock upon exercise of stock awards, net of withheld shares
269

 


 
 
 
 
 
(436
)
 
 
 
 
 
(436
)
Acquisition of treasury shares
 
 
 
 
1,736

 
(16,927
)
 
 
 
 
 
 
 
(16,927
)
Stock-based compensation expense
 
 
 
 
 
 
 
 
1,406

 
 
 
 
 
1,406

Cumulative effect of change related to adoption of ASC 606
 
 
 
 
 
 
 
 
 
 
 
 


 

Cumulative effect of change related to adoption of ASU 2016-16
 
 
 
 
 
 
 
 
 
 
 
 


 

Balance as of June 30, 2018
64,372

 
$
6

 
12,688

 
$
(81,471
)
 
$
237,634

 
$
(21,472
)
 
$
123,094

 
$
257,791


 
Common Stock
 
Treasury Stock
 
Additional Paid-in-Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total
(in thousands)
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2017
64,075

 
$
6

 
10,020

 
$
(55,873
)
 
$
235,199

 
$
(19,229
)
 
$
124,442

 
$
284,545

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
(1,983
)
 
(1,983
)
Total other comprehensive loss - foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
 
(2,243
)
 
 
 
(2,243
)
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(4,226
)
Issuance of common stock upon exercise of stock awards, net of withheld shares
297

 


 
 
 
 
 
(388
)
 
 
 
 
 
(388
)
Acquisition of treasury shares
 
 
 
 
2,668

 
(25,598
)
 
 
 
 
 
 
 
(25,598
)
Stock-based compensation expense
 
 
 
 
 
 
 
 
2,823

 
 
 
 
 
2,823

Cumulative effect of change related to adoption of ASC 606
 
 
 
 
 
 
 
 
 
 
 
 
482

 
482

Cumulative effect of change related to adoption of ASU 2016-16
 
 
 
 
 
 
 
 
 
 
 
 
153

 
153

Balance as of June 30, 2018
64,372

 
$
6

 
12,688

 
$
(81,471
)
 
$
237,634

 
$
(21,472
)
 
$
123,094

 
$
257,791



The accompanying notes form an integral part of the condensed consolidated financial statements.


7


InnerWorkings, Inc. and subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
(in thousands)
 
 
 
Cash flows from operating activities
 

 
 

Net loss
$
(3,631
)

$
(1,983
)
Adjustments to reconcile net loss to net cash from operating activities:
 


 

Depreciation and amortization
5,849


7,173

Stock-based compensation expense
2,141


2,823

Bad debt provision
689


630

Implementation cost amortization
213


263

Other operating activities
224


(154
)
Change in assets:
 


 

Accounts receivable and unbilled revenue
(10,225
)

21,643

Inventories
4,488


(87
)
Prepaid expenses and other assets
(4,318
)

9,424

Change in liabilities:
 


 

Accounts payable
(17,670
)

(18,735
)
Accrued expenses and other liabilities
23,529


1,643

Net cash (used in) provided by operating activities
1,289


22,640

 
 
 
 
Cash flows from investing activities
 

 
 

Purchases of property and equipment
(6,881
)
 
(5,490
)
Net cash used in investing activities
(6,881
)
 
(5,490
)
 
 
 
 
Cash flows from financing activities
 

 
 

Net borrowings from revolving credit facility
14,908

 
8,629

Net short-term secured repayments
(833
)
 
(578
)
Repurchases of common stock

 
(25,689
)
Proceeds from exercise of stock options
63

 
284

Payment of debt issuance costs
(935
)
 

Other financing activities
(156
)
 
(695
)
Net cash provided by (used in) financing activities
13,047

 
(18,049
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(226
)
 
(1,397
)
Increase (Decrease) in cash and cash equivalents
7,229

 
(2,296
)
Cash and cash equivalents, beginning of period
26,770

 
30,562

Cash and cash equivalents, end of period
$
33,999

 
$
28,266


The accompanying notes form an integral part of the condensed consolidated financial statements.


8

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2019




1. Summary of Significant Accounting Policies

Basis of Presentation of Interim Financial Statements
 
The accompanying unaudited condensed consolidated financial statements of InnerWorkings, Inc. and subsidiaries (the “Company”) included herein have been prepared to conform to the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation of the accompanying unaudited financial statements have been included, and all adjustments are of a normal and recurring nature. The operating results for the three and six month periods ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019. These condensed consolidated interim financial statements and notes should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto as of and for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 19, 2019.
 
Description of the Business
 
The Company was incorporated in the state of Delaware on January 3, 2006. The Company is a leading global marketing execution firm for some of the world's most marketing intensive companies, including those in the Fortune 1000, across a wide range of industries. As a comprehensive outsourced enterprise solution, the Company leverages proprietary technology, an extensive supplier network and deep domain expertise to streamline the creation, production and distribution of marketing and promotional materials, signage and displays, retail experiences, events and promotions and packaging across every major market worldwide. The items the Company sources are generally procured through the marketing supply chain and are referred to collectively as marketing materials. The Company’s 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.
 
During the third quarter of 2018, the Company changed its reportable segments. The Company is now organized and managed by the chief operating decision maker for purposes of resource allocation and assessing performance as three operating segments: North America, EMEA and LATAM. The Company reflected the segment change as if it had occurred in all periods presented. See Note 14 for further information about the Company’s reportable segments.

Preparation of Financial Statements and Use of Estimates
 
The preparation of the consolidated financial statements is in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, the Company evaluates its estimates, including those related to product returns, allowance for doubtful accounts, inventories and inventory valuation, valuation and impairments of goodwill and long-lived assets, income taxes, accrued bonus, contingencies, stock-based compensation and litigation costs. The Company bases its estimates on historical experience and on other assumptions that management believes are reasonable under the circumstances. These estimates form the basis for making judgments about the carrying value of assets and liabilities when those values are not readily apparent from other sources. Actual results may differ from those estimates.
 
Foreign Currency Translation

The Company determines the functional currency for its parent company and each of its subsidiaries by reviewing the currencies in which their respective operating activities occur. Assets and liabilities where the functional currency differs from the reporting currency, these amounts are translated into U.S. currency at the rates of exchange at the balance sheet date. Income and expense items are translated at average monthly rates of exchange. The resulting translation adjustments are included in accumulated other comprehensive loss, a separate component of stockholders’ equity. Transaction gains and losses arising from activities in other than the applicable functional currency are calculated using average exchange rates for the applicable period and reported in net income as a non-operating item in each period. Non-monetary balance sheet items denominated in a currency other than the applicable functional currency are translated using the historical rate.


9

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2019



Argentinian Highly Inflationary Accounting

In the second quarter of 2018, the Argentinian economy was classified as highly inflationary under GAAP due to multiple years of increasing inflation, the devaluation of the Argentine peso ("ARS") and increasing borrowing rates. Effective July 1, 2018, the Company's Argentinian subsidiary is being accounted for under highly inflationary accounting rules, which principally means all transactions are recorded in U.S. dollars. The Company uses the official ARS exchange rate to translate the results of its Argentinian operations into U.S. dollars. As of June 30, 2019, the Company had a balance of net monetary assets denominated in ARS of approximately 75.4 million ARS, and the exchange rate was approximately 42.6 ARS per U.S. dollar.

During the three and six months ended June 30, 2019, the Company recorded $0.2 million and $0.1 million, respectively, of favorable currency impacts within Other income (expense). For the three and six months ended June 30, 2019, the Company's Argentinian operations generated revenue of $1.1 million and $1.7 million and gross margin of $0.1 million and $0.2 million, respectively.

Revenue Recognition

Revenue is measured based on consideration specified in a contract with a customer and the Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer which may be at a point in time or over time. Unbilled revenue represents shipments or deliveries that have been made to customers for which the related account receivable has not yet been invoiced.

Shipping and handling costs after control over a product has transferred to a customer are expensed as incurred and are included in cost of goods sold in the condensed consolidated statements of operations.    

In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, the Company generally reports revenue on a gross basis because the Company typically controls the goods or services before transferring to the customer. Under these arrangements, the Company is primarily responsible for the fulfillment, including the acceptability, of the marketing materials and other products or services. In addition, the Company has reasonable discretion in establishing the price, and in some transactions, the Company also has inventory risk and is involved in the determination of the nature or characteristics of the marketing materials and products. In some arrangements, the Company is not primarily responsible for fulfilling the goods or services. In arrangements of this nature, the Company does not control the goods or services before they are transferred to the customer and such revenue is reported on a net basis.

Some service revenue, including stand-alone creative and other services, may be earned over time; however, the difference from recognizing that revenue over time compared to a point in time (i.e., when the service is completed and accepted by the customer) is not material. Service revenue has not been material to the Company's overall revenue to date.

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

Recent Accounting Pronouncements

Recently Adopted Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use asset on the balance sheet. The Company adopted ASU 2016-02, along with related clarifications and improvements, as of January 1, 2019, using the modified retrospective approach, which allows the Company to apply ASC 840, Leases, in the comparative periods presented in the year of adoption. The cumulative effect of adoption was recorded as an adjustment to the opening balance of retained earnings in the period of adoption.
 
The Company elected to use the package of practical expedients, which permitted the Company to not reassess: (i) whether a contract is or contains a lease, (ii) lease classification, and (iii) initial direct costs resulting from the lease. The Company has not elected the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets. The Company elected to apply the short-term lease exception, which allows the Company to keep leases with terms of 12 months or less off the balance sheet. The Company also elected to combine lease and non-lease components as a single component for the Company's entire population of lease assets.
 

10

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2019



Adoption of the new standard resulted in the recording of net lease assets and lease liabilities of approximately $39.4 million and $41.5 million, respectively, as of January 1, 2019. The $2.1 million difference in the lease liabilities and net lease assets represents the net ASC 840 lease liabilities at the effective date that were netted against the initial right-of-use-asset, which included: straight-line rent, prepaid rent, and lease incentives. The $0.2 million transition adjustment to retained earnings was comprised of $1.0 million of build-to-suit financing lease assets that were derecognized and recorded as operating leases in transition and $0.5 million of initial impairment to right-of-use-assets, which were partially offset by the related deferred tax effect of $0.3 million.

Adoption of ASU 2016-02 did not materially impact the Company's consolidated net earnings nor cash flows, and did not have a notable impact on the Company's liquidity or debt-covenant compliance under the Company's current agreements.

In the first quarter of 2019, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which amends ASC 220, Income Statement - Reporting Comprehensive Income. This ASU allows a reclassification from accumulated OCI to retained earnings for stranded tax effects resulting from tax reform. This update is effective for fiscal years beginning after December 15, 2018, including interim periods therein, and early adoption is permitted. An election was not made to reclassify the income tax effects of the Tax Cuts and Jobs Act (“Tax Reform Act”) from accumulated other comprehensive income to retained earnings. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires entities to measure the impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. The effective date is for fiscal years beginning after December 15, 2019, with early adoption permitted for financial statement periods beginning after December 15, 2018. The Company is evaluating the potential effects of the ASU on the consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which amends ASC 820, Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The effective date is the first quarter of fiscal year 2021, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2021 permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company is evaluating the potential effects of the ASU on the consolidated financial statements.

2. Revenue Recognition

Nature of Goods and Services

The Company primarily generates revenue from the procurement of marketing materials for customers. Service revenue, including creative, design, installation, warehousing and other services, has not been material to the Company’s overall revenue to date.

Products and services may be sold separately or in bundled packages. For bundled packages, the Company accounts for individual products and services separately if they are distinct - that is, if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer.

The Company includes any fixed charges per its contracts as part of the total transaction price. The transaction price is allocated between separate products and services in a bundle based on their standalone selling prices. The standalone selling prices are generally determined based on the prices at which the Company separately sells the products and services.

Contracts may include variable consideration (for example, customer incentives like rebates), and to the extent that variable consideration is not constrained, the Company includes the expected amount within the total transaction price and updates its assumptions over the duration of the contract. The constraint will generally not result in a reduction in the estimated transaction price.


11

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2019



The Company’s performance obligations related to the procurement of marketing materials are typically satisfied upon shipment or delivery of its products to customers. Payment is typically due from the customer at this time or shortly thereafter. Unbilled revenue represents shipments or deliveries that have been made to customers for which the related account receivable has not yet been invoiced. The Company does not have material future performance obligations that extend beyond one year.

Some service revenue may be recognized over time, but the difference between recognizing that revenue over time versus at a point in time when the service is completed and accepted by the customer is not material to the Company’s overall revenue to date.

Costs to Fulfill Customer Contracts and Contract Liabilities

The Company capitalizes certain setup costs related to new customers as fulfillment costs. Capitalized contract costs are amortized over the expected period of benefit using the straight-line method which is generally three years. For the three and six months ended June 30, 2019, the amount of amortization was $0.1 million and $0.2 million, respectively, and there was no impairment loss in relation to the capitalized costs in either period presented.

Contract liabilities are referred to as deferred revenue in the condensed consolidated financial statements. We record deferred revenue when cash payments are received in advance of satisfying our performance obligations and we recognize revenue as these obligations are satisfied.

The following is a summary of Company's costs to fulfill and contract liabilities as of June 30, 2019 and December 31, 2018 (in thousands):
 
June 30, 2019
 
December 31, 2018
 
 
 
 
Costs to fulfill
1,258

 
1,152

Contract liabilities
21,532

 
17,614

Cash received
5,082

 
11,387

Revenue recognized
1,100

 
11,850


Costs to Obtain a Customer Contract

The Company incurs certain incremental costs to obtain a contract that the Company expects to recover. The Company applies a practical expedient and recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. No incremental costs to obtain a contract incurred by the Company during the six months ended June 30, 2019 and 2018 were required to be capitalized. These costs would primarily relate to commissions paid to our account executives and are included in selling, general and administrative expenses.

Transaction Price Allocated to Remaining Performance Obligations

ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of June 30, 2019. The Company does not have material future performance obligations that extend beyond one year. Accordingly, the Company has applied the optional exemption for contracts that have an original expected duration of one year or less. The nature of the remaining performance obligations as well as the nature of the variability and how it will be resolved is described above.

3. Leases

The Company leases office space, warehouses, automobiles, and equipment. The Company determines whether a contract is or contains a lease at the inception of the contract. A contract will be deemed to be or contain a lease if the contract conveys the right to control and direct the use of identified office space, warehouse or equipment for a period of time in exchange for consideration. The Company generally must also have the right to obtain substantially all the economic benefits from the use of the office space, warehouse and equipment. The leases are recorded as right-of-use ("ROU") assets and lease liabilities for leases with terms greater than 12 months. The Company’s leases generally have terms of 1-10 years, with certain leases including

12

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2019



renewal options to extend the leases for additional periods at the Company’s discretion. Generally, the lease term is the minimum of the noncancelable period of the lease, as the Company is not reasonably certain to exercise renewal options. Sublease income is not significant.

Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Tenant allowances used to fund leasehold improvements are recognized when earned and reduce the right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.
 
Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, the Company estimates incremental secured borrowing rates corresponding to the maturities of the leases. The Company estimates this rate based on prevailing financial market conditions as rates are not implicitly stated in most leases. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Leased assets are presented net of accumulated amortization. Variable lease payment amounts that cannot be determined at the commencement of the lease, such as increases in lease payments based on changes in index rates or usage, are not included in the ROU assets or liabilities; instead, these are expensed as incurred and recorded as variable lease expense.
 
Supplemental balance sheet information related to leases was as follows (in thousands):
 
 
June 30, 2019
Right of use assets:
 
 
Operating leases:
 
 
Right of use assets
 
$
50,451

Finance leases:
 
 
Right of use assets:
 
 
Right of use asset, cost
 
$
19

   Accumulated amortization
 
(10
)
Right of use asset, net
 
$
9

Total right of use assets, net
 
50,460

 
 
 
Lease liabilities:
 
 
Current
 
 
   Operating
 
$
6,928

   Finance
 
82

Non-current
 

   Operating
 
$
46,419

   Finance
 
196

Total lease liabilities
 
$
53,625















13

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2019



The components of lease cost were as follows:
(in thousands)
 
June 30, 2019
Operating lease cost
 
$
4,693

Variable lease cost
 
578

Short-term lease cost
 
1,143

Finance lease cost:
 

   Amortization of right-of-use assets
 
1

   Interest on lease liabilities
 
17

  Total financing lease cost
 
$
18

Sublease income
 
35

Total lease cost
 
$
6,397


Average lease terms and discount rates were as follows:
 
 
June 30, 2019
Weighted-average remaining lease term (years)
 
 
   Operating leases
 
7.38

   Financing leases
 
3.18

Weighted-average discount rate
 
 
   Operating leases
 
6.57
%
   Financing leases
 
12.49
%

Supplemental cash flow information related to leases was as follows (in thousands):
 
 
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
   Operating cash flows from finance leases
 
$
53

   Operating cash flows from operating leases
 
3,624

Total
 
$
3,677


The aggregate future lease payments for operating and finance leases as of June 30, 2019 are as follows (in thousands):
 
Operating
 
Finance
Remaining 2019
$
4,463

 
$
53

2020
9,783

 
106

2021
10,494

 
106

2022
9,279

 
51

2023
7,856

 
11

Thereafter
27,491

 

Total lease payments
$
69,366

 
$
327

Less: Interest
16,019

 
49

Present value of lease liabilities
$
53,347

 
$
278





14

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2019



The aggregate future lease payments for operating and capital leases as of December 31, 2018 were as follows (in thousands):
 
Operating
2019
$
6,383

2020
5,017

2021
4,422

2022
3,245

2023
2,068

Thereafter
1,966

Total lease payments
$
23,101


4. Goodwill 

The following is a summary of the goodwill balance for each reportable segment as of June 30, 2019 (in thousands): 
 
North America
 
EMEA
 
LATAM
 
Total
Goodwill as of December 31, 2018
$
152,158

 
$

 
$

 
$
152,158

Foreign exchange impact
45

 

 

 
45

Goodwill as of June 30, 2019
$
152,203

 
$

 
$

 
$
152,203

 
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, the Company tests for goodwill impairment as of the first day of the fourth fiscal quarter of each year. 

The fair value estimates used in the goodwill impairment analysis require significant judgment. The fair value estimates were based on assumptions management believes to be reasonable, but that are inherently uncertain, including estimates of future revenue and operating margins and assumptions about the overall economic climate and the competitive environment for the business.

The Company most recently recognized an impairment of a portion of its goodwill in the North America reportable segment as of December 31, 2018, as outlined below. The Company further considered indicators for impairment at June 30, 2019 given the significant level of goodwill remaining in the reportable segment as well as the recent impairment test. The fair value determination of the reporting unit primarily relies on management judgments around timing of generating revenue from recent new customer wins as well as timing of benefits expected to be received from the significant restructuring actions currently underway (see Note 6). If assumptions surrounding either of these factors change, then a future impairment charge may occur.

2018 Goodwill Impairment Charges

During the quarter ended September 30, 2018, the Company changed its segments and re-evaluated its reporting units. This change required an interim impairment assessment of goodwill. The Company determined an enterprise value for its North America, EMEA and LATAM reporting units that considered both discounted cash flow and guideline public company methods. The Company further compared the enterprise value of each reporting unit to its respective carrying value. The enterprise value for North America exceeded its carrying value, which indicated that there was no impairment, whereas enterprise values for the EMEA and LATAM reporting units were less than their respective carrying values, and as a result the Company recognized $20.8 million and $7.1 million goodwill impairment charges, respectively.

As of December 31, 2018, the Company performed an interim impairment assessment due to a triggering event caused by a sustained decrease in the Company's stock price. The Company determined an enterprise value for its North America reporting unit that considered both the discounted cash flow and guideline public company methods. The Company further

15

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2019



compared the enterprise value of the reporting unit to its carrying value. The enterprise value for the North America reporting unit was less than its carrying value and resulted in a $18.4 million non-cash goodwill impairment charge. No tax benefit was recognized on such charge, and this charge had no impact on the Company's cash flows or compliance with debt covenants.

Prior to this 2018 activity, the Company previously recorded gross and accumulated impairment losses of $75.4 million resulting from prior period goodwill impairment tests.

5. Other Intangibles and Long-Lived Assets

The following is a summary of the Company’s intangible assets as of June 30, 2019 and December 31, 2018 (in thousands):
 
June 30,
2019
 
December 31, 2018
 
Weighted
Average Life
Customer lists
$
73,708

 
$
73,792

 
14.4
Non-competition agreements
950

 
950

 
4.1
Trade names
2,510

 
2,510

 
13.3
Patents
57

 
57

 
9.0
 
77,225

 
77,309

 
 
Less accumulated amortization and impairment
(68,451
)
 
(67,481
)
 
 
Intangible assets, net
$
8,774

 
$
9,828

 
 

In accordance with ASC 350, Intangibles - Goodwill and Other, the Company amortizes its intangible assets with finite lives over their respective estimated useful lives and reviews for impairment whenever impairment indicators exist. Impairment indicators could include significant under-performance relative to the historical or projected future operating results, significant changes in the manner of use of assets, significant negative industry or economic trends or significant changes in the Company’s market capitalization relative to net book value. Any changes in key assumptions used by the Company, including those set forth above, could result in an impairment charge and such a charge could have a material adverse effect on the Company’s condensed consolidated statements of comprehensive (loss) income. The Company’s intangible assets consist of customer lists, non-competition agreements, trade names, and patents. The Company’s customer lists, which have an estimated weighted-average useful life of approximately fourteen years, are being amortized using the economic life method. The Company’s non-competition agreements, trade names, and patents are being amortized on a straight-line basis over their estimated weighted-average useful lives of approximately four years, thirteen years, and nine years, respectively.
 
Amortization expense related to these intangible assets was $0.6 million and $1.1 million for the three months ended June 30, 2019 and 2018, respectively, and $1.1 million and $2.3 million for the six months ended June 30, 2019 and 2018, respectively. The Company's customer lists had accumulated amortization and impairment of $65.4 million and $64.5 million as of June 30, 2019 and December 31, 2018, respectively. The Company's trade names, non-competition agreements and patents were fully amortized or impaired as of June 30, 2019 and December 31, 2018, respectively.
 
As of June 30, 2019, estimated amortization expense for the remainder of 2019 and each of the next five years and thereafter is as follows (in thousands):
Remainder of 2019
$
1,064

2020
2,021

2021
1,783

2022
1,408

2023
962

2024
745

Thereafter
791

 
$
8,774


2018 Intangible and Long-Lived Asset Impairment


16

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2019



In the third quarter of 2018, the Company changed its reporting units as part of a segment change, which required an interim impairment assessment. The Company's intangible and long-lived assets associated with the reporting units assessed were also reviewed for impairment. It was determined that the fair value of intangible assets in EMEA and LATAM was less than the recorded book value of certain customer lists. Additionally, it was determined that the fair value of capitalized costs related to a legacy ERP system in EMEA was less than the recorded book value of such assets. As a result, the Company recognized a $13.8 million non-cash, intangible asset impairment charge related to certain customer lists, which is included in the accumulated amortization balance and impairment above. Of the total charge, $0.6 million related to the LATAM reportable segment, and $13.2 million related to the EMEA reportable segment. During the third quarter of 2018, the Company also recognized a $3.0 million non-cash, long-lived asset impairment charge related to a legacy ERP system in the EMEA reportable segment.

  
6. Restructuring Activities

2018 Restructuring Plan

On August 10, 2018, the Company approved a plan to reduce the Company's cost structure while driving value for its clients and stockholders. The plan was adopted as a result of the Company's determination that its selling, general and administrative costs were disproportionately high in relation to its revenue and gross profit. From adoption through completion of the plan, the Company expects to incur pre-tax cash restructuring charges of $20.0 million to $25.0 million and pre-tax non-cash restructuring charges of $0.4 million. Cash charges are expected to include $12.0 million to $15.0 million for employee severance and related benefits and $8.0 million and $10.0 million for consulting fees and lease and contract terminations. Where required by law, the Company will consult with each of the affected countries’ local Works Councils prior to implementing the plan. The plan was expected to be completed by the end of 2019. On February 21, 2019, the Board of Directors approved a two-year extension to the restructuring plan through the end of 2021.

For the three and six months ended June 30, 2019, the Company recognized $3.7 million and $7.6 million, respectively, in restructuring charges.

The following table summarizes the accrued restructuring activities for this plan for the six months ended June 30, 2019 (in thousands):
 
 
Employee Severance and Related Benefits
 
Lease and Contract Termination Costs
 
Other
 
Total
Balance at December 31, 2018
 
$
357

 
$
286

 
$
706

 
$
1,349

Charges
 
2,174

 
759

 
4,699

 
7,632

Cash payments
 
(1,282
)
 
(763
)
 
(4,815
)
 
(6,860
)
Non-cash settlements/adjustments
 
(194
)
 
(168
)
 

 
(362
)
Balance as of June 30, 2019
 
$
1,055

 
$
114

 
$
590

 
$
1,759


During the six months ended June 30, 2019, the Company recorded the following restructuring costs within loss from operations and loss before income taxes (in thousands):
 
 
North America
 
EMEA
 
LATAM
 
Other
 
Total
Restructuring charges
 
$
1,408

 
$
1,405

 
$
74

 
$
4,745

 
$
7,632


From adoption through June 30, 2019, the Company recognized $13.7 million in total restructuring charges pursuant to the 2018 Restructuring Plan.

2015 Restructuring Plan


17

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2019



On December 14, 2015, the Company approved a global realignment plan that allowed the Company to more efficiently meet client needs across its international platform. Through improved integration of global resources, the plan created back office and other efficiencies and allowed for the elimination of approximately 100 positions. In connection with these actions, the Company incurred pre-tax cash restructuring charges of $6.7 million, the majority of which were recognized during 2017. These cash charges included approximately $5.6 million for employee severance and related benefits and $1.1 million for lease and contract terminations and other associated costs. The charges were all incurred by the end of 2017 with the final payouts of the charges expected to occur in 2019. As required by law, the Company consulted with each of the affected countries’ local Works Councils throughout the plan.

The following table summarizes the accrued restructuring activities for this plan for the six months ended June 30, 2019 (in thousands), all of which relate to EMEA:
 
 
Employee Severance and Related Benefits
 
Lease and Contract Termination Costs
 
Other
 
Total
Balance as of December 31, 2018
 
$
486

 
$

 
$

 
$
486

Cash payments
 
(364
)
 

 

 
(364
)
Balance as of June 30, 2019
 
$
122

 
$

 
$

 
$
122


7. Income Taxes
 
On December 22, 2017, the Tax Reform Act was enacted into law. The Tax Reform Act significantly revises the U.S. corporate income tax laws by, amongst other things, reducing the corporate income tax rate from 35.0% to 21.0%. In addition to the tax rate reduction, the legislation establishes new provisions that affect our 2019 results, including but not limited to: the creation of a new minimum tax called the base erosion anti-abuse tax ("BEAT"); a new provision that taxes U.S. allocated expenses (e.g., interest and general administrative expenses) and currently taxes certain income greater than 10% return on assets from foreign operations called Global Intangible Low-Tax Income (“GILTI”); a new limitation on deductible interest expense; and limitations on the deductibility of certain employee compensation and benefits.

The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items. The Company’s reported effective income tax rate was 185.2% and 198.4% for the three months ended June 30, 2019 and 2018, respectively. The Company’s reported effective income tax rate was (14.4)% and (145.7)% for six months ended June 30, 2019 and 2018, respectively. The Company’s 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, valuation allowances, impacts of the Tax Reform Act, and foreign tax rates that are different than the U.S. federal statutory tax rate. In addition, the effective tax rate can be impacted each period by discrete factors and events such as a write-off of a deferred tax asset for stock‑based compensation due to the expiration of unexercised stock options.
   
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will expire unutilized. At the end of each reporting period, the Company reviews the realizability of its deferred tax assets. There were no material valuation adjustments for the three months ended June 30, 2019 and 2018. Additionally, the Company continues to incur losses in jurisdictions which have valuation allowances against tax loss carryforwards, so a tax benefit has not been recognized in the financial statements for these losses.

8. Loss Per Share
 
Basic loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per share is calculated by dividing net loss by the weighted average shares outstanding assuming dilution. Dilutive common shares outstanding is computed using the Treasury Stock Method and reflects the additional shares that would be outstanding if dilutive stock options were exercised and restricted stock and restricted stock units were settled for common shares during the period. In addition, dilutive shares include any shares issuable related to PSUs for which the performance conditions have been met as of the end of the period.

There were no dilutive effects during the three and six months ended June 30, 2019 and 2018 as a result of a net loss incurred in each period. The number of antidilutive securities excluded from the computation of diluted earnings per share

18

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2019



amounts was not material. The computations of basic and diluted loss per share for the three and six months ended June 30, 2019 and 2018 are as follows (in thousands, except per share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net loss
$
(1,169
)
 
$
(299
)
 
$
(3,631
)
 
$
(1,983
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding – basic
51,883


51,770


51,857


52,738

Effect of dilutive securities:
 
 
 
 
 
 
 
Employee stock options and restricted common shares







Weighted-average shares outstanding – diluted
51,883


51,770


51,857


52,738

 
 
 
 
 
 
 
 
Basic loss per share
$
(0.02
)

$
(0.01
)

$
(0.07
)

$
(0.04
)
Diluted loss per share
$
(0.02
)

$
(0.01
)

$
(0.07
)

$
(0.04
)

9. Related Party Transactions
 
The Company provides print procurement services to Arthur J. Gallagher & Co. J. Patrick Gallagher, Jr., a member of the Company’s Board of Directors, is the Chairman, President, and Chief Executive Officer of Arthur J. Gallagher & Co. and has a direct ownership interest in Arthur J. Gallagher & Co. The total amount billed for such print procurement services during the three months ended June 30, 2019 and 2018 was $0.5 million and $0.5 million, respectively, and $0.9 million and $0.7 million during the six months ended June 30, 2019 and 2018, respectively. The amounts receivable from Arthur J. Gallagher & Co. were $0.4 million and $0.3 million as of June 30, 2019 and December 31, 2018, respectively.

In the fourth quarter of 2017, the Company began providing marketing execution services to Enova International, Inc. ("Enova"). David Fisher, a member of the Company's Board of Directors, is the Chairman and Chief Executive Officer of Enova and has a direct ownership interest in Enova. The total amount billed for such services during the three months ended June 30, 2019 and 2018 was $3.4 million and $2.2 million, respectively, and $6.1 million and $4.0 million during the six months ended June 30, 2019 and 2018, respectively. The amounts receivable from Enova were $2.7 million and $2.0 million as of June 30, 2019 and December 31, 2018, respectively.
 
10. Fair Value Measurement
 
ASC 820, Fair Value Measurement, includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on observable or unobservable inputs to valuation techniques that are used to measure fair value. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions.
 
The fair value hierarchy consists of the following three levels:
 
Level 1: Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data.
Level 3: Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The book value of the debt under the Credit Agreement (as defined herein) is considered to approximate its fair value as of June 30, 2019 as the interest rates are considered in line with current market rates.

11. Commitments and Contingencies

19

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2019



 
Legal Contingencies

In October 2013, the Company removed the former owner of Productions Graphics from his role as President of Productions Graphics, the Company’s French subsidiary. He had been in that role since the Company’s 2011 acquisition of Productions Graphics, a European business then principally owned by him. In December 2013, the former owner of Productions Graphics initiated a wrongful termination claim in the Commercial Court of Paris seeking approximately €0.7 million (approximately $1.0 million) in fees and damages. In anticipation of this claim, in November 2013, he also obtained a judicial asset attachment order in the amount of €0.7 million (approximately $1.0 million) as payment security; the attachment order was confirmed in January 2014, and the Company filed an appeal of the order. In March 2015, the appellate court ruled in the Company’s favor in the attachment proceedings, releasing all attachments. The Company disputes the allegations of the former owner of Productions Graphics and intends to vigorously defend these matters. In February 2014, based on a review the Company initiated into certain transactions associated with the former owner of Productions Graphics, the Company concluded that he had engaged in fraud by inflating the results of the Productions Graphics business in order to induce the Company to pay him €7.1 million in contingent consideration pursuant to the acquisition agreement. In light of those findings, in February 2014, the Company filed a criminal complaint in France seeking to redress the harm caused by his conduct and this proceeding is currently pending. In addition, in September 2015, the Company initiated a civil claim in the Paris Commercial Court against the former owner of Productions Graphics, seeking civil damages to redress these same harms. In addition to these pending matters, there may be other potential disputes between the Company and the former owner of Productions Graphics relating to the acquisition agreement. The Company had paid €5.8 million (approximately $8.0 million) in fixed consideration and €7.1 million (approximately $9.4 million) in contingent consideration to the former owner of Productions Graphics; the remaining maximum contingent consideration under the acquisition agreement was €34.5 million (approximately $37.6 million at the time) and the Company has determined that none of this amount was earned and payable.

In January 2014, a former finance employee of Productions Graphics initiated wrongful termination and overtime claims in the Labor Court of Boulogne-Billancourt, and he currently seeks damages of approximately €0.6 million (approximately $0.7 million). The Company disputes these allegations and intends to vigorously defend these matters. In addition, the Company’s criminal complaint in France, described above, seeks to redress harm caused by this former employee in light of his participation in the fraudulent transactions described above. The labor claim has been stayed in deference to the Company’s related criminal complaint.

12. Revolving Credit Facilities and Going Concern

The Company entered into a Credit Agreement, dated as of August 2, 2010, subsequently amended most recently as of March 15, 2019, among the Company, the lenders party thereto and Bank of America, N.A., as Administrative Agent (the “Credit Agreement”) refinanced its debt, which is further discussed in Note 15. At June 30, 2019 the Credit Agreement included a revolving commitment amount of $175 million and $160 million in the aggregate through September 25, 2019 and September 25, 2020, respectively. The Credit Agreement also provided the Company the right to increase the aggregate commitment amount by an additional $50 million. Outstanding borrowings under the revolving credit facility were guaranteed by the Company’s material domestic subsidiaries, as defined in the Credit Agreement. The Company’s obligations under the Credit Agreement and such domestic subsidiaries’ guaranty obligations were secured by substantially all of their respective assets. The ranges of applicable rates charged for interest on outstanding loans and letters of credit were 50-225 basis point spread for loans based on the base rate and 150-325 basis point spread for letter of credit fees and loans based on the Eurodollar rate.

The most recent amendment (i) modified the definition of the term “Consolidated EBITDA” as used in the covenant calculations, (ii) increased the maximum leverage ratio to which the Company is subject for the trailing twelve month periods ended December 31, 2018 and March 31, 2019 and (iii) decreased the minimum interest coverage ratio to which the Company is subject for the trailing twelve month periods ended December 31, 2018 and March 31, 2019. All ratios for fiscal periods thereafter remained unchanged.

The terms of the Credit Agreement included various covenants, including covenants that require the Company to maintain a maximum leverage ratio and a minimum interest coverage ratio. The most recent amendment to the Credit Agreement modified the maximum leverage ratio from 3.50 to 1.00 to 4.50 to 1.00 for the trailing twelve months ended December 31, 2018, and from 3.00 to 1.00 to 4.75 to 1.00 for the trailing twelve months ended March 31, 2019. The maximum leverage ratio is 3.00 to 1.00 for the trailing twelve months ended June 30, 2019 and each period thereafter. The most recent amendment to the Credit Agreement also modified the minimum interest coverage ratio from 5.00 to 1.00 to 4.00 to 1.00 for the trailing twelve months ended December 31, 2018 and from 5.00 to 1.00 to 3.50 to 1.00 for the trailing twelve months ended March 31, 2019.

20

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2019



The minimum interest coverage ratio is 5.00 to 1.00 for the trailing twelve months ended June 30, 2019 and each period thereafter. The Company was in violation of the debt covenants under the credit agreement as of June 30, 2019; however, the Company successfully completed refinancing of its debt, which is further discussed in Note 15, prior to the financial statement issuance date.

The revised covenants only affected the fourth quarter of 2018 and the first quarter of 2019. Therefore, the covenant for the second quarter of 2019 remains unchanged and the Company concluded that it has exceeded the maximum leverage ratio and the minimum interest coverage ratio, allowing the lenders to demand repayment of the outstanding debt. Accordingly, the outstanding balance under the Credit Agreement is presented as a current liability as of June 30, 2019 based on the guidance in ASC 470, Debt.

Additionally, under ASC 205, Presentation of Financial Statements, the Company is required to consider and has evaluated whether there is substantial doubt that it has the ability to meet its obligations within one year from the financial statement issuance date. This assessment also includes the Company’s consideration of any management plans to alleviate such doubts. As of December 31, 2018, the inability of the Company to meet its covenant obligations beyond the covenant waiver periods cast substantial doubt on the Company’s ability to meet its obligations within one year from the financial statement issuance date. However, following the successful refinancing of its debt described in Note 15, management completed an updated evaluation of the Company’s ability to continue as a going concern and has concluded the factors that raised substantial doubts about the Company’s ability to continue as a going concern have been successfully remediated as of the financial statement issuance date.

At June 30, 2019, the Company had $1.5 million of letters of credit which have not been drawn upon. The amount outstanding under the Company's' revolving credit facility was $157.7 million and $142.7 million as of June 30, 2019 and December 31, 2018, respectively. The Company had unamortized deferred financing fees associated with the Credit Agreement of $1.4 million and $0.7 million as of June 30, 2019 and December 31, 2018, respectively.

On February 22, 2016, the Company entered into a Revolving Credit Facility (the “Facility”) with Bank of America N.A. to support ongoing working capital needs of the Company's operations in China. The Facility includes a revolving commitment amount of $5.0 million whereby maturity dates vary based on each individual drawdown. Outstanding borrowings under the Facility are guaranteed by the Company’s assets. Borrowings and repayments are made in renminbi, the official Chinese currency. The applicable interest rate is 110% of the People’s Bank of China’s base rate. The terms of the Facility include limitations on use of funds for working capital purposes as well as customary representations and warranties made by the Company. At June 30, 2019, the Company had $4.5 million of unused availability under the Facility.

13. Share Repurchase Program

On February 12, 2015, the Company announced that its Board of Directors approved a share repurchase program authorizing the repurchase of up to an aggregate of $20 million of its common stock through open market and privately negotiated transactions over a two-year period. On November 2, 2016, the Board of Directors approved a two-year extension to the share repurchase program through February 28, 2019. On May 4, 2017, the Board of Directors authorized an increase in its authorized share repurchase program of up to an additional $30.0 million of the Company's common stock through open market and privately negotiated transactions over a two-year period ending May 31, 2019. The timing and amount of any share repurchases will be determined based on market conditions, share price and other factors, and the program may be discontinued or suspended at any time. Repurchases will be made in compliance with SEC rules and other legal requirements. As of June 30, 2019 the program purchase period had lapsed and shares are no longer available for purchase under this plan.
 
During the three and six months ended June 30, 2019, respectively, the Company did not repurchase any shares of its common stock under this program. During the three and six months ended June 30, 2018 the Company repurchased 1,735,983 and 2,667,732 shares of its common stock for $16.9 million and $25.6 million in the aggregate at an average cost of $9.75 and $9.60, respectively. Shares repurchased under this program are recorded at acquisition cost, including related expenses.

14. Business Segments
 
Segment information is prepared on the same basis that our Chief Executive Officer, who is our chief operating decision maker ("CODM"), manages the segments, evaluates financial results, and makes key operating decisions. During the third quarter of 2018, the Company changed its reportable segments. The Company is now organized and managed by the CODM as three operating segments: North America, EMEA and LATAM. The North America segment includes operations in the United States

21

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2019



and Canada; the EMEA segment includes operations in the United Kingdom, continental Europe, the Middle East, Africa, and Asia; and the LATAM segment includes operations in Mexico, Central America, and South America. Other consists of intersegment eliminations, shared service activities, and unallocated corporate expenses. All transactions between segments are presented at their gross amounts and eliminated through Other. We have reflected the segment change as if it had occurred in all periods presented.
 
Management evaluates the performance of its operating segments based on revenues and Adjusted EBITDA, which is a non-GAAP financial measure. The accounting policies of each of the operating segments are the same as those described in the summary of significant accounting policies in Note 1. Adjusted EBITDA represents income from operations excluding depreciation and amortization, stock-based compensation expense, goodwill, intangible and long-lived asset impairment charges, restructuring charges, senior leadership transition and other employee-related expenses, business development realignment, obsolete retail inventory writeoff, professional fees related to ASC 606 implementation, executive search expenses, restatement of prior period financial statements, and other expenses related to investment in operational and financial process improvements. Management does not evaluate the performance of its operating segments using asset measures.

The table below presents financial information for the Company’s reportable segments and Other for the three and six months ended June 30, 2019 and 2018 (in thousands):
 
North America
 
EMEA
 
LATAM
 
Other(2)
 
Total
Three Months Ended June 30, 2019:
 
 
 
 
 
 
 
 
 
Revenue from third parties
$
200,283

 
$
62,483

 
$
21,287

 
$

 
$
284,053

Revenue from other segments
650

 
2,713

 
2

 
(3,365
)
 

Total revenue
200,933

 
65,196

 
21,289

 
(3,365
)
 
284,053

Adjusted EBITDA(1)
21,151

 
4,292

 
611

 
(12,414
)
 
13,640

 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018:
 
 
 
 
 
 
 
 
 
Revenue from third parties
$
194,735

 
$
65,039


$
22,193

 
$

 
$
281,967

Revenue from other segments
951

 
2,696


(48
)
 
(3,599
)
 

Total revenue
195,686

 
67,735


22,145

 
(3,599
)
 
281,967

Adjusted EBITDA(1)
18,372

 
805


1,244

 
(12,235
)
 
8,186


 
North America
 
EMEA
 
LATAM
 
Other(2)
 
Total
Six Months Ended June 30, 2019:


 


 


 


 


Revenue from third parties
$
388,584

 
$
122,662

 
$
40,045

 
$

 
$
551,291

Revenue from other segments
1,213

 
4,360

 
4

 
(5,577
)
 

Total revenue
389,797

 
127,022

 
40,049

 
(5,577
)
 
551,291

Adjusted EBITDA(1)
36,602

 
6,819

 
876

 
(24,083
)
 
20,214

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
Revenue from third parties
$
384,012

 
$
129,207


$
43,287

 
$

 
$
556,506

Revenue from other segments
2,371

 
5,346


78

 
(7,795
)
 

Total revenue
386,383

 
134,553


43,365

 
(7,795
)
 
556,506

Adjusted EBITDA(1)
35,588

 
2,310


1,830

 
(24,193
)
 
15,535



(1)
Adjusted EBITDA, which represents income from operations with the addition of depreciation and amortization, stock-based compensation expense, restructuring charges, professional fees related to ASC 606 implementation, executive search costs and restatement-related professional fees 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. The Company presents this measure as supplemental information to help investors better understand trends in its business results over time. The Company’s management team uses Adjusted EBITDA to evaluate the performance of the business. Adjusted EBITDA is not equivalent to any measure of performance required to be

22

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2019



reported under GAAP, nor should this data be considered an indicator of the Company’s overall financial performance and liquidity. Moreover, the Adjusted EBITDA definition the Company uses may not be comparable to similarly titled measures reported by other companies.

(2)
“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.

The table below reconciles the total of the reportable segments' Adjusted EBITDA and the Adjusted EBITDA included in Other to loss before income taxes (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Adjusted EBITDA
13,640

 
8,186

 
20,214

 
15,535

Depreciation and amortization
(3,233
)
 
(3,514
)
 
(5,849
)
 
(7,173
)
Stock-based compensation expense
(1,402
)
 
(1,406
)
 
(2,141
)
 
(2,823
)
Stock appreciation rights market-to-market
(46
)
 

 
(46
)
 

Restructuring charges
(3,698
)
 

 
(7,632
)
 

Control remediation-related fees
(175
)
 
(537
)
 
(540
)
 
(537
)
Executive search fees

 
(234
)
 
(80
)
 
(234
)
Professional fees related to ASC 606 implementation

 
(60
)
 
 
 
(1,092
)
Sales and use tax audit
(1,235
)
 

 
(1,235
)
 

Other professional fees
(376
)
 
(80
)
 
(376
)
 
(80
)
Income (Loss) from operations
3,475

 
2,355

 
2,315

 
3,596

Interest income
104

 
54

 
202

 
115

Interest expense
(2,486
)
 
(1,517
)
 
(5,232
)
 
(3,085
)
Other, net
279

 
(588
)
 
(460
)
 
(1,433
)
Income (Loss) before income taxes
$
1,372

 
$
304

 
$
(3,175
)
 
$
(807
)

15. Subsequent Event

Debt Refinancing

On July 16, 2019, the Company and certain of its direct and indirect subsidiaries entered into a credit agreement (the “ABL Credit Agreement”) with Bank of America, N.A., as administrative agent, lender, issuing bank and collateral agent, and JPMorgan Chase Bank, N.A. and PNC Bank, National Association, as lenders (the “ABL Credit Facility”). The ABL Credit Facility consists of a $105.0 million asset-based revolving line of credit with a maturity date of July 16, 2024.
Further, on July 16, 2019, the Company and certain of its direct and indirect subsidiaries entered into a credit agreement (the “Term Loan Credit Agreement”) with TCW Asset Management Company LLC, as administrative agent and collateral agent, and the financial institutions party thereto as lenders (the “Term Loan Credit Facility”).  The Term Loan Credit Facility consists of a $100.0 million term loan facility with a maturity date of July 16, 2024.
In connection with the Term Loan Credit Agreement, the Company issued a Warrant (as defined below) to Macquarie US Trading LLC, an affiliate of TCW Asset Management Company LLC, to purchase fully paid and non-assessable shares of common stock of the Company. The Warrant is initially exercisable for an aggregate of 1,335,337 shares of the Company’s common stock with a per share exercise price of $0.01 (the “Initial Warrant”). The Initial Warrant is exercisable on or after (A) the date which is 10 days after the earlier of (x) the date that the Company delivers its financial statements for the fiscal quarter ending March 31, 2020 to the administrative agent and (y) May 15, 2020 (the “First Quarter Reporting Period End Date”) through (B) July 16, 2024.

In addition, if either (x) the Total Leverage Ratio (as defined in the Term Loan Credit Agreement) as of March 31, 2020 for the four (4) consecutive fiscal quarter period then ended is greater than 4.25 to 1.00 or (y) the Company fails to deliver financial statements to the administrative agent as required by Term Loan Credit Agreement for the fiscal quarter

23

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2019



ending March 31, 2020, then from the First Quarter Reporting Period End Date through July 16, 2024, the Warrant shall also be exercisable for an additional 2.49% of the Company’s common stock calculated on a fully-diluted basis (the “Additional Warrant” and together with the Initial Warrant, the “Warrant”).

The Warrant may be exercised on a cashless basis, and the number of shares for which the Warrant are exercisable and the associated exercise price are subject to certain proportional adjustments as set forth in the Warrant. In addition, the holder of the Warrant is entitled to certain piggyback registration rights.

The Company used the initial proceeds from the ABL Credit Facility and the Term Loan Credit Facility to repay in full all amounts outstanding under the Credit Agreement, to pay fees and transaction expenses in connection with the closing of the ABL Credit Facility and the Term Loan Credit Facility and for working capital purposes.
Refer to the Company’s Form 8-K filed on July 16, 2019 for more information surrounding the debt refinancing agreements.
Remediation of Going Concern
The Company’s independent registered public accounting firm’s report on the Company’s December 31, 2018 consolidated financial statements contains an emphasis of a matter regarding substantial doubt about the Company’s ability to continue as a going concern. Following the successful refinancing of its debt described above, management completed an updated evaluation of the Company’s ability to continue as a going concern and has concluded the factors that raised substantial doubts about the Company’s ability to continue as a going concern that existed as of December 31, 2018 have successfully been remediated. The new debt structure provides long-term capital with improved flexibility to support the Company’s growth plans.


24


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

Certain statements in this Quarterly Report on Form 10-Q 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 that could materially affect such forward-looking statements can be found in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018 and elsewhere in this Form 10-Q. Investors are urged to consider these factors carefully in evaluating any 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.

Overview
 
We are a leading global marketing execution firm for some of the world's most marketing intensive companies, including those listed in the Fortune 1000. As a comprehensive outsourced global solution, we leverage proprietary technology, an extensive supplier network and deep domain expertise to streamline the creation, production and distribution of marketing and promotional materials, signage and displays, retail experiences, events and promotions and product packaging across every major market worldwide. The items we source generally are procured through the marketing supply chain and we refer to these items collectively as marketing materials. Through our network of global suppliers, we offer a full range of fulfillment and logistics services that allow us to procure marketing materials 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 materials procurement needs of our clients.
 
Our proprietary software applications and databases create a fully-integrated solution that stores, analyzes and tracks the production capabilities of our supplier network, as well as detailed pricing data. As a result, we believe we have one of the largest independent repositories of supplier capabilities and pricing data for suppliers of marketing materials around the world. Our technology and databases of product and supplier information are designed to capitalize on excess manufacturing capacity and other inefficiencies in the traditional marketing materials supply chain to obtain favorable pricing while delivering high-quality products and services for our clients.

We use our supplier capability and pricing data to match orders with suppliers that are optimally suited to meet the client's needs at a highly competitive price. By leveraging our technology 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 procurement activity on an enterprise-wide basis provides our clients with greater visibility and control of their marketing materials expenditures.

We generate revenue by procuring and purchasing marketing materials 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, consumer packaged goods, non-profits, healthcare, pharmaceuticals, food and beverage, broadcasting, and cable and transportation.

As of June 30, 2019, we had approximately 2,000 employees in more than 30 countries. For the six months ended June 30, 2019 we generated global revenue from third parties of $388.6 million in the North America segment, $122.7 million in the EMEA segment, and $40.0 million in the LATAM segment.

Our objective is to continue to increase our sales in the United States and internationally by adding new clients and increasing our sales to existing clients through additional marketing execution services or geographic markets. In addition, we believe the opportunity exists to expand our business through acquisition and entry into new geographic markets.
 








25


Revenue

We generate revenue through the procurement of marketing materials for our clients. Our revenue consists of the prices paid to us by our clients for marketing materials. These prices, in turn, reflect the amounts charged to us by our suppliers plus our gross profit. Our gross profit margin may be fixed by contract or may depend on prices negotiated on a job-by-job basis. Once the 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 generally 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 the products and we invoice our client.

We agree to provide our clients with marketing materials 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 to date.

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, may be established by contract based on a fixed gross profit as a percentage of revenue, which we refer to as gross margin, or may be determined at the discretion of the account executive or production manager within predetermined parameters.

Operating Expenses and Income from Operations
 
Our selling, general and administrative expenses consist of commissions paid to our account executives, compensation costs for our management team and 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.

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.

Comparison of three months ended June 30, 2019 and 2018
 
Revenue
 
Our third party revenue by segment for each of the periods presented was as follows (dollars in thousands):  
 
Three Months Ended June 30,
 
2019
 
% of Total
 
2018
 
% of Total
 

 
 
 
 
 
 
North America
$
200,283

 
70.5
%
 
$
194,735

 
69.0
%
EMEA
62,483

 
22.0

 
65,039

 
23.1

LATAM
21,287

 
7.5

 
22,193

 
7.9

Revenue from third parties
$
284,053

 
100.0
%
 
$
281,967

 
100.0
%
 
North America
 
North America revenue increased by $5.6 million, or 2.9%, from $194.7 million during the three months ended June 30, 2018 to $200.3 million during the three months ended June 30, 2019. This increase in revenue relates primarily to growth from new and existing enterprise clients.





26


EMEA

EMEA revenue decreased by $2.5 million, or 3.8%, from $65.0 million during the three months ended June 30, 2018 to $62.5 million during the three months ended June 30, 2019. The decrease was a result of growth that was more than offset by foreign currency impact and declines in marketing spend by certain clients.

LATAM
 
LATAM revenue decreased by $0.9 million, or 4.1%, from $22.2 million during the three months ended June 30, 2018 to $21.3 million during the three months ended June 30, 2019. The decrease was a result of growth that was more than offset by foreign currency impact and declines in marketing spend by certain clients.

Cost of goods sold
 
Our cost of goods sold decreased by $2.1 million, or 1.0%, from $217.1 million during the three months ended June 30, 2018 to $215.0 million during the three months ended June 30, 2019. Our cost of goods sold as a percentage of revenue was 75.7% and 77.0% during the three months ended June 30, 2019 and 2018, respectively.
 
Gross profit margin
 
Our gross profit margin was 24.3% and 23.0% during the three months ended June 30, 2019 and 2018, respectively. This increase was primarily driven by operating efficiencies in North America and improved customer mix in EMEA.
 
Selling, general, and administrative expenses
 
Selling, general, and administrative expenses decreased by $0.3 million, or 0.5%, from $59.0 million during the three months ended June 30, 2018 to $58.7 million during the three months ended June 30, 2019. This decrease was driven by the Company’s restructuring efforts, partially offset by higher legal fees and additional sales tax resulting from sales tax audit of prior periods. As a percentage of gross profit, selling, general, and administrative expenses also decreased to 84.9% for the three months ended June 30, 2019 compared to 90.9% for the three months ended June 30, 2018.

Depreciation and amortization
 
Depreciation and amortization expense decreased by $0.3 million, or 8.6%, from $3.5 million during the three months ended June 30, 2018 to $3.2 million during the three months ended June 30, 2019. This decrease is due to lower amortization resulting from impairment charges to intangible assets in 2018.

Restructuring charges
 
On August 10, 2018, the Company approved a plan to reduce the Company's cost structure while driving value for its clients and stockholders. Consequently, no restructuring charges were recognized in the three months ended June 30, 2018. For the three months ended June 30, 2019, we recognized $3.7 million in restructuring charges.

Income from operations

Income from operations increased by $1.1 million from $2.4 million during the three months ended June 30, 2018 to $3.5 million during the three months ended June 30, 2019. As a percentage of revenue, income from operations was 1.2% and 0.9% during the three months ended June 30, 2019 and 2018, respectively. As a percentage of gross profit, income from operations was 5.1% and 3.7% during the three months ended June 30, 2019 and 2018, respectively. This increase is primarily attributable to higher gross profit and lower selling, general and administrative expenses, offset by restructuring charges.

Other expense
 
Other expense did not materially change from the three months ended June 30, 2018 to three months ended June 30, 2019.


 

27




Income tax expense

Income tax expense increased by $1.9 million from $0.6 million during the three months ended June 30, 2018 to $2.5 million during the three months ended June 30, 2019. Our effective tax rate was 185.2% and 198.4% for the three months ended June 30, 2019 and 2018, 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, valuation allowances, impacts of the Tax Reform Act, and foreign tax rates that are different than the U.S. federal statutory tax rate. In addition, the effective tax rate can be impacted each period by discrete factors and events such as a write-off of a deferred tax asset for stock‑based compensation due to the expiration of unexercised stock options.

 Net loss
 
Net loss increased by $0.9 million, or 300.0%, from net loss of $0.3 million during the three months ended June 30, 2018 to a $1.2 million net loss during the three months ended June 30, 2019. Net loss as a percentage of revenue was (0.4)% and (0.1)% during the three months ended June 30, 2019 and 2018, respectively. Net loss as a percentage of gross profit was (1.7)% and (0.5)% during the three months ended June 30, 2019 and 2018, respectively. The increase in net loss is attributable to the increase in income taxes, offset by higher income from operations.

Comparison of six months ended June 30, 2019 and 2018
 
Revenue
 
Our third party revenue by segment for each of the periods presented was as follows (dollars in thousands):  
 
Six Months Ended June 30,
 
2019
 
% of Total
 
2018
 
% of Total
 

 
 
 
 
 
 
North America
$
388,584

 
70.5
%
 
$
384,012

 
69.0
%
EMEA
122,662

 
22.2

 
129,207

 
23.2

LATAM
40,045

 
7.3

 
43,287

 
7.8

Revenue from third parties
$
551,291

 
100.0
%
 
$
556,506

 
100.0
%
 
North America
 
North America revenue increased by $4.6 million, or 1.2%, from $384.0 million during the six months ended June 30, 2018 to $388.6 million during the six months ended June 30, 2019. This increase in revenue relates primarily to continued growth from new and existing enterprise clients.

EMEA

EMEA revenue decreased by $6.5 million, or 5.0%, from $129.2 million during the six months ended June 30, 2018 to $122.7 million during the six months ended June 30, 2019. The decrease was a result of growth that was more than offset by foreign currency impacts and declines in marketing spend by certain clients.

LATAM
 
LATAM revenue decreased by $3.3 million, or 7.6%, from $43.3 million during the six months ended June 30, 2018 to $40.0 million during the six months ended June 30, 2019. The decrease was a result of growth that was more than offset by foreign currency impacts and declines in marketing spend by certain clients.






28


Cost of goods sold
 
Our cost of goods sold decreased by $4.6 million, or 1.1%, from $425.6 million during the six months ended June 30, 2018 to $421.0 million during the six months ended June 30, 2019. Our cost of goods sold as a percentage of revenue was 76.4% and 76.5% during the six months ended June 30, 2019 and 2018, respectively.
 
Gross profit margin
 
Our gross profit margin was 23.6% and 23.5% during the six months ended June 30, 2019 and 2018, respectively. This increase was primarily driven by operating efficiencies in North America and better customer mix in EMEA.
 
Selling, general, and administrative expenses
 
Selling, general, and administrative expenses decreased by $5.7 million, or 4.7%, from $120.2 million during the six months ended June 30, 2018 to $114.5 million during the six months ended June 30, 2019. This decrease was driven by the Company’s restructuring efforts, partially offset by higher legal fees and additional sales tax resulting from a sales tax audit of prior periods. As a percentage of gross profit, selling, general, and administrative expenses also decreased to 87.9% for the six months ended June 30, 2019 compared to 91.8% for the six months ended June 30, 2018.

Depreciation and amortization
 
Depreciation and amortization expense decreased by $1.4 million, or 19.4%, from $7.2 million during the six months ended June 30, 2018 to $5.8 million during the six months ended June 30, 2019. The decrease is due to lower amortization resulting from impairment charges to intangible assets in 2018.

Restructuring charges
 
On August 10, 2018, the Company approved a plan to reduce the Company's cost structure while driving value for its clients and stockholders. Consequently, no restructuring charges were recognized in the six months ended June 30, 2018. For the six months ended June 30, 2019, we recognized $7.6 million in restructuring charges.

Income from operations

Income from operations decreased by $1.3 million from $3.6 million during the six months ended June 30, 2018 to $2.3 million during the six months ended June 30, 2019. As a percentage of revenue, income from operations was 0.4% and 0.6% during the six months ended June 30, 2019 and 2018, respectively. As a percentage of gross profit, income from operations was 1.8% and 2.8% during the six months ended June 30, 2019 and 2018, respectively. This increase is primarily attributable to lower selling, general and administrative expenses, offset by restructuring charges.

Other expense
 
Other expense increased by $1.1 million from $4.4 million for the six months ended June 30, 2018 to $5.5 million during the six months ended June 30, 2019. This increase in expense was primarily driven by an increase in interest expense, offset by foreign exchange gains.

Income tax expense

Income tax expense decreased by $0.7 million from $1.2 million during the six months ended June 30, 2018 to $0.5 million during the six months ended June 30, 2019. Our effective tax rate was (14.4)% and (145.7)% for the six months ended June 30, 2019 and 2018, 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, valuation allowances, impacts of the Tax Reform Act, and foreign tax rates that are different than the U.S. federal statutory tax rate. In addition, the effective tax rate can be impacted each period by discrete factors and events such as a write-off of a deferred tax asset for stock‑based compensation due to the expiration of unexercised stock options.

 Net loss
 

29


Net loss increased by $1.6 million, or 80.0%, from $2.0 million during the six months ended June 30, 2018 to $3.6 million during the six months ended June 30, 2019. Net loss as a percentage of revenue was (0.7)% and (0.4)% during the six months ended June 30, 2019 and 2018, respectively. Net loss as a percentage of gross profit was (2.8)% and (1.5)% during the six months ended June 30, 2019 and 2018, respectively. The increase in net loss is primarily attributable to lower selling, general and administrative expenses, offset by restructuring charges and higher interest expense.

Adjusted EBITDA 

Adjusted EBITDA, which represents income from operations with the addition of depreciation and amortization, stock-based compensation expense, restructuring charges, professional fees related to ASC 606 implementation, executive search expenses and restatement-related professional fees itemized in the reconciliation table below, 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 periods presented was as follows (dollars in thousands):

 
Three Months Ended June 30,
 
2019

% of Total

2018

% of Total








North America
$
21,151


155.0
 %

$
18,372


224.5
 %
EMEA
4,292


31.5


805


9.8

LATAM
611


4.5


1,244


15.2

Other(1)
(12,414
)

(91.0
)

(12,235
)

(149.5
)
Adjusted EBITDA
$
13,640


100.0
 %

$
8,186


100.0
 %

 
Six Months Ended June 30,
 
2019
 
% of Total
 
2018
 
% of Total
 
 
 
 
 
 
 
 
North America
$
36,602

 
181.1
 %
 
$
35,588

 
229.0
 %
EMEA
6,819

 
33.7

 
2,310

 
14.9

LATAM
876

 
4.3

 
1,830

 
11.8

Other(1)
(24,083
)
 
(119.1
)
 
(24,193
)
 
(155.7
)
Adjusted EBITDA
$
20,214

 
100.0
 %
 
$
15,535

 
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.

Comparison of three months ended June 30, 2019 and 2018. Adjusted EBITDA increased by $5.4 million, or 66.0%, from $8.2 million during the three months ended June 30, 2018 to $13.6 million during the three months ended June 30, 2019. North America Adjusted EBITDA increased by $2.8 million, or 15.2%, from $18.4 million during the three months ended June 30, 2018 to $21.2 million during the three months ended June 30, 2019 mainly from higher revenue and higher Gross margin. EMEA Adjusted EBITDA increased by $3.5 million, or 437.5%, from $0.8 million during the three months ended June 30, 2018 to $4.3 million during the three months ended June 30, 2019 due to customer mix and reduced operating expenses as a result of restructuring efforts. LATAM Adjusted EBITDA decreased by $0.6 million, or 50.0%, from $1.2 million during the three months ended June 30, 2018 to $0.6 million