INNERWORKINGS, INC. 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
Overview
We are a leading global marketing engineering 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.
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
Outlook
Our objective is to continue to increase our sales globally by adding new clients and increasing our sales to existing clients through additional marketing services or expanding into new geographic markets. Operationally, we are integrating our product and service offerings, re-evaluating our geographic footprint, and creating synergies across various business units.
Impact of COVID-19
The emergence of a novel coronavirus (COVID-19) around the world, and
particularly in
Overall, the Company maintains sufficient liquidity to continue business
operations during these uncertain economic conditions. As discussed in Liquidity
and Capital Resources section below, the Company had liquidity of approximately
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The Company will continue to monitor the situation and may take further actions
that affect our business operations and performance. These actions may result
from requirements mandated by federal, state or local authorities or that we
determine to be in the best interests of our employees, customers, and
shareholders. The situation surrounding COVID-19 remains fluid, and the
potential for a material impact on the Company increases the longer the pandemic
impacts the level of economic activity in
Critical Accounting Policies
Our unaudited interim condensed consolidated financial statements have been
prepared in accordance with
Current Expected Credit Loss (CECL)
In
Key Performance Metrics
We regularly review a number of key metrics to evaluate our business, measure progress and make strategic decisions. The measures include Revenue, Gross Profit and Adjusted EBITDA. For additional discussion, see Key Components of Statement of Operations and Non-GAAP Financial Measures sections below.
Key Components of Statement of Operations
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 arrange shipment of the product. The product is shipped directly from our supplier or from our warehouse to a destination specified by our client. The client is invoiced upon shipment or receipt, depending on contract terms, for the product as well as shipping and handling.
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 of the price at which we purchase products from our suppliers, facility costs, and personnel costs for creative design services and warehousing. We procure product for our own account and generally take full title and risk of loss upon shipment.
Our gross profit is determined by the selling prices of the product and shipping charges less the cost of the product, direct personnel, warehousing, and shipping and handling costs.
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Operating Expenses and Loss from Operations
Our selling, general and administrative expenses consist of compensation costs for our management team, client engagement personnel, production managers, corporate functions and operational support employees, as well as commissions paid to our account executives. In addition, selling, general and administrative expenses include public company expenses, facilities fees, travel and entertainment expenses, corporate systems fees, and legal and accounting fees.
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.
Non-GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA, which represents loss from operations with the addition of
depreciation and amortization, stock-based compensation expense, goodwill and
long-lived asset impairment charges, restructuring charges, various one-time
professional fees, executive search expenses, and other charges itemized in the
reconciliation table noted within Note 14, Business Segments, is considered a
non-GAAP financial measure under
Adjusted Diluted Earnings Per Share
Adjusted diluted earnings per share, which represents net loss, with the
addition of exclusive items that are non-recurring to our operating business,
divided by the weighted average shares outstanding plus share equivalents that
would arise from the exercise of stock options and restricted stock and other
contingently issuable shares, is considered a non-GAAP financial measure under
Comparison of Three Months Ended
Revenue
Third party revenue by segment for each of the periods presented was as follows
(dollars in thousands):
Three Months Ended March 31,
2020 % of Total 2019 % of Total
North America $ 197,709 75.7 % $ 188,274 70.5 %
EMEA 48,210 18.4 % 60,179 22.5 %
LATAM 15,441 5.9 % 18,758 7.0 %
Revenue from third parties
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EMEA. Revenue decreased by
LATAM. Revenue decreased by
Cost of goods sold
Cost of goods sold decreased by
Gross profit margin
Gross profit margin was 24.3% and 23.2% during the three months ended
Selling, general and administrative expenses
Selling, general and administrative expenses decreased by
Depreciation and amortization
Depreciation and amortization expense increased by
Goodwill Impairment
As of
On
Loss from operations
Loss from operations increased by
Other expense
Other expense decreased by
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Income tax expense
Income tax expense increased by
Net loss
Net loss increased by
Adjusted EBITDA
Adjusted EBITDA by segment for each of the periods presented was as follows (dollars in thousands):
Three Months Ended March 31,
2020 % of Total 2019 % of Total
North America $ 23,640 183.1 % $ 16,018 216.8 %
EMEA 1,362 10.6 % 2,774 37.5 %
LATAM 428 3.3 % 265 3.6 %
Other(1) (12,524 ) (97.0 )% (11,668 ) (157.9 )%
Adjusted EBITDA $ 12,906 100.0 % $ 7,389 100.0 %
(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
EMEA. Adjusted EBITDA decreased by
LATAM. Adjusted EBITDA increased by
Other. Adjusted EBITDA decreased by
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Adjusted Diluted Earnings Per Share
Adjusted diluted earnings per share for each of the periods presented was as follows (in thousands, except per share amounts):
Three Months Ended March 31,
2020 2019
Net loss $ (2,840 ) $ (2,044 )
Restructuring charges 3,637 3,934
Professional fees related to control
remediation 264 365
Change in fair value of warrant and
derivatives (5,640 ) -
Goodwill impairment 7,191 -
Long-lived asset impairment 273 -
Executive search fees - 80
Sales and use tax audit - 25
Income tax effects of adjustments (971 ) (1,024 )
Adjusted net income $ 1,914 $ 1,336
GAAP weighted-average shares outstanding -
diluted 53,474 51,830
Effect of dilutive securities:
Employee stock options and restricted common
shares 762 65
Adjusted weighted-average shares outstanding
- diluted 54,236 51,895
Adjusted diluted earnings per share $ 0.04 $ 0.03
Comparison of three months ended
Liquidity and Capital Resources
While uncertainty exists as to the full impact of the COVID-19 pandemic on our liquidity and capital resources, the Company believes it has maintained sufficient liquidity to satisfy our working capital and other funding requirements with internally generated cash flow and, as necessary, cash on hand and borrowings under our revolving credit facility. In order to ensure adequate liquidity under a range of economic scenarios, we are currently evaluating the possibility of securing additional financing, which may include participation in lending programs established under the Coronavirus Aid, Relief, and Economic Security Act.
Cash Flow Summary
The following table presents cash flows for the three months ended
Three months ended March 31,
2020 2019
Net cash (used in) provided by operating
activities $ (9,745 ) $ 5,492
Net cash used in investing activities (3,190 ) (3,345 )
Net cash used in financing activities (1,905 ) (3,095 )
At
Operating Activities. Cash used in operating activities primarily consists of
net loss adjusted for certain non-cash items, including depreciation and
amortization and share-based compensation and the effect of changes in working
capital and other activities. Cash used in operating activities for the three
months ended
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and other assets of
Cash provided by operating activities for the three months ended
Investing Activities. Cash used in investing activities for the three months
ended
Financing Activities. Cash used in financing activities for the three months
ended
Cash used in financing activities for the three months ended
Revolving Credit Facilities and Long-Term Debt
On
The ABL Credit Agreement contains a minimum fixed charge coverage ratio
financial covenant that must be maintained when excess availability falls below
a specified amount. The Term Loan Credit Agreement includes a minimum fixed
charge coverage ratio financial covenant, a maximum total leverage ratio
financial covenant, a minimum liquidity financial covenant and a maximum capital
expenditures covenant, each of which must be maintained for the periods
described in the Term Loan Credit Agreement. The Company is in compliance with
all debt covenants in the ABL Credit Agreement and Term Loan Credit Agreement as
of
In addition, we will continue to utilize cash, in part, to invest in our innovative technology platform, fund acquisitions of or make strategic investments in complementary businesses and expand our sales force. Although we can provide no assurances, we believe that our available cash and cash equivalents and the funds available under our new debt structure will be sufficient to meet our working capital and operating expenditure requirements for the next 12 months. We may find it necessary to obtain additional equity or debt financing in the future.
We earn a portion of our operating income outside
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements.
Contractual Obligations
There have been no material changes outside the normal course of business in the
contractual obligations disclosed in Item 7 to our Annual Report on Form 10-K
for the fiscal year ended
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Forward-Looking Statements
This Quarterly Report on Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains words such
as "may," "will," "believe," "expect," "anticipate," "intend," "plan,"
"project," "estimate" and "objective" or the negative thereof or similar
terminology concerning the Company's future financial performance, business
strategy, plans, goals and objectives. These expressions are intended to
identify forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include information
concerning our possible or assumed future performance or results of operations
and are not guarantees. While these statements are based on assumptions and
judgments that management has made in light of industry experience as well as
perceptions of historical trends, current conditions, expected future
developments and other factors believed to be appropriate under the
circumstances, they are subject to risks, uncertainties and other factors that
may cause our actual results, performance or achievements to be materially
different. Some of the factors that would cause future results to differ from
the recent results or those projected in forward-looking statements include, but
are not limited to, the risk factors described in our Annual Report on Form 10-K
for the year ended
Additional Information
We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, other reports and information filed with the
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