April 30, 2013


We believe shares of InnerWorkings, Inc. are grossly overvalued and poised to collapse by as much as 55%.

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We believe shares of InnerWorkings, Inc. (Nasdaq: INWK or “IW”) are grossly overvalued and poised to collapse by as much as 55%. We believe the company is inflating its revenues in violation of GAAP principles by misapplying gross revenue accounting, placing it in violation of its credit agreement. The SEC has inquired about IW’s gross revenue treatment, and we believe management’s response was incomplete and/or misleading. We note that Groupon (Nasdaq: GRPN) – which has many connections with IW, including a common cofounder, former board members, and the same auditor in Ernst & Young, Chicago – violated GAAP principles in the same way and was forced to restate its revenues. Similarly, we believe IW will be forced to restate its historical financial results. Furthermore, IW shares many of the same bad qualities we profiled in our previous reports on The Active Network (Nasdaq: ACTV or “Active”) and Boulder Brands (Nasdaq: BDBD or “Boulder”). Similar to Active, we note IW was also formed through dozens of questionable acquisitions – but IW structures them with opaque contingent payment terms that artificially boost EBITDA and EPS, even when its deals fail! To be clear, we believe IW has been able to inflate its EBITDA and EPS by converting acquisition earn-out payables to earnings.  Similar to Boulder, where we spotted prior failures of management and trouble at the Board level with numerous departures, we note that IW had 4 out of its 7 board members either resign or decide not to run for reelection in 2012. IW also appears to be overstating its revenue opportunity: our research shows that IW has penetrated 25% of its North American market opportunity (80% of revenue), while having claimed a penetration rate <1% – a harbinger of waning organic growth. Follow the $$: IW’s gross margins and free cash flow have been declining for several years and its CEO is selling stock!

Given our concerns that IW’s financial statements fail to represent the company’s true financial condition, that it will be forced to restate its historical financials, that its true prospects are obscured by management over-promotion, and that it should be valued closer to its commercial printing/diversified business products and services peers, we believe IW’s stock has an intrinsic value today of $5.00 per share, ~55% below current levels.

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