Edgar Filing: INNERWORKINGS INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

Commission file number: 000-52170

INNERWORKINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware		20-5997364
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

600 West Chicago Avenue, Suite 850, Chicago, IL 60654		(312) 642-3700
(Address of principal executive offices) (Zip Code)		(Registrants’ telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, $0.0001 par value		Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨		Accelerated filer x		Non-accelerated filer ¨		Smaller reporting company ¨
				(Do not check if a smaller reporting company)

The aggregate market value of the common equity held by non-affiliates of the registrant as of June 30, 2014, the last business day of the registrant’s most recent completed second quarter, was $316,956,806 (based on the closing sale price of the registrant’s common stock on that date as reported on the Nasdaq Global Market).

As of February 25, 2014, the registrant had 53,946,282 shares of common stock, par value $0.0001 per share, outstanding which includes 1,072,005 shares of unvested restricted stock awards that have voting rights and are held by members of the Board of Directors and the Company’s employees.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the InnnerWorkings, Inc. Proxy Statement for the 2015 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.

EXPLANATORY NOTE

InnerWorkings, Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-K/A to its Annual Report on Form 10-K for the year ended December 31, 2014, originally filed with the Securities and Exchange Commission (the “SEC”) on March 6, 2015 (the “Original Form 10-K”), in response to a comment received from the SEC requesting that the Company’s independent registered public accounting firm update its report to include an opinion regarding the Company’s financial statement schedule.

In response to the SEC’s comment, this Form 10-K/A sets forth the complete text of Item 8 of Part II of the Original Form 10-K, which has been updated solely to add the following language to the report of our independent registered public accounting firm: “In our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.”

Other than the update discussed above, this Form 10-K/A speaks as of the original filing date of the Original Form 10-K and has not been updated to reflect other events occurring subsequent to the original filing date. This includes forward-looking statements and all other sections of this Form 10-K/A that were not amended, which should be read in their historical context.

TABLE OF CONTENTS

PART II		2

	Forward-Looking Statements	2

Item 8.	Financial Statements and Supplementary Data	2

PART IV		35

Item 15.	Exhibits, Financial Statement Schedules	35

Signatures		36

PART II

Unless otherwise indicated or the context otherwise requires, references in this Annual Report on Form 10-K to “InnerWorkings, Inc.,” “InnerWorkings,” the “Company,” “we,” “us” or “our” are to InnerWorkings, Inc., a Delaware corporation, and its subsidiaries.

Forward-Looking Statements

Certain statements in this Annual Report on Form 10-K are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements involve a number of risks, uncertainties and other factors that could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors which could materially affect such forward-looking statements can be found in Part I, Item 1A entitled “Risk Factors” and Part II, Item 7 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K. Investors are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date hereof and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

Item 8.

Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS AND

FINANCIAL STATEMENT SCHEDULE

INNERWORKINGS, INC.:

Management’s Assessment of Internal Control over Financial Reporting	4
Report of Independent Registered Public Accounting Firm	5
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting	6
Consolidated Statements of Operations	7
Consolidated Statements of Comprehensive Income (Loss)	8
Consolidated Balance Sheets	9
Consolidated Statements of Stockholders’ Equity	10
Consolidated Statements of Cash Flows	11
Notes To Consolidated Financial Statements	12

MANAGEMENT’S ASSESSMENT OF

INTERNAL CONTROL OVER FINANCIAL REPORTING

The financial statements were prepared by management, which is responsible for their integrity and objectivity and for establishing and maintaining adequate internal controls over financial reporting.

The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

ii.

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

iii.

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal controls may vary over time.

Management assessed the design and effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework (2013 framework). Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2014 based on criteria in Internal Control –Integrated Framework issued by the COSO.

Ernst & Young LLP, independent registered public accounting firm, has audited the financial statements of the Company for the fiscal years ended December 31, 2012, 2013 and 2014 and the Company’s internal control over financial reporting as of December 31, 2014. Their reports are presented on the following pages.

InnerWorkings, Inc.

March 6, 2015

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of InnerWorkings, Inc. and subsidiaries

We have audited the accompanying consolidated balance sheets of InnerWorkings, Inc. and subsidiaries as of December 31, 2014 and 2013 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of InnerWorkings, Inc. and subsidiaries at December 31, 2014 and 2013 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), InnerWorkings, Inc.’s and subsidiaries internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 6, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Chicago, Illinois

March 6, 2015

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

The Board of Directors and Stockholders of InnerWorkings, Inc. and subsidiaries

We have audited InnerWorkings, Inc.’s and subsidiaries internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). InnerWorkings, Inc.’s and subsidiaries management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, InnerWorkings, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of InnerWorkings, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014, and our report dated March 6, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Chicago, Illinois

March 6, 2015

InnerWorkings, Inc. and subsidiaries

Consolidated Statements of Operations

	Years Ended December 31,
	2012			2013			2014
Revenue	$	789,585,041		$	890,959,963		$	1,000,132,771
Cost of goods sold		612,026,494			688,933,899			770,673,282
Gross profit		177,558,547			202,026,064			229,459,489
Operating expenses:
Selling, general and administrative expenses		146,123,614			183,443,438			195,006,221
Depreciation and amortization		10,790,452			13,663,859			17,723,493
Change in fair value of contingent consideration		(27,688,774	)		(31,330,567	)		(37,873,588	)
Preference claim settlement charge		1,099,386			-			-
VAT settlement charge		1,485,088			-			-
Goodwill impairment charge		-			37,908,000			-
Intangible asset impairment charges		-			-			2,710,435
Restructuring and other charges		-			4,321,862			-
Income (loss) from operations		45,748,781			(5,980,528	)		51,892,928
Other income (expense):
Gain on sale of investment		1,196,196			-			-
Interest income		66,489			75,931			57,392
Interest expense		(2,438,234	)		(2,954,339	)		(4,427,934	)
Other, net		94,411			(357,341	)		(747,316	)
Total other income (expense)		(1,081,138	)		(3,235,749	)		(5,117,858	)
Income (loss) before taxes		44,667,643			(9,216,277	)		46,775,070
Income tax expense (benefit)		5,873,621			(555,928	)		2,313,145
Net income (loss)	$	38,794,022		$	(8,660,349	)	$	44,461,925

Basic earnings (loss) per share	$	0.79		$	(0.17	)	$	0.85
Diluted earnings (loss) per share	$	0.76		$	(0.17	)	$	0.84

See accompanying notes to the consolidated financial statements.

InnerWorkings, Inc. and subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

	Years Ended December 31,
	2012			2013			2014
Net income (loss)	$	38,794,022		$	(8,660,349	)	$	44,461,925
Other comprehensive income (loss), before tax
Foreign currency translation adjustments		676,272			2,505,417			(8,178,135	)
Unrealized gains on marketable securities
Unrealized holding gains arising during the period		85,958			317			-
Less: Reclassification adjustments for gains included in net income		(1,196,196	)		(2,518	)		-
Unrealized losses on marketable securities, net		(1,110,238	)		(2,201	)		-
Other comprehensive income (loss), before tax		(433,966	)		2,503,216			(8,178,135	)
Income tax benefit related to components of other comprehensive loss		438,556			863			-
Other comprehensive income (loss), net of tax		4,590			2,504,079			(8,178,135	)

Comprehensive income (loss)	$	38,798,612		$	(6,156,270	)	$	36,283,790

See accompanying notes to the consolidated financial statements.

InnerWorkings, Inc. and subsidiaries

Consolidated Balance Sheets

	December 31,
	2013			2014
Assets
Current assets:
Cash and cash equivalents	$	18,606,030		$	22,577,942
Accounts receivable, net of allowance for doubtful accounts of $2,128,790 and $2,685,497, respectively		171,832,907			179,465,922
Unbilled revenue		27,483,544			31,698,924
Inventories		26,473,732			27,162,642
Prepaid expenses		11,746,965			12,684,237
Deferred income taxes		1,119,333			1,819,139
Other current assets		22,408,692			28,818,891
Total current assets		279,671,203			304,227,697
Property and equipment, net		23,724,750			29,763,583
Intangibles and other assets:
Goodwill		251,228,698			246,947,900
Intangible assets, net		56,575,534			44,919,573
Deferred income taxes		2,319,515			3,903,937
Other assets		1,147,078			1,487,690
		311,270,825			297,259,100
Total assets	$	614,666,778		$	631,250,380
Liabilities and stockholders' equity
Current liabilities:
Accounts payable-trade	$	169,243,349		$	144,044,592
Current portion of contingent consideration		16,718,516			9,078,138
Due to seller		-			402,499
Other liabilities		15,818,791			30,636,505
Accrued expenses		17,117,878			9,989,963
Total current liabilities		218,898,534			194,151,697
Revolving credit facility		69,000,000			104,538,750
Deferred income taxes		9,061,535			9,967,039
Contingent consideration, net of current portion		70,613,945			23,504,436
Other long-term liabilities		1,651,190			2,941,889
Total liabilities		369,225,204			335,103,811
Stockholders' equity:
Common stock, par value $0.0001 per share, 200,000,000 and 200,000,000 shares authorized, 61,395,494 and 61,851,709 shares issued, 51,282,185 and 52,830,842 shares outstanding, respectively		6,140			6,185
Additional paid-in capital		202,042,296			207,428,962
Treasury stock at cost, 10,113,309 and 9,020,867 shares, respectively		(62,312,101	)		(49,996,166	)
Accumulated other comprehensive income (loss)		2,777,000			(5,401,135	)
Retained earnings		102,928,239			144,108,723
Total stockholders' equity		245,441,574			296,146,569
Total liabilities and stockholders' equity	$	614,666,778		$	631,250,380

See accompanying notes to the consolidated financial statements.

InnerWorkings, Inc. and subsidiaries

Consolidated Statements of Stockholders' Equity


														Accumulated
														Other
	Common Stock				Treasury Stock						Additional			Comprehensive			Retained
	Shares		Amount		Shares			Amount			Paid-in-Capital			Income (Loss)			Earnings			Total

*Balance at December 31, 2011*		57,903,418	$	5,790		10,905,407		$	(71,241,947	)	$	179,687,503		$	268,331		$	73,005,129		$	181,724,806

Net income																		38,794,022			38,794,022
Other comprehensive income:
Foreign currency translation adjustment															676,272						676,272
Change in unrealized gain on marketable securities, net of tax															(671,682	)					(671,682	)
Total other comprehensive income															4,590						4,590
Comprehensive income																					38,798,612
Issuance of common stock upon exercise of stock awards		2,832,143		284								5,445,056									5,445,340
Issuance of treasury shares as consideration for acquisition						(369,944	)		4,170,624			145,768						(172,702	)		4,143,690
Excess tax benefit derived from stock award exercises												6,646,739									6,646,739
Stock based compensation expense												6,192,870									6,192,870

*Balance at December 31, 2012*		60,735,561		6,074		10,535,463			(67,071,323	)		198,117,936			272,921			111,626,449			242,952,057

Net loss																		(8,660,349	)		(8,660,349	)
Other comprehensive income:
Foreign currency translation adjustment															2,505,417						2,505,417
Change in unrealized gain on marketable securities, net of tax															(1,338	)					(1,338	)
Total other comprehensive income															2,504,079						2,504,079
Comprehensive loss																					(6,156,270	)
Issuance of common stock upon exercise of stock awards		659,933		66								1,594,299									1,594,365
Issuance of treasury shares as consideration for acquisition						(422,154	)		4,759,222			490,522						(37,861	)		5,211,883
Excess tax benefit derived from stock award exercises												(2,893,492	)								(2,893,492	)
Stock based compensation expense												4,733,031									4,733,031

*Balance at December 31, 2013*		61,395,494	$	6,140		10,113,309		$	(62,312,101	)	$	202,042,296		$	2,777,000		$	102,928,239		$	245,441,574

Net income																		44,461,925			44,461,925
Total other comprehensive income (loss)															(8,178,135	)					(8,178,135	)
Comprehensive income																					36,283,790
Issuance of common stock upon exercise of stock awards		456,215		45								182,474									182,519
Issuance of treasury shares as consideration for acquisition						(1,092,442	)		12,315,935									(3,281,441	)		9,034,494
Excess tax benefit derived from stock award exercises												(147,380	)								(147,380	)
Stock based compensation expense												5,351,572									5,351,572

*Balance at December 31, 2014*		61,851,709	$	6,185		9,020,867		$	(49,996,166	)	$	207,428,962		$	(5,401,135	)	$	144,108,723		$	296,146,569

See accompanying notes to the consolidated financial statements.

InnerWorkings, Inc. and subsidiaries

Consolidated Statements of Cash Flows

	Year Ended December 31,
	2012			2013			2014
Cash flows from operating activities
Net income (loss)	$	38,794,022		$	(8,660,349	)	$	44,461,925
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		10,790,452			13,663,859			17,723,493
Stock-based compensation expense		6,192,870			4,733,031			5,351,572
Deferred income taxes		(995,218	)		(652,395	)		(2,190,527	)
Gain on sale of investment		(1,196,196	)		-			-
Bad debt provision		1,681,942			1,285,326			1,983,928
Excess tax benefit from exercise of stock awards		(6,666,884	)		2,618,779			(184,593	)
Change in fair value of contingent consideration liability		(27,688,774	)		(31,330,567	)		(37,873,588	)
Goodwill impairment charge		-			37,908,000			-
Intangible asset impairment charges		-			-			2,710,435
Reduction of prepaid commissions		-			3,939,974			-
Other operating activities		533,842			238,778			363,362
Change in assets, net of acquisitions:
Accounts receivable and unbilled revenue		(14,846,005	)		(4,843,040	)		(13,832,324	)
Inventories		(3,089,909	)		(1,383,994	)		(634,984	)
Prepaid expenses and other		(13,077,541	)		2,331,672			(7,355,592	)
Change in liabilities, net of acquisitons:
Accounts payable		14,818,713			29,642,545			(25,198,757	)
Accrued expenses and other		4,160,421			(12,120,684	)		2,161,388
Net cash provided by (used in) operating activities		9,411,735			37,370,935			(12,514,262	)

Cash flows from investing activities
Purchases of property and equipment		(11,823,646	)		(12,226,083	)		(14,116,448	)
Payments for acquisitions, net of cash acquired		(1,127,954	)		(19,300,864	)		-
Payments to seller for acquisitions closed prior to 2009		(3,000,000	)		-			-
Proceeds from sale of marketable securities		1,213,501			-			-
Other investing activities		31,566			-			(594,207	)
Net cash used in investing activities		(14,706,533	)		(31,526,947	)		(14,710,655	)

Cash flows from financing activities
Net borrowings from revolving credit facility and short-term debt		5,000,000			4,000,000			35,538,750
Payments of contingent consideration		(7,178,407	)		(7,297,803	)		(5,768,591	)
Secured borrowing arrangements		-			-			2,618,052
Proceeds from exercise of stock options		5,458,981			2,005,114			777,949
Excess tax benefit from exercise of stock awards		6,666,884			(2,618,779	)		184,593
Payment of debt issuance costs		(356,700	)		(325,240	)		(695,852	)
Other financing activities		(7,270	)		(410,750	)		(399,369	)
Net cash provided by (used in) financing activites		9,583,488			(4,647,458	)		32,255,532

Effect of exchange rate changes on cash and cash equivalents		(289,176	)		190,601			(1,058,703	)
Increase in cash and cash equivalents		3,999,514			1,387,131			3,971,912
Cash and cash equivalents, beginning of period		13,219,385			17,218,899			18,606,030
Cash and cash equivalents, end of period	$	17,218,899		$	18,606,030		$	22,577,942

Supplemental disclosure of cash flow information
Cash paid for interest	$	2,229,525		$	2,414,527		$	3,790,179
Cash paid for income taxes, net of refunds		4,208,970			811,108			6,855,388

See accompanying notes to the consolidated financial statements.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

1.	Description of the Business

InnerWorkings, Inc. (together with its subsidiaries, “the Company”) was incorporated in the state of Delaware on January 3, 2006. The Company is a leading global marketing execution firm for Fortune 500 brands 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.

The Company is organized and managed as three business segments, North America, Latin America and EMEA, and is viewed as three operating segments by the chief operating decision maker for purposes of resource allocation and assessing performance. See Note 17 for further information about the Company’s reportable segments.

2.	Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The consolidated financial statements include the accounts of InnerWorkings, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current presentation. These reclassifications have not been material and have not affected net income.

Preparation of Financial Statements and Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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, contingencies, stock-based compensation and litigation. The Company bases its estimates on historical experience and on other assumptions that its 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 can 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 of these operations 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 income (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.

The net realized gains (losses) on foreign currency transactions were $0.1 million, $(0.3) million and $(0.8) million for the years ended December 31, 2012, 2013 and 2014, respectively.

Revenue Recognition

The Company recognizes revenue upon meeting all of the following revenue recognition criteria, which is typically met upon shipment or delivery of our products to customers: (i) persuasive evidence of an arrangement exists through customer contracts and orders, (ii) the customer takes title and assumes the risks and rewards of ownership, (iii) the sales price charged is fixed or determinable as evidenced by customer contracts and orders, and (iv) collectability is reasonably assured. Unbilled revenue relates to shipments that have been made to customers for which the related account receivable has not yet been billed.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

2.	Summary of Significant Accounting Policies (Continued)

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-45, Revenue Recognition – Principal Agent Considerations, the Company generally reports revenue on a gross basis because the Company is the primary obligor in its arrangements to procure marketing materials and other products for its customers. Under these arrangements, the Company is responsible for the fulfillment, including the acceptability, of the printed materials and other products. In addition, the Company (i) determines which suppliers are included in its network, (ii) has discretion to select from among the suppliers within its network, (iii) is obligated to pay its suppliers regardless of whether it is paid by its customers, and (iv) has reasonable latitude to establish exchange price. In some transactions, the Company also has general inventory risk and is involved in the determination of the nature or characteristics of the printed materials and products. When the Company is not the primary obligor, revenues are reported on a net basis.

The Company recognizes revenue for creative, design, installation, warehousing and other services provided to its customers which may be delivered in conjunction with the procurement of marketing materials at the time when delivery and customer acceptance occur and all other revenue recognition criteria are met. When provided on a stand-alone basis, the Company recognizes revenue for these services upon completion of the service. 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.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.

Accounts Receivable

Accounts receivable are uncollateralized customer obligations due under normal trade terms. Invoices generally require payment within 30 to 90 days from the invoice date. Accounts receivable are stated at the amount billed to the customer, less an estimate for amounts deemed uncollectible. Interest is not generally accrued on outstanding balances.

The carrying amount of accounts receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. The Company estimates the collectability of its accounts receivable based on a combination of factors including, but not limited to, customer credit ratings and historical experience. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations to the Company (e.g., bankruptcy filings or substantial downgrading of credit ratings), the Company provides allowances for bad debts against amounts due to reduce the net recognized receivable to the amount it reasonably believes will be collected. Fully reserved receivables are reviewed on a monthly basis and uncollectible accounts are written off when all reasonable collection efforts have been exhausted.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Market value is based upon an estimated average selling price reduced by estimated costs of disposal. Inventories primarily consist of purchased finished goods. Finished goods inventory includes consigned inventory held on behalf of customers as well as inventory held at third-party fulfillment centers and subcontractors.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. The estimated useful lives, by asset class, are as follows:

Computer equipment		3 years
Software, including internal-use software		1 to 6 years
Office equipment		5 years
Furniture and fixtures		7 years

Leasehold improvements are depreciated using the straight-line method over the shorter of their estimated useful lives or the terms of the related leases.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

2.	Summary of Significant Accounting Policies (Continued)

Internal-Use Software

In accordance with ASC 350-40, Intangibles—Goodwill and Other, Internal-Use Software, certain costs incurred in the planning and evaluation stage of internal-use computer software are expensed as incurred. Certain costs incurred during the application development stage are capitalized and included in property and equipment. Capitalized internal-use software costs are depreciated over the expected economic life of three to six years using the straight-line method. Capitalized internal-use software asset depreciation expense for the years ended December 31, 2012, 2013 and 2014 was $4.3 million, $3.9 million and $7.2 million, respectively, and is included in total depreciation expense. At December 31, 2013 and 2014, the net book value of internal-use software was $17.3 million and $23.5 million, respectively.

Goodwill and Other Intangibles

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with ASC 350, Intangibles—Goodwill and Other, goodwill is not amortized, but instead is tested for impairment annually, or more frequently if circumstances indicate a possible impairment may exist. Absent any interim indicators of impairment, the Company tests for goodwill impairment as of the first day of the fourth fiscal quarter of each year.

Under ASC 350, an entity is permitted to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. If the quantitative test is required, in the first step, the fair value for each reporting unit is compared to its book value including goodwill. In the case that the fair value is less than the book value, a second step is performed which compares the implied fair value of goodwill to the book value of goodwill. The fair value for the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair values of the identifiable assets and liabilities. If the implied fair value of the goodwill is less than the book value of the goodwill, the difference is recognized as an impairment.

The Company defines its three reporting units as North America, Latin America and EMEA. At October 1, 2014, the Company elected to perform the quantitative impairment test for each of its three reporting units. In performing this test, the Company determined the fair value of the reporting units based on the income approach. Under the income approach, the fair value of a reporting unit is calculated based on the present value of estimated future cash flows. No impairment was identified as of October 1, 2014 as a result of this test. The Company does not believe that goodwill is impaired as of December 31, 2014.

In the third quarter of 2013, the Company recorded a non-cash, goodwill impairment charge of $37.9 million. For additional information related to the goodwill impairment, see Note 4.

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 consolidated results of operations. The Company’s intangible assets consist of customer lists, noncompete agreements, trade names and patents. The Company’s customer lists, which have an estimated weighted-average useful life of fourteen years, are being amortized using the economic life method. The Company’s noncompete agreements, trade names and patents are being amortized on the straight-line basis over their estimated weighted-average useful lives of approximately four years, twelve years and nine years, respectively.

In the fourth quarter of 2014, the Company recorded a non-cash, intangible asset impairment charge of $2.7 million. For additional information related to the intangible asset impairment, see Note 5.

Shipping and Handling Costs

Shipping and handling costs are classified in cost of goods sold in the consolidated statements of operations.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

2.	Summary of Significant Accounting Policies (Continued)

Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, under which deferred tax assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and their respective tax bases. A valuation allowance is established to reduce the carrying value of deferred tax assets if it is considered more likely than not that such assets will not be realized. Any change in the valuation allowance would be charged to income in the period such determination was made.

The Company recognizes the tax benefit from an uncertain tax position only if it is “more likely than not” the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. There was no interest or penalties related to unrecognized tax benefits for the years ended December 31, 2012, 2013 and 2014.

Based on the Company’s evaluation, it was concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. The evaluation was performed for the tax years ended December 31, 2011, 2012, 2013 and 2014, the tax years which remain subject to examination by major tax jurisdictions as of December 31, 2014.

Advertising

Costs of advertising, which are expensed as incurred by the Company, were $0.8 million, $0.7 million and $0.5 million for the years ended December 31, 2012, 2013 and 2014, respectively, and are included in selling, general and administrative expenses in the consolidated statement of operations.

Comprehensive Income

The components of accumulated comprehensive income (loss) included in the Consolidated Balance Sheets at December 31, 2013 and 2014 are as follows:

	Foreign currency			Unrealized holding gains on available- for-sale securities			Total accumulated other comprehensive income
Balance at December 31, 2012	$	271,583		$	1,338		$	272,921

Other comprehensive income before reclassifications		2,505,417			-			2,505,417
Amounts reclassified from AOCI					(1,338	)		(1,338	)
Net current-period other comprehensive income		2,505,417			(1,338	)		2,504,079

Balance at December 31, 2013		2,777,000			-			2,777,000

Other comprehensive income before reclassifications		(8,178,135	)		-			(8,178,135	)
Amounts reclassified from AOCI					-			-
Net current-period other comprehensive income		(8,178,135	)		-			(8,178,135	)

Balance at December 31, 2014	$	(5,401,135	)	$	-		$	(5,401,135	)

Stock-Based Compensation

The Company accounts for stock-based compensation awards in accordance with ASC 718, Compensation-Stock Compensation. Compensation expense is measured by determining the fair value using the Black-Scholes option valuation model and is then recognized over the requisite service period of the awards, which is generally the vesting period, on a straight-line basis for the entire award.

Stock-based compensation cost recognized during the period is based on the portion of the share-based payment awards that are ultimately expected to vest. Accordingly, stock-based compensation cost recognized has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense is included in selling, general and administrative expenses in the consolidated statement of operations.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

2.	Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 will be effective for the Company beginning on January 1, 2017. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact of adopting the new revenue standard on its consolidated financial statements.

In April 2014, the FASB issued Accounting Standards Update No. 2014-08 Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 provides a narrower definition of discontinued operations than under existing GAAP. The standard update requires that only disposals of components of an entity (or groups of components) that represent a strategic shift that has or will have a major effect on the reporting entity’s operations are reported in the financial statements as discontinued operations. The standard also provides guidance on the financial statement presentations and disclosures of discontinued operations. The standard is effective prospectively for disposals (or classifications of businesses as held-for-sale) of components of an entity that occur in annual or interim periods beginning after December 15, 2014.

In July 2013, FASB issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”) to provide guidance on the presentation of unrecognized tax benefits. This update requires that companies net their unrecognized tax benefits against all same-jurisdiction net operating losses or tax credit carryforwards that would be used to settle the position with a tax authority. The Company adopted ASU 2013-11 on January 1, 2014, and it did not have an effect on its consolidated financial statements.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements - Going Concern (“ASU 2014-15”). This standard requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity's ability to continue as a going concern and to provide disclosures in certain circumstances. The standard is effective for annual and interim periods beginning after December 15, 2016. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

Voluntary Change in Accounting Policy

During the quarter ended September 30, 2014, the Company voluntarily changed the date of its annual goodwill impairment test from the last day of the fiscal year to the first day of the fourth quarter. This voluntary change is preferable under the circumstances as it provides the Company with additional time to complete its annual goodwill impairment testing in advance of its year-end reporting and results in better alignment with the Company’s strategic forecasting and budgeting process. The voluntary change in accounting principle related to the annual testing date did not delay, accelerate or avoid an impairment charge. This change was not applied retrospectively as it is impracticable to do so because retrospective application would require application of significant estimates and assumptions with the use of hindsight. Accordingly, the change has been applied prospectively.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

3.	Acquisitions

Contingent Consideration

In connection with certain of the Company’s acquisitions, contingent consideration is payable in cash or common stock upon the achievement of certain performance measures over future periods. The Company has recorded the acquisition date fair value of the contingent consideration liability as additional purchase price. The Company has recorded $32.6 million in contingent consideration at December 31, 2014 related to these arrangements. Any adjustments made to the fair value of the contingent consideration liability subsequent to the acquisition date will be recorded in the Company’s results of operations. During the years ended December 31, 2012, 2013 and 2014, the Company recorded income of $27.7 million, $31.3 million and $37.9 million for changes in the fair value of contingent consideration, reflecting the net reductions in the liability for each of those periods.

For the years ended December 31, 2012, 2013 and 2014, the Company’s fair value adjustment to the contingent consideration liability includes adjustments of $25.4 million, $26.6 million and $7.2 million, respectively, to reduce the liability relating to the Productions Graphics acquisition in 2011. As of December 31, 2014, the fair value of the potential remaining $41.9 million contingent consideration payments was zero as the Company believes the likelihood of making any future payments is remote. See Note 9 for more information on Productions Graphics.

For the year ended December 31, 2014, the Company’s fair value adjustment to the contingent consideration liability also included an adjustment of $30.4 million to reduce the liability relating to the DB Studios acquisition in 2013 due to a decrease in forecasted results. As of December 31, 2014, the fair value of the potential remaining $44.3 million contingent consideration payments was estimated to be $5.2 million.

As of December 31, 2014, the potential maximum contingent payments are payable as follows:

	Cash		Common Stock		Total
2015	$	402,499	$	31,094,284	$	31,496,783
2016		29,354,325		34,061,635		63,415,960
2017		-		45,751,700		45,751,700
	$	29,756,824	$	110,907,619	$	140,664,443

If the performance measures required by the purchase agreements are not achieved, the Company may pay less than the maximum amounts as presented in the table above, depending on the terms of the agreement. While the maximum potential payments shown in the table are $140.7 million, the Company estimates the fair value of the payments that will be made is $32.6 million.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

4.	Goodwill

The following is a summary of the goodwill balance for each operating segment as of December 31:

	North America			Latin America		EMEA			Total
Balance as of December 31, 2012	$	119,162,735		$	9,656,417	$	83,977,270		$	212,796,422
Goodwill acquired related to 2013 acquisitions		52,025,837			-		20,576,957			72,602,794
Finalization of purchase accounting for prior year acquisitions		(34,120	)		218,819		(40,940	)		143,759
Impairment charge		-			-		(37,908,000	)		(37,908,000	)
Foreign exchange impact		(59,876	)		-		3,653,599			3,593,723
Balance as of December 31, 2013		171,094,576			9,875,236		70,258,886			251,228,698
Finalization of purchase accounting for prior year acquisitions		(167,922	)		-		692,839			524,917
Foreign exchange impact		(67,233	)		-		(4,738,482	)		(4,805,715	)
Balance as of December 31, 2014	$	170,859,421		$	9,875,236	$	66,213,243		$	246,947,900

As discussed in Note 2, the Company performed its annual impairment test as of October 1, 2014 and did not identify an impairment in any of its three reporting units. The Company does not believe that goodwill is impaired as of December 31, 2014.

2013 Goodwill Impairment Charge

In the third quarter of 2013, a change in the Company’s identified reporting units along with a decline in forecasted financial performance in fiscal year 2013 compelled management to perform an interim goodwill impairment test for these reporting units as of September 30, 2013. In the first step of the impairment test, the Company concluded that the carrying amount of the EMEA reporting unit exceeded its fair value, requiring the Company to perform the second step of the impairment test to measure the amount of impairment loss, if any. The fair values of the North America and Latin America reporting units exceeded their carrying values, and the second step was not necessary.

Based upon fair value estimates of long-lived assets and discounted cash flows of the EMEA reporting unit, the Company compared the implied fair value of the goodwill in this reporting unit with the carrying value. The test resulted in a $37.9 million non-cash, goodwill impairment charge which was recognized in the third quarter of 2013. No tax benefit is recognized on the goodwill impairment. This charge had no impact on the Company’s cash flows or compliance with debt covenants.

The fair value estimates used in the goodwill impairment analysis required significant judgment. The Company's fair value estimates for purposes of determining the goodwill impairment charge are considered Level 3 fair value measurements. The fair value estimates were based on assumptions that management believes to be reasonable, but that are inherently uncertain, including estimates of future revenues and operating margins and assumptions about the overall economic climate and the competitive environment for the business.

5.	Other Intangible Assets

The following is a summary of the Company’s other intangible assets as of December 31:

	2013			2014			Weighted Average Life
Customer lists	$	77,244,427		$	75,113,728			13.8 years
Noncompete agreements		1,077,349			1,077,349			3.9 years
Trade names		3,467,655			3,467,655			12.4 years
Patents		56,896			56,896			9.0 years
		81,846,327			79,715,628
Less accumulated amortization		(25,270,793	)		(34,796,055	)
Intangible assets, net	$	56,575,534		$	44,919,573

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

5.	Other Intangible Assets (Continued)

Amortization expense related to these intangible assets was $4.6 million, $6.9 million and $7.4 million for the years ended December 31, 2012, 2013 and 2014, respectively.

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

2015	$	6,123,124
2016		5,779,756
2017		5,302,817
2018		4,799,594
2019		4,473,976
Thereafter		18,440,306
	$	44,919,573

Customer List Impairment Charge

In the fourth quarter of 2014, the Company recognized a $2.7 million non-cash, intangible asset impairment charge related to certain customer lists acquired in prior year business combinations. Due to the loss of specific customers included in the lists, the undiscounted projected cash flows from those customers did not exceed the recorded book value of the customer lists as of December 31, 2014. As such, the Company recorded an impairment charge of $2.7 million to reduce the customer lists to their respective fair values. Of the total charge, $2.4 million related to customer lists in the North America segment, and $0.3 million related to customers lists in the EMEA segment.

6.	Restructuring Activities and Other Charges

2014: No restructuring charges were incurred during the year ended December 31, 2014.

2013: During the third quarter of 2013, the Company commenced various restructuring actions which resulted in charges of $3.0 million during the quarter. These actions consisted of terminating 49 employees and providing them with severance benefits in accordance with benefit plans previously communicated to the affected employee group or local employment laws.

The following table summarizes the restructuring charges by reportable segment. All restructuring charges were incurred during the three months ended September 30, 2013, and the obligations were paid prior to December 31, 2013. There were no new charges recognized during the year ended December 31, 2014.

	North America			EMEA			Total
Employee terminations and other benefits	$	2,745,373		$	260,407		$	3,005,780
Cash payments		(121,482	)		(260,407	)		(381,889	)
Write-off of prepaid commissions balance (1)		(2,623,891	)		-			(2,623,891	)
Accrued restructuring costs as of December 31, 2013	$	-		$	-		$	-

(1)

Prepaid commission balances represent cash paid to our account executives in advance of commissions earned and is recorded in prepaid expenses on the balance sheet. For employees who had a balance and were affected by the restructuring actions, which primarily includes Small and Medium Business (“SMB”) account executives, the Company included these balances as part of the severance paid to these individuals.

The Company’s SMB division was one of the principal groups affected by the restructuring actions noted above. In addition to these restructuring charges, the Company changed its compensation structure during the third quarter so that remaining employees of SMB are paid a fixed salary. This change in compensation structure resulted in the recording of an additional charge of $ 1.3 million for these employees in 2013.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

7.	Property and Equipment

Property and equipment at December 31, 2013 and 2014 consisted of the following:

	2013			2014
Computer equipment	$	7,889,630		$	7,453,903
Software, including internal use software		41,987,111			48,731,177
Office equipment and furniture		2,136,168			4,099,076
Leasehold improvements		1,468,841			1,901,714
		53,481,750			62,185,870
Less accumulated depreciation		(29,757,000	)		(32,422,287	)
	$	23,724,750		$	29,763,583

Depreciation expense was $6.2 million, $6.7 million and $10.4 million for the years ended December 31, 2012, 2013 and 2014, respectively.

8.	Revolving Credit Facility

The Company entered into a Credit Agreement, dated as of August 2, 2010, subsequently amended most recently as of September 25, 2014, among the Company, the lenders party thereto and Bank of America, N.A., as Administrative Agent (the “Credit Agreement”). The Credit Agreement includes a revolving commitment amount of $175 million in the aggregate with a maturity date of September 25, 2019, and provides the Company the right to increase the aggregate commitment amount by an additional $50 million. Outstanding borrowings under the revolving credit facility are guaranteed by the Company’s material domestic subsidiaries. The Company’s obligations under the Credit Agreement and such domestic subsidiaries’ guaranty obligations are secured by substantially all of their respective assets. The ranges of applicable rates charged for interest on outstanding loans and letters of credit are 125-250 basis point spread for letter of credit fees and loans based on the Eurodollar rate and 25-150 basis point spread for loans based on the base rate.

The terms of the Credit Agreement include various covenants, including covenants that require the Company to maintain a maximum leverage ratio and a minimum interest coverage ratio. The Credit Agreement requires the Company to maintain a leverage ratio of no more than 3.25 to 1.0 for the quarters ended December 31, 2014, March 31, 2015 and June 30, 2015 and 3.00 to 1.0 for each period thereafter. The Company is also required to maintain an interest coverage ratio of no less than 5.00 to 1.0. The Company is in compliance with all debt covenants as of December 31, 2014.

At December 31, 2014, the Company had $28.8 million of unused availability under the Credit Agreement and $0.7 million of letters of credit which have not been drawn upon.

The fair value of the debt under this Credit Agreement is not materially different from its book value as of December 31, 2014.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

9.	Transactions Involving Former Owner of Productions Graphics

The Company removed the former owner of Productions Graphics from his role as President of the Company’s French subsidiary in October 2013 for performance-related reasons, and he is no longer an employee of the Company. This individual had served in such role since the Company’s acquisition in 2011 of Productions Graphics, a European business then owned by this individual and an organization affiliated with him (collectively, the “Seller”). As of December 31, 2014, the Company had paid to the Seller €5.8 million in fixed consideration and €7.1 million in contingent earn-out consideration.

There are certain potential disputes between the former owner of Productions Graphics and the Company relating to, among other things, the termination of his employment and the Productions Graphics acquisition agreement. In connection with such disputes, the Company initiated a review of this individual’s conduct in connection with certain transactions impacting the earn-out payments made to the Seller (collectively, the “Transactions”). As a result of the review, the Company concluded it was the victim of a fraud perpetrated by the former owner of Productions Graphics. Specifically, the Company concluded that the former owner of Productions Graphics artificially inflated the financial results of Productions Graphics in order to induce the Company to make earn-out payments of €1.2 and €5.9 million for the 2011 and 2012 earn-out measurement periods, respectively. He inflated the results by directing the issuance of fraudulent invoices to purported third-party customers and then, indirectly or directly, funded or reimbursed the third parties’ payments in respect of such invoices. The Company estimates that he issued approximately €6.9 million of fraudulent invoices in 2011 and 2012, collectively, of which €5.7 million was subsequently received by the Company. The Company has accounted for these aggregate payments of €5.7 million as a partial refund of the €7.1 million in earn-out consideration unduly paid to the Seller.

The Company intends to seek to redress the harm caused by conduct of the former owner of Productions Graphics through appropriate legal proceedings. See Note 10 for further discussion of the legal matters relating to the former owner of Productions Graphics.

10.

Commitments and Contingencies

Lease Commitments

The Company leases many of its office facilities for various terms under long-term, noncancelable operating lease agreements. The leases expire at various dates from fiscal year 2015 through fiscal year 2021. Future minimum lease payments are presented below:

	Operating Leases
2015	$	7,013,184
2016		6,112,734
2017		4,656,062
2018		3,437,026
2019		2,978,252
Thereafter		3,567,247
Total minimum lease payments	$	27,764,505

The Company recognizes rental expense on a straight-line basis over the term of the lease. The total rent expense for the years ended December 31, 2012, 2013 and 2014 was $7.7 million, $9.1 million and $10.0 million, respectively.

Secured Borrowing Arrangements

Certain international subsidiaries are party to short-term secured borrowing arrangements which allow the Company to borrow against the value of a pool of current accounts receivable. The Company retains possession of the accounts receivable which are pledged as collateral. The pledged amounts are immaterial to the consolidated accounts receivable balance.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

10.

Commitments and Contingencies (Continued)

Legal Contingencies

In December 2010, e-Lynxx Corporation filed a complaint against the Company and numerous other defendants for patent infringement in the United States District Court for the Middle District of Pennsylvania. As to the Company, the complaint alleges, among other things, that certain aspects of the Company’s PPM4 technology infringe on two patents owned by e-Lynxx purporting to cover a system and method for competitive pricing and procurement of customized goods and services, and seeks monetary damages, interest, costs, attorneys’ fees, punitive damages and a permanent injunction. In May 2013, e-Lynxx asserted that the monetary damages it seeks from the Company are in the range of $35 million to $88 million for the period from May 2009 through December 2012; e-Lynxx has not yet specified damages sought for 2013 and future periods. The Company disputes the allegations contained in e-Lynxx’s complaint and intends to vigorously defend this matter. Specifically, the Company contends that the patents at issue are invalid and not infringed, and, therefore, e-Lynxx is not entitled to any relief and the complaint should be dismissed. Further, even if e-Lynxx could establish liability, the Company contends that e-Lynxx is not entitled to the excessive monetary relief it seeks. On July 25, 2013, the court granted the Company’s motion for summary judgment, finding that the Company did not infringe the patents-in-suit. E-Lynxx filed a motion for reconsideration, which was denied. On March 5, 2014, e-Lynxx filed an appeal from the judgment entered in favor of the Company. On February 9, 2015, the Federal Circuit Court of Appeals affirmed the judgment entered in favor of the Company. Absent further appellate review, the judgment will become final, and the Company will have no liability in the matter. If e-Lynxx seeks further appellate review, the Company would vigorously defend any such proceedings. The Company believes that the likelihood of an unfavorable outcome is remote.

In October 2012, a former sales employee of the Company filed an arbitration claim against the Company arising from the Company’s termination of his employment in November 2011. He alleged disability discrimination, defamation, breach of employment agreement, invasion of privacy, and wage payment claims, and sought monetary damages in excess of $9.0 million, interest, punitive damages, injunctive relief, declaratory relief, and attorneys’ fees and costs. An arbitration hearing was held in this matter in November 2013. The Company disputed these allegations and vigorously defended itself in the matter. Specifically, the Company contended that it lawfully terminated his employment for cause, and, therefore, that he is not entitled to any relief and his claims should be dismissed. On May 7, 2014, the Arbitrator issued a final decision in favor of the Company on all of the alleged claims. Therefore, the Company has no liability to the claimant, and the matter is closed.

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 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 as payment security; the attachment order was confirmed in January 2014, and the Company filed an appeal of the order, which is currently pending. 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. 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. As of December 31, 2014, the Company had paid €5.8 million in fixed consideration and €7.1 million in contingent consideration to the former owner of Productions Graphics; the remaining maximum contingent consideration for the earn-out period ending in 2015 is €34.5 million.

In February 2014, following the Company’s February 2014 announcement of its intention to restate certain historical financial statements, an individual filed a putative securities class action complaint in the United States District Court for the Northern District of Illinois entitled Van Noppen v. InnerWorkings et al. The complaint, as amended in July 2014, alleges that the Company and certain executive officers violated federal securities laws by making materially false or misleading statements or omissions, and by engaging in a scheme to defraud purchasers of securities, relating to the Company’s financial results and prospects. The purported misstatements and scheme relate to the Company’s inside sales initiative and the Productions Graphics business based in France. The complaint seeks unspecified damages, interest, attorneys’ fees and other costs. The Company and individual defendants dispute the claims and intend to vigorously defend the matter. On September 29, 2014, the Company and individual defendants filed a motion to dismiss the complaint for failure to state a claim, and this motion is currently pending. On December 12, 2014, the Company received a derivative demand letter on behalf of Tom Turberg, a purported stockholder, demanding that the Company’s Board of Directors investigate and take action on behalf of the Company against the executive officers named in the Van Noppen action as well as certain past and current members of the Audit Committee of the Board of Directors. The demand letter’s allegations relate to (i) the Company’s restatement of financial statements for the fourth quarter of 2011 through the third quarter of 2013, (ii) the Company’s use of gross revenue accounting, (iii) incentive compensation paid to executive officers in 2011 and 2012, (iv) allegations in the Van Noppen action, and (v) typographical errors in the 2013 Form 10-K. The demand letter has been forwarded to the Company’s Board of Directors for its review and handling. Any loss that the Company and individual defendants may incur as a result of these matters cannot be estimated.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

11.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, under which deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and their respective tax bases.

The provision for income taxes consisted of the following components for the years ended December 31, 2012, 2013 and 2014:

	Year Ended December 31,
	2012			2013			2014
Current
Federal	$	5,364,247		$	(1,803,191	)	$	236,511
State		703,380			(316,367	)		196,637
Foreign		801,212			2,216,025			4,070,524
Total current		6,868,839			96,467			4,503,672
Deferred
Federal		1,494,274			2,823,798			87,396
State		206,125			449,424			2,697
Foreign		(2,695,617	)		(3,925,617	)		(2,280,620	)
Total deferred		(995,218	)		(652,395	)		(2,190,527	)
Income tax expense (benefit)	$	5,873,621		$	(555,928	)	$	2,313,145

The provision for income taxes for the years ended December 31, 2012, 2013 and 2014 differs from the amount computed by applying the U.S. federal income tax rate of 35% to pretax income because of the effect of the following items:

	Year Ended December 31,
	2012			2013			2014
Tax expense at U.S. federal income tax rate	$	15,633,675		$	(3,225,697	)	$	16,371,275
State income taxes, net of federal income tax effect		747,802			204,687			1,465,344
Effect of non-US operations		(1,294,217	)		(644,353	)		(1,631,614	)
Foreign valuation allowances		-			607,467			850,323
Nontaxable contingent liability fair value changes and goodwill impairment		(8,737,329	)		3,827,806			(14,334,053	)
Research and development credit		-			(1,046,430	)		(376,350	)
199 Domestic production activities deduction		(141,376	)		-			-
Nondeductible (benefit) and other		(334,934	)		(279,408	)		(31,780	)
Income tax expense (benefit)	$	5,873,621		$	(555,928	)	$	2,313,145

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

11.

Income Taxes (Continued)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax return reporting purposes. At December 31, 2013 and 2014, the Company’s deferred tax assets and liabilities consisted of the following:

	December 31,
	2013			2014
Current deferred tax assets:
Reserves and allowances not currently deductible	$	1,452,133		$	1,857,862
Other		19,561			77,466
Total current deferred tax assets		1,471,694			1,935,328
Noncurrent deferred tax assets:
Income tax basis in excess of financial statement basis in intangible assets		6,140,517			5,234,704
Deductible stock-based compensation		3,974,354			4,739,865
Net operating loss carryforward		10,002,615			10,983,464
Tax credit carryforwards		1,353,589			1,338,409
Other		46,303			-
		21,517,378			22,296,442
Valuation allowance		(762,123	)		(1,603,665	)
Total noncurrent deferred tax assets		20,755,255			20,692,777
Total deferred tax assets		22,226,949			22,628,105

Total current deferred tax liability:
Prepaid & other expenses		(352,361	)		(116,189	)
Total current deferred tax liability		(352,361	)		(116,189	)
Noncurrent deferred tax liabilities:
Fixed assets		(5,085,865	)		(4,930,792	)
Intangible assets		(22,411,410	)		(21,825,087	)
Total noncurrent deferred tax liabilities		(27,497,275	)		(26,755,879	)
Total deferred tax liabilities		(27,849,636	)		(26,872,068	)
Net deferred tax liability	$	(5,622,687	)	$	(4,243,963	)

Net current deferred tax asset	$	1,119,333		$	1,819,139
Net noncurrent deferred tax liability		(6,742,020	)		(6,063,102	)
Net deferred tax liability	$	(5,622,687	)	$	(4,243,963	)

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

11.

Income Taxes (Continued)

The realizability of deferred income tax assets is based on a more likely than not standard. If it is determined that it is more likely than not that deferred income tax assets will not be realized, a valuation allowance must be established against the deferred income tax assets. Realization of deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance the Company considers historical, as well as, future projected taxable income along with other positive and negative evidence in assessing the realizability of its deferred tax assets.

For the years ended December 31, 2013 and 2014, the Company recorded net increases in its valuation allowances of $0.6 million and $0.8 million, respectively.

As of December 31, 2014, the Company has gross federal and state net operating loss (“NOLs”) carryforwards of $20.5 million and $16.5 million, respectively. The federal carryovers begin to expire in 2025, and the state carryovers begin to expire in 2022. Section 382 of the Internal Revenue Code imposes an annual limitation on the utilization of net operating loss carryforwards related to acquired corporations based on a statutory rate of return (usually the “applicable federal funds rate” as defined in the Internal Revenue Code) and the value of the corporation at the time of a “change in ownership” as defined by Section 382. The Company’s total federal NOL as of December 31, 2014 includes $2.0 million of NOLs from acquired corporations. These acquired NOLs have an annual limitation under Section 382 of the Internal Revenue Code of $0.2 million.

As of December 31, 2014, the Company had gross NOLs in France, Italy, Chile and Brazil of $17.1 million, $1.4 million, $2.7 million and $0.5 million, respectively, which have an indefinite carryover period.

As of December 31, 2014, the Company had gross federal and state research and development credit carryforwards of approximately $1.2 million and $0.5 million, respectively. The federal carryovers begin to expire in 2031, and the state carryovers begin to expire in 2015.

As a result of certain realization requirements of ASC 718, Stock-Based Compensation, the Company has not recorded certain deferred tax assets that arose directly from tax deductions related to equity compensation that are greater than the compensation recognized for financial reporting. As of December 31, 2014, the Company has $13.4 million and $11.4 million in federal and state tax deductions, respectively, related to these stock option exercises which have not been recorded but are available to reduce taxable income in future periods. These deductions will be recorded to additional paid in capital in the period in which they are realized.

The Company's intention is to permanently reinvest the undistributed earnings of its foreign subsidiaries in accordance with ASC 740. Deferred income taxes were not calculated on undistributed earnings of foreign subsidiaries, which were $3.1 million and $8.9 million at December 31, 2013 and 2014, respectively. Determination of the amount of unrecognized deferred tax liability on the undistributed earnings considered permanently reinvested is not practicable. If the undistributed earnings were to be remitted to the Company, foreign tax credits would be available to reduce any U.S. tax due upon repatriation.

The Company's income (loss) before taxes on foreign operations was $23.8 million, $(13.8) million and $15.4 million for the years ended December 31, 2012, 2013 and 2014, respectively.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

12.

Fair Value Measurement

ASC 820 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 Company's potential contingent consideration payments relating to acquisitions occurring subsequent to January 1, 2009 are its only Level 3 liabilities as of December 31, 2013 and 2014. The fair value of the liabilities determined by this analysis is primarily driven by the probability of reaching the performance measures required by the purchase agreements and the associated discount rate. Probabilities are estimated by reviewing financial forecasts and assessing the likelihood of reaching the required performance measures based on factors specific to each acquisition as well as the Company’s historical experience with similar arrangements. If an acquisition reaches the required performance measure, the estimated probability would be increased to 100%, and if the measure is not reached, the probability would be reduced to reflect the amount earned, if any, depending on the terms of the agreement. Discount rates are estimated by using the local government bond yields plus the Company’s credit spread. A one percentage point increase in the discount rate across all contingent consideration liabilities would result in a decrease to the fair value of approximately $0.5 million.

The following tables set forth the Company’s financial assets and financial liabilities measured at fair value on a recurring basis and the basis of measurement at December 31, 2013 and 2014, respectively:

At December 31, 2013	Total Fair Value Measurement			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds(1)	$	667,122		$	667,122	$	-	$	-
Liabilities:
Contingent consideration	$	(87,332,461	)	$	-	$	-	$	(87,332,461	)

At December 31, 2014	Total Fair Value Measurement			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds(1)	$	667,127		$	667,127	$	-	$	-
Liabilities:
Contingent consideration	$	(32,582,574	)	$	-	$	-	$	(32,582,574	)

(1)

Included in cash and cash equivalents on the balance sheet.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

12.

Fair Value Measurement (Continued)

The following table provides a reconciliation of the beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3):

	Fair Value Measurements at Reporting Date Using Significant Unobservable Inputs (Level 3)
	Contingent Consideration
Balance at December 31, 2012	$	(54,497,824	)
Contingent consideration from 2013 acquisitions		(68,165,674	)
Contingent consideration payments paid in cash		4,297,803
Contingent consideration payments paid in stock		614,216
Change in fair value (1)		31,330,567
Foreign exchange impact (2)		(911,549	)

Balance as of December 31, 2013		(87,332,461	)
Contingent consideration payments paid in cash		5,768,591
Contingent consideration payments paid in stock		9,132,682
Change in fair value (1)		37,873,588
Reclass to Due to seller		402,499
Foreign exchange impact (2)		1,572,527

Balance as of December 31, 2014	$	(32,582,574	)

(1)

Adjustments to original contingent consideration obligations recorded were the result of using revised financial forecasts and updated fair value measurements. These changes are recognized within operating expenses on the consolidated statements of operations.

(2)

Changes in the contingent consideration liability which are caused by foreign exchange rate fluctuations are recognized in other comprehensive income.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

13.

Earnings Per Share

Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted average shares outstanding plus share equivalents that would arise from the exercise of stock options and vesting of restricted common shares. For the years ended December 31, 2012, 2013 and 2014, respectively, 1,099,604, 4,288,084 and 2,427,089 options and restricted common shares were excluded from the calculation as these options and restricted common shares were anti-dilutive.

The computation of basic and diluted earnings per common share for the years ended December 31, 2012, 2013, and 2014, is as follows:

	Year Ended December 31,
	2012		2013			2014
Numerator:
Net income (loss)	$	38,794,022	$	(8,660,349	)	$	44,461,925

Denominator:
Denominator for basic earnings per share—weighted-average shares outstanding		48,811,218		50,875,131			52,095,481
Effect of dilutive securities:
Employee stock options and restricted common shares		2,411,260		-			924,189
Contingently issuable shares		17,598		-			84,273

Denominator for dilutive earnings per share		51,240,076		50,875,131			53,103,943

Basic earnings (loss) per share	$	0.79	$	(0.17	)	$	0.85
Diluted earnings (loss) per share	$	0.76	$	(0.17	)	$	0.84

14.

Stock-Based Compensation Plans

In 2006, the Company adopted the 2006 Stock Incentive Plan (the Plan). Upon adoption, all previously existing plans were merged into the Plan and ceased to separately exist. The Plan was amended and restated effective June 2014 resulting in an increase in the maximum number of shares of common stock that may be issued under the Plan by 2,200,000, from 5,650,000 to 7,850,000. The Company’s policy is to issue shares resulting from the exercise of stock options and conversion of restricted stock as new shares.

The Company recorded $6.2 million, $4.7 million and $5.4 million in compensation expense related to stock-based compensation, for the years ended December 31, 2012, 2013 and 2014, respectively. All stock-based compensation expense is recorded net of an estimated forfeiture rate and adjusted to reflect actual forfeiture activity. The estimated forfeiture rates applied as of December 31, 2014 ranged from 7.0% to 8.0% for various types of employees. The Company recorded $2.0 million, $0.5 million and $0.5 million of additional stock-based compensation expense for the years ended December 31, 2012, 2013 and 2014, respectively, for awards vested which exceeded the expense recorded using the estimated forfeiture rate.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

14.

Stock-Based Compensation Plans (Continued)

Stock Options

Eligible employees receive non-qualified stock options as a portion of their total compensation. The options vest over various time periods depending upon the grant, but generally vest ratably over a four to five year service period. Vested options may be exercised and converted to one share of the Company’s common stock in exchange for the exercise price which is generally equal to the share price on the grant date. The Company measures the compensation cost based on the Black-Scholes option valuation model at the grant date. The stock-based compensation expense related to stock options for the years ended December 31, 2012, 2013 and 2014 was $3.0 million, $2.1 million and $1.7 million, respectively.

A summary of stock option activity for the years ended December 31, 2012, 2013 and 2014 is as follows:

	Outstanding Options			Weighted- Average Exercise Price		Aggregate Intrinsic Value
Outstanding at December 31, 2011		5,950,481		$	5.07	$	28,048,306
Granted		538,933			12.15		-
Exercised		(2,474,713	)		2.23		23,936,039
Forfeited		(93,519	)		7.35		-

Outstanding at December 31, 2012		3,921,182			5.07		28,048,306
Granted		226,971			14.60		-
Exercised		(415,480	)		4.83		3,190,219
Forfeited		(179,139	)		8.97		-

Outstanding at December 31, 2013		3,553,534			8.52		4,778,565
Granted		778,906			7.23		-
Exercised		(161,486	)		4.82		3,301,667
Forfeited		(125,370	)		4.11		-

Outstanding at December 31, 2014		4,045,584		$	8.35	$	4,725,483

Options vested at December 31, 2014		2,702,753		$	7.95	$	4,247,128

The weighted-average fair values and ranges of exercise prices for stock options granted during the years ended December 31, 2012, 2013 and 2014, which vest ratably from one to five years, are as follows:

	Options Granted		Weighted-Average Fair Value		Exercise Prices
2012		538,933	$	5.99	$11.97 - $14.39
2013		226,971		5.58	$10.76 - $15.05
2014		778,906		3.57	$7.18 - $8.72

Vested options totaled 2.5 million, 2.6 million and 2.7 million as of December 31, 2012, 2013 and 2014, respectively.

The aggregate intrinsic value of options outstanding and exercisable represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of each fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options in 2012, 2013 and 2014, respectively. These amounts change based on the fair market value of the Company’s stock which was $13.78, $7.79 and $7.79 on the last business day of the years ended December 31, 2012, 2013 and 2014, respectively.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

14.

Stock-Based Compensation Plans (Continued)

The following assumptions were utilized in the Black-Scholes valuation model for options granted in 2012, 2013 and 2014:

	2012		2013		2014
Dividend yield	—	%	—	%	—	%
Risk-free interest rate	1.03%-1.67	%	1.32%-1.41	%	1.32%-2.17	%
Expected life	6-7 years		6 years		6 years
Volatility	38.0%-47.5	%	38	%	38.0%-50.0	%

Expected term is estimated based on historical experience related to similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The Company believes that its historical experience provides the best estimate of future expected life. The risk-free interest rate is based on actual U.S. Treasury zero-coupon rates for bonds commensurate with the expected term. The expected volatility assumption is based on the historical volatility of the Company’s common stock over a period commensurate with the expected term.

There was $3.9 million, $2.9 million and $5.8 million of unrecognized compensation costs related to the stock options granted under the Plan as of December 31, 2012, 2013 and 2014, respectively. This cost was expected to be recognized over a weighted average period of 3.1, 2.6 and 2.4 years, respectively.

The following table summarizes information about all stock options outstanding for the Company as of December 31, 2014:

Options Outstanding							Options Vested
Exercise Price	Number Outstanding		Weighted- Average Life		Weighted- Average Exercise Price		Number Exercisable		Weighted- Average Exercise Price
$0.65 - $4.92		662,258		1.46	$	3.52		662,258	$	3.52
$5.19 - $7.86		1,730,266		6.76		6.69		919,555		6.25
$8.07 - $11.97		628,607		6.42		9.37		435,797		9.27
$12.10 - $16.41		1,024,453		5.58		13.61		685,143		13.68

		4,045,584			$	8.35		2,702,753	$	7.95

Restricted Common Shares

Eligible employees receive restricted common shares as a portion of their total compensation. The restricted common shares vest over various time periods depending upon the grant, but generally vest from zero to five years and convert to common stock at the conclusion of the vesting period. The Company measures the compensation cost based on the closing market price of the Company’s common stock at the grant date. The stock-based compensation expense related to restricted common shares for the years ended December 31, 2012, 2013 and 2014 was $3.2 million, $2.6 million and $3.6 million, respectively.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

14.

Stock-Based Compensation Plans (Continued)

A summary of restricted share activity is as follows:

	Outstanding Restricted Common Shares			Weighted- Average Grant- Date Fair Value
Nonvested Restricted Common Shares at December 31, 2011		783,816		$	7.52
Granted		306,296			11.92
Vested and transferred to unrestricted common stock		(362,116	)		8.86
Forfeited		(35,864	)		7.02

Nonvested Restricted Common Shares at December 31, 2012		692,132			8.95
Granted		448,158			11.46
Vested and transferred to unrestricted common stock		(278,461	)		9.22
Forfeited		(127,279	)		8.56

Nonvested Restricted Common Shares at December 31, 2013		734,550			10.45
Granted		736,238			7.59
Vested and transferred to unrestricted common stock		(361,650	)		8.90
Forfeited		(19,077	)		8.02

Nonvested Restricted Common Shares at December 31, 2014		1,090,061		$	8.92

There was $3.6 million, $4.5 million $8.9 of total unrecognized compensation costs related to the restricted common shares as of December 31, 2012, 2013 and 2014, respectively. This cost was expected to be recognized over a weighted average period of 2.8, 2.9 and 2.4 years, as of December 31, 2012, 2013 and 2014, respectively.

15.

Benefit Plans

The Company adopted a 401(k) savings plan effective February 1, 2005, covering all of the Company’s employees upon completion of 90 days of service. Employees may contribute a percentage of eligible compensation on both a before-tax basis and after-tax basis. The Company has the right to make discretionary contributions to the plan. For the years ended December 31, 2012, 2013 and 2014, total costs incurred from the Company’s contributions to the 401(k) plan were $0.5 million, $0.1 million and $1.0 million, respectively.

16.

Related Party Transactions

Agreements and Services with Related Parties

The Company provides print procurement services to Arthur J. Gallagher & Co. J. Patrick Gallagher, Jr., a member of the Company’s Board of Directors since August 2011, 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 years ended December 31, 2012, 2013 and 2014 was $0.6 million, $0.7 million and $1.7 million, respectively. Additionally, Arthur J. Gallagher & Co. provides insurance brokerage and risk management services to the Company. As consideration for these services, Arthur J. Gallagher & Co. billed the Company $0.4 million, $0.5 million and $0.6 million for the years ended December 31, 2012, 2013 and 2014, respectively. The net amounts payable to Arthur J. Gallagher & Co. as of December 31, 2013 and 2014 were immaterial.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

17.

Business Segments

Segment information is prepared on the same basis that our CEO, who is our chief operating decision maker (“CODM”), manages the segments, evaluates financial results, and makes key operating decisions. The Company is organized and managed as three business segments: North America, Latin America, and EMEA. The North America segment includes operations in the United States and Canada; the Latin America segment includes operations in Mexico, South America and Central America; and the EMEA segment includes operations in the United Kingdom, continental Europe, the Middle East, Africa and Asia. “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.

Management evaluates the performance of its operating segments based on net 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 2. Adjusted EBITDA represents income from operations excluding depreciation and amortization, stock-based compensation expense, income/expense related to changes in the fair value of contingent consideration liabilities and other items as described below. Management does not evaluate the performance of its operating segments using asset measures. The identifiable assets by segment disclosed in this note are those assets specifically identifiable within each segment and include cash, accounts receivable, inventory, goodwill and intangible assets. Shared service assets are primarily comprised of short-term investments, capitalized internal-use software and net property and equipment of the corporate headquarters.

The table below presents financial information for our reportable operating segments and Other for the fiscal years noted (in thousands):

	North America		Latin America		EMEA			Other			Total
Fiscal 2014:
Net revenues from third parties	$	688,942	$	99,734	$	211,457		$	-		$	1,000,133
Net revenues from other segments		48		429		5,160			(5,637	)		-
Total net revenues		688,990		100,163		216,617			(5,637	)		1,000,133
Adjusted EBITDA (1)		57,662		5,273		5,893			(25,990	)		42,838
Total assets		443,530		30,488		135,257			21,975			631,250
Fiscal 2013:
Net revenues from third parties		657,989		88,016		144,955			-			890,960
Net revenues from other segments		33		1,270		75			(1,378	)		-
Total net revenues		658,022		89,286		145,030			(1,378	)		890,960
Adjusted EBITDA (1)		51,873		3,098		764			(28,834	)		26,901
Total assets		431,562		29,841		119,531			33,733			614,667
Fiscal 2012:
Net revenues from third parties		648,732		57,575		83,278			-			789,585
Net revenues from other segments		68		1,625		27			(1,720	)		-
Total net revenues		648,800		59,200		83,305			(1,720	)		789,585
Adjusted EBITDA (1)		61,890		1,745		(2,664	)		(23,754	)		37,217
Total assets		330,159		23,219		139,466			21,936			514,780

(1)

Adjusted EBITDA, which represents income from operations with the addition of depreciation and amortization, stock-based compensation expense, income/expense related to changes in the fair value of contingent consideration liabilities, goodwill and intangible asset impairment charges, restructuring and other charges and legal fees from patent infringement defense, 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 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.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

17.

Business Segments (Continued)

The table below reconciles the total of the reportable segments' Adjusted EBITDA and the Adjusted EBITDA included in Other to consolidated income before income taxes (in thousands):

	Year Ended December 31,
	2012			2013			2014
Adjusted EBITDA	$	37,217		$	26,901		$	42,838
Depreciation and amortization		(10,791	)		(13,664	)		(17,723	)
Stock-based compensation		(6,193	)		(4,733	)		(5,352	)
Change in fair value of contingent consideration		27,689			31,331			37,873
Preference claim charge (1)		(1,099	)		-			-
VAT settlement charge (2)		(1,485	)		-			-
Payments to former owner of Productions Graphics, net of cash recovered		411			(2,624	)		-
Goodwill impairment charge		-			(37,908	)		-
Intangible asset impairment charges		-			-			(2,710	)
Restructuring and other charges		-			(4,322	)		-
Legal fees in connection with patent infringement		-			(961	)		-
Restatement-related professional fees		-			-			(2,093	)
Secured asset reserve		-			-			(940	)
Total other expense		(1,081	)		(3,236	)		(5,118	)

Income (loss) before income taxes	$	44,668		$	(9,216	)	$	46,775

(1)

In the fourth quarter of 2012, the Company recognized a $1.1 million charge related to the settlement of a lawsuit filed by the Trustee of the Circuit City Liquidating Trust (the “Trust”) in connection with the Circuit City Stores, Inc. bankruptcy proceedings. A settlement agreement was entered in January 2013 with the Trust resolving this preference claim as well the administrative and general unsecured claims against the Trust.

(2)

In the fourth quarter of 2012, the Company accrued a loss reserve of $1.5 million relating to a VAT assessment issued by Her Majesty’s Revenue and Customs (“HMRC”) InnerWorkings Europe Limited (formerly Etrinsic). In July 2013, the Company finalized settlement with the HMRC and received a refund of the amounts paid to HMRC in July 2012 less the settlement amount which was not materially different than the estimated reserve.

The Company had long-lived assets, consisting of net property and equipment, in the United States of $13.9 million, $18.1 million and $21.5 million at December 31, 2012, 2013 and 2014, respectively. Long-lived assets in foreign countries were $3.2 million, $5.6 million and $8.3 million at December 31, 2012, 2013 and 2014, respectively.

InnerWorkings, Inc. and subsidiaries

Notes to Consolidated Financial Statements

18.

Subsequent Event

On February 12, 2015, the Company announced that its Board of Directors approved a share repurchase program providing it authorization to repurchase up to an aggregate of $20 million of its common stock through open market and privately negotiated transactions over a two-year period. 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

19.

Quarterly Financial Data (Unaudited)

The tables below are a condensed summary of the Company’s unaudited quarterly statements of operations and quarterly earnings per share data for the years ended December 31, 2013 and 2014 (in thousands):

	Year Ended December 31, 2014
	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
	(In thousands, except per share data)
Revenue	$	241,490	$	260,350	$	251,652	$	246,641
Gross profit		54,584		58,927		57,098		58,850
Net income (loss)		289		1,605		5,114		37,454
Net income (loss) per share:
Basic	$	0.01	$	0.03	$	0.10	$	0.71
Diluted	$	0.01	$	0.03	$	0.10	$	0.69

	Year Ended December 31, 2013
	First			Second		Third			Fourth
	Quarter(1)			Quarter(2)		Quarter(3)			Quarter
	(In thousands, except per share data)
Revenue	$	204,577		$	210,876	$	232,630		$	242,877
Gross profit		46,350			48,177		53,181			54,318
Net income (loss)		(2,801	)		3,675		(9,066	)		(468	)
Net income (loss) per share:
Basic	$	(0.06	)	$	0.07	$	(0.18	)	$	(0.01	)
Diluted	$	(0.06	)	$	0.07	$	(0.18	)	$	(0.01	)

(1)

The Company acquired DB Studios, Inc. in March 2013. Financial results for this acquisition are included in the Consolidated Financial Statements beginning in March 2013.

(2)

The Company made acquisitions during the second quarter of 2013 which were not material to the Company’s operations. Financial results for these acquisitions are included in the Consolidated Financial Statements beginning at the respective acquisition dates.

(3)

The Company acquired U.S. and international businesses of EYELEVEL in July 2013 as well as one other company which was not material to the Company’s operations. Financial results for these acquisitions are included in the Consolidated Financial Statements beginning at the respective acquisition dates.

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

Valuation and Qualifying Accounts

Description	Balance at Beginning of Period		Charged to Expense		(Uncollectible Accounts Written Off, Net of Recoveries)			Other		Balance at End of Period
Fiscal year ended December 31, 2014 Allowance for doubtful accounts	$	2,128,790	$	1,983,928	$	(1,427,221	)	$	-	$	2,685,497
Fiscal year ended December 31, 2013 Allowance for doubtful accounts	$	1,553,926	$	1,285,326	$	(710,462	)	$	-	$	2,128,790
Fiscal year ended December 31, 2012 Allowance for doubtful accounts	$	3,293,241	$	1,681,942	$	(3,421,257	)	$	-	$	1,553,926

PART IV

Item 15.

Exhibits, Financial Statement Schedules

(a) (1) Financial Statements: Reference is made to the Index to Financial Statements and Financial Statement Schedule in the section entitled “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K.

(2) Financial Statement Schedule: Reference is made to the Index to Financial Statements and Schedule II - Valuation and Qualifying Accounts in the section entitled “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K. Schedules not listed above are omitted because they are not required or because the required information is given in the consolidated financial statements or notes thereto.

(3) Exhibits: Exhibits are as set forth in the section entitled “Exhibit Index” which follows the section entitled “Signatures” in this Annual Report on Form 10-K. Certain of the exhibits listed in the Exhibit Index have been previously filed with the Securities and Exchange Commission pursuant to the requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Such exhibits are identified by the parenthetical references following the listing of each such exhibit and are incorporated by reference.

Exhibits which are incorporated herein by reference can be inspected and copied at the public reference rooms maintained by the SEC in Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. SEC filings are also available to the public from commercial document retrieval services and at the Web site maintained by the SEC at http://www.sec.gov .

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	INNERWORKINGS, INC.
March 10, 2016
	By:	/ S / Eric D. Belcher
		Eric D. Belcher
		Title: Chief Executive Officer and President

EXHIBIT INDEX

Exhibit No.		Description
3.1		Second Amended and Restated Certificate of Incorporation.(1)

3.2		Amended and Restated By-Laws.(1)

4.1		Specimen Common Stock Certificate.(2)

10.1		InnerWorkings, LLC 2004 Unit Option Plan.(2)†

10.2		InnerWorkings, Inc. 2006 Stock Incentive Plan, as amended and restated effective June 13, 2014.(4)†

10.3		Form of InnerWorkings Restricted Stock Award Agreement.(3)†

10.4		Form of Stock Option Award Agreement.(1)†

10.5		InnerWorkings, Inc. Annual Incentive Plan.(2)†

10.6		Stock Option Grant Agreement dated October 1, 2005 between InnerWorkings, Inc. and Jack M. Greenberg.(3)†

10.7		Form of Indemnification Agreement.(2)

10.8		Amended and Restated Employment Agreement entered into as of December 19, 2013 by and between Eric D. Belcher and InnerWorkings, Inc.(5)†

10.9		Amended and Restated Employment Agreement effective as of April 30, 2012 by and between Joseph Busky and InnerWorkings, Inc.(6)†

10.10		Credit Agreement, dated as of August 2, 2010, by and among InnerWorkings, Inc., as borrower, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., as syndication agent, PNC Bank, National Association, as documentation agent, and the other lenders party thereto. (7)

10.11		First Amendment to Credit Agreement, dated as of April 20, 2012, by and among InnerWorkings, Inc., as borrower, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., as syndication agent, PNC Bank, National Association, as documentation agent, and the other lenders party hereto. (8)

10.12		Fourth Amendment to Credit Agreement, dated as of September 25, 2014, by and among InnerWorkings, Inc., the lenders party thereto and Bank of America, N.A., as Administrative Agent. (9)

Exhibit No.		Description
10.13		Employment Agreement entered into as of September 6, 2011 by and between InnerWorkings, Inc. and John Eisel.(9)†

21.1		Subsidiaries of InnerWorkings, Inc.(10)

23.1		Consent of Ernst & Young LLP.

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

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

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

	(1)		Incorporated by reference to Form S-1 Registration Statement (File No. 333-139811).
	(2)		Incorporated by reference to Form S-1 Registration Statement (File No. 333-133950).
	(3)		Incorporated by reference to Current Report on Form 8-K filed on January 28, 2008.
	(4)		Incorporated by reference to 2014 Proxy Statement on Schedule 14A filed on April 24, 2014.
	(5)		Incorporated by reference to Current Report on Form 8-K filed on December 20, 2013.
	(6)		Incorporated by reference to Current Report on Form 8-K filed on May 3, 2012.
	(7)		Incorporated by reference to Quarterly Report on Form 10-Q filed on August 6, 2010.
	(8)		Incorporated by reference to Current Report on Form 8-K filed on April 26, 2012.
	(9)		Incorporated by reference to Current Report on Form 8-K filed on October 1, 2014.
	(10)		Incorporated by reference to Annual Report on Form 10-K filed on March 6, 2015.
	†		Management contract or compensatory plan or arrangement of the Company.