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 nine monthssix month periods ended SeptemberJune 30, 20172019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.2019. These condensed consolidated 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, 20162018 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 9, 2017.19, 2019.

The Company was incorporated in the state of Delaware on January 3, 2006. The Company is a leading global marketing execution firm for some of the world's most marketing intensive companies, including those in the Fortune 1000, across a wide range of industries. As a comprehensive outsourced enterprise solution, the Company leverages proprietary technology, an extensive supplier network and deep domain expertise to streamline the creation, production and distribution of marketing and promotional materials, signage and displays, retail experiences, events and promotions and packaging across every major market worldwide. The items the Company sources are generally procured through the marketing supply chain and are referred to collectively as marketing materials. The Company’s technology and database of information is designed to capitalize on excess manufacturing capacity and other inefficiencies in the traditional marketing and print supply chain to obtain favorable pricing and to deliver high-quality products and services.

During the third quarter of 2018, the Company changed its reportable segments. The Company is now organized and managed 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.performance as three operating segments: North America, EMEA and LATAM. The Company reflected the segment change as if it had occurred in all periods presented. See Note 14 for further information about the Company’s reportable segments.

The preparation of the consolidated financial statements is in conformity with accounting principles generally accepted in the United States ("GAAP"). GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, the Company evaluates its estimates, including those related to product returns, allowance for doubtful accounts, inventories and inventory valuation, valuation and impairments of goodwill and long-lived assets, income taxes, accrued bonus, contingencies, stock-based compensation and litigation costs. The Company bases its estimates on historical experience and on other assumptions that 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 may differ from those estimates.

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 ofwhere the functional currency differs from the reporting currency, these operationsamounts 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.

TheRevenue is measured based on consideration specified in a contract with a customer and the Company recognizes revenue upon meeting all of the following revenue recognition criteria,when it satisfies a performance obligation by transferring control over a product or service to a customer which is typically met upon shipmentmay be at a point in time or delivery of our products to customers: (i) persuasive evidence of an arrangement exists through customer contracts and orders, (ii) the customer takes title and assumes the risks and rewards of ownership, (iii) the sales price charged is fixed or determinable as evidenced by customer contracts and orders and (iv) collectability is reasonably assured.over time. Unbilled revenue represents shipments or deliveries that have been made to customers for which the related account receivable has not yet been invoiced.

The Company recognizesSome service revenue, forincluding stand-alone creative design, installation, warehousing and other services, provided to its customers which may be deliveredearned over time; however, the difference from recognizing that revenue over time compared to a point in conjunction withtime (i.e., when the procurement of marketing materials atservice is completed and accepted by the time when delivery and customer acceptance occur and all other revenue recognition criteria are met. When provided on a stand-alone basis, the Company recognizes revenue for these services upon completion of the service.customer) is not material. Service revenue has not been material to the Company’sCompany's overall revenue to date.

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

The Company recorded $2.4 millionelected to use the package of practical expedients, which permitted the Company to not reassess: (i) whether a contract is or contains a lease, (ii) lease classification, and $1.7 million in stock-based compensation expense(iii) initial direct costs resulting from the lease. The Company has not elected the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets. The Company elected to apply the short-term lease exception, which allows the Company to keep leases with terms of 12 months or less off the balance sheet. The Company also elected to combine lease and non-lease components as a single component for the three months ended September 30, 2017 and 2016, respectively, and $5.3 million and $4.1 million for the nine months ended September 30, 2017 and 2016, respectively.Company's entire population of lease assets.

Amortization expense related to these intangible assets was $1.2$0.6 million and $1.4$1.1 million for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and $3.7$1.1 million and $4.2$2.3 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The Company's customer lists had accumulated amortization and impairment of $65.4 million and $64.5 million as of June 30, 2019 and December 31, 2018, respectively. The Company's trade names, non-competition agreements and patents were fully amortized or impaired as of June 30, 2019 and December 31, 2018, respectively.

TheAs of June 30, 2019, estimated amortization expense for the remainder of 20172019 and each of the next five years and thereafter is as follows (in thousands):

On December 14, 2015, the Company approved a global realignment plan that allowed the Company to more efficiently meet client needs across its international platform. Through improved integration of global resources, the plan created back office and other efficiencies and allowed for the elimination of approximately 100 positions. In connection with these actions, the Company incurred pre-tax cash restructuring charges of $6.7 million, the majority of which were recognized during 2016.2017. These cash charges included approximately $5.6 million for employee severance and related benefits and $1.1 million for lease and contract terminations and other associated costs. The charges were all incurred by the end of 20162017 with the final payouts of the charges occurringexpected to occur in 2017.2019. As required by law, the Company consulted with each of the affected countries’ local Works Councils throughout the plan.

The following table summarizes the accrued restructuring activities for this plan for the ninesix months ended SeptemberJune 30, 20172019 (in thousands):, all of which relate to EMEA:

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 34.5%185.2% and 42.7%198.4% for the three months ended SeptemberJune 30, 20172019 and 2016, respectively,2018, respectively. The Company’s reported effective income tax rate was (14.4)% and 35.7% and 109.2%(145.7)% for the ninesix months ended SeptemberJune 30, 20172019 and 2016 .2018, respectively. The Company’s effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, valuation allowances, impacts of the Tax Reform Act, and foreign taxestax rates that are different than the U.S. federal statutory tax rate. In addition, the effective tax rate can be impacted each period by discrete factors and events.

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, theThere were no material valuation allowance balance was decreased for a Peruvian valuation allowance adjustment. The Company believed sufficient positive evidence existed 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 expenseadjustments for the ninethree months ended SeptemberJune 30, 2017.2019 and 2018. Additionally, the Company continues to incur losses in jurisdictions which have valuation allowances against tax loss carryforwards, so a tax benefit has not been recognized in the financial statements for these losses.

Basic earnings (loss)loss per common share is calculated by dividing net income (loss)loss by the weighted average number of common shares outstanding for the period. Diluted earnings (loss)loss per share is calculated by dividing net income (loss)loss by the

There were no dilutive effects during the three and six months ended SeptemberJune 30, 20172019 and 2016, an aggregate2018 as a result of 1.3 million and 2.5 million options and restricted common shares, respectively, and during the nine months ended September 30, 2017 and 2016, an aggregatea net loss incurred in each period. The number of 2.4 million and 4.0 million options and restricted common shares, respectively, wereantidilutive securities excluded from the calculation as these options and restricted common shares were anti-dilutive. The computationscomputation of basic and diluted earnings (loss) per common share for three and nine months ended September 30, 2017 and 2016 are as follows (in thousands, except per share amounts): 

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, 20172019 and 20162018 was $0.5 million and $0.4$0.5 million, respectively, and $1.3$0.9 million and $1.3$0.7 million during the ninesix months ended SeptemberJune 30, 20172019 and 2016, respectively. Additionally, Arthur J. Gallagher & Co. has provided insurance brokerage and risk management services to the Company. As consideration of these services, Arthur J. Gallagher & Co. billed the Company $0.1 million and $0.0 million for the three months ended September 30, 2017 and 2016, respectively, and $0.1 million and $0.2 million for the nine months ended September 30, 2017 and 2016,2018, respectively. The net amountamounts receivable from Arthur J. Gallagher & Co. was $0.3were $0.4 million and $0.4$0.3 million as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively.

In the fourth quarter of 2017, the Company began providing marketing execution services to Enova International, Inc. ("Enova"). David Fisher, a member of the Company's Board of Directors, is the Chairman and Chief Executive Officer of Enova and has a direct ownership interest in Enova. The total amount billed for such services during the three months ended June 30, 2019 and 2018 was $3.4 million and $2.2 million, respectively, and $6.1 million and $4.0 million during the six months ended June 30, 2019 and 2018, respectively. The amounts receivable from Enova were $2.7 million and $2.0 million as of June 30, 2019 and December 31, 2018, respectively.

The fair value hierarchy consists of the following three levels:

As of September 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 from acquisitions occurring subsequent to January 1, 2009. The fairbook value of the liabilities determined by this analysis was primarily driven bydebt under the probabilityCredit Agreement (as defined herein) is considered to approximate its fair value as of reaching the performance measures required by the applicable purchase agreements and the associated discount rates. Probabilities were estimated by reviewing financial forecasts and assessing the likelihood of reaching the required performance measures based on factors specific to each acquisition as wellJune 30, 2019 as the Company’s historical experienceinterest rates are considered in line with similar arrangements. If an acquisition reached the required performance measure, the estimated probability would be increased to 100% and reclassified to due to seller, and if the measure was not reached, the probability would have been reduced to reflect the amount earned, if any, depending on the terms of the agreement. Discount rates were determined by applying a risk premium to a risk-free interest rate.

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

The Company entered into a Credit Agreement, dated as of August 2, 2010, subsequently amended most recently as of February 3, 2017,March 15, 2019, among the Company, the lenders party thereto and Bank of America, N.A., as Administrative Agent (the “Credit Agreement”). The refinanced its debt, which is further discussed in Note 15. At June 30, 2019 the Credit Agreement includesincluded a revolving commitment amount of $175 million and $160 million in the aggregate with a maturity date ofthrough September 25, 2019 and providesSeptember 25, 2020, respectively. The Credit Agreement also provided the Company the right to increase the aggregate commitment amount by an additional $50 million. Outstanding borrowings under the revolving credit facility arewere 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 arewere secured by substantially all of their respective assets. The ranges of applicable rates charged for interest on outstanding loans and letters of credit are 125-250were 50-225 basis point spread for loans based on the base rate and 150-325 basis point spread for letter of credit fees and loans based on the Eurodollar raterate.

The most recent amendment (i) modified the definition of the term “Consolidated EBITDA” as used in the covenant calculations, (ii) increased the maximum leverage ratio to which the Company is subject for the trailing twelve month periods ended December 31, 2018 and 25-150 basis point spreadMarch 31, 2019 and (iii) decreased the minimum interest coverage ratio to which the Company is subject for loans based on the base rate.trailing twelve month periods ended December 31, 2018 and March 31, 2019. All ratios for fiscal periods thereafter remained unchanged.

The terms of the Credit Agreement includeincluded various covenants, including covenants that require the Company to maintain a maximum leverage ratio and a minimum interest coverage ratio. The most recent amendment to the Credit Agreement requiresmodified the Company to maintain amaximum leverage ratio of no more than 3.0from 3.50 to 1.01.00 to 4.50 to 1.00 for the trailing twelve months ended SeptemberDecember 31, 2018, and from 3.00 to 1.00 to 4.75 to 1.00 for the trailing twelve months ended March 31, 2019. The maximum leverage ratio is 3.00 to 1.00 for the trailing twelve months ended June 30, 20172019 and 3.0each period thereafter. The most recent amendment to 1.0the Credit Agreement also modified the minimum interest coverage ratio from 5.00 to 1.00 to 4.00 to 1.00 for the trailing twelve months ended December 31, 2018 and from 5.00 to 1.00 to 3.50 to 1.00 for the trailing twelve months ended March 31, 2019.

At June 30, 2019, the Company had $1.5 million of letters of credit which have not been drawn upon.

On February 12, 2015, the Company announced that its Board of Directors approved a share repurchase program authorizing the repurchase of up to an aggregate of $20 million of its common stock through open market and privately negotiated transactions over a two-year period. On November 2, 2016, the Board of Directors approved a two-year extension to the share repurchase program through February 28, 2019. On May 4, 2017, the Board of Directors authorized thean increase in its authorized share repurchase program of up to an additional $30.0 million of itsthe Company's common stock through open market and privately negotiated transactions over a two-year period ending May 31, 2019. The timing and amount of any share repurchases will be determined based on market conditions, share price and other factors, and the program may be discontinued or suspended at any time. Repurchases will be made in compliance with SEC rules and other legal requirements. As of June 30, 2019 the program purchase period had lapsed and shares are no longer available for purchase under this plan.

 

During the ninethree and six months ended SeptemberJune 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 under this program. No shares were repurchased under this plan for the three months ended September 30, 2017. During the three and nine months ended September 30, 2016,2019, respectively, the Company did not repurchase any shares of its common stock under this program. During the three and six months ended June 30, 2018 the Company repurchased 1,735,983 and 2,667,732 shares of its common stock for $16.9 million and $25.6 million in the aggregate at an average cost of $9.75 and $9.60, respectively. Shares repurchased under this program are recorded at acquisition cost, including related expenses.

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

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/expensegoodwill, intangible and long-lived asset impairment charges, restructuring charges, senior leadership transition and other employee-related expenses, business development realignment, obsolete retail inventory writeoff, professional fees related to changes in the fair valueASC 606 implementation, executive search expenses, restatement of contingent consideration liabilities and restructuringprior period financial statements, and other charges.expenses related to investment in operational and financial process improvements. Management does not evaluate the performance of its operating segments using asset measures.

The table below presents financial information for the Company’s reportable segments and Other for the three and nine month periods notedsix months ended June 30, 2019 and 2018 (in thousands):