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

________________________________________ 

FORM 10-Q
________________________________________ 
  
ýQuarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended SeptemberJune 30, 20162017
  
¨Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from                              to
 
Commission File Number 000-52170
________________________________________ 
 
INNERWORKINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
________________________________________
 
Delaware 20-5997364
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
 
600 West Chicago Avenue, Suite 850
Chicago, Illinois 60654
Phone: (312) 642-3700
(Address, zip code and telephone number, including area code, of principal executive offices)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes:   ý    No:   ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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:   ý      No:   ¨
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer:   ¨
Accelerated filer:   x
Non-accelerated filer:   ¨ (Do not check if a smaller reporting company)
Smaller reporting companycompany:   ¨
Emerging growth company:   ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes: ¨ No:  ý

As of October 31, 2016,August 2, 2017, the Registrant had 54,860,53154,505,178 shares of Common Stock, par value $0.0001 per share, outstanding, which includes 1,088,057987,261 shares of unvested restricted stock awards that have voting rights and are held by members of the Board of Directors and certain of the Company’s employees.

INNERWORKINGS, INC.
 
TABLE OF CONTENTS
 
  Page
PART I. FINANCIAL INFORMATION 
   
Item 1.Condensed Consolidated Financial Statements (Unaudited) and Notes to Condensed Consolidated Financial Statements (Unaudited)
   
 Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 (Unaudited)
   
 Condensed Consolidated Balance Sheet as of SeptemberJune 30, 20162017 (Unaudited) and December 31, 20152016
Condensed Consolidated Statement of Stockholders' Equity as of June 30, 2017 (Unaudited)
   
 Condensed Consolidated Statement of Cash Flows for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 (Unaudited)
   
 Notes to Condensed Consolidated Financial Statements (Unaudited)
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
Item 3.Quantitative and Qualitative Disclosures about Market Risk
   
Item 4.Controls and Procedures
   
PART II. OTHER INFORMATION 
   
Item 1.Legal Proceedings
   
Item 1A.Risk Factors
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
   
Item 6.Exhibits
   
SIGNATURES 
   
EXHIBIT INDEX 

PART I. FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

InnerWorkings, Inc. and subsidiaries
Condensed Consolidated Statement of Comprehensive Income (Loss)
(In thousands, except per share data)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 20152017 2016 2017 2016
              
Revenue$279,993
 $264,720
 $820,286
 $759,043
$279,530
 $269,220
 $546,920
 $540,292
Cost of goods sold212,212
 201,109
 625,465
 581,387
209,303
 204,126
 412,416
 413,253
Gross profit67,781
 63,611
 194,821
 177,656
70,227
 65,094
 134,504
 127,039
Operating expenses: 
  
     
  
    
Selling, general and administrative expenses52,601
 48,787
 155,511
 144,836
55,086
 51,418
 108,513
 102,910
Depreciation and amortization5,066
 4,485
 14,382
 12,842
3,182
 4,721
 6,086
 9,316
Change in fair value of contingent consideration788
 701
 9,975
 1,691
1,884
 7,276
 844
 9,187
Restructuring and other charges466
 
 4,433
 

 623
 
 3,967
Income from operations8,860
 9,638
 10,520
 18,287
10,075
 1,056
 19,061
 1,659
Other income (expense): 
  
     
  
    
Interest income26
 6
 63
 55
12
 24
 46
 38
Interest expense(1,191) (1,132) (3,252) (3,382)(1,038) (985) (2,041) (2,062)
Other, net(114) (1,089) 16
 (992)(1,165) 291
 (1,388) 130
Total other expense(1,279) (2,215) (3,173) (4,319)(2,191) (670) (3,383) (1,894)
Income before income taxes7,581
 7,423
 7,347
 13,968
Income (loss) before income taxes7,884
 386
 15,678
 (235)
Income tax expense3,240
 3,487
 8,023
 6,100
3,391
 2,710
 5,727
 4,782
Net income (loss)$4,341
 $3,936
 $(676) $7,868
$4,493
 $(2,324) $9,951
 $(5,017)
              
Basic earnings (loss) per share$0.08
 $0.07
 $(0.01) $0.15
$0.08
 $(0.04) $0.19
 $(0.09)
Diluted earnings (loss) per share$0.08
 $0.07
 $(0.01) $0.15
$0.08
 $(0.04) $0.18
 $(0.09)
             $
Comprehensive income (loss)$4,676
 $2,072
 $(2,201) $1,658
$8,373
 $(3,714) $15,810
 $(6,877)


See accompanying notes to the condensed consolidated financial statements.
 

InnerWorkings, Inc. and subsidiaries
Condensed Consolidated Balance Sheet
(In thousands)
September 30, 2016 December 31, 2015June 30, 2017 December 31, 2016
(unaudited)  (unaudited)  
Assets 
  
 
  
Current assets: 
  
 
  
Cash and cash equivalents$20,787
 $30,755
$23,537
 $30,924
Accounts receivable, net of allowance for doubtful accounts of $2,218 and $1,231, respectively190,438
 188,819
Accounts receivable, net of allowance for doubtful accounts of $2,466 and $2,622, respectively208,382
 182,874
Unbilled revenue40,505
 30,758
36,515
 32,723
Inventories45,377
 33,327
28,192
 31,638
Prepaid expenses11,984
 14,353
23,588
 18,772
Other current assets30,528
 31,825
20,949
 24,769
Total current assets339,619
 329,837
341,163
 321,700
Property and equipment, net32,279
 32,681
36,030
 32,656
Intangibles and other assets: 
  
 
  
Goodwill204,978
 206,257
205,399
 202,700
Intangible assets, net33,476
 37,715
29,699
 31,538
Deferred income taxes1,123
 586
1,281
 1,031
Other non-current assets1,426
 1,391
1,267
 1,374
Total intangibles and other assets241,003
 245,949
237,646
 236,643
Total assets$612,901
 $608,467
$614,839
 $590,999
Liabilities and stockholders' equity 
  
 
  
Current liabilities: 
  
 
  
Accounts payable$129,980
 $170,244
$125,593
 $121,289
Current portion of contingent consideration19,320
 11,387

 19,283
Due to seller1,683
 402
17,842
 
Accrued expenses21,037
 17,866
27,567
 30,067
Other current liabilities35,515
 31,363
37,748
 35,049
Total current liabilities207,535
 231,262
208,750
 205,688
Revolving credit facility133,734
 99,258
118,658
 107,468
Deferred income taxes11,594
 10,526
9,852
 11,291
Contingent consideration, net of current portion
 10,775
Other non-current liabilities2,235
 2,510
1,988
 1,926
Total liabilities355,098
 354,331
339,248
 326,373
Commitments and contingencies (See Note 11)

 



 

Stockholders' equity: 
  
 
  
Common stock, par value $0.0001 per share, 200,000 and 200,000 shares authorized, 63,274 and 62,645 shares issued, and 53,770 and 53,098 shares outstanding, respectively6
 6
Common stock, par value $0.0001 per share, 200,000 and 200,000 shares authorized, 63,808 and 63,391 shares issued, and 53,500 and 54,088 shares outstanding, respectively6
 6
Additional paid-in capital219,085
 213,566
230,030
 224,480
Treasury stock at cost, 9,504 and 9,547 shares, respectively(51,724) (52,207)
Treasury stock at cost, 10,308 and 9,303 shares, respectively(59,224) (49,458)
Accumulated other comprehensive loss(15,518) (13,993)(14,940) (20,799)
Retained earnings105,954
 106,764
119,719
 110,397
Total stockholders' equity257,803
 254,136
275,591
 264,626
Total liabilities and stockholders' equity$612,901
 $608,467
$614,839
 $590,999

See accompanying notes to the condensed consolidated financial statements.

InnerWorkings, Inc. and subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(In thousands)
(Unaudited)
 Common Stock Treasury Stock Additional Paid-in-Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total
 Shares Amount Shares Amount    
Balance at December 31, 201663,391
 $6
 9,303
 $(49,458) $224,480
 $(20,799) $110,397
 $264,626
Net income            9,951
 9,951
Total other comprehensive income, net of tax          5,859
   5,859
Comprehensive income              15,810
Issuance of common stock upon exercise of stock awards417
 
     536
     536
Issuance of treasury shares as consideration for acquisition    (24) 275
     (16) 259
Acquisition of treasury shares    1,029
 (10,041)     
 (10,041)
Stock-based compensation expense        2,921
     2,921
Cumulative effect of change related to adoption of ASU 2016-09        2,093
   (613) 1,480
Balance at June 30, 201763,808
 $6
 10,308
 $(59,224) $230,030
 $(14,940) $119,719
 $275,591

See accompanying notes to the condensed consolidated financial statements.


InnerWorkings, Inc. and subsidiaries
Condensed Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)

Nine Months Ended September 30,Six Months Ended June 30,
2016 20152017 2016
      
Cash flows from operating activities 
  
 
  
Net income (loss)$(676) $7,868
$9,951
 $(5,017)
Adjustments to reconcile net income (loss) to net cash used in operating activities: 
  
 
  
Depreciation and amortization14,382
 12,842
6,086
 9,316
Stock-based compensation expense4,097
 4,854
2,921
 2,358
Deferred income taxes677
 768
76
 450
Bad debt provision1,433
 1,214
82
 789
Change in fair value of contingent consideration9,975
 1,691
844
 9,187
Other operating activities157
 157
104
 105
Change in assets: 
  
 
  
Accounts receivable and unbilled revenue(12,798) (17,558)(29,395) (2,366)
Inventories(12,050) (13,116)3,446
 (2,573)
Prepaid expenses and other assets3,574
 (13,436)(957) 16,255
Change in liabilities: 
  
 
  
Accounts payable(40,264) 4,471
4,304
 (33,984)
Accrued expenses and other liabilities7,861
 2,989
851
 4,632
Net cash used in operating activities(23,632) (7,256)(1,687) (848)
      
Cash flows from investing activities 
  
 
  
Purchases of property and equipment(10,502) (12,126)(7,024) (7,445)
Net cash used in investing activities(10,502) (12,126)(7,024) (7,445)
      
Cash flows from financing activities 
  
 
  
Net borrowings from revolving credit facilities34,722
 23,489
11,491
 12,553
Net short-term secured borrowings(820) (551)37
 104
Repurchases of common stock
 (4,897)(10,041) 
Payments of contingent consideration(11,008) (8,010)(2,089) (4,144)
Proceeds from exercise of stock options2,002
 650
1,319
 1,090
Other financing activities(680) (426)(119) (474)
Net cash provided by financing activities24,216
 10,255
598
 9,129
      
Effect of exchange rate changes on cash and cash equivalents(50) (813)726
 15
Decrease in cash and cash equivalents(9,968) (9,940)
Increase (decrease) in cash and cash equivalents(7,387) 851
Cash and cash equivalents, beginning of period30,755
 22,578
30,924
 30,755
Cash and cash equivalents, end of period$20,787
 $12,638
$23,537
 $31,606

See accompanying notes to the condensed consolidated financial statements.

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and NineSix Months Ended SeptemberJune 30, 2016


2017




1. Summary of Significant Accounting Policies

Basis of Presentation of Interim Financial Statements
 
The accompanying unaudited condensed consolidated financial statements of InnerWorkings, Inc. and subsidiaries (the “Company”) included herein have been prepared to conform to the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation of the accompanying unaudited financial statements have been included, and all adjustments are of a normal and recurring nature. The operating results for the three and ninesix months ended SeptemberJune 30, 20162017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016.2017. These condensed interim consolidated financial statements and notes should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto as of and for the year ended December 31, 20152016 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2016.9, 2017.
 
Description of the Business
 
InnerWorkings, Inc.The Company was incorporated in the state of Delaware on January 3, 2006. The Company is a leading global marketing execution firm for some of the world's most marketing intensive companies, including those in the Fortune 1000, across a wide range of industries. As a comprehensive outsourced enterprise solution, the Company leverages proprietary technology, an extensive supplier network and deep domain expertise to streamline the creation, production and distribution of marketing and promotional materials, signage and displays, retail experiences, events and promotions and packaging across every major market worldwide. The items the Company sources are generally procured through the marketing supply chain and are referred to collectively as marketing materials. The Company’s technology and database of information is designed to capitalize on excess manufacturing capacity and other inefficiencies in the traditional marketing and print supply chain to obtain favorable pricing and to deliver high-quality products and services.
 
The Company is organized and managed as two business segments, North America and International, and is viewed as two operating segments by the chief operating decision maker for purposes of resource allocation and assessing performance. See Note 14 for further information about the Company’s reportable segments.
 
Preparation of Financial Statements and Use of Estimates
 
The preparation of the consolidated financial statements is in conformity with accounting principles generally accepted in the United States ("GAAP"). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, the Company evaluates its estimates, including those related to product returns, allowance for doubtful accounts, inventories and inventory valuation, valuation and impairments of goodwill and long-lived assets, income taxes, accrued bonus, contingencies, stock-based compensation and litigation.litigation costs. 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 canmay 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 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.

Revenue Recognition
InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and NineSix Months Ended SeptemberJune 30, 2016


2017



Revenue Recognition

The Company recognizes revenue upon meeting all of the following revenue recognition criteria, which areis typically met upon shipment or delivery of itsour 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 torepresents shipments that have been made to customers for which the related account receivable has not yet been billed.
invoiced.

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 marketingprinted materials and other products. In addition, the CompanyCompany: (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 itthe Company 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 marketingprinted materials and products. When the Company is not the primary obligor, revenues arerevenue is reported net.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. TheWhen provided on a stand-alone basis, the Company recognizes revenue for creative and otherthese services provided on a stand-alone basis 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.

Stock-Based Compensation
 
The Company accounts for stock-based compensation awards to employees and directors in accordance with ASC 718, Compensation – Stock Compensation. Compensation expense is measured by determining the fair value of each award using the Black-Scholes option valuation model for stock options or the closing share price on the grant date for restricted shares.shares and performance share units. The fair value 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.

On June 1, 2017, the Compensation Committee approved, pursuant to the 2006 Stock Incentive Plan, awards of performance share units (“PSUs”) for certain executive officers and employees. The PSUs are performance-based awards that will settle in shares of the Company's common stock, in an amount between 0%and 200% of the target award level, based on the cumulative adjusted earnings per share and the return on invested capital achieved by the Company between April 1, 2017 and December 31, 2019. Compensation expense for PSUs is measured by determining the fair value of the award using the closing share price on the grant date and is recognized ratably from the grant date to the vesting date for the number of awards expected to vest. The amount of compensation expense recognized for PSUs is dependent upon a quarterly assessment of the likelihood of achieving the performance conditions.
 
Stock-based compensation cost recognized during the period is based on the portionfull grant date fair value of the share-based payment awards that are ultimately expected to vest. Accordingly, stock-based compensation cost recognized has been reducedadjusted for estimated forfeitures. Forfeitures are estimated atany forfeitures during the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.period.
 
The Company recorded $1.7$1.5 million and $1.2$1.1 million in stock-based compensation expense for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, and $4.1$2.9 million and $4.9$2.4 million in stock-based compensation expense for the ninesix months ended SeptemberJune 30, 2017 and 2016, and 2015, respectively. During 2015, $0.4 million of stock-based compensation expense was recognized related to the modification of a former executive’s award agreements in connection with his transition agreement.

 Recent Accounting Pronouncements

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Scope of Modification Accounting ("ASU 2017-09"), which amends ASC 718, Compensation - Stock Compensation. This ASU amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The new guidance will allow companies to make certain changes to awards without accounting for them as modifications. It does not change the accounting for modifications. The new guidance will be applied prospectively to awards modified on or after the adoption date. This new guidance
InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2017



is effective for interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), which simplified the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. This ASU is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard is not expected to have a material impact on the consolidated financial statements and related disclosures.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"), which amends ASC 230, Statement of Cash Flows. This ASU provides guidance on the statement of cash flows presentation of certain transactions where diversity in practice exists. The guidance is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Company's consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, ("ASU 2016-09") which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. Under the standard, the income tax effect of awards is required to be recognized in the income statement when the awards vest or are settled, as opposed to in additional paid-in capital under Topic 718. The standard also provides an option to recognize gross share-based compensation expense with actual forfeitures recognized as they occur. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016. This guidance can be applied either prospectively, retrospectively or using a modified retrospective transition method. Early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements and expects to adopt this standard in the first quarter of 2017.

In March 2016,The Company adopted all amendments to the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ("ASU 2016-08")standard at January 1, 2017. The amendments related to the classification of excess tax benefits on the statement of cash flows were adopted prospectively and the classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes was adopted retrospectively. The adoption of both resulted in April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ("ASU 2016-10"), both of which provide supplemental adoption guidance and clarification to ASC 2014-09. ASU 2016-08 and ASU 2016-10 must be adopted concurrently withno prior period adjustments. With the adoption of ASU 2014-09. the standards related to eliminating the requirement that excess tax benefits be realized before companies can recognize them and election to recognize forfeitures as they occur, the Company elected to use the modified retrospective method which resulted in changes to retained earnings, components of equity and net assets. The Company is currently evaluating the impactnet cumulative effect of adopting these standards on its consolidated financial statements, including possible transition electionschanges resulted in a $2.1 million increase to additional paid in capital, a $1.5 million decrease to deferred tax liabilities and expectsa $0.6 million decrease to adopt these standards in 2018.

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Nine Months Ended September 30, 2016




retained earnings.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842), ("ASU 2016-02") which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosure of key information about leasing arrangements. ASU 2016-02 requires lessees to recognize a right-of-use asset and a lease liability for most leases in the balance sheet as well as other qualitative and quantitative disclosures. The update is to be applied using a modified retrospective method and is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.statements.

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”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. The FASB has issued several amendments to the standard since ASU 2014-09.

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective transition method). We currently anticipate adopting the standard electing to use the modified retrospective transition method. The standard provides an option to apply the transition method to all contracts at the inception date or only to contracts that are not completed as of that date. At the current time, the Company only intends to apply the standard to contracts that are not completed as of December 31, 2017. Also, we anticipate disclosing the aggregate effect of contract modifications that occur before the beginning of the earliest reporting period presented (only for contracts not completed at the date of adoption).

We are currently evaluating the full impact that ASU No. 2014-09 will have on the Company’s consolidated financial statements. Historically, the Company generally reports revenue on a gross basis because the Company has been determined to
InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2017



be the primary obligor in its arrangements to procure marketing materials and other products for our customers. In August 2015,March 2016, the FASB issued Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferralfurther guidance on principal versus agent considerations. We are currently evaluating the impact of the Effective Date (ASU 2015-14) which defers theprincipal versus agent guidance on our classification of revenues and cost of goods sold.

The new standard will be effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.2017. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of adopting these standards on its consolidated financial statementsand expects to adopt these standards in 2018.

In July 2015, the FASB issued Accounting Standards Update 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11). ASU 2015-11 applies to inventory that is measured using first-in, first-out (FIFO) or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, last-out (LIFO). The standard is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company does not expect ASU 2015-11 to have a material impact on its consolidated financial statements and expects to adopt this standard in the fourthfirst quarter of 2016.

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements – Going Concern (“ASU 2014-15”). ASU 2014-15 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 periods ending after December 15, 2016 and interim periods beginning on or after December 15, 2016. The Company does not expect ASU 2014-15 to have a material impact on its consolidated financial statements and expects to adopt this standard in the fourth quarter of 2016.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"), which amends ASC 230, Statement of Cash Flows. This ASU provides guidance on the statement of cash flows presentation of certain transactions where diversity in practice exists. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Company's consolidated financial statements.2018.

2. Contingent Consideration

In connection with certain of the Company’s acquisitions, contingent consideration is payable in cash or common stock of the Company upon the achievement of certain performance measures over future periods. The Company recorded the acquisition date fair value of the contingent consideration liability as additional purchase price. As discussed in Note 10, the process for determining the fair value of the contingent consideration liability consists of 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. Subsequent to the acquisition date, the Company estimates the fair value of the contingent consideration liability each reporting period and any adjustments made to the fair value are recorded in the Company’s results of operations. If an acquisition reaches the required performance measures within the reporting period, the fair value of the contingent consideration liability is increased to 100%, the maximum potential payment, and reclassified to Duedue to seller.

The Company has recorded $19.3 million in contingent considerationOn June 30, 2017, the EYELEVEL acquisition reached the required performance measures at September 30, 2016 related to these arrangements. Any adjustments made tothe end of its earnout period and the balance of the fair value of the contingent consideration liability subsequentwas reclassified to due to seller. At June 30, 2017, the acquisition date will beCompany reduced the contingent liability to $0.0 million and recorded $17.8 million in the Company’s results of operations.Due to Seller related to these arrangements. During the three months ended SeptemberJune 30, 2017 and 2016, the Company recorded expense of $1.9 million and 2015,$7.3 million, respectively. During the six months ended June 30, 2017 and 2016 the Company recorded expense of $0.8 million and $0.7$9.2 million, respectively, to increase its contingent liability related to these arrangements. During
InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Nine Months Ended September 30, 2016





the nine months ended September 30, 2016 and 2015, the Company recorded expense of $10.0 million and $1.7 million, respectively, to increase its contingent liability related to these arrangements.

For the three and nine months ended September 30, 2016, the Company's fair value adjustment to the contingent consideration liability includes an adjustment of $1.3 million and $9.4 million, respectively, of expense to increase the liability relating to the Eyelevel acquisition due to strong financial performance in recent periods and an improvement in forecasted results. This improved performance was primarily driven by significant expansion within Eyelevel's existing customer base during 2016. As a result of this growth and the increase in forecast, the probability of Eyelevel achieving the target threshold for the final earnout measurement period increased from less than probable to highly probable as of June 30, 2016, and further increased in probability as of September 30, 2016. These probability changes were the primary drivers of the increasesrespectively. The change in the fair value of the contingent consideration liability in these periods. The large year-to-date increase in fair value resulting from these probability changes also takes in to account the acquisition agreement's earnout payment structure foris driven by the final measurement period, which begins funding at $12.0 million based on cumulative EBITDA of $30.0 million but pays nothing below that threshold and up to a maximum payout of $24 million if cumulative EBITDA of $40.0 million is achieved. This increase to the contingent consideration liability for Eyelevel was partially offset by decreases in the fair value of other earnout agreements of $0.5 million and $0.6 million for the three and nine months ended September 30, 2016, respectively.
As of September 30, 2016, the potential maximum contingent payments, excluding the amounts recorded in Due to seller which are currently payable, would be due as follows if all performance measures are achieved (in thousands): 
 Maximum Potential Payment Fair Value of Liability
2016$
 $
201769,490
 19,320
 $69,490
 $19,320
If the performance measures required by the applicable purchase agreements are not achieved, the Company may pay less than the maximum amounts presented in the table above, depending on the termsadjustment of the agreement. WhileDB Studios liability during the maximum potential payments shown infirst quarter of 2017 and the table are $69.5 million, the Company estimates that the fair valuefinal adjustment of the payments that will be made is $19.3 million based on expected performance andEYELEVEL liability during the result in payouts.second quarter of 2017.
 
3. Goodwill 

The following is a summary of the goodwill balance for each reportable segment as of SeptemberJune 30, 20162017 (in thousands): 
 North America International Total
Net goodwill as of December 31, 2015$170,735
 $35,522
 $206,257
Foreign exchange impact38
 (1,317) (1,279)
Net goodwill as of September 30, 2016$170,773
 $34,205
 $204,978
 North America International Total
Net goodwill as of December 31, 2016$170,757
 $31,943
 $202,700
Foreign exchange impact22
 2,677
 2,699
Net goodwill as of June 30, 2017$170,779
 $34,620
 $205,399
 
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 ("ASC 350"), goodwill is not amortized, but instead is tested for impairment annually, or more frequently if circumstances indicate a possible impairment may exist. Absent any interim indicators of impairment, the Company tests for goodwill impairment as of the first day of the fourth fiscal quarter of each year.

The fair value estimates used in the goodwill impairment analysis require significant judgment. The Company's fair value estimates for purposes of performing the analysis 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.

The Company reviewsassesses for potentialgoodwill impairment indicators each reporting period and does not believe that goodwill is impaired as of SeptemberJune 30, 2016.2017.

4. Other Intangible Assets

The following is a summary of the Company’s other intangible assets as of SeptemberJune 30, 20162017 and December 31, 20152016 (in thousands):
InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and NineSix Months Ended SeptemberJune 30, 2016


2017



September 30,
2016
 December 31, 2015 
Weighted
Average Life
June 30,
2017
 December 31, 2016 
Weighted
Average Life
Customer lists$73,635
 $73,759
 13.6$73,858
 $72,667
 13.6
Noncompete agreements955
 988
 4.1955
 943
 4.1
Trade names3,141
 3,228
 12.62,510
 2,510
 13.3
Patents57
 57
 9.057
 57
 9.0
77,788
 78,032
 77,380
 76,177
 
Less accumulated amortization(44,312) (40,317) (47,681) (44,639) 
Intangible assets, net$33,476
 $37,715
 $29,699
 $31,538
 

In accordance with ASC 350, 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 approximately fourteen years, are being amortized using the economic life method. The Company’s noncompete agreements, trade names and patents are being amortized on a straight-line basis over their estimated weighted-average useful lives of approximately four years, thirteen years and nine years, respectively.
 
Amortization expense related to these intangible assets was $1.4$1.3 million and $1.5$1.4 million for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, and $4.2$2.5 million and $4.4$2.7 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively.

The estimated amortization expense for the remainder of 20162017 and each of the next five years and thereafter is as follows (in thousands):
Remainder of 2016$1,342
20175,086
Remainder of 2017$2,452
20184,611
4,524
20194,316
4,291
20204,193
4,281
20214,158
Thereafter13,928
9,993
$33,476
$29,699
  
5. Restructuring Activities and Other Charges 

2016: On December 14, 2015, the Company approved a global realignment plan that is expected to allowallowed the Company to more efficiently meet client needs across its international platform. Through improved integration of global resources, the plan will createcreated back office and other efficiencies and allowallowed for the elimination of approximately 100 positions. In connection with these actions, the Company expects to incur totalincurred pre-tax cash restructuring charges of $6.4 million to $6.7 million, the majority of which will bewere recognized during 2016. These cash charges will includeincluded approximately $5.4 million to $5.7$5.6 million for employee severance and related benefits and $1.0$1.1 million for lease and contract terminationterminations and other associated costs. The remainder of these charges will bewere all incurred by the end of 2016 with payouts of the charges alsooccurring in 2017. As required by law, the Company is consultingconsulted with each of the affected countries’ local Works Councils throughout implementation of thisthe plan.
     
As of SeptemberFor the three and six months ended June 30, 2016,2017, the Company has recognized $5.5 million inno additional restructuring charges related to this plan, of which $0.3 million, $4.2 million and $1.0 million related toas the North America, International and Other segments, respectively. This plan is expected to bewas completed by the end of 2016.

The following table summarizes the accrued restructuring activities for this plan for the six months ended June 30, 2017 (in thousands):
InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and NineSix Months Ended SeptemberJune 30, 2016


2017



The following table summarizes
  Employee Severance and Related Benefits Lease and Contract Termination Costs Other Total
Balance at December 31, 2016 $1,349
 $17
 $200
 $1,566
Cash payments (349) (17) 
 (366)
Balance at June 30, 2017 $1,000
 $
 $200
 $1,200

As of June 30, 2016, the accruedCompany recognized $5.0 million in restructuring activities forcharges related to this plan, forof which $0.3 million, $3.9 million and $0.8 million related to the nine months ended September 30, 2016 (in thousands):
  Employee Severance and Related Benefits Lease and Contract Termination Costs Total
Balance at December 31, 2015 $284
 $75
 $359
Charges 3,571
 862
 4,433
Cash payments (2,991) (863) (3,854)
Balance at September 30, 2016 $864
 $74
 $938

2015: No restructuring activities occurred during the nine months ended September 30, 2015.North America, International and Other segments, respectively.

6. Income Taxes
 
The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items. The Company’s reported effective income tax rate was 42.7%43.0% and 47.0%702.0% for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, and 109.2%36.5% and 43.7%(2,038.9)% for the ninesix months ended SeptemberJune 30, 2017 and 2016 and 2015, respectively.. The Company’s effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted each period by discrete factors and events.
 
The effective tax rates were affected by the fair value changes to contingent consideration in each period. Portions of the total amount recognized from fair value changes to contingent consideration relate to non-taxable acquisitions for which deferred taxes are not recognized, consistent with the treatment of goodwill and intangible assets for those acquisitions under U.S. GAAP. In the three months ended SeptemberJune 30, 2017 and 2016, and 2015, $0.8$1.9 million and $0.7$7.3 million, respectively, was recognized as expense from fair value changes to contingent consideration, and inconsideration. In the ninesix months ended SeptemberJune 30, 2017 and 2016, and 2015, $10.0$0.8 million and $1.7$9.2 million, respectively, was recognized as expense from fair value changes to contingent consideration, which did not result in recognition of a deferred tax asset, therefore, increasing theconsideration.
The effective tax rate for these periods.the three and six months ended June 30, 2017 was unfavorably impacted by $0.2 million and $0.2 million, respectively, of stock-based compensation activity due to the adoption ASU 2016-09 on January 1, 2017.

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will expire unutilized. At the end of each reporting period, the Company reviews the realizability of its deferred tax assets. During the second quarter of 2017, the valuation allowance balance was decreased for a Peruvian valuation allowance adjustment. The Company believes sufficient positive evidence exists to release the valuation allowance, therefore, the Company adjusted the valuation allowance by $0.8 million resulting in a $0.2 million benefit to income tax expense for the three and six months ended June 30, 2017. Additionally, the global realignment plan resulted in restructuring and other chargesCompany continues to incur losses in jurisdictions which have valuation allowances against tax loss carryforwards, so a tax benefit has not been recognized in the financial statements.statements for these losses.

7. Earnings Per Share
 
Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding.outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average shares outstanding plus share equivalentsassuming dilution. Dilutive common shares outstanding is computed using the Treasury Stock Method and reflects the additional shares that would arise from the exercise ofbe outstanding if dilutive stock options vesting ofwere exercised and restricted stock and restricted stock units were settled for common shares and contingentlyduring the period. In addition, dilutive shares would include any shares issuable shares in connection withrelated to PSUs for which the Company’s acquisitions.performance conditions have been met as of the end of the period. During the three months ended SeptemberJune 30, 20162017 and 2015,2016, an aggregate of 2.5 million and 4.04.2 million options and restricted common shares, respectively, and during the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, an aggregate of 4.02.6 million and 4.14.2 million options and restricted common shares, respectively, were excluded from the calculation as these options and restricted common shares were anti-dilutive. The computations of basic and diluted earnings (loss) per common share for three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 are as follows (in thousands, except per share amounts): 
InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and NineSix Months Ended SeptemberJune 30, 2016


2017



Three Months Ended September 30, Nine Months Ended September 30,
2016 2015 2016 2015Three Months Ended June 30, Six Months Ended June 30,
       2017 2016 2017 2016
Numerator:              
Net income (loss)$4,341
 $3,936
 $(676) $7,868
$4,493
 $(2,324) $9,951
 $(5,017)
              
Denominator:              
Weighted-average shares outstanding basic
53,818
 52,973
 53,536
 52,759
53,278
 53,411
 53,665
 53,278
Effect of dilutive securities:              
Employee and director stock options and restricted common shares817
 376
 
 698
1,150
 
 1,025
 
Contingently issuable shares137
 
 
 
761
 
 380
 
Weighted-average shares outstanding diluted
54,772
 53,349
 53,536
 53,457
55,189
 53,411
 55,070
 53,278


 

    

      
Basic earnings (loss) per share$0.08
 $0.07
 $(0.01) $0.15
$0.08
 $(0.04) $0.19
 $(0.09)
Diluted earnings (loss) per share$0.08
 $0.07
 $(0.01) $0.15
$0.08
 $(0.04) $0.18
 $(0.09)

8. Accumulated Other Comprehensive Loss
 
The table below presents changes in the components of accumulated other comprehensive loss for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 (in thousands):
Three Months Ended September 30,Three Months Ended June 30,
2016 20152017 2016
Foreign currency translation adjustments Foreign currency translation adjustmentsForeign currency translation adjustments Foreign currency translation adjustments
Balance, beginning of period$(15,853) $(9,745)$(18,820) $(14,463)
Other comprehensive loss before reclassifications335
 (1,865)
Net current-period other comprehensive loss335
 (1,865)
Other comprehensive income (loss) before reclassifications3,880
 (1,390)
Net current-period other comprehensive income (loss)3,880
 (1,390)
Balance, end of period$(15,518) $(11,610)$(14,940) $(15,853)
Nine Months Ended September 30,
2016 2015
Foreign currency translation adjustments Foreign currency translation adjustments
Balance, beginning of period$(13,993) $(5,401)
Other comprehensive loss before reclassifications(1,525) (6,209)
Net current-period other comprehensive loss(1,525) (6,209)
Balance, end of period$(15,518) $(11,610)

 Six Months Ended June 30,
 2017 2016
 Foreign currency translation adjustments Foreign currency translation adjustments
Balance, beginning of period$(20,799) $(13,993)
Other comprehensive income (loss) before reclassifications5,859
 (1,860)
Net current-period other comprehensive income (loss)5,859
 (1,860)
Balance, end of period$(14,940) $(15,853)

9. Related Party Transactions
 
The Company provides print procurement services to Arthur J. Gallagher & Co. J. Patrick Gallagher, Jr., a member of the Company’s Board of Directors, is the Chairman, President and Chief Executive Officer of Arthur J. Gallagher & Co. and has a direct ownership interest in Arthur J. Gallagher & Co. The total amount billed for such print procurement services during the three months ended SeptemberJune 30, 2017 and 2016 and 2015 was $0.4$0.5 million and $0.5 million, respectively, and $1.3$0.9 million and $1.4$1.0 million during the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. Additionally, Arthur J. Gallagher & Co. provideshas provided insurance brokerage and risk management services to the Company. As consideration of these services, Arthur J. Gallagher & Co. billed the Company $0.0 million and $0.3$0.1 million for the three months ended SeptemberJune 30, 2017 and 2016, respectively, and 2015,$0.0 million and $0.2 million for the six months ended June 30, 2017, respectively. The net amount receivable from Arthur J. Gallagher & Co. was $0.2 million and $0.4 million as of June 30th, 2017 and December 31, 2016, respectively.
InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and NineSix Months Ended SeptemberJune 30, 2016


2017



respectively, and $0.2 million and $0.5 million during the nine months ended September 30, 2016 and 2015, respectively. The net amount receivable from Arthur J. Gallagher & Co. at September 30, 2016 was $0.3 million.
 
10. 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.

TheAs of June 30, 2017 the Company no longer has any Level 3 assets or liabilities remaining on its condensed consolidated financial statements as a result of the finalization of the contingent consideration liabilities discussed in Note 2. As of December 31, 2016, the only Level 3 liabilities on the Company's financial statements related to its potential contingent consideration payments relating tofrom acquisitions occurring subsequent to January 1, 2009 are its only Level 3 liabilities as of September 30, 2016 and December 31, 2015.2009. The fair value of the liabilities determined by this analysis iswas primarily driven by the probability of reaching the performance measures required by the applicable purchase agreements and the associated discount rates. Probabilities arewere 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 reachesreached the required performance measure, the estimated probability would be increased to 100% and reclassified to Duedue to seller, and if the measure iswas not reached, the probability would behave been reduced to reflect the amount earned, if any, depending on the terms of the agreement. Discount rates are estimatedwere determined 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 inapplying a decreaserisk premium to the fair value of approximately $0.1 million.a risk-free interest rate.
 
The following table sets forth the Company’s financial assets and financial liabilities measured at fair value on a recurring basis and the basis of measurement at SeptemberJune 30, 20162017 and December 31, 20152016 (in thousands):
At September 30, 2016 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)
 $

$

$

$
Liabilities: 










Contingent consideration $(19,320)
$

$

$(19,320)
At June 30, 2017Total Fair Value MeasurementQuoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)
Liabilities:










Contingent consideration$

$

$

$
  

At December 31, 2015 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

$667

$

$
Liabilities: 










Contingent consideration $(22,162)
$

$

$(22,162)
(1)Included in cash and cash equivalents on the balance sheet.
InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Nine Months Ended September 30, 2016





At December 31, 2016 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)
Liabilities: 










Contingent consideration $19,283

$

$

$19,283

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) (in thousands): 
InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2017


 
Fair Value Measurements at Reporting Date Using Significant Unobservable Inputs
(Level 3)
 Contingent Consideration
Balance as of December 31, 2015$(22,162)
Contingent consideration payments paid in cash11,008
Change in fair value(1)
(9,975)
Reclassification to Due to seller1,281
Contingent consideration payments paid in stock350
Foreign exchange impact(2)
178
Balance as of September 30, 2016$(19,320)

 
Fair Value Measurements at Reporting Date Using Significant Unobservable Inputs
(Level 3)
 Contingent Consideration
Balance as of December 31, 2016$(19,283)
Change in fair value(1)
(844)
Reclassification to Due to seller17,842
Contingent Consideration paid in cash2,089
Contingent Consideration paid in stock259
Foreign exchange impact(2)
(63)
Balance as of June 30, 2017$
(1)Adjustments to original contingent consideration obligations recorded were the result of using revised financial forecasts and actuals and updated fair value measurements. These changes are recognized within operating expenses on the condensed consolidated statement of comprehensive income (loss).
(2)Changes in the contingent consideration liability which are caused by foreign exchange rate fluctuations are recognized in other comprehensive loss. 
InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2017




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

In January 2014, a former finance employee of Productions Graphics initiated wrongful termination and overtime claims in the Labor Court of Boulogne-Billancourt, and he currently seeks damages of approximately €0.6 million (approximately $0.8 million). The Company disputes these allegations and intends to vigorously defend these matters. In addition, the Company’s criminal complaint in France, described above, seeks to redress harm caused by this former employee in light of his participation in the fraudulent transactions described above. The labor claim has been stayed in deference to the Company’s related criminal complaint.

In February 2014, shortly following the Company’s 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
InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Nine Months Ended September 30, 2016





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. On September 29, 2014, the Company and individual defendants filed a motion to dismiss the complaint for failure to state a claim. On September 30, 2015, the Court granted in part and denied in part the motion to dismiss, resulting in the dismissal with prejudice of all claims relating to the inside sales initiative. On March 18, 2016, the parties reached an agreement in principle to settle the litigation. The settlement provides for payment to the class of $6.0 million, including plaintiff’s attorneys’ fees, in exchange for a full and final release, and includes a denial of liability or any wrongdoing by the Company and the individual defendants. The settlement payment will be fully paid by the Company’s insurance carrier. On November 2, 2016, the Court issued an order approving the settlement and dismissing the action with prejudice.

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 Company's Board of Directors formed a Committee of independent directors to review the matters raised in the letter. The Committee, with assistance from the Committee's independent legal adviser, reviewed, investigated, and evaluated the matters raised in the letter. Following the completion of its review, the Committee concluded that pursuit of the derivative claims was not in the best interests of the Company’s stockholders and recommended to the Board of Directors that it reject Turberg’s demand to pursue such claims. On November 2, 2016, the Board of Directors considered and accepted this recommendation.

In March 2016, Capgemini America, Inc. (“Capgemini”) filed a complaint against the Company in the United States District Court for the Northern District of Illinois, alleging breach of contract and unjust enrichment in connection with the Company’s termination of Capgemini’s services under an agreement requiring Capgemini to provide certain business process outsourcing services to the Company. The complaint seeks damages of $2.4 million, interest, costs, and attorney’s fees. The Company disputes the claims and intends to vigorously defend the matter. In April 2016, the Company filed an answer, affirmative defenses and counterclaims against Capgemini. The Company’s counterclaims allege fraud in the inducement, Illinois Consumer Fraud Act liability, and breach of contract, and seek compensatory and punitive damages, costs, and attorney’s fees in an amount to be determined. In June 2016, the parties entered into a confidential settlement agreement in which the parties mutually released each other from all claims and the lawsuit was dismissed with prejudice. The settlement did not have a material impact on the Company’s financial position or results of operations.

12. Revolving Credit Facilities

The Company entered into a Credit Agreement, dated as of August 2, 2010, subsequently amended most recently as of September 25, 2014,February 3, 2017, 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, as defined in the Credit Agreement. 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 3.003.0 to 1.0 for the trailing twelve months ended SeptemberJune 30, 20162017 and 3.003.0 to 1.0 for each period thereafter. The Company is also required to maintain an interest coverage ratio of no less than 5.005.0 to 1.0. The Company is in compliance with all debt covenants as of SeptemberJune 30, 2016.2017.
 
At SeptemberJune 30, 2016,2017, the Company had $24.0$54.8 million of unused availability under the Credit Agreement and $0.7$0.8 million of letters of credit which have not been drawn upon.
 
The book value of the debt under this Credit Agreement is considered to approximate its fair value as of SeptemberJune 30, 20162017 as the debt is considered short-term in nature and the interest rates are considered in line with current market rates.
InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Nine Months Ended September 30, 2016






On February 22, 2016, the Company entered into a Revolving Credit Facility (the “Facility”) with Bank of America N.A. to support ongoing working capital needs of the Company. The Facility includes a revolving commitment amount of $5.0 million
InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2017



whereby maturity dates vary based on each individual drawdown. Outstanding borrowings under the Facility are guaranteed by the Company’s assets. Borrowings and repayments are made in renminbi, the official Chinese currency. The applicable interest rate is 110% of the People’s Bank of China’s base rate. The terms of the Facility

include limitations on use of funds for working capital purposes as well as customary representations and warranties made by the Company. At SeptemberJune 30, 2016,2017, the Company had $4.8$4.2 million of unused availability under the Facility.
 
13. Share Repurchase Program

On February 12, 2015, the Company announced that its Board of Directors approved a share repurchase program authorizing the repurchase of up to an aggregate of $20 million of its common stock through open market and privately negotiated transactions over a two-year period. On November 2, 2016, the Board of Directors approved a two-year extension to the share repurchase program. The Company now expects the program to run through February 12,28, 2019. On May 4, 2017, the Board of Directors authorized the repurchase of up to an additional $30.0 million of its common stock through open market and privately negotiated transactions over a two-year period ending May 31, 2019. The timing and amount of any share repurchases will be determined based on market conditions, share price and other factors, and the program may be discontinued or suspended at any time. Repurchases will be made in compliance with SEC rules and other legal requirements.
 
During the six months ended June 30, 2017, the Company repurchased 1,028,654 shares of its common stock for $10.0 million in the aggregate at an average cost of $9.76 per share. During the three months ended June 30, 2017, the Company repurchased 459,030 shares of its common stock for $4.6 million in the aggregate at an average cost of $9.91 per share. During the three and ninesix months ended SeptemberJune 30, 2016 the Companycompany did not repurchase any shares of its common stock. During the three months ended September 30, 2015, the Company did not repurchase any shares of its common stock. During the nine months ended September 30, 2015, the Company repurchased 763,787 shares of its common stock for $4.9 million in the aggregate at an average cost of $6.41 per share. Shares repurchased under this program are recorded at acquisition cost, including related expenses.


14. Business Segments
 
Segment information is prepared on the same basis that our Chief Executive Officer, who is our chief operating decision maker (“CODM”), manages the segments, evaluates financial results, and makes key operating decisions. In fiscal year 2015, segments wereThe Company is organized and managed by the CODM as three business segments: North America, including the United States and Canada; EMEA, including operations in the United Kingdom, continental Europe, the Middle East, Africa and Asia; and LATAM, including operations in Mexico, South America and Central America. Effective in the first fiscal quarter of 2016, the Company implemented changes to the organizational structure of the Latin America and EMEA segments which included combining the two segments under single management and managing those businesses as one segment. In conjunction with this change, the CODM now manages the results of the Company as two business segments: North America and International. The North America segment includes operations in the United States and Canada; the International segment includes all other operations across Europe, Asia, Mexico, Central America and South America; Other consists of intersegment eliminations, shared service activities and unallocated corporate expenses. All transactions between segments are presented at their gross amounts and eliminated through Other. Prior period amounts have been restated to reflect this change.
 
Management evaluates the performance of its operating segments based on revenues and Adjusted EBITDA, which is a non-GAAP financial measure. The accounting policies of each of the operating segments are the same as those described in the summary of significant accounting policies in Note 1. Adjusted EBITDA represents income from operations excluding depreciation and amortization, stock-based compensation expense, income/expense related to changes in the fair value of contingent consideration liabilities and restructuring and other charges. Management does not evaluate the performance of its operating segments using asset measures.
 
InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Six Months Ended June 30, 2017



The table below presents financial information for the Company’s reportable segments and Other for the three and ninesix month periods noted (in thousands):
InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and Nine Months Ended September 30, 2016
 North America International Other Total
Three Months Ended June 30, 2017:       
Revenue from third parties$186,807
 $92,723
 $
 $279,530
Revenue from other segments1,087
 2,987
 (4,074) 
Total revenue187,894
 95,710
 (4,074) 279,530
Adjusted EBITDA(1)
18,108
 7,028
 (8,492) 16,644
        
Three Months Ended June 30, 2016:       
Revenue from third parties$177,006
 $92,214
 $
 $269,220
Revenue from other segments
 3,742
 (3,742) 
Total revenue177,006
 95,956
 (3,742) 269,220
Adjusted EBITDA(1)
15,793
 6,103
 (7,103) 14,793
        
 North America International Other Total
Six Months Ended June 30, 2017       
Revenue from third parties$370,633
 $176,287
 $
 $546,920
Revenue from other segments2,842
 6,347
 (9,189) 
Total revenue373,475
 182,634
 (9,189) 546,920
Adjusted EBITDA(1)
37,000

9,449
 (17,537) 28,912
        
Six Months Ended June 30, 2016       
Revenue from third parties$367,009
 $173,283
 $
 $540,292
Revenue from other segments
 7,509
 (7,509) 
Total revenue367,009
 180,792
 (7,509) 540,292
Adjusted EBITDA(1)
31,799
 10,038
 (15,350) 26,487





 North America International Other Total
Three Months Ended September 30, 2016:       
Revenue from third parties$185,199
 $94,794
 $
 $279,993
Revenue from other segments3,401
 9,065
 (12,466) 
Total revenue188,600
 103,859
 (12,466) 279,993
Adjusted EBITDA(1)
16,411
 7,444
 (6,935) 16,920
        
Three Months Ended September 30, 2015:       
Revenue from third parties$179,990
 $84,730
 $
 $264,720
Revenue from other segments
 2,874
 (2,874) 
Total revenue179,990
 87,604
 (2,874) 264,720
Adjusted EBITDA(1)
17,050
 5,710
 (6,710) 16,050
        
 North America International Other Total
Nine Months Ended September 30, 2016:       
Revenue from third parties$550,561
 $269,725
 $
 $820,286
Revenue from other segments5,048
 16,573
 (21,621) 
Total revenue555,609
 286,298
 (21,621) 820,286
Adjusted EBITDA(1)
48,209
 17,482
 (22,284) 43,407
        
Nine Months Ended September 30, 2015:       
Revenue from third parties$519,727
 $239,316
 $
 $759,043
Revenue from other segments
 8,328
 (8,328) 
Total revenue519,727
 247,644
 (8,328) 759,043
Adjusted EBITDA(1)
46,746
 11,661
 (20,733) 37,674
(1)Adjusted EBITDA, which represents income from operations with the addition of depreciation and amortization, stock-based compensation expense, change in the fair value of contingent consideration liabilities, and certain legal settlements, restructuring and other charges, 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.
 
The table below reconciles the total of the reportable segments' Adjusted EBITDA and the Adjusted EBITDA included in Other to income before income taxes (in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
 2016 2015 2016 2015
        
Adjusted EBITDA$16,920
 $16,050
 $43,407
 $37,674
Depreciation and amortization(5,066) (4,485) (14,382) (12,842)
Stock-based compensation expense(1,740) (1,226) (4,097) (4,854)
Change in fair value of contingent consideration(788) (701) (9,975) (1,691)
Restructuring and other charges(466) 
 (4,433) 
Income from operations8,860
 9,638
 10,520
 18,287
Total other expense(1,279) (2,215) (3,173) (4,319)
Income before income taxes$7,581
 $7,423
 $7,347
 $13,968

InnerWorkings, Inc. and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three and NineSix Months Ended SeptemberJune 30, 2016


2017




The table below presents total assets for the Company’s reportable segments and Other as of September 30, 2016 and December 31, 2015 (in thousands):

 September 30, 2016 December 31, 2015
 (unaudited)  
North America$387,634
 $390,739
International204,106
 195,060
Other21,161
 22,668
Total assets$612,901
 $608,467

 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
Adjusted EBITDA16,644
 14,793
 28,912
 26,487
Depreciation and amortization(3,182) (4,721) (6,086) (9,316)
Stock-based compensation expense(1,503) (1,117) (2,921) (2,358)
Change in fair value of contingent consideration(1,884) (7,276) (844) (9,187)
Restructuring and other charges
 (623) 
 (3,967)
Income from operations10,075
 1,056
 19,061
 1,659
Interest income12
 24
 46
 38
Interest expense(1,038) (985) (2,041) (2,062)
Other, net(1,165) 291
 (1,388) 130
Income (loss) before income taxes$7,884
 $386
 $15,678
 $(235)


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

Overview
 
We are a leading global marketing execution firm for some of the world's most marketing intensive companies, including those in the Fortune 1000 brands, across a wide range of industries.1000. As a comprehensive outsourced global solution, we leverage proprietary technology, an extensive supplier network substantial procurement data, buying power and deep domain expertise to design, procurestreamline the creation, production and execute brandeddistribution of marketing and promotional materials, signage and displays, retail experiences, events and promotions creative services and product packaging across every major market worldwide. The items we source generally are generally procured through the marketing supply chain and we refer to these items collectively as marketing materials. Our solution is designedThrough our network of more than 8,000 global suppliers, we offer a full range of fulfillment and logistics services that allow us to deliver substantial savings, shorter lead times, greater brand consistency,procure marketing materials of virtually any kind. The breadth of our product offerings and more controlservices and transparency acrossthe depth of our supplier network enable us to fulfill the marketing supply chain while delivering high-quality products and services formaterials procurement needs of our clients.
 
Our proprietary software applications and databases create a fully-integrated solution that stores, analyzes and tracks the production capabilities of our supplier network, as well as detailed pricing data. As a result, we believe we have one of the largest independent repositories of supplier capabilities and pricing data for suppliers of marketing materials around the world. We leverage our supplier capabilities and pricing data to match our orders with suppliers that are optimally suited to meet the client’s needs at a highly competitive price.
Through our network Our technology and databases of more than 9,000 global suppliers, we offer a full range of fulfillmentproduct and logistics services that allow ussupplier information are designed to procurecapitalize on excess manufacturing capacity and other inefficiencies in the traditional marketing materials of virtually any kind. The breadth of our product offeringssupply chain to obtain favorable pricing while delivering high-quality products and services and the depth offor our clients. 

We use our supplier network enable uscapability and pricing data to fulfillmatch orders with suppliers that are optimally suited to meet the marketing materials procurementclient's needs of our clients.at a highly competitive price. By leveraging our technology and data, our clients are able to reduce overhead costs, redeploy internal resources and obtain favorable pricing and service terms. In addition, our ability to track individual transactions and provide customized reports detailing procurement activity on an enterprise-wide basis provides our clients with greater visibility and control of their marketing materials expenditures.
 We were formed in 2001, commenced operations in 2002 and converted from a limited liability company to a Delaware corporation in January 2006. We have increased our annual revenue from $5.0 million in 2002 to $1,029.4 million in 2015, representing a compound annual growth rate of 50.6%.
Our corporate headquarters are located in Chicago, Illinois. As of September 30, 2016, we operated in 67 global office locations in more than 39 countries. Effective in the first fiscal quarter of 2016, we organize our operations into two operating segments based on geographic regions: North America and International. The North America segment includes operations in the United States and Canada; the International segment includes operations in Mexico, South America, Central America, Europe, the Middle East, Africa and Asia.
Revenue

We generate revenue by procuring and purchasing marketing materials from our suppliers and selling those products to our clients. We procure products for clients across a wide range of industries, such as retail, financial services, hospitality, consumer packaged goods, non-profits, healthcare, pharmaceuticals, food and beverage, broadcasting and cable and transportation. Our clients fall into two categories, enterprise and transactional. We enter into contracts with our enterprise clients to provide some or substantially all, of their marketing materials typicallyfor certain categories, geographies and/or campaigns, on a recurring basis. We provide marketing materials to our transactional clients on an order-by-order basis.  During

As of June 30, 2017, we had approximately 1,900 employees and independent contractors in more than 26 countries. We organize our operations into two operating segments based on geographic regions: North America and International. The North America segment includes operations in the threeUnited States and nine months ended September 30,Canada; the International segment includes operations in Mexico, South America, Central America, Europe, the Middle East, Africa and Asia. In 2016, we generated global revenue from third parties of $734.2 million in the North America segment and $356.5 million in the International Segment. We believe the opportunity exists to expand our business into new geographic markets. Our objective is to continue to increase our sales in the United States and internationally by adding new clients and increasing our sales to existing clients through additional marketing execution services or geographic markets. We intend to hire or acquire more account executives within close proximity to these large markets.
Revenue

We generate revenue through the procurement of marketing materials for our clients. Our revenue is generated from two different types of clients: enterprise and transactional. Enterprise clients usually order marketing materials in higher dollar amounts and volume than our transactional clients. We categorize a client as an enterprise client if we have a contract with the client for the provision of marketing materials on a recurring basis; if the client has signed an open-ended purchase order or a series of related purchase orders; or if the client has enrolled in our e-stores program, which enables the client to make online purchases of marketing materials on a recurring basis. We categorize all other clients as transactional. We enter into contracts with our enterprise clients accounted for 84% and 85%to provide some or a specific portion of their marketing products on a recurring basis. Our contracts with enterprise clients are generally three to five years, often subject to termination by either party upon prior notice ranging from 90 days to twelve months. 


Several of our revenue, respectively, whileenterprise clients have outsourced substantially all of their recurring marketing materials needs to us. We provide marketing materials to our transactional clients accounted for 16% and 15% of our revenue, respectively.on an order-by-order basis. 

Our revenue consists of the prices paid to us by our clients for marketing materials. These prices, in turn, reflect the amounts charged to us by our suppliers plus our gross profit. Our gross profit margin, in the case of some of our enterprise clients, is fixed by contract or, in the case of transactional clients, is dependent on prices negotiated on a job-by-job basis. Once either type of client accepts our pricing terms, the selling price is established and we procure the product for our own account in order to re-sell it to the client. We take full title and risk of loss for the product upon shipment. The finished product is typically shipped directly from our supplier to a destination specified by our client. Upon shipment, our supplier invoices us for the products and we invoice our client.

Our revenue from enterprise clients tends to generate lower gross profit as a percentage of revenue, which we refer to as gross profit margins than our revenue from transactional clients because the gross profit margins established in our contracts

with large enterprise clients are generally lower than the gross profit margins typically realized in our transactional business.lower. Although our enterprise revenue generates lower gross profit margins, our enterprise business tends to be as profitable as our transactional business on an operating profit basis because the commission expense associated with enterprise clients is generally lower.

Cost of Goods Sold and Gross Profit
 
Our cost of goods sold consists primarily of the price at which we purchase products from our suppliers. Our selling price, including our gross profit, in the case of some of our enterprise clients, is based on a fixed gross margin established by contract or, in the case of transactional clients, is determined at the discretion of the account executive or production manager given predetermined parameters. Our gross profit margins on our enterprise clients are typically lower than our gross profit margins on our transactional clients. As a result, our cost of goods sold as a percentage of revenue for our enterprise clients is typically higher than those for our transactional clients. Our gross profit for the three months ended SeptemberJune 30, 2017 and 2016 and 2015 was $67.8$70.2 million and $63.6$65.1 million, or 24.2%25.1% and 24.0%24.2% of revenue, respectively.
 
Operating Expenses
 
Our selling, general and administrative expenses consist of commissions paid to our account executives, compensation costs for our management team and production managers, as well as compensation costs for our finance and support employees, public company expenses, corporate systems, legal and accounting, facilities and travel and entertainment expenses. Selling, general and administrative expenses as a percentage of revenue were 18.8% and 18.4%gross profit decreased to 78.4% for the three months ended SeptemberJune 30, 2016 and 2015, respectively.2017 compared to 79.0% for the three months ended June 30, 2016.

We accrue for commissions when we recognize the related revenue. Some of our account executives receive a monthly draw to provide them with a more consistent income stream. The cash paid to our account executives in advance of commissions earned is reflected as a prepaid expense on our balance sheet. As our account executives earn commissions, a portion of their commission payment is withheld and offset against their prepaid commission balance, if any. Our prepaid commission balance, net of accrued earned commissions not yet paid, increaseddecreased to $1.1$0.2 million as of SeptemberJune 30, 20162017 from $0.9$0.5 million as of December 31, 2015.2016.
 
We agree to provide our clients with marketing materials that conform to the industry standard of a “commercially reasonable quality,” and our suppliers in turn generally agree to provide us with products of the same quality. In addition, the quotes we execute with our clients typically include customary industry terms and conditions that limit the amount of our liability for product defects. Product defects have not had a material adverse effect on our results of operations.
  

Comparison of three months ended SeptemberJune 30, 20162017 and 20152016
 
Revenue
 
Our revenue by segment for each of the periods presented was as follows :follows:  
Three Months Ended September 30,Three Months Ended June 30,
2016 % of Total 2015 % of Total2017 % of Total 2016 % of Total
(dollars in thousands)(dollars in thousands)
North America$185,199
 66.1% $179,990
 68.0%$186,807
 66.8% $177,006
 65.7%
International94,794
 33.9% 84,730
 32.0%92,723
 33.2% 92,214
 34.3%
Revenues from third parties$279,993
 100.0% $264,720
 100.0%$279,530
 100.0% $269,220
 100.0%
 
North America
 
North America revenue increased by $5.2$9.8 million, or 2.9%5.5%, from $180.0$177.0 million during the three months ended SeptemberJune 30, 20152016 to $185.2$186.8 million during the three months ended SeptemberJune 30, 2016.2017. This increase in revenue is driven primarily by organic growth from new enterprise accounts added during the last 12 to 18 months.

International
 
International revenue increased by $10.1$0.5 million, or 11.9%0.6%, from $84.7$92.2 million during the three months ended SeptemberJune 30, 20152016 to $94.8$92.7 million during the three months ended SeptemberJune 30, 2016.2017. This increase in revenue is driven primarily driven by organic growth from new and existing customers, partially offset by the strengthening of the U.S. Dollar.enterprise customers. 

Cost of goods sold
 
Our cost of goods sold increased by $11.1$5.2 million, or 5.5%2.5%, from $201.1$204.1 million during the three months ended SeptemberJune 30, 20152016 to $212.2$209.3 million during the three months ended SeptemberJune 30, 2016. The increase is a result of increased revenue during the three months ended September 30, 2016 as described above.2017. Our cost of goods sold as a percentage of revenue was 75.8%74.9% and 76.0%75.8% during the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively.
 
Gross profit margin
 
Our gross profit margin was 24.2%25.1% and 24.0%24.2% during the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. This increase is due to a shift in revenuewas primarily driven by benefits from supply chain initiatives and favorable product category and geographical mix to higher margin categories during the three months ended SeptemberJune 30, 2016.2017.
 
Selling, general and administrative expenses
 
Selling, general and administrative expenses increased by $3.8$3.7 million, or 7.8%7.1%, from $48.8$51.4 million during the three months ended SeptemberJune 30, 20152016 to $52.6$55.1 million during the three months ended SeptemberJune 30, 2016.2017. This increase is primarily driven by increased investments in operational improvements and product category and geographical mix during the increase in revenue described above.current quarter. As a percentage of revenue,gross profit, selling, general and administrative expenses remained relatively consistent at 18.8%decreased to 78.4% for the three months ended SeptemberJune 30, 2016 and 18.4%2017 compared to 79.0% for the three months ended SeptemberJune 30, 2015.2016.

Depreciation and amortization
 
Depreciation and amortization expense increaseddecreased by $0.6$1.5 million, or 12.9%32.6%, from $4.5$4.7 million during the three months ended SeptemberJune 30, 20152016 to $5.1$3.2 million during the three months ended SeptemberJune 30, 2016.2017. This increasedecrease is driven by additional depreciation expense from the timingimpact of capital expenditures, including internal-use software.the change in useful life of certain proprietary software made during the fourth quarter of 2016 as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

Change in fair value of contingent consideration
 
Expense from the change in fair value of contingent consideration increaseddecreased by $0.1$5.4 million from $0.7$7.3 million during the three months ended SeptemberJune 30, 20152016 to $0.8$1.9 million during the three months ended SeptemberJune 30, 2016.2017. The change in the fair value

of the contingent liability is driven by the final adjustment of the DB Studios liability during the first quarter of 2017 and the final adjustment of the EYELEVEL liability during the second quarter of 2017.

Restructuring and other charges
 
During the three months ended September 30, 2016, we recorded restructuring and other charges of $0.5 million. During the fourth quarter of 2015, wemanagement approved a global realignment plan that is expected to allow usallowed the Company to more efficiently meet client needs across ourits international platform. Through improved integration of global resources, the plan will createcreated back office and other efficiencies and allowallowed for the elimination of approximately 100 positions. As required by law, we are consultingpositions deemed unnecessary. The realignment plan was completed during the fourth quarter of 2016. In connection with each of the affected countries’ local Works Councils throughout implementation of this plan.

As of September 30, 2016,these actions, the Company has recognized $5.5 million inincurred total pre-tax cash restructuring charges related to this plan,of $6.7 million, the majority of which $0.3 million, $4.2 million and $1.0 million related to the North America, International and Other segments, respectively. This plan is expected to be completedwere recognized during 2016.

No restructuring activitiescharges occurred during the three months ended SeptemberJune 30, 2015.2017.

During the three months ended June 30, 2016, the Company recorded restructuring and other charges of $0.6 million.

Income from operations

Income from operations decreasedincreased by $0.7$9.0 million or 8.1%, from $9.6$1.1 million during the three months ended SeptemberJune 30, 20152016 to $8.9$10.1 million during the three months ended SeptemberJune 30, 2016.2017. As a percentage of revenue, income from operations was 3.2%3.6% and 3.6%0.4% during the three months ended SeptemberJune 30, 2017 and 2016, respectively. As a percentage of gross profit, income from operations was 14.3% and 2015,1.6% during the three months ended June 30, 2017 and 2016, respectively. This decreaseincrease is primarily attributable to the restructuring chargesoperating leverage and changes in depreciation and amortization, fair valuesvalue of contingent consideration asand restructuring charges discussed above, partially offset by higher gross profit margin.above.

Other expense
 
Other expense decreasedincreased by $0.9$1.5 million from $2.2$0.7 million duringfor the three months ended SeptemberJune 30, 20152016 to $1.3$2.2 million during the three months ended SeptemberJune 30, 2016.2017. This decrease isincrease included a $0.4 million foreign exchange loss due to the Czech National Bank's decision to discontinue the Czech koruna's peg to the Euro during the second quarter of 2017. The remaining expense was primarily driven by unrealized foreign exchange losses on balances denominated in foreign currency transactionscurrencies, including intercompany loans, caused by exchange rate changes in the International segment in the prior year due to exchange rate fluctuations across multipleEuro, Brazilian Real, and some other currencies.
 
Income tax expense

Income tax expense decreasedincreased by $0.3$0.7 million from $3.5$2.7 million during the three months ended SeptemberJune 30, 20152016 to $3.2$3.4 million during the three months ended SeptemberJune 30, 2016.2017. Our effective tax rate was 42.7%43.0% and 47.0%702.0% for the three months ended SeptemberJune 30, 2017 and 2016, respectively. Our effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted each period by discrete factors and events.

The effective tax rates were affected by the fair value changes to contingent consideration in each period. Portions of the total amount recognized from fair value changes to contingent consideration relate to non-taxable acquisitions for which deferred taxes are not recognized, consistent with the treatment of goodwill and intangible assets for those acquisitions under U.S. GAAP. In the three months ended June 30, 2017 and 2016, $1.9 million and $7.3 million, respectively, was recognized from fair value changes to contingent consideration. Excluding the impact of the contingent liability, prior year restructuring charge in each period and Czech exit from exchange rate commitment, the effective tax rate was 34.6% and 29.9% in the three months ended June 30, 2017 and 2016, respectively.

The effective tax rate for the three months ended June 30, 2017 was unfavorably impacted by $0.2 million of stock-based compensation activity due to the adoption ASU 2016-09 on January 1, 2017. There was no impact for the three months ended June 30, 2016.

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will expire unutilized. At the end of each reporting period, the Company reviews the realizability of its deferred tax assets. During the second quarter of 2017, the valuation allowance balance was decreased for a Peruvian valuation allowance adjustment. The Company believes sufficient positive evidence exists to release the valuation allowance, therefore, the Company adjusted the valuation allowance by $0.8 million resulting in a $0.2 million benefit to income tax expense for the three months ended

June 30, 2017. There were no material valuation adjustments for the three months ended June 30, 2016. Additionally, the Company continues to incur losses in jurisdictions which have valuation allowances against tax loss carryforwards, so a tax benefit has not been recognized in the financial statements for these losses.

Net income (loss)
Net income (loss) increased by $6.8 million, or 293.4%, from a net loss of $2.3 million during the three months ended June 30, 2016 to net income of $4.5 million during the three months ended June 30, 2017. Net income (loss) as a percentage of revenue was 1.6% and (0.9)% during the three months ended June 30, 2017 and 2016, respectively. Net income (loss) as a percentage of gross profit was 6.4% and (3.6)% during the three months ended June 30, 2017 and 2016, respectively. This increase is primarily attributable to changes in depreciation and amortization, change in fair value of contingent consideration and restructuring charges discussed above.


Diluted earnings (loss) per share
 Three Months Ended June 30,
 2017 2016
(in thousands, except per share data)   
Net income (loss)$4,493
 $(2,324)
Denominator for dilutive earnings per share55,189
 53,411
Diluted earnings (loss) per share$0.08
 $(0.04)

Diluted earnings (loss) per share increased by $0.12 from a loss of $0.04 per share during the three months ended June 30, 2016 to earnings per share of $0.08 per share during the three months ended June 30, 2017.


Comparison of six months ended June 30, 2017 and 2016

Revenue
Our revenue by segment for each of the periods presented was as follows:  
 Six Months Ended June 30,
 2017 % of Total 2016 % of Total
 (dollars in thousands)
North America$370,633
 67.8% $367,009
 67.9%
International176,287
 32.2% 173,283
 32.1%
Revenue from third parties$546,920
 100.0% $540,292
 100.0%
North America
North America revenue increased by $3.6 million, or 1.0%, from $367.0 million during the six months ended June 30, 2016 to $370.6 million during the six months ended June 30, 2017. This increase in revenue is driven primarily by organic growth from new enterprise accounts added during the last 12 to 18 months.

International
International revenue increased by $3.0 million, or 1.7%, from $173.3 million during the six months ended June 30, 2016 to $176.3 million during the six months ended June 30, 2017. This increase in revenue is driven primarily by organic growth from new and existing enterprise customers. 

Cost of goods sold
Our cost of goods sold decreased by $0.9 million, or 2.5%, from $413.3 million during the six months ended June 30, 2016 to $412.4 million during the six months ended June 30, 2017. Our cost of goods sold as a percentage of revenue was 75.4% and 76.5% during the six months ended June 30, 2017 and 2016, respectively.
Gross profit margin
Our gross profit margin was 24.6% and 23.5% during the six months ended June 30, 2017 and 2016, respectively. This increase was primarily driven by benefits from supply chain initiatives and favorable product category and geographical mix during six months ended June 30, 2017.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $5.6 million, or 5.4%, from $102.9 million during the six months ended June 30, 2016 to $108.5 million during the six months ended June 30, 2017. This increase is primarily driven by increased investments into the infrastructure of the Company through operational improvements during the current quarter. As a percentage of gross profit, selling, general and administrative expenses decreased to 80.7% for the six months ended June 30, 2017 compared to 81.0% for the six months ended June 30, 2016.

Depreciation and amortization
Depreciation and amortization expense decreased by $3.2 million, or 34.7%, from $9.3 million during the six months ended June 30, 2016 to $6.1 million during the six months ended June 30, 2017. This decrease is driven by the impact of the change in useful life of certain proprietary software made during the fourth quarter of 2016 as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

Change in fair value of contingent consideration
Expense from the change in fair value of contingent consideration decreased by $8.4 million from expense of $9.2 million during the six months ended June 30, 2016 to expense of $0.8 million during the six months ended June 30, 2017. The change

in the fair value of the contingent liability is driven by the final adjustment of the DB Studios liability during the first quarter of 2017 and the final adjustment of the EYELEVEL liability during the second quarter of 2017.

Restructuring and other charges
During the fourth quarter of 2015, management approved a global realignment plan that allowed the Company to more efficiently meet client needs across its international platform. Through improved integration of global resources, the plan created back office and other efficiencies and allowed for the elimination of approximately 100 positions deemed unnecessary. The realignment plan was completed during the fourth quarter of 2016. In connection with these actions, the Company incurred total pre-tax cash restructuring charges of $6.7 million, the majority of which were recognized during 2016.

No restructuring activities occurred during the six months ended June 30, 2017.

During the six months ended June 30, 2016, the Company recorded restructuring and other charges of $4.0 million.

Income from operations

Income from operations increased by $17.4 million from $1.7 million during the six months ended June 30, 2016 to $19.1 million during the three months ended June 30, 2017. As a percentage of revenue, income from operations was 3.5% and 0.3% during the six months ended June 30, 2017 and 2016, respectively. As a percentage of gross profit, income from operations was 14.2% and 1.3% during the six months ended June 30, 2017 and 2016, respectively. This increase is primarily attributable to operating leverage and changes in depreciation and amortization, fair value of contingent consideration and restructuring charges discussed above.

Other expense
Other expense increased by $1.5 million from $1.9 million for the six months ended June 30, 2016 to $3.4 million for the six months ended June 30, 2017. This increase included a $0.4 million foreign exchange loss due to the Czech National Bank's decision to discontinue the Czech koruna's peg to the Euro during the second quarter of 2017. The remaining expense was primarily driven by unrealized foreign exchange losses on balances denominated in foreign currencies, including intercompany loans, caused by exchange rate changes in the Euro, Brazilian Real, and some other currencies.
Income tax expense

Income tax expense increased by $0.9 million from $4.8 million during the six months ended June 30, 2016 to $5.7 million during the six months ended June 30, 2017. Our effective tax rate was 36.5% and (2,038.9)% for the six months ended June 30, 2017 and 2016, respectively. Our effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted each period by discrete factors and events.
 
The effective tax rates were affected by the fair value changes to contingent consideration in each period. Portions of the total amount recognized from fair value changes to contingent consideration relate to non-taxable acquisitions for which deferred taxes are not recognized, consistent with the treatment of goodwill and intangible assets for those acquisitions under U.S. GAAP. In the three months ended September 30, 2016 and 2015, $0.8 million and $0.7 million was recognized as expense from fair value changes to contingent consideration, respectively, which did not result in recognition of a deferred tax asset, therefore, increasing the effective tax rate for these periods. Additionally, the global realignment plan resulted in restructuring and other charges in jurisdictions which have valuation allowances against tax loss carryforwards, so a tax benefit has not been recognized in the financial statements. Excluding the impact of these transactions in each period, the effective tax rate was 34.6% and 42.9% in the three months ended September 30, 2016 and 2015, respectively. The decrease in the effective tax rate in 2016 is primarily due to forecasted changes in pre-tax income mix by jurisdiction and the effect of valuation allowances on the tax losses of certain entities.
Net income
Net income increased by $0.4 million, or 10.2%, from $3.9 million during the three months ended September 30, 2015 to $4.3 million during the three months ended September 30, 2016. Net income as a percentage of revenue was 1.6% and 1.5% during the three months ended September 30, 2016 and 2015, respectively.





Diluted earnings per share
 Three Months Ended September 30,
 2016 2015
(in thousands, except per share data)   
Net income$4,341
 $3,936
Denominator for dilutive earnings per share54,772
 53,349
Diluted earnings per share$0.08
 $0.07

Diluted earnings per share increased by $0.01 from $0.07 during the three months ended September 30, 2015 to $0.08 during the three months ended September 30, 2016.

Comparison of nine months ended September 30, 2016 and 2015
Revenue
Our revenue by segment for each of the periods presented was as follows:  
 Nine Months Ended September 30,
 2016 % of Total 2015 % of Total
 (dollars in thousands)
North America$550,561
 67.1% $519,727
 68.5%
International269,725
 32.9% 239,316
 31.5%
Revenues from third parties$820,286
 100.0% $759,043
 100.0%

North America
North America revenue increased by $30.8 million, or 5.9%, from $519.7 million during the nine months ended September 30, 2015 to $550.6 million during the nine months ended September 30, 2016. This increase in revenue is driven primarily by organic growth from new enterprise accounts added during the last 12 to 18 months.

International
International revenue increased by $30.4 million, or 12.7%, from $239.3 million during the nine months ended September 30, 2015 to $269.7 million during the nine months ended September 30, 2016. This increase is primarily driven by organic growth from new and existing customers, offset by the strengthening of the U.S. Dollar.

Cost of goods sold
Our cost of goods sold increased by $44.1 million, or 7.6%, from $581.4 million during the nine months ended September 30, 2015 to $625.5 million during the nine months ended September 30, 2016. The increase is a result of increased revenue during the nine months ended September 30, 2016 as described above. Our cost of goods sold as a percentage of revenue was 76.2% and 76.6% during the nine months ended September 30, 2016 and 2015, respectively.
Gross profit margin
Our gross profit margin was 23.8% and 23.4% during the nine months ended September 30, 2016 and 2015, respectively. This increase is due to a shift in revenue mix to higher margin categories during the nine months ended September 30, 2016.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $10.7 million, or 7.4%, from $144.8 million during the nine months ended September 30, 2015 to $155.5 million during the nine months ended September 30, 2016. Our selling, general and administrative expenses as a percentage of revenue remained relatively consistent at 19.1% for the nine months ended September 30, 2015 to 19.0% for the nine months ended September 30, 2016.

Depreciation and amortization
Depreciation and amortization expense increased by $1.6 million, or 12.0%, from $12.8 million during the nine months ended September 30, 2015 to $14.4 million during the nine months ended September 30, 2016. This increase is driven by additional depreciation expense from the timing of capital expenditures, including internal-use software.

Change in fair value of contingent consideration
Expense from the change in fair value of contingent consideration increased by $8.3 million from $1.7 million during the nine months ended September 30, 2015 to $10.0 million during the nine months ended September 30, 2016. The expense for the nine months ended September 30, 2016 includes an adjustment of $9.4 million of expense to increase the liability relating to the Eyelevel acquisition due to strong financial performance in recent periods and an increase in forecasted results.

Restructuring and other charges
During the nine months ended September 30, 2016, we recorded restructuring and other charges of $4.4 million. During the fourth quarter of 2015, we approved a global realignment plan that is expected to allow us to more efficiently meet client needs across our international platform. Through improved integration of global resources, the plan will create back office and other efficiencies and allow for the elimination of approximately 100 positions. As required by law, we are consulting with each of the affected countries’ local Works Councils throughout implementation of this plan.
As of September 30, 2016, the Company has recognized $5.5 million in restructuring charges related to this plan, of which $0.3 million, $4.2 million and $1.0 million related to the North America, International and Other segments, respectively. This plan is expected to be completed during 2016.

No restructuring activities occurred during the nine months ended September 30, 2015.

Income from operations

Income from operations decreased by $7.8 million, or 42.5%, from $18.3 million during the nine months ended September 30, 2015 to $10.5 million during the nine months ended September 30, 2016. As a percentage of revenue, income from operations was 1.3% and 2.4% during the nine months ended September 30, 2016 and 2015, respectively. This decrease is primarily attributable to the restructuring charges and changes in fair values of contingent consideration discussed above, partially offset by higher gross profit margin and lower selling, general and administrative expenses as a percentage of revenue.

Other expense
Other expense decreased by $1.1 million from $4.3 million during the nine months ended September 30, 2015 to $3.2 million during the nine months ended September 30, 2016. This decrease is primarily driven by losses on foreign currency transactions in the International segment in the prior year due to exchange rate fluctuations across multiple currencies.
Income tax expense

Income tax expense increased by $1.9 million from $6.1 million during the nine months ended September 30, 2015 to $8.0 million during the nine months ended September 30, 2016. Our effective tax rate was 109.2% and 43.7% for the nine months ended September 30, 2016 and 2015, respectively. Our effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate. In addition, the effective tax rate can be impacted each period by discrete factors and events.
The effective tax rates were affected by the fair value changes to contingent consideration in each period. Portions of the total amount recognized from fair value changes to contingent consideration relate to non-taxable acquisitions for which deferred taxes are not recognized, consistent with the treatment of goodwill and intangible assets for those acquisitions under U.S. GAAP. In the ninesix months ended SeptemberJune 30, 2017 and 2016, and 2015, $10.0$0.8 million and $1.7$9.2 million, respectively, was recognized as expense from fair value changes to contingent consideration, respectively, which did not resultconsideration. Excluding the impact of the contingent liability, prior year restructuring charge in recognition of a deferred tax asset, therefore, increasingeach period and Czech exit from exchange rate commitment, the effective tax rate was 34.6% and 35.1% in the six months ended June 30, 2017 and 2016, respectively.

The effective tax rate for these periods.the six months ended June 30, 2017 was unfavorably impacted by $0.2 million of stock-based compensation activity due to the adoption ASU 2016-09 on January 1, 2017. There was no impact for the six months ended June 30, 2016.


Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will expire unutilized. At the end of each reporting period, the Company reviews the realizability of its deferred tax assets. During the second quarter of 2017, the valuation allowance balance was decreased for a Peruvian valuation allowance adjustment. The Company believes sufficient positive evidence exists to release the valuation allowance, therefore, the Company adjusted the valuation allowance by $0.8 million resulting in a $0.2 million benefit to income tax expense for the six months ended June 30, 2017. There were no material valuation adjustments for the six months ended June 30, 2016. Additionally, the global realignment plan resulted in restructuring and other chargesCompany continues to incur losses in jurisdictions which have valuation allowances against tax loss carryforwards, so a tax benefit has not been recognized

in the financial statements. Excluding the impact ofstatements for these transactions in each period, the effective tax rate was 34.9% and 39.0% in the nine months ended September 30, 2016 and 2015, respectively. The increase in the effective tax rate in 2016 is primarily due to forecasted changes in pre-tax income mix by jurisdiction and the effect of valuation allowances on the tax losses of certain entities.losses.

 
Net income (loss)
 
Net income decreased(loss) increased by $8.6$15.0 million, or 108.6%298.3%, from $7.9a net loss of $5.0 million during the ninesix months ended SeptemberJune 30, 20152016 to a lossnet income of $0.7$10.0 million during the ninesix months ended SeptemberJune 30, 2016.2017. Net income (loss) as a percentage of revenue was (0.1)%1.8% and 1.0%(0.9)% during the ninesix months ended SeptemberJune 30, 2017 and 2016, respectively. Net income (loss) as a percentage of gross profit was 7.4% and 2015,(3.9)% during the six months ended June 30, 2017 and 2016, respectively. This decreaseincrease is primarily dueattributable to restructuring charges and changes in depreciation and amortization, change in fair valuesvalue of contingent consideration and restructuring charges discussed above, increased other expense and a higher income tax expense discussed above, partially offset by higher gross profit margin.above.


Diluted earnings (loss) per share  
Nine Months Ended September 30,Six months ended June 30,
2016 20152017 2016
(in thousands, except per share data)      
Net income (loss)$(676) $7,868
$9,951
 $(5,017)
Denominator for dilutive earnings per share53,536
 53,457
55,070
 53,278
Diluted earnings (loss) per share$(0.01) $0.15
$0.18
 $(0.09)

Diluted earnings (loss) per share decreasedincreased by $0.16$0.27 from earningsa loss of $0.09 per shares of $0.15share during the ninesix months ended SeptemberJune 30, 20152016 to loss$0.18 per share of $0.01 during the ninesix months ended SeptemberJune 30, 2016. This decrease is primarily due to the decrease in net income discussed above.2017.

Adjusted EBITDA
 
Adjusted EBITDA, which represents income from operations with the addition of depreciation and amortization, stock-based compensation expense, change in the fair value of contingent consideration liabilities, and restructuring charges itemized in the reconciliation table below, is considered a non-GAAP financial measure under SEC regulations. Net income is the most directly comparable financial measure calculated in accordance with GAAP. We present this measure as supplemental information to help our investors better understand trends in our business over time. Our management team uses Adjusted EBITDA to evaluate the performance of our business. Adjusted EBITDA is not equivalent to any measure of performance required to be reported under GAAP, nor should this data be considered an indicator of our overall financial performance and liquidity. Moreover, the Adjusted EBITDA definition we use may not be comparable to similarly titled measures reported by other companies. Our Adjusted EBITDA by segment for each of the periods presented was as follows:

Three Months Ended September 30,Three Months Ended June 30,
2016 % of Total 2015 % of Total2017 % of Total 2016 % of Total
(dollars in thousands)(dollars in thousands)
North America$16,411
 97.0 % $17,050
 106.2 %$18,108
 108.8 % $15,793
 106.8 %
International7,444
 44.0
 5,710
 35.6
7,028
 42.2
 6,103
 41.2
Other(1)
(6,935) (41.0) (6,710) (41.8)(8,492) (51.0) (7,103) (48.0)
Adjusted EBITDA$16,920
 100.0 % $16,050
 100.0 %$16,644
 100.0 % $14,793
 100.0 %

Nine Months Ended September 30,Six Months Ended June 30,
2016 % of Total 2015 % of Total2017 % of Total 2016 % of Total
(dollars in thousands)(dollars in thousands)
North America$48,209
 111.1 % $46,746
 124.0 %$37,000
 128.0 % $31,799
 120.1 %
International17,482
 40.3
 11,661
 31.0
9,449
 32.7
 10,038
 37.9
Other(1)
(22,284) (51.2) (20,733) (55.0)(17,537) (60.7) (15,350) (58.0)
Adjusted EBITDA$43,407
 100.0 % $37,674
 100.0 %$28,912
 100.0 % $26,487
 100.0 %
(1) “Other” consists of intersegment eliminations, shared service activities and corporate expenses which are not allocated to the operating segments as management does not consider them in evaluating segment performance.

Comparison of three months ended SeptemberJune 30, 20162017 and 2015.2016. Adjusted EBITDA increased by $0.8$1.8 million, or 5.4%12.5%, from $16.1$14.8 million during the three months ended SeptemberJune 30, 20152016 to $16.9$16.6 million during the three months ended SeptemberJune 30, 2016.2017. North America Adjusted EBITDA decreasedincreased by $0.7$2.3 million, or 3.7%14.7%, from $17.1$15.8 million during the three months ended SeptemberJune 30, 20152016 to $16.4$18.1 million during the three months ended SeptemberJune 30, 20162017 due to increased selling, general and administrative expenses described above, offset by increased revenue andimproved gross profit from organic growth of new enterprise customers.margins. International Adjusted EBITDA increased by $1.7$0.9 million, or 30.4%15.2%, from $5.7$6.1 million during the three months ended SeptemberJune 30, 20152016 to $7.4$7.0 million during the three months ended SeptemberJune 30, 2016 primarily2017 due to organic growth of new enterprise customers, improved operating leverage and higher gross profit margin discussed above.margins. Other Adjusted EBITDA decreased by $0.2$1.4 million, or 3.4%19.6%, from $(6.7)a loss of $7.1 million during the three months ended SeptemberJune 30, 20152016 to $(6.9)a loss of $8.5 million during the three months ended SeptemberJune 30, 2016. 2017 due to investments in operational improvements.


Comparison of ninesix months ended SeptemberJune 30, 20162017 and 2015.2016. Adjusted EBITDA increased by $5.7$2.4 million, or 15.2%9.2%, from $37.7$26.5 million during the ninesix months ended SeptemberJune 30, 20152016 to $43.4$28.9 million during the ninesix months ended SeptemberJune 30, 2016.2017. North America Adjusted EBITDA increased by $1.5$5.2 million, or 3.1%16.4%, from $46.7$31.8 million during the ninesix months ended SeptemberJune 30, 20152016 to $48.2$37.0 million during the ninesix months ended SeptemberJune 30, 20162017 due to increased revenue andimproved gross profit from organic growth of new enterprise customers.margins. International Adjusted EBITDA increaseddecreased by $5.8$0.6 million, or 49.9%5.9%, from $11.7$10.0 million during the ninesix months ended SeptemberJune 30, 20152016 to $17.5$9.4 million during the ninesix months ended SeptemberJune 30, 2016 primarily2017 due to organic growth of new enterprise customers, improved operating leveragelower revenue and higher gross margin discussed above.client mix. Other Adjusted EBITDA decreased by $1.6$2.1 million, or 7.5%14.2%, from $(20.7)a loss of $15.4 million during the ninesix months ended SeptemberJune 30, 20152016 to $(22.3)a loss of $17.5 million during the ninesix months ended SeptemberJune 30, 2016.2017 due to investments in operational improvements. 

The table below provides a reconciliation of Adjusted EBITDA to net income (loss) for each of the periods presented (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 20152017 2016 2017 2016
Net income (loss)$4,341
 $3,936
 $(676) $7,868
$4,493
 $(2,324) $9,951
 $(5,017)
Income tax expense3,240
 3,487
 8,023
 6,100
3,391
 2,710
 5,727
 4,782
Total other expense1,279
 2,215
 3,173
 4,319
Interest income(12) (24) (46) (38)
Interest expense1,038
 985
 2,041
 2,062
Other, net1,165
 (291) 1,388
 (130)
Depreciation and amortization5,066
 4,485
 14,382
 12,842
3,182
 4,721
 6,086
 9,316
Stock-based compensation expense1,740
 1,226
 4,097
 4,854
1,503
 1,117
 2,921
 2,358
Change in fair value of contingent consideration788
 701
 9,975
 1,691
1,884
 7,276
 844
 9,187
Restructuring and other charges466
 
 4,433
 

 623
 
 3,967
Non-GAAP Adjusted EBITDA$16,920
 $16,050
 $43,407
 $37,674
$16,644
 $14,793
 $28,912
 $26,487

Adjusted Diluted Earnings Per Share
 
Adjusted diluted earnings per share, which represents net income (loss), with the addition of the change in the fair value of contingent consideration liabilities, impairment charges and other amounts itemized in the reconciliation table below, divided by the weighted average shares outstanding plus share equivalents that would arise from the exercise of stock options and restricted stock and other contingently issuable shares, is considered a non-GAAP financial measure under SEC regulations. Diluted earnings per share is the most directly comparable financial measure calculated in accordance with GAAP. We present

this measure as supplemental information to help our investors better understand trends in our business over time. Our management team uses adjusted diluted earnings per share to evaluate the performance of our business. Adjusted diluted earnings per share is not equivalent to any measure of performance required to be reported under GAAP, nor should this data be considered an indicator of our overall financial performance and liquidity. Moreover, the adjusted diluted earnings per share definition we use may not be comparable to similarly titled measures reported by other companies. Our adjusted diluted earnings per share for each of the years presented was as follows (in thousands, except per share amounts):
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 20152017 2016 2017 2016
Net income (loss)$4,341
 $3,936
 $(676) $7,868
$4,493
 $(2,324) $9,951
 $(5,017)
Change in fair value of contingent consideration788
 700
 9,975
 1,680
1,884
 7,276
 844
 9,187
Czech exit from exchange rate commitment, net of tax294
 
 294
 
Restructuring and other charges, net of tax382
 
 3,964
 

 618
 
 3,582
Realignment-related income tax charges263
 
 898
 

 238
 
 635
Adjusted net income$5,774
 $4,636
 $14,161
 $9,548
$6,671
 $5,808
 $11,089
 $8,387
Weighted-average shares outstanding, diluted54,772
 53,349
 54,359
 53,457
55,189
 54,297
 55,070
 54,139
Non-GAAP Diluted Earnings Per Share$0.11
 $0.09
 $0.26
 $0.18
$0.12
 $0.11
 $0.20
 $0.15


Comparison of three months ended June 30, 2017 and 2016. Adjusted EPS increased by $0.01 or 11.0% from $0.11 during the three months ended June 30, 2016 to $0.12 during the three months ended June 30, 2017. This increase is primarily attributable to improved gross margin and the reduction in depreciation expense as discussed above.

Comparison of six months ended June 30, 2017 and 2016. Adjusted EPS increased by $0.05, or 33.3%, from $0.15 during the six months ended June 30, 2016 to $0.20 during the six months ended June 30, 2017. This increase is primarily attributable to improved gross margin and the reduction in depreciation expense as discussed above.

Liquidity and Capital Resources
 
At SeptemberJune 30, 2016,2017, we had $20.8$23.5 million of cash and cash equivalents.

Operating Activities. Cash used in operating activities primarily consists of net lossincome (loss) adjusted for certain non-cash items, including depreciation and amortization and the effect of changes in working capital and other activities. Cash used in operating activities for the ninesix months ended SeptemberJune 30, 20162017 was $23.6$1.7 million and consisted of a net lossincome of $0.7$10.0 million and $30.7$10.1 million of non-cash items, offset by $53.7$21.8 million used by working capital and other activities. The most significant impact on working capital and other activities consisted of an increase in accounts receivable and unbilled revenue of $12.8$29.4 million, an increasea decrease in inventory of $12.0$3.4 million and a decreasean increase in accounts payable of $40.3$4.3 million, offset by and a decrease in prepaid expenses and other assets of $3.6 million and an increase in accrued expenses and other liabilities of $7.9$0.9 million.

Cash used in operating activities for the ninesix months ended SeptemberJune 30, 20152016 was $7.3$0.8 million and consisted of a net incomeloss of $7.9$5.0 million and $21.5$22.2 million of non-cash items, offset by $36.7$18.0 million used by working capital and other activities. The most significant impact on working capital and other activities consisted of an increase in inventory of $13.1 million, an increase in accounts receivable and unbilled revenue of $17.6$2.4 million, an increase in inventory of $2.6 million and a decrease in accounts payable of $34.0 million, offset by and a decrease in prepaid expenses and other assets of $16.3 million and an increase in accrued expenses and other liabilities of $3.0 million, offset by an increase in accounts payable of $4.5$4.6 million.

Investing Activities. Cash used in investing activities for the ninesix months ended SeptemberJune 30, 20162017 of $10.5$7.0 million was entirely attributable to capital expenditures.
 
Cash used in investing activities for the ninesix months ended SeptemberJune 30, 20152016 of $12.1$7.4 million was entirely attributable to capital expenditures.
 
Financing Activities. Cash provided by financing activities for the ninesix months ended SeptemberJune 30, 20162017 of $24.2$0.6 million was primarily attributable to net borrowings under the revolving credit facility of $34.7$11.5 million, offset by paymentsrepurchases of contingent considerationcommon stock of $11.0 million and net short-term secured repayments of $0.8$10.0 million.
 
Cash provided by financing activities for the ninesix months ended SeptemberJune 30, 20152016 of $10.3$9.1 million was primarily
attributable to net borrowings under the revolving credit facility of $23.5$12.6 million, offset by repurchases of common stock of $4.9 million and payments of contingent consideration of $8.0$4.1 million and net short-term secured repayments of $0.1 million.

Share Repurchase Program
 
On February 12, 2015, the Company announced that its Board of Directors approved a share repurchase program authorizing the repurchase of up to an aggregate of $20 million of its common stock through open market and privately negotiated transactions over a two-year period. On November 2, 2016, the Board of Directors approved a two-year extension to the share repurchase program. The Company now expects the program to run through February 12,28, 2019. On May 4, 2017, the Board of Directors authorized the repurchase of up to an additional $30.0 million of its common stock through open market and privately negotiated transactions over a two-year period ending May 31, 2019. The timing and amount of any

share repurchases will be determined based on market conditions, share price and other factors, and the program may be discontinued or suspended at any time. Repurchases will be made in compliance with SEC rules and other legal requirements.

During the six months ended June 30, 2017, the Company repurchased 1,028,654 shares of its common stock for $10.0 million in the aggregate at an average cost of $9.76 per share. During the three months ended June 30, 2017, the Company repurchased 459,030 shares of its common stock for $4.6 million in the aggregate at an average cost of $9.91 per share. During the three and ninesix months ended SeptemberJune 30, 2016 , the Company did not repurchase any shares of its common stock. During the three months ended September 30, 2015, the Company did not repurchase any shares of its common stock. During the nine months ended September 30, 2015, the Company repurchased 763,787 shares of its common stock for $4.9 million in the aggregate at an average cost of $6.41 per share. Shares repurchased under this program are recorded at acquisition cost, including related expenses.

Revolving Credit Facilities

We entered into a Credit Agreement, dated as of August 2, 2010, subsequently amended most recently as of September 25, 2014,February 3, 2017, among us, 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 us the right to increase the aggregate commitment amount by an additional $50 million. Outstanding borrowings under the revolving credit facility are guaranteed by our material domestic subsidiaries. Our 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 requirements to maintain a maximum leverage ratio and a minimum interest coverage ratio. The Credit Agreement requires us to maintain a leverage ratio of no more than 3.00 to 1.0. We are also required to maintain an interest coverage ratio of no less than 5.005.0 to 1.0. We were in compliance with all debt covenants as of SeptemberJune 30, 2016.2017.

At SeptemberJune 30, 2016,2017, we had $24.0$54.8 million of unused availability under the Credit Agreement and $0.7$0.8 million of letters of credit which have not been drawn upon.
 
On February 22, 2016, we entered into a Revolving Credit Facility (the “Facility”) with Bank of America N.A. to support our ongoing working capital needs. The Facility includes a revolving commitment amount of $5 million whereby maturity dates vary based on each individual drawdown. Outstanding borrowings under the Facility are guaranteed by our assets. Borrowings and repayments are made in renminbi, the official Chinese currency. The applicable interest rate is 110% of the People’s Bank of China’s base rate. The terms of the Facility include limitations on use of funds for working capital purposes as well as customary representations and warranties made us. At SeptemberJune 30, 2016,2017, the Company had $4.8$4.2 million of unused availability under the Facility.

In addition, we will continue to utilize cash, in part, to fund acquisitions and expand our operations. We believe that our available cash and cash equivalents and the availability under our revolving credit facility will be sufficient to meet our working capital and operating expenditure requirements for the foreseeable future. Thereafter, we may find it necessary to obtain additional equity or debt financing.
 
We earn a significant amount of our operating income outside the United States, which is deemed to be permanently reinvested in foreign jurisdictions. We do not currently foresee a need to repatriate funds; however, should we require more capital in the United States than is generated by our operations locally or through debt or equity issuances, we could elect to repatriate funds held in foreign jurisdictions. If foreign earnings were to be remitted to the United States, foreign tax credits would be available to reduce any U.S. tax due upon repatriation. Included in our cash and cash equivalents are amounts held by foreign subsidiaries. We had $18.1$21.5 million and $15.1$27.8 million of foreign cash and cash equivalents as of SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively, which are generally denominated in the local currency where the funds are held.
 
Off-Balance Sheet Arrangements
 
We do not have any material off-balance sheet arrangements.
 
Contractual Obligations
 
With the exception of the contingent consideration in connection with our historical business acquisitions discussed in Note 2 in the Notes to Consolidated Financial Statements, there have been no material changes outside the normal course of

business in the contractual obligations disclosed in Item 7 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2015,2016, under the caption “Contractual Obligations.”
 
Critical Accounting Policies and Estimates
 
Stock-Based Compensation

On June 1, 2017, the Compensation Committee approved, pursuant to the 2006 Stock Incentive Plan, awards of performance share units (“PSUs”) for certain executive officers and employees. The PSUs are performance-based awards that will settle in shares of our stock, in an amount between 0% and 200% of the target award level, based on the cumulative adjusted earnings per share and the return on invested capital achieved by the Company between April 1, 2017 and December 31, 2019. Compensation expense for PSUs is measured by determining the fair value of the award using the closing share price on the grant date and is recognized ratably from the grant date to the vesting date for the number of awards expected to vest. The amount of compensation expense recognized for PSUs is dependent upon our quarterly assessment of the likelihood of achieving the performance conditions.
As of SeptemberJune 30, 2016,2017, except for the new critical accounting policy for PSUs described above and the adoption of ASU 2016-09 disclosed in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, there were no material changes to our critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
 
Forward-Looking Statements
 
This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains words such as “may,” “will,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “project,” “estimate” and “objective” or the negative thereof or similar terminology concerning the Company’s future financial performance, business strategy, plans, goals and objectives. These expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include information concerning our possible or assumed future performance or results of operations and are not guarantees. While these statements are based on assumptions and judgments that management has made in light of industry experience as well as perceptions of historical trends, current conditions, expected future developments and other factors believed to be appropriate under the circumstances, they are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different. Some of the factors that would cause future results to differ from the recent results or those projected in forward-looking statements include, but are not limited to, the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
 
Additional Information
 
We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, other reports and information filed with the SEC and amendments to those reports available, free of charge, through our Internet website (http://www.inwk.com) as soon as reasonably practical after we electronically file or furnish such materials to the SEC. All of our filings may be read or copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on the operation of the Public Filing Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

Item 3.            Quantitative and Qualitative Disclosures about Market Risk
 
Commodity Risk
 
We are dependent upon the availability of paper, and paper prices represent a substantial portion of the cost of our products. The supply and price of paper depend on a variety of factors over which we have no control, including environmental and conservation regulations, natural disasters and weather. We believe a 10% increase in the price of paper would not have a significant effect on our condensed consolidated statements of income or cash flows, as these costs are generally passed through to our clients.
 
Interest Rate Risk
 
We have exposure to changes in interest rates on our revolving credit facility. Interest is payable at the adjusted LIBOR rate or the alternate base rate. Assuming our $175.0 million revolving credit facility was fully drawn, a 1.0% increase in the interest rate would increase our annual interest expense by $1.75 million.
 
Our interest income is sensitive to changes in the general level of U.S. interest rates, in particular because all of our investments are in cash equivalents and marketable securities. The average duration of our investments as of SeptemberJune 30, 20162017 was less than one year. Due to the short-term nature of our investments, we believe that there is no material risk exposure.
 
Foreign Currency Risk
 
We transact business in various foreign currencies other than the U.S. dollar, principally the Euro, British pound sterling, Czech Koruna, Brazilian real, Peruvian Nuevo Sol, Mexican peso, Colombian peso and Chilean peso, which exposes us to foreign currency risk. For the ninesix months ended SeptemberJune 30, 2016,2017, we derived approximately 32.9%33.2% of our revenue from international customers, and we expect the percentage of revenue derived from outside the United States to increase in future periods as we continue to expand globally. Revenue and related expenses generated from our international operations are denominated in the functional currencies of the corresponding country. The functional currency of our subsidiaries that either operate or support these markets is generally the same as the corresponding local currency. The results of operations of, and certain of our intercompany balances associated with, our international operations are exposed to foreign exchange rate fluctuations. Changes in exchange rates could negatively affect our revenue and other operating results as expressed in U.S. dollars. We may record significant gains or losses on the remeasurement of intercompany balances. Foreign exchange gains and losses recorded to date have been immaterial to our financial statements. At this time we do not, but in the future we may enter into derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the impact hedging activities would have on our results of operations.

 
Item 4.            Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our chief executive officer and chief financial officer, we evaluated the effectiveness of our disclosure controls and procedures as of SeptemberJune 30, 2016 (the "Evaluation Date"). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that due to the material weakness in our internal control over financial reporting described below, our disclosure2017. The term “disclosure controls and procedures, were not effective as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of the Evaluation Date such1934, as amended (the “Exchange Act”), means controls and other procedures of a company that theare designed to ensure that information relating to the Company, including its consolidated subsidiaries, required to be disclosed by a company in our SECthe reports (i)that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SECthe SEC's rules and forms,forms. Disclosure controls and (ii)procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’scompany's management, including our chiefits principal executive officer and chiefprincipal financial officer,officers, as appropriate to allow timely decisions regarding required disclosure.

NotwithstandingManagement recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the ineffectivenesscost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of the Evaluation DateJune 30, 2017, our chief executive officer and the material weaknesses in our internal control overchief financial reportingofficer concluded that, existed as of thatsuch date, as described below, management believes that (i) this Form 10-Q does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the periods covered by this Quarterly Report and (ii) the unaudited consolidated financial statements, and other financial information, included in this Quarterly Report fairly present in all material respects in accordance with generally accepted accounting principles (“GAAP”) our financial condition, results of operations and cash flows as of, and for, the dates and periods presented.

Material Weakness and Related Remediation Efforts
As previously disclosed, during the financial statement close for the period ended June 30, 2016, management identified the following material weakness:
Material Weakness
We identified a material weakness in our internal control over financial reporting relating to the recognition of non-executive bonus compensation expense. Specifically, the Company did not have a control within the financial statement close process that is designed to detect the incorrect accounting related to the accrual of non-executive bonus compensation expense.
Remediation Efforts
Our management has worked, and continues to work, to strengthen our internal control over financial reporting. We are committed to ensuring that suchCompany's disclosure controls are operating effectively. The Company is now accruing non-executive bonus expense during the course of the relevant service year when the amount is estimable and probable, which results in the Company using the same method of accounting for non-executive bonuses as it applies to executive bonuses.
In addition, the Company has initiated a plan to remediate the material weakness noted above by adopting controls within the financial statement close process as follows: (1) implement a process to ensure accounting policies and procedures related to non-executive bonuses are reviewed on a regular basis and updated for any changes inwere effective at the related bonus plans; (2) analyze and modify checklists and forms to aid in application of the Company’s principal accounting policies and procedures related to non-executive bonuses; and (3) implement additional review procedures over the calculation of the non-executive bonus expense to ensure proper application of the accounting policies and procedures and accuracy of the recorded amounts.

We will continue to seek to actively identify, develop and implement additional measures designed to materially improve and strengthen our internal control over financial reporting.reasonable assurance level.

Changes in Internal Control Over Financial Reporting
 
We continue to implement a new global enterprise resource planning system which includes the implementation of shared service centers in some regions.regions and, beginning in January 2017, includes a cloud-based consolidation and reporting tool. This multi-year initiative will be conducted in phases and will include modifications to the design and operation of internal controls over financial reporting. We are testing internal controls over financial reporting for design effectiveness prior to implementation of each phase, and we have monitoring controls in place over the implementation of these changes.

Except as described above, there have been no other changes in our internal control over financial reporting (as such term is defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act) during the quarter ended SeptemberJune 30, 20162017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION
 
Item 1.            Legal Proceedings
 
For information concerning our legal proceedings, see Note 11 to the Condensed Consolidated Financial Statements in this Form 10-Q.
 
Item 1A.         Risk Factors
 
There have been no material changes in the risk factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
 
Item 2.            Unregistered Sales of Equity Securities and Use of Proceeds 
 
There were no unregistered sales of the Company's equity securities during the period covered by this report.
 
Issuer Purchases of Equity Securities
 
On February 12, 2015, we announced that our Board of Directors approved a share repurchase program providing us authorization to repurchase up to an aggregate of $20.0 million of our common stock through open market and privately negotiated transactions over a two-year period. On November 2, 2016, the Board of Directors approved a two-year extension to the share repurchase program through February 28, 2019.

On May 4, 2017, the Board of Directors authorized the repurchase of up to an additional $30.0 million of its common stock through open market and privately negotiated transactions over a two-year period ending May 31, 2019. The timing and amount of any share repurchases will be determined based on market conditions, share price and other factors, and the program may be discontinued or suspended at any time. Repurchases will be made in compliance with SEC rules and other legal requirements.

During the threesix months ended SeptemberJune 30, 2016, we did not repurchase any2017, the Company repurchased 1,028,654 shares of ourits common stock under our share repurchase program.for $10.0 million in the aggregate at an average cost of $9.76 per share.

The following table provides information relating to our purchase of shares of our common stock in the thirdsecond quarter of 20162017 (in thousands, except per share amounts).
Period 
Number of Shares Purchased(1)
 Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(2)
7/1/16-7/31/16 897
 $8.51
 
 1,775
8/1/16-8/31/16 7,582
 8.62
 
 1,703
9/1/16-9/30/16 15,306
 8.84
 
 1,603
Total 23,785
 $8.84
 
  
Period 
Number of Shares Purchased(1)
 Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(2)
4/1/17-4/30/17 459
 $9.91
 459
 620
5/1/17-5/31/17 
 11.65
 
 4,067
6/1/17-6/30/17 56
 10.96
 
 4,240
Total 515
 $10.02
 459
  

(1)Includes 23,78556,175 shares delivered to us by employees to satisfy the mandatory tax withholding requirement upon vesting of restricted stock.
(2)The share repurchase plan authorized by our Board of Directors allows repurchases of up to $20$50 million of our common stock, of which 1.6 million shares remain available under the plan.stock.  The maximum number of shares that may yet be repurchased under the plan is estimated using the closing share price on the last day of each period presented.

Item 6.            Exhibits
 
Exhibit No   Description of Exhibit
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 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 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS** XBRL Instance Document
   
101.SCH** XBRL Taxonomy Extension Schema Document
   
101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF** XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB** XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document
 
**Submitted electronically with this Quarterly Report on Form 10-Q

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 INNERWORKINGS, INC.
   
Date: November 8, 2016August 7, 2017By: /s/    Eric D. Belcher
  Eric D. Belcher
  Chief Executive Officer
   
Date: November 8, 2016August 7, 2017By:/s/    Jeffrey P. Pritchett
  Jeffrey P. Pritchett
  Chief Financial Officer
 





Three Months Ended March 31, 2015



EXHIBIT INDEX
 
Number Description
10.1 InnerWorkings, Inc. 2006 Stock Incentive Plan, as amended and restated effective June 6, 2016 (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed on June 6, 2016).
   
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 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 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS** XBRL Instance Document
   
101.SCH** XBRL Taxonomy Extension Schema Document
   
101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF** XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB** XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document
 
**Submitted electronically with this Quarterly Report on Form 10-Q
 

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