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

FORM 10-Q
________________________________________ 
  
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 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:       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:        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
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:   

As of November 11, 2019, the Registrant had 52,132,517 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
 
 
 
 
Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018 (Unaudited)
 
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018
 
 
 
 
Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2019 and 2018 (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
(in thousands, except per share data)
 
 
 
 
 
 
 
Revenue
$
286,525

 
$
270,850

 
$
837,816

 
$
827,356

Cost of goods sold
218,356

 
206,808

 
639,385

 
632,376

Gross profit
68,169

 
64,042

 
198,431

 
194,980

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative expenses
59,938

 
56,142

 
174,404

 
176,312

Depreciation and amortization
3,090

 
3,265

 
8,939

 
10,438

Goodwill impairment

 
27,887

 

 
27,887

Intangible and other asset impairments

 
16,818

 

 
16,818

Restructuring charges
3,055

 
3,142

 
10,687

 
3,142

Income (loss) from operations
2,086

 
(43,212
)
 
4,401

 
(39,617
)
Other income (expense):
 
 
 
 
 
 
 
Interest income
37

 
19

 
239

 
135

Interest expense
(4,376
)
 
(1,769
)
 
(9,608
)
 
(4,854
)
Other expense
(1,736
)
 
(301
)
 
(2,196
)
 
(1,734
)
Total other expense
(6,075
)
 
(2,051
)
 
(11,565
)
 
(6,453
)
Loss before income taxes
(3,989
)
 
(45,263
)
 
(7,164
)
 
(46,070
)
Income tax expense (benefit)
(1,815
)
 
(326
)
 
(1,359
)
 
851

Net loss
$
(2,174
)
 
$
(44,937
)
 
$
(5,805
)
 
$
(46,921
)
 


 
 
 
 
 
 
Basic and diluted net loss per share
$
(0.04
)
 
$
(0.87
)
 
$
(0.11
)
 
$
(0.90
)
 
 
 
 
 
 
 
 
Comprehensive loss
$
(3,910
)
 
$
(46,646
)
 
$
(6,541
)
 
$
(50,872
)


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

4


InnerWorkings, Inc. and subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
September 30, 2019
 
December 31, 2018
Assets
(unaudited)
 

Current assets:
 

 
 

Cash and cash equivalents
$
38,488

 
$
26,770

Accounts receivable, net of allowance for doubtful accounts of $4,247 and $4,880, respectively
190,992

 
193,253

Unbilled revenue
65,584

 
46,474

Other receivables
39,317

 
23,727

Inventories
64,136

 
56,001

Prepaid expenses
13,973

 
16,982

Other current assets
13,271

 
10,379

Total current assets
425,761

 
373,586

Property and equipment, net
36,714

 
82,933

Intangibles and other assets:
 

 
 

Goodwill
152,191

 
152,158

Intangible assets, net
8,230

 
9,828

Right of use assets, net
51,726

 

Deferred income taxes
1,112

 
1,195

Other non-current assets
4,333

 
2,976

Total intangibles and other assets
217,592

 
166,157

Total assets
$
680,067

 
$
622,676

Liabilities and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
169,173

 
$
158,449

Accrued expenses
44,096

 
35,474

Deferred revenue
18,526

 
17,614

Revolving credit facility - current
4,585

 
142,736

Term loan - current
6,250

 

Other current liabilities
32,325

 
26,231

Total current liabilities
274,955

 
380,504

Lease liabilities
47,094

 

Revolving credit facility - non-current
76,829

 

Term loan - non-current
89,991

 

Deferred income taxes
8,257

 
8,178

Other non-current liabilities
2,486

 
50,903

Total liabilities
499,612

 
439,585

Commitments and contingencies (See Note 11)


 


Stockholders' equity:
 

 
 

Common stock, par value $0.0001 per share, 200,000 shares authorized, 64,802, and 64,495 shares issued, and 52,114 and 51,807 shares outstanding, respectively
6

 
6

Additional paid-in capital
243,706

 
239,960

Treasury stock at cost, 12,688 and 12,688 shares, respectively
(81,471
)
 
(81,471
)
Accumulated other comprehensive loss
(25,045
)
 
(24,309
)
Retained earnings
43,259

 
48,905

Total stockholders' equity
180,455

 
183,091

Total liabilities and stockholders' equity
$
680,067

 
$
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 July 1, 2019
64,629

 
$
6

 
12,688

 
$
(81,471
)
 
$
242,010

 
$
(23,309
)
 
$
45,433

 
$
182,669

Net loss


 


 


 


 


 


 
(2,174
)
 
(2,174
)
Total other comprehensive income - foreign currency translation adjustments


 


 


 


 


 
(1,736
)
 


 
(1,736
)
Comprehensive loss


 


 


 


 


 


 


 
(3,910
)
Issuance of common stock upon exercise of stock awards, net of withheld shares
173

 


 


 


 
(88
)
 


 


 
(88
)
Stock-based compensation expense


 


 


 


 
1,784

 


 


 
1,784

Balance as of September 30, 2019
64,802

 
$
6

 
12,688

 
$
(81,471
)
 
$
243,706

 
$
(25,045
)
 
$
43,259

 
$
180,455


 
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

 

 

 

 

 

 
(5,805
)
 
(5,805
)
Total other comprehensive income - foreign currency translation adjustments

 

 

 

 

 
(736
)
 

 
(736
)
Comprehensive loss

 

 

 

 

 

 

 
(6,541
)
Issuance of common stock upon exercise of stock awards, net of withheld shares
307

 

 


 


 
(179
)
 

 

 
(179
)
Stock-based compensation expense

 

 


 

 
3,925

 

 

 
3,925

Cumulative effect of change related to adoption of ASC 842

 

 


 

 

 

 
159

 
159

Balance as of September 30, 2019
64,802

 
$
6

 
12,688

 
$
(81,471
)
 
$
243,706

 
$
(25,045
)
 
$
43,259

 
$
180,455

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













6


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 July 1, 2018
64,372

 
$
6

 
12,688

 
$
(81,471
)
 
$
237,634

 
$
(21,472
)
 
$
123,094

 
$
257,791

Net loss


 


 


 


 


 


 
(44,937
)
 
(44,937
)
Total other comprehensive loss - foreign currency translation adjustments


 


 


 


 


 
(1,708
)
 


 
(1,708
)
Comprehensive loss


 


 


 


 


 


 


 
(46,646
)
Issuance of common stock upon exercise of stock awards, net of withheld shares
62

 


 


 


 
(50
)
 


 


 
(50
)
Stock-based compensation expense


 


 


 


 
801

 


 


 
801

Balance as of September 30, 2018
64,434

 
$
6

 
12,688

 
$
(81,471
)
 
$
238,385

 
$
(23,180
)
 
$
78,156

 
$
211,896


 
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


 


 


 


 


 


 
(46,921
)
 
(46,921
)
Total other comprehensive loss - foreign currency translation adjustments


 


 


 


 


 
(3,951
)
 


 
(3,951
)
Comprehensive loss


 


 


 


 


 


 


 
(50,872
)
Issuance of common stock upon exercise of stock awards, net of withheld shares
359

 


 


 


 
(438
)
 


 


 
(438
)
Acquisition of treasury shares


 


 
2,668

 
(25,598
)
 


 


 


 
(25,598
)
Stock-based compensation expense


 


 


 


 
3,624

 


 


 
3,624

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 September 30, 2018
64,434

 
$
6

 
12,688

 
$
(81,471
)
 
$
238,385

 
$
(23,180
)
 
$
78,156

 
$
211,896


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)
 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
Cash flows from operating activities
 

 
 

Net loss
$
(5,805
)
 
$
(46,921
)
Adjustments to reconcile net loss to net cash from operating activities:
 

 
 

Depreciation and amortization
8,939

 
10,438

Stock-based compensation expense
4,219

 
3,624

Bad debt provision
1,447

 
888

Implementation cost amortization
250

 
344

Goodwill impairment

 
27,887

Intangible and long-lived asset impairment

 
16,818

Change in fair value of warrant
950

 

Change in fair value of embedded derivative
(97
)
 

Unrealized foreign exchange loss
986

 

Other operating activities
705

 
(189
)
Change in assets:
 

 
 

Accounts receivable and unbilled revenue
(21,245
)
 
5,810

Inventories
(8,767
)
 
(16,469
)
Prepaid expenses and other assets
(29,141
)
 
(7,903
)
Change in liabilities:
 

 
 

Accounts payable
12,403

 
20,350

Accrued expenses and other liabilities
25,378

 
(4,572
)
Net cash (used in) provided by operating activities
(9,778
)
 
10,105

 
 
 
 
Cash flows from investing activities
 

 
 

Purchases of property and equipment
(10,012
)
 
(7,835
)
Payments for acquisition, net of cash acquired
(390
)
 

Net cash used in investing activities
(10,402
)
 
(7,835
)
 
 
 
 
Cash flows from financing activities
 

 
 

Net borrowings (repayments) from old revolving credit facility
(142,583
)
 
23,230

Net borrowings (repayments) from new revolving credit facility
81,472

 

Net short-term secured (repayments) borrowings
(833
)
 
55

Proceeds from term loan
100,000

 

Payments on term loan
(1,250
)
 

Repurchases of common stock

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

 
416

Payment of debt issuance costs
(5,488
)
 
(545
)
Other financing activities
(242
)
 
(746
)
Net cash provided by (used in) financing activities
31,139

 
(3,279
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
759

 
(1,958
)
Increase (decrease) in cash and cash equivalents
11,718

 
(2,967
)
Cash and cash equivalents, beginning of period
26,770

 
30,562

Cash and cash equivalents, end of period
$
38,488

 
$
27,595

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)




1. Basis of Presentation

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 (the “SEC”) and generally accepted accounting principles in the United States (“GAAP”) for interim financial information. Footnote disclosures that would substantially duplicate the disclosures included in the December 31, 2018 audited financial statements have been omitted from these interim unaudited financial statements pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation of the accompanying unaudited financial statements have been included, and all adjustments are of a normal and recurring nature. The operating results for the three and nine month periods ended September 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.

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 September 30, 2019, the Company had a balance of net monetary assets denominated in ARS of approximately 58.3 million ARS, and the exchange rate was approximately 57.5 ARS per U.S. dollar.

During the three and nine months ended September 30, 2019, the Company recorded a nominal amount and $0.1 million, respectively, of favorable currency impacts within other expense. For the three and nine months ended September 30, 2019, the Company's Argentinian operations generated revenue of $0.5 million and $2.2 million and gross margin of $0.1 million and $0.2 million, respectively.

During the three and nine months ended September 30, 2018, the Company recorded $0.1 million of unfavorable currency impacts within other expense. For the three and nine months ended September 30, 2018, the Company's Argentinian operations generated revenue of $0.6 million and $3.3 million and gross margin of $0.1 million and $0.4 million, respectively.

Fair Value Measurements

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 fair value of revolving credit facilities and long-term debt facilities are determined using current market yields.

Fair value accounting requires bifurcation of embedded derivative instruments such as interest rate reset features in debt instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value for

9

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)



embedded derivatives, the Company uses a 'with and without' valuation model. Additionally, fair value accounting requires liability-classified awards, such as warrant liabilities, to be measured at fair value for accounting purposes. The fair value of freestanding derivative instruments, such as warrant liabilities, are valued using the Black-Scholes-Merton option pricing model.

Once determined, derivative liabilities and warrant liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded within other expense as an adjustment to fair value of derivatives.

Deferred Financing Fees and Debt Discounts

Deferred financing fees represent third-party debt issuance costs associated with the related debt facility. Deferred financing fees and related derivative and warrant features associated with the Company’s long-term debt agreement are treated as a discount on the long-term debt and amortized using the effective interest rate method. Derivative features associated with the Company’s revolving credit agreement are treated as a discount on the revolving credit facility and amortized using the straight-line method. Deferred financing fees related to the Company's revolving credit facility are capitalized and reflected as deferred financing costs within other non-current assets and are amortized over the term of the revolving credit facility. Debt discounts on the Company’s revolving credit facility and long-term debt are reflected as a direct deduction from the carrying amount of the long-term portion of the related debt liability.

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.
 
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 or 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.


10

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)



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 guidance introduces a new credit reserving methodology known as the Current Expected Credit Loss (CECL) methodology, which will alter the estimation process, inputs, and assumptions used in estimating credit 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 CECL methodology requires measurement of expected credit losses for the estimated life of the financial instrument, not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information. At the date of adoption, the change in reserves will be recorded in retained earnings as a cumulative-effect adjustment.

The Company is continuing its implementation efforts and has substantially completed scoping activities. The Company is in process of developing CECL models for each pool of financial assets based on risk characteristics of each pool. Model creation, model validation, and parallel runs will continue through the remainder of 2019. In addition, the Company continues to develop the business processes, policies, and controls that satisfy the requirements of the new guidance.

The actual impact at adoption will depend on the outstanding balances, characteristics of the Company’s receivable portfolios, macroeconomic conditions, and forecasted information at the date of adoption; however, the Company does not expect ASU 2016-13 to have a significant impact to the consolidated financial statements and related disclosures.

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 such as 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.

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.


11

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)



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 nine months ended September 30, 2019, the amount of amortization was $0.04 million and $0.25 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 the Company's costs to fulfill and contract liabilities as of September 30, 2019 and December 31, 2018 (in thousands):
 
September 30, 2019
 
December 31, 2018
Costs to fulfill
$
1,272

 
$
1,152

Contract liabilities
18,526

 
17,614

Cash received
7,622

 
11,387

Revenue recognized
$
6,710

 
$
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 nine months ended September 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 September 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 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.

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

12

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)



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):
 
 
September 30, 2019
Operating leases
 
 
Right of use assets:
 
 
Right of use assets
 
$
51,425

Finance leases
 
 
Right of use assets:
 
 
Right of use assets, cost
 
$
579

   Less: Accumulated amortization
 
(278
)
Right of use assets, net
 
$
301

Total right of use assets, net
 
$
51,726

 
 
 
Lease liabilities
 
 
Current
 
 
   Operating
 
$
8,485

   Finance
 
114

Non-current
 
 
   Operating
 
$
46,865

   Finance
 
229

Total lease liabilities
 
$
55,693



The components of lease cost were as follows (in thousands):
 
 
September 30, 2019
Operating lease cost
 
$
7,649

Variable lease cost
 
866

Short-term lease cost
 
1,530

Finance lease cost:
 


   Amortization of right of use assets
 
57

   Interest on lease liabilities
 
16

  Total finance lease cost
 
$
73

Less: Sublease income
 
(132
)
Total lease cost
 
$
9,986



13

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)



Average lease terms and discount rates were as follows:
 
 
September 30, 2019
Weighted-average remaining lease term (years)
 
 
   Operating leases
 
6.96

   Finance leases
 
2.92

Weighted-average discount rate
 
 
   Operating leases
 
6.59
%
   Finance leases
 
7.77
%

Supplemental cash flow information related to leases was as follows (in thousands):
 
 
September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
   Operating cash flows from finance leases
 
$
82

   Operating cash flows from operating leases
 
5,828

Total
 
$
5,910



The aggregate future lease payments for operating and finance leases as of September 30, 2019 are as follows (in thousands):
 
Operating
 
Finance
Remaining 2019
$
2,638

 
$
33

2020
11,089

 
133

2021
11,873

 
134

2022
10,292

 
71

2023
7,804

 
10

Thereafter
27,210

 

Total lease payments
$
70,906

 
$
381

Less: Interest
(15,556
)
 
(38
)
Present value of lease liabilities
$
55,350

 
$
343



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




14

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)



4. Goodwill

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

 
$

 
$

 
$
152,158

Foreign exchange impact
33

 

 

 
33

Goodwill as of September 30, 2019
$
152,191

 
$

 
$

 
$
152,191


 
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 fair value determination of the North America 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, Restructuring Activities). If assumptions surrounding either of these factors change, then a future impairment charge may occur.

The goodwill impairment charge recorded to the North America reporting unit, as outlined below, represents a partial impairment of the North America segment goodwill, which resulted in “at risk” goodwill under ASC 350, Intangibles – Goodwill and Other. The Company's policy is to include enhanced disclosures should the fair value of the North America segment exceed the carrying value by less than 30 percent at the date of the most recent step one test and the Company fails to meet projections used by management in determining the fair value of the reporting unit or market indicators exist which could lead management to believe the reporting unit may be impaired. The Company considered indicators for impairment and did not identify any that would have triggered additional impairment testing and analysis as of September 30, 2019.

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 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.


15

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)



5. Other Intangibles and Long-Lived Assets

The following is a summary of the Company’s intangible assets as of September 30, 2019 and December 31, 2018 (in thousands):
 
September 30, 2019
 
December 31, 2018
 
Weighted
Average Life
Customer lists
$
73,101

 
$
73,792

 
14.4
Non-competition agreements
942

 
950

 
4.1
Trade names
2,510

 
2,510

 
13.3
Patents
57

 
57

 
9.0
Intangible assets
76,610

 
77,309

 
 
Less: accumulated amortization
(68,380
)
 
(67,481
)
 
 
Intangible assets, net
$
8,230

 
$
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. 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 $0.9 million for the three months ended September 30, 2019 and 2018, respectively, and $1.6 million and $3.2 million for the nine months ended September 30, 2019 and 2018, respectively. The Company's customer lists had accumulated amortization and impairment of $65.3 million and $64.5 million as of September 30, 2019 and December 31, 2018, respectively. The Company's non-competition agreements and patents were fully amortized or impaired as of September 30, 2019 and December 31, 2018.
 
As of September 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
 
$
533

2020
 
2,021

2021
 
1,783

2022
 
1,407

2023
 
962

2024
 
745

Thereafter
 
779

 
 
$
8,230



2018 Intangible and Long-Lived Asset Impairment

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

16

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)



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 to $10.0 million for consulting fees and lease and contract terminations. Where required by law, the Company will consult with each of the affected country’s 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.

The following table summarizes the accrued restructuring activities for this plan for the nine months ended September 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
 
4,434

 
851

 
5,402

 
10,687

Cash payments
 
(3,217
)
 
(888
)
 
(4,968
)
 
(9,073
)
Non-cash settlements/adjustments
 
55

 
(167
)
 

 
(112
)
Balance as of September 30, 2019
 
$
1,629

 
$
82

 
$
1,140

 
$
2,851



The Company recorded the following restructuring costs by segment (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
North America
 
$
2,549

 
$
1,666

 
$
3,957

 
$
1,666

EMEA
 
112

 
1,186

 
1,517

 
1,186

LATAM
 
102

 
290

 
176

 
290

Other
 
292

 

 
5,037

 

Total
 
$
3,055

 
$
3,142

 
$
10,687

 
$
3,142



From adoption through September 30, 2019, the Company recognized $16.7 million in total restructuring charges pursuant to the 2018 Restructuring Plan.

2015 Restructuring Plan

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 total pre-tax cash restructuring charges of $6.7 million, the majority of which were recognized during 2016. 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 2016 with the final payouts of the charges expected to occur in 2019.

17

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)




The following table summarizes the accrued restructuring activities for this plan for the nine months ended September 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 September 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 45.5% and 0.7% for the three months ended September 30, 2019 and 2018, respectively. The Company’s reported effective income tax rate was 19.0% and (1.8)% for nine months ended September 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 and prior year provision to return adjustments.
   
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 September 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. Warrants issued in connection with the Company's long-term debt were issued at a nominal exercise price and are considered outstanding at the date of issuance. 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 performance share units ("PSUs") for which the performance conditions have been met as of the end of the period.


18

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)



There were no dilutive effects for securities during the three and nine months ended September 30, 2019 and 2018 as a result of a net loss incurred in each period. The warrants related to the long-term debt are classified and recorded as a liability at fair value with subsequent changes in fair value recognized in earnings. Refer to Note 13