Filed Pursuant to Rule 424(b)(1)
Registration No. 333-184673
PROSPECTUS
3,600,000 Shares
Common Stock
Proto Labs, Inc. is offering 100,000 shares of its common stock and the selling shareholders identified in this prospectus are offering an additional 3,500,000 shares. We will not receive any of the proceeds from the sale of the shares sold by the selling shareholders.
Our common stock is listed on the New York Stock Exchange under the symbol PRLB. On November 15, 2012, the last reported sale price of our common stock on the New York Stock Exchange was $31.78 per share.
We are an emerging growth company under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in our common stock involves a high degree of risk. Please read Risk Factors beginning on page 9 of this prospectus.
PRICE $31.00 A SHARE
Price to Public |
Underwriting |
Proceeds to |
Proceeds to | |||||
Per Share |
$31.00 | $1.488 | $29.512 | $29.512 | ||||
Total |
$111,600,000 | $5,356,800 | $2,951,200 | $103,292,000 |
Certain of the selling shareholders have granted the underwriters an option for a period of 30 days to purchase up to an additional 540,000 shares of our common stock. Discounts, commissions and proceeds will be prorated between us and the selling shareholders.
The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock to purchasers on November 21, 2012.
MORGAN STANLEY | PIPER JAFFRAY |
WILLIAM BLAIR & COMPANY | ||||||
NEEDHAM & COMPANY | ||||||
CRAIG-HALLUM CAPITAL GROUP | ||||||
DOUGHERTY & COMPANY LLC |
November 15, 2012
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Certain U.S. Federal Income Tax Consequences to Non-U.S. Holders |
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F-1 |
Neither we, the selling shareholders, nor the underwriters have authorized anyone to provide you with information different than that contained in this prospectus or in any free writing prospectus we may specifically authorize to be delivered or made available to you in connection with this offering. We and the selling shareholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where such offers and sales are permitted. The information in this prospectus or a free writing prospectus is accurate only as of its date, regardless of its time of delivery or the time of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
For investors outside the United States: None of us, the selling shareholders, or the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.
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This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that you should consider before making an investment decision. We urge you to read the entire prospectus carefully, including the historical consolidated financial statements and the notes to those financial statements included in this prospectus, as well as the information included in any free writing prospectus that we have authorized for use in connection with this offering, before making an investment decision. Please read the sections entitled Risk Factors and Forward-Looking Statements for more information about important risks that you should consider before investing in our common stock.
Overview
We are a leading online and technology-enabled quick-turn manufacturer of custom parts for prototyping and short-run production. We provide Real Parts, Really Fast to product developers worldwide, who are under increasing pressure to bring their finished products to market faster than their competition. We utilize computer numerical control, or CNC, machining and injection molding to manufacture custom parts for our customers. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts in low volumes. Our customers conduct nearly all of their business with us over the Internet. We target our services to the millions of product developers who use three-dimensional computer-aided design, or 3D CAD, software to design products across a diverse range of end-markets. We believe our use of advanced technology enables us to offer significant advantages at competitive prices to many product developers and is the primary reason we have become a leading supplier of low-volume custom parts.
We believe low-volume manufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our proprietary technology and sophisticated algorithms have enabled us to automate and integrate the majority of these activities. Our customers typically order low volumes of custom parts because they need a prototype to confirm the form, fit and function of one or more components of a product under development, or because they need an initial supply of parts to support pilot production while their high-volume production mold is being prepared, or because their product will only be released in a limited quantity. In each of these instances, we believe our solution provides product developers with an exceptional combination of speed, competitive pricing, ease of use and reliability that they typically cannot find among conventional custom parts manufacturers. Our technology and manufacturing expertise enable us to ship parts in as little as one business day after receipt of a customers design submission and process a large number of submissions. As a result of the factors described above, many of our customers tend to return to Proto Labs to meet their ongoing needs, with approximately 77%, 77%, 81%, and 85% of our revenue in 2009, 2010, 2011, and the nine months ended September 30, 2012, respectively, derived from existing customers who had placed orders with us in prior years.
We have experienced significant growth since our inception in 1999. We have grown our total revenue from $35.9 million in 2007 to $98.9 million in 2011 and $92.4 million in the nine months ended September 30, 2012. We have grown our income from operations from $8.4 million in 2007 to $26.9 million in 2011 and $24.7 million in the nine months ended September 30, 2012.
Our Industry and Market Opportunity
We serve product developers worldwide who bring new ideas to market in the form of products containing one or more custom mechanical parts. Many of these product developers use 3D CAD software to create digital models representing their custom part designs that are then used to create physical parts for prototyping, functional testing, market evaluation or eventual production.
Custom prototype parts play a critical role in the product development process, as they provide product developers with the ability to confirm their intended performance requirements and explore design alternatives.
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Early in the product development process, additive rapid prototyping processes such as stereolithography, selective laser sintering, fused deposition modeling or 3D printing can be used to quickly produce an approximate physical representation of a part, but these representations often do not meet product developers requirements for dimensional accuracy, cosmetics and material properties. As an alternative or supplement to additive rapid prototyping, CNC machining can be used to produce low volumes of high-quality custom parts in either metal or plastic, while for follow-on functional testing, market evaluation and production runs, plastic parts are typically manufactured using injection molding. Both CNC machining and injection molding yield a part with the look, feel and performance of the finished product.
There are several important trends impacting product developers worldwide, including the increasing use of e-commerce to bring efficiency, collaboration and immediate access to information, the increasing pressure to accelerate the speed with which they can bring their new products to market, and the increasing adoption of 3D CAD software to facilitate the design of custom mechanical parts.
We know of no published third-party estimates of our specific addressable markets. Our Protomold injection molding service addresses a subset of the plastic injection molding market, which Plastics Custom Research, a market research firm, estimates was $50.3 billion in North America in 2010. Our Firstcut CNC machining service addresses a subset of the machine shop services segment, which IBISWorld, a market research firm, estimates was $34.9 billion in the United States in 2010. In addition, according to Jon Peddie Research, a market research firm, in December 2009 there were approximately 13 million users of CAD software worldwide, of which approximately 41%, or 5.3 million, were users of 3D CAD software. We believe a substantial portion of these 3D CAD users were product developers working in industries we serve, although we do not serve every application within these industries. From the inception of our company in 1999 through September 30, 2012, we have filled orders for approximately 26,000 product developers.
Our Solution
We have developed proprietary software and advanced manufacturing processes that automate much of the skilled labor conventionally required in quoting, production engineering and manufacturing custom parts. We believe our interactive web-based interface and highly automated processes address the desires of many product developers for a fast, efficient and competitively priced means of obtaining low-volume custom parts. Key elements of our solution include:
Sophisticated Technology that Reduces Turnaround Time. Our platform automates many aspects of the entire process from design submission through manufacturability analysis and feedback, quotation, order submission, mold design, tool path generation and mold or part manufacture. As a result, in many cases we are able to quote orders in minutes and ship parts in as little as one business day.
Enhanced Customer Experience. Our web-based customer interface provides a straightforward means of submitting 3D CAD part designs. Our technology can quickly analyze manufacturability and in many cases provides suggested design modifications to enhance manufacturability. Our interactive quotations provide instant visibility into the impact of changing an orders various parameters such as material, finish, quantity or shipping schedule.
Attractive Low-Volume Pricing. Based on internal market research, we believe we generally have competitive pricing on low-volume orders. We believe this is a direct result of our technology and the efficiency of our operations, both of which were designed specifically for low-volume production.
Scale to Process Large Numbers of Unique Part Designs. Our proprietary, highly scalable quoting technology enables us to quickly analyze high volumes of 3D CAD part design submissions and provide feedback to our prospective product developer customers. Our proprietary manufacturing automation technology is also highly scalable, enabling us to process large numbers of unique designs and efficiently manufacture the related parts to meet the needs of product developers.
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Our Competitive Advantages
We believe our leadership position is based on a number of distinct competitive advantages:
Advanced Proprietary Technology. Our proprietary technology automates much of the skilled labor conventionally required to quote and manufacture low-volume custom parts, including the often time-consuming steps of design submission, manufacturability analysis and feedback, quotation, order submission, mold design, tool path generation, mold or part manufacture, and production management. We believe our competitors typically lack the expertise and resources to develop similar technology.
Turnaround Speed. We believe we are generally the fastest provider of low-volume custom CNC machined or injection molded parts. Our solution allows product developers to submit designs at any time and enables us to ship parts to our customers in as little as one business day. Our competitors often require several days just to generate a price quotation and even longer if the order parameters are subsequently changed by the product developer.
Operations Designed for Low-Volume Manufacturing. Unlike conventional custom parts manufacturers, our operating model is specifically designed for efficient low-volume production. Our customer interactions occur primarily online, and our proprietary technology eliminates much of the skilled labor that typically accounts for a significant portion of the total costs in the low-volume custom parts manufacturing environment and enables us to quote many thousands of CNC machined or injection molded part designs per month, which we believe few of our competitors can match.
Marketing and Sales Strength. We have developed expertise in marketing to product developers, both within our existing customer companies and at companies we have not yet served. We have also built a professionally-led international sales organization focused on quickly following up on marketing leads and quotation requests, understanding our customers internal initiatives and converting prospects into customers. We believe that most of our competitors lack the expertise and resources to establish and maintain an organized, international program of similar scale.
Deep Industry Knowledge. We believe that the volume of new custom part designs we process and the size and diversity of our customer base give us unique insight into the needs of our prospective customers. This has allowed us to focus our development resources on areas that we believe represent significant opportunities for our business.
Our Growth Strategy
The principal elements of our growth strategy are to:
Increase Penetration of Existing Customer Companies. We plan to expand our customer base to include more product developers within the companies that have already used our services. We believe a significant opportunity exists for us to leverage highly satisfied product developers to encourage others within the same organization to utilize our services, and we plan to combine these word-of-mouth referrals with the efforts of our marketing and sales force to identify and market our services to the colleagues of our existing customers.
Acquire New Customer Companies in Existing Geographic Markets. We plan to use our marketing and sales capabilities to continue to pursue product developers within companies who have not yet used our services. Our presence in geographic regions that have high populations of 3D CAD users provides us with a broad universe of potential new customer companies on which to focus our marketing and sales efforts.
Expand the Range of Parts We Offer. We regularly analyze the universe of customer design submissions that we are currently unable to manufacture and focus a significant portion of our research and development efforts on expanding the size and geometric complexity of the parts we are able to manufacture and the diversity of materials we are able to support in order to meet the needs of a broader set of product developers and consequently convert a higher number of quotation requests into orders.
3
Introduce New Manufacturing Processes. We seek to identify additional manufacturing processes to which we can apply our technology and expertise to meet a greater range of product developers needs. We regularly evaluate new manufacturing processes that may attract new customers and provide us with an opportunity to cross-sell with our existing services to our existing customer base, and we introduce such services when we are confident that a sufficient market need exists and we can offer the same advantages our customers have come to expect from us.
Expand into New Geographic Markets. We believe there may be opportunities to grow by identifying and expanding into select additional geographic markets. We currently operate in the United States, Europe and Japan, where we believe a substantial portion of the worlds product developers are located. We believe opportunities exist to serve the needs of product developers in select new geographic regions.
Capitalize on Increasing Customer Expectations for 24/7 Access to Comprehensive, User-Friendly E- Commerce Capabilities. We plan to further enhance the functionality and ease of use of our platform and expand the capabilities of our technology in order to further increase automation and meet the evolving needs of product developers worldwide. We will continue to use the Internet to provide product developers with a standardized interface through which they can upload their 3D CAD models and obtain firm, interactive quotations quickly and efficiently.
Risk Factors
Our business is subject to numerous risks, as more fully described in the section entitled Risk Factors immediately following this prospectus summary, beginning on page 9. You should read these risks before you invest in our common stock. We may be unable, for many reasons, including those that are beyond our control, to implement our business strategy. In particular, some of the risks associated with our business include:
| the level of competition in our industry and our ability to compete; |
| our ability to continue to sell to existing customers and sell to new customers; |
| our ability to respond to changes in our industry; |
| our ability to meet the needs of product developers; |
| our ability to meet product developers expectations regarding quick turnaround time and price; |
| any failure to maintain and enhance our brand; |
| our ability to process a large volume of designs and identify significant opportunities in our business; |
| the adoption rate of e-commerce and 3D CAD software by product developers; |
| the loss of key personnel or failure to attract, integrate and retain additional personnel; |
| our ability to effectively grow our business and manage our growth; |
| system interruptions at our operating facilities, in particular our Maple Plain, Minnesota location; |
| our ability to protect our intellectual property and not infringe others intellectual property; and |
| our ability to effectively operate as a public company. |
Corporate Information
Proto Labs, Inc. was incorporated in Minnesota in 1999. The address of our principal executive offices is 5540 Pioneer Creek Drive, Maple Plain, Minnesota 55359, and our telephone number at this address is (763) 479-3680. Our website address is www.protolabs.com. The information contained in or that can be accessed through our website is not part of this prospectus.
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Unless the context indicates otherwise, as used in this prospectus, the terms Proto Labs, we, us and our refer to Proto Labs, Inc. and its subsidiaries taken as a whole.
Proto Labs®, Protomold®, Firstcut®, ProtoQuote®, and FirstQuote® are registered trademarks in the United States and certain other countries. This prospectus also includes references to trademarks and service marks of other entities, and those trademarks and service marks are the property of their respective owners.
5
The Offering
Common stock offered by us |
100,000 shares |
Common stock offered by selling shareholders |
3,500,000 shares |
Common stock to be outstanding immediately after this offering |
24,402,437 shares |
Option to purchase additional shares |
Certain of the selling shareholders have granted the underwriters an option to purchase up to 540,000 additional shares of our common stock. This option is exercisable, in whole or in part, for a period of 30 days from the date of this prospectus. |
Use of proceeds |
We intend to use the net proceeds to us from this offering to pay the expenses we will incur in connection with this offering and for working capital and general corporate purposes. We will not receive any of the proceeds from the sale of shares by the selling shareholders. See Use of Proceeds and Principal and Selling Shareholders. |
Risk factors |
Investing in our common stock involves a high degree of risk. You should read the Risk Factors section of this prospectus beginning on page 9 and all of the other information set forth in this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock. |
New York Stock Exchange listing |
Our common stock is listed on the New York Stock Exchange under the symbol PRLB. |
Outstanding Shares
The number of shares of our common stock that will be outstanding immediately after this offering is based on 24,302,437 shares outstanding as of September 30, 2012, and excludes as of that date:
| 1,762,841 shares of common stock issuable upon the exercise of outstanding options under our 2000 Stock Option Plan, having a weighted average exercise price of $7.05 per share; |
| 239,300 shares of common stock issuable upon the exercise of outstanding options under our 2012 Long-Term Incentive Plan, having a weighted average exercise price of $28.02 per share; |
| 3,872,266 additional shares of common stock reserved for future issuance under our 2012 Long-Term Incentive Plan; and |
| 1,500,000 additional shares of common stock reserved for future issuance under our Employee Stock Purchase Plan. |
Except as otherwise indicated, information in this prospectus assumes no exercise of the underwriters option to purchase additional shares.
6
Summary Consolidated Financial Data
The following tables set forth our summary consolidated financial data for the periods and at the dates indicated. The summary consolidated financial data for the years ended December 31, 2009, 2010 and 2011 and as of December 31, 2010 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated financial data for the nine months ended September 30, 2011 and 2012 and as of September 30, 2012 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus.
The historical results presented below are not necessarily indicative of the results to be expected for any future period. The consolidated pro forma data are unaudited, are presented for informational purposes only and do not purport to represent what our financial results or position actually would have been had the events so described occurred on the dates indicated or to project our financial position as of any future date. Our unaudited consolidated financial statements for the nine months ended September 30, 2011 and 2012 have been prepared on the same basis as the annual financial statements and include all adjustments, which include only normal recurring adjustments, necessary for fair presentation of this data in all material respects. Our operating results for interim periods are not necessarily indicative of the results that may be expected for a full-year period. This information should be read in conjunction with Risk Factors, Selected Consolidated Financial Data, Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes included elsewhere in this prospectus.
Year Ended December 31, | Nine Months Ended September 30, |
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2009 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
(in thousands, except share and per share amounts) | ||||||||||||||||||||
Consolidated Statements of Comprehensive Income Data: |
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Revenue |
$ | 43,833 | $ | 64,919 | $ | 98,939 | $ | 73,302 | $ | 92,375 | ||||||||||
Cost of revenue |
18,559 | 25,443 | 39,324 | 28,251 | 37,242 | |||||||||||||||
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Gross profit |
25,274 | 39,476 | 59,615 | 45,051 | 55,133 | |||||||||||||||
Operating expenses: |
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Marketing and sales |
8,262 | 10,867 | 15,752 | 11,139 | 13,440 | |||||||||||||||
Research and development |
3,140 | 4,281 | 5,222 | 3,639 | 6,622 | |||||||||||||||
General and administrative |
5,965 | 7,629 | 11,772 | 8,297 | 10,394 | |||||||||||||||
Loss on impairment of foreign subsidiary assets |
| 773 | | | | |||||||||||||||
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Total operating expenses |
17,367 | 23,550 | 32,746 | 23,075 | 30,456 | |||||||||||||||
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Income from operations |
7,907 | 15,926 | 26,869 | 21,976 | 24,677 | |||||||||||||||
Other income (expense), net |
(517 | ) | (213 | ) | (114 | ) | 18 | (90 | ) | |||||||||||
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Income before income taxes |
7,390 | 15,713 | 26,755 | 21,994 | 24,587 | |||||||||||||||
Provision for income taxes |
3,167 | 4,762 | 8,783 | 7,252 | 7,957 | |||||||||||||||
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Net income |
4,223 | 10,951 | 17,972 | 14,742 | 16,630 | |||||||||||||||
Less: dividends on redeemable preferred stock |
(4,180 | ) | (4,179 | ) | (4,179 | ) | (3,126 | ) | | |||||||||||
Less: undistributed earnings allocated to preferred shareholders |
(16 | ) | (2,377 | ) | (4,507 | ) | (3,834 | ) | | |||||||||||
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Net income attributable to common shareholders |
$ | 27 | $ | 4,395 | $ | 9,286 | $ | 7,782 | $ | 16,630 | ||||||||||
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Net income per share attributable to common shareholders: (1) |
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Basic |
$ | 0.00 | $ | 0.40 | $ | 0.75 | $ | 0.64 | $ | 0.72 | ||||||||||
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Diluted |
$ | 0.00 | $ | 0.34 | $ | 0.67 | $ | 0.58 | $ | 0.68 | ||||||||||
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Weighted average shares outstanding: (1) |
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Basic |
10,564,946 | 11,079,432 | 12,352,004 | 12,162,808 | 22,975,950 | |||||||||||||||
Diluted |
13,201,762 | 13,051,458 | 13,939,072 | 13,496,238 | 24,356,785 | |||||||||||||||
Pro forma net income per share (unaudited) (1) |
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Basic |
$ | 0.64 | $ | 0.98 | $ | 0.81 | $ | 0.72 | ||||||||||||
Diluted |
$ | 0.58 | $ | 0.90 | $ | 0.76 | $ | 0.68 | ||||||||||||
Pro forma weighted average shares outstanding used in computing net income per share (unaudited) (1) |
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Basic |
17,071,222 | 18,343,794 | 18,154,598 | 22,975,950 | ||||||||||||||||
Diluted |
19,043,248 | 19,930,862 | 19,488,028 | 24,356,785 | ||||||||||||||||
Other comprehensive income (loss), net of tax |
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Foreign currency translation adjustments |
$ | 152 | $ | (214 | ) | $ | (280 | ) | $ | (280 | ) | $ | 197 | |||||||
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Comprehensive income |
$ | 4,375 | $ | 10,737 | $ | 17,692 | $ | 14,462 | $ | 16,827 | ||||||||||
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Other Financial Data: |
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Adjusted EBITDA (unaudited) (2) |
$ | 11,059 | $ | 20,513 | $ | 32,263 | $ | 25,727 | $ | 31,419 |
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Stock-based compensation expense included in the statements of comprehensive income data above is as follows:
Year Ended December 31, | Nine Months Ended September 30, |
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2009 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Stock options and grants |
$ | 245 | $ | 331 | $ | 1,130 | $ | 742 | $ | 1,993 | ||||||||||
Employee stock purchase plan |
| | | | 369 | |||||||||||||||
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Total stock-based compensation expense |
$ | 245 | $ | 331 | $ | 1,130 | $ | 742 | $ | 2,362 | ||||||||||
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Cost of revenue |
$ | 29 | $ | 39 | $ | 78 | $ | 58 | $ | 248 | ||||||||||
Operating expenses: |
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Marketing and sales |
70 | 84 | 215 | 154 | 300 | |||||||||||||||
Research and development |
53 | 73 | 274 | 206 | 346 | |||||||||||||||
General and administrative |
93 | 135 | 563 | 324 | 1,468 | |||||||||||||||
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Total stock-based compensation expense |
$ | 245 | $ | 331 | $ | 1,130 | $ | 742 | $ | 2,362 | ||||||||||
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As of December 31, 2011 |
As of September 30, 2012 |
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(unaudited) | ||||||||
(in thousands) | ||||||||
Consolidated Balance Sheet Data: |
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Cash and cash equivalents |
$ | 8,135 | $ | 36,290 | ||||
Working capital |
18,138 | 72,078 | ||||||
Total assets |
62,326 | 156,921 | ||||||
Total liabilities |
15,675 | 16,188 | ||||||
Redeemable convertible preferred stock and redeemable common stock |
66,894 | | ||||||
Total shareholders equity (deficit) |
$ | (20,243 | ) | $ | 140,733 |
(1) | See Note 3 of Notes to Consolidated Financial Statements for an explanation of the method used to calculate net income per basic and diluted share attributable to common shareholders, unaudited pro form net income per basic and diluted share and the related weighted average shares outstanding for the years ended December 31, 2010 and 2011 and the nine months ended September 30, 2011 and 2012, respectively. |
(2) | We define adjusted EBITDA as net income, plus provision for income taxes, other expense, net, depreciation and amortization, loss on impairment of foreign subsidiary assets and stock-based compensation. See Selected Consolidated Financial DataAdjusted EBITDA for more information and for a reconciliation of adjusted EBITDA to net income, the most directly comparable measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP. |
8
Investing in our common stock involves a high degree of risk. You should carefully consider each of the following risk factors and all of the other information set forth in this prospectus, including our consolidated financial statements and related notes, before investing in our common stock. The following risks and the risks described elsewhere in this prospectus, including in the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations, could materially harm our business, prospects, financial condition, future results and cash flow. If that occurs, the trading price of our common stock could decline, and you could lose all or part of your investment.
Risks Relating to Our Business
We face significant competition and expect to face increasing competition in many aspects of our business, which could cause our operating results to suffer.
The market for low-volume custom parts manufacturing is fragmented, highly competitive and subject to rapid and significant technological change. We compete for customers with a wide variety of custom parts manufacturers and methods. Some of our current and potential competitors include captive in-house services, other custom manufacturers, and alternative manufacturing vendors such as those utilizing stereolithography, selective laser sintering, fused deposition modeling and 3D printing. Moreover, some of our existing and potential competitors are researching, designing, developing and marketing other types of products and services. We also expect that future competition may arise from the development of allied or related techniques for custom parts manufacturing that are not encompassed by our patents, from the issuance of patents to other companies that may inhibit our ability to develop certain products and from improvements to existing technologies. And our competitors may attempt to adopt and improve upon key aspects of our business model, such as development of technology that automates much of the manual labor conventionally required to quote and manufacture low-volume custom parts, implementation of interactive web-based and automated user interface and quoting systems and/or building scalable operating models specifically designed for efficient low-volume production. Third-party CAD software companies may develop software that mold-makers, injection molders and CNC machine shops could use to compete with our business model. Additive manufacturers may develop stronger, higher temperature resins or introduce other improvements that could more effectively compete with us on part quality. We may also, from time to time, establish alliances or relationships with other competitors or potential competitors. To the extent companies terminate such relationships and establish alliances and relationships with our competitors, our business could be harmed.
Existing and potential competitors may have substantially greater financial, technical, sales and marketing, manufacturing, distribution and other resources and name recognition than us, as well as experience and expertise in intellectual property rights and operating within certain international locations, any of which may enable them to compete effectively against us.
Though we plan to continue to expend resources to develop new technologies, processes and services, we cannot assure you that we will be able to maintain our current position or continue to compete successfully against current and future sources of competition. Our challenge in developing new services is finding services for which our automated quotation and manufacturing processes offer an attractive value proposition, and we may not be able to find any new services with potential economies of scale similar to our molding and machining services. If we do not keep pace with technological change and introduce new technologies, processes and services, the demand for our products and services may decline and our operating results may suffer.
Our success depends on our ability to deliver products and services that meet the needs of product developers and to effectively respond to changes in our industry.
We derive almost all of our revenue from the manufacture and sale to product developers of quick-turn low volumes of custom parts for prototyping, support of internal manufacturing and limited quantity product release. Our business has been and we believe will continue to be affected by changes in product developer requirements
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and preferences, rapid technological change, new product and service introductions and the emergence of new standards and practices, any of which could render our technology, products and services less attractive, uneconomical or obsolete. To the extent that our customers need for quick-turn parts decreases for any reason, it would likely have a material adverse affect on our business and operating results and harm our competitive position. In addition, CAD simulation and other technologies may reduce the demand for physical prototype parts. Therefore, we believe that to remain competitive, we must continually expend resources to enhance and improve our technology, product offerings and services.
In particular, we plan to increase our research and development efforts and to continue to focus a significant portion of those efforts to further develop our technology in areas such as our interactive user interface and manufacturing processes, potentially introduce new manufacturing processes within the research and development initiative we refer to as Protoworks, and broaden the range of parts that we are able to manufacture. We believe successful execution of this part of our business plan is critical for our ability to compete in our industry and grow our business, and there are no guarantees we will be able to do so in a timely fashion, or at all. Broadening the range of parts we offer is of particular importance since limitations in manufacturability are the primary reason we are not able to fulfill many quotation requests. There are no guarantees that the resources devoted to executing on this aspect of our business plan will improve our business and operating results or result in increased demand for our products and services. Failures in this area could adversely impact our operating results and harm our reputation and brand. And even if we are successful in executing in these areas, our industry is subject to rapid and significant technological change, and our competitors may develop new technologies, processes and services that are superior to ours.
Any failure to properly meet the needs of product developers or respond to changes in our industry on a cost-effective and timely basis, or at all, would likely have a material adverse affect on our business and operating results and harm our competitive position.
Our failure to meet our product developers expectations regarding quick turnaround time would adversely affect our business and results of operations.
We believe many product developers are facing increased pressure from global competitors to be first to market with their finished products, often resulting in a need for quick turnaround of custom parts. We believe our ability to quickly quote, manufacture and ship custom parts has been an important factor in our results to date. There are no guarantees we will be able to meet product developers increasing expectations regarding quick turnaround time, especially as we increase the scope of our operations. If we fail to meet our customers expectations regarding turnaround time in any given period, our business and results of operations will likely suffer.
Our failure to meet our product developers price expectations would adversely affect our business and results of operations.
Demand for our services is sensitive to price. We believe our competitive pricing has been an important factor in our results to date. Therefore, changes in our pricing strategies can have a significant impact on our business and ability to generate revenue. Many factors, including our production and personnel costs and our competitors pricing and marketing strategies, can significantly impact our pricing strategies. If we fail to meet our customers price expectations in any given period, demand for our products and services could be negatively impacted and our business and results of operations could suffer.
The strength of our brand is important to our business, and any failure to maintain and enhance our brand would hurt our ability to retain and expand our customer base as well as further penetrate existing customers.
Since our products and services are sold primarily through our websites, the success of our business depends upon our ability to attract new and repeat customers to our websites in order to increase business and grow our revenue. Customer awareness of, and the perceived value of, our brand will depend largely on the success of our marketing efforts, as well as our ability to consistently provide quality custom parts within the required timeframes and positive customer experiences, which we may not do successfully. A primary component of our
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business strategy is the continued promotion and strengthening of our brand, and we have incurred and plan to continue to incur substantial expense related to advertising and other marketing efforts directed toward enhancing our brand. We have initiated marketing efforts through social media, but this method of marketing may not be successful and subjects us to a greater risk of inconsistent messaging and bad publicity. We may choose to increase our branding expense materially, but we cannot be sure that this investment will be profitable. If we are unable to successfully maintain and enhance our brand, this could have a negative impact on our business and ability to generate revenue.
Our business depends in part on our ability to process a large volume of new part designs from a diverse group of product developers and successfully identify significant opportunities for our business based on those submissions.
We believe the volume of new part designs we process and the size and diversity of our customer base give us valuable insight into the needs of our prospective customers. We utilize this industry knowledge to determine where we should focus our development resources. If the number of new part designs we process or the size and diversity of our customer base decrease, our ability to successfully identify significant opportunities for our business and meet the needs of product developers could be negatively impacted. In addition, even if we do continue to process a large number of new part designs and work with a significant and diverse customer base, there are no guarantees that any industry knowledge we extract from those interactions will be successfully utilized to help us identify significant business opportunities or better understand the needs of product developers.
The loss of one or more key members of our management team or personnel, or our failure to attract, integrate and retain additional personnel in the future, could harm our business and negatively affect our ability to successfully grow our business.
We are highly dependent upon the continued service and performance of the key members of our management team and other personnel. The loss of any of these individuals, each of whom is at will and may terminate his or her employment relationship with us at any time, could disrupt our operations, harm our reputation and brand, and significantly delay or prevent the achievement of our business objectives. Moreover, some of the members of our management are new to our team. We believe that our future success will also depend in part on our continued ability to identify, hire, train and motivate qualified personnel. We conduct our operations in the United States at our facilities located in the greater metropolitan areas of Minneapolis and St. Paul, Minnesota. A possible shortage of qualified individuals in this region might require us to pay increased compensation to attract and retain key employees, thereby increasing our costs. In addition, we face intense competition for qualified individuals from numerous companies, many of whom have substantially greater financial and other resources and name recognition than us. We may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing operational, managerial and other requirements, or we may be required to pay increased compensation in order to do so. Our failure to attract, hire, integrate and retain qualified personnel could impair our ability to achieve our business objectives.
If we fail to grow our business as anticipated, our net sales and profitability will be adversely affected.
We are attempting to grow our business substantially. To this end, we have made and expect to continue to make significant investments in our business, including investments in our infrastructure, technology, and sales and marketing efforts. These investments include dedicated facilities expansion and increased staffing, both domestic and international. If our business does not generate the level of revenue required to support our investment, our net sales and profitability will be adversely affected.
If we are unable to manage our growth and expand our operations successfully, our reputation and brand may be damaged, and our business and results of operations may be harmed.
Over the past several years, we have experienced rapid growth. For example, we have grown from approximately 230 full-time employees as of January 1, 2008 to 610 full-time employees as of September 30, 2012. We have expanded internationally, including establishing manufacturing operations in Europe in 2005 and
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in Japan in late 2009. In 2011, we added a number of key individuals to our organization. We expect this growth to continue and accelerate and the number of countries and facilities from which we operate to continue to increase in the future. Our ability to effectively manage our anticipated growth and expansion of our operations will require us to do, among other things, the following:
| enhance our operational, financial and management controls and infrastructure, human resource policies, and reporting systems and procedures, in particular as we continue our transition as a public company; |
| effectively scale our operations, including accurately predicting the need for additional staffing; |
| successfully identify, recruit, hire, train, maintain, motivate and integrate additional employees; |
| expand our international resources; and |
| expand our facilities and equipment. |
These enhancements and improvements will require significant capital expenditures and allocation of valuable management and employee resources. And our growth, combined with the geographical dispersion of our operations, has placed, and will continue to place, a strain on our operational, financial and management infrastructure. Our future financial performance and our ability to execute on our business plan will depend, in part, on our ability to effectively manage any future growth and expansion. There are no guarantees we will be able to do so in an efficient or timely manner, or at all. Our failure to effectively manage growth and expansion could have a material adverse effect on our business, results of operations, financial condition, prospects, and reputation and brand, including impairing our ability to perform to our customers expectations.
We may not timely and effectively scale and adapt our existing technology, processes and infrastructure to meet the needs of our business.
A key element to our continued growth is the ability to quickly and efficiently quote an increasing number of product developer submissions across geographies and to manufacture the related parts. This will require us to timely and effectively scale and adapt our existing technology, processes and infrastructure to meet the needs of our business. With respect to our websites and quoting technology, it may become increasingly difficult to maintain and improve their performance, especially during periods of heavy usage and as our solutions become more complex and our user traffic increases across geographies. Similarly, our manufacturing automation technology may not enable us to process the large numbers of unique designs and efficiently manufacture the related parts in a timely fashion to meet the needs of product developers as our business continues to grow. Any failure in our ability to timely and effectively scale and adapt our existing technology, processes and infrastructure could negatively impact our ability to retain existing customers and attract new customers, damage our reputation and brand, result in lost revenue, and otherwise substantially harm our business and results of operations.
If we are unable to maintain our gross margin from sales of our products, our profitability will be adversely affected.
Our current business plan entails increasing our sales and the scope of our operations while maintaining relatively high gross margin. However, there is no guarantee we will be successful in doing so. Pricing pressure could require us to lower the prices we charge our customers. A number of factors may increase our direct costs. Any inability to maintain our gross margin will have an adverse effect on our profitability and may result in a decrease in our stock price.
Numerous factors may cause us not to maintain the revenue growth that we have historically experienced.
Although our revenue has grown from $35.9 million for the year ended December 31, 2007 to $98.9 million for the year ended December 31, 2011, we likely will not be able to maintain our historical rate of revenue growth. We believe that our continued revenue growth will depend on many factors, a number of which are out of our control, including among others, our ability to:
| retain and further penetrate existing customer companies, as well as attract new customer companies; |
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| consistently execute on custom part orders in a manner that satisfies product developers needs and provides them with a superior experience; |
| continually develop new technologies or manufacturing processes, and broaden the range of parts we offer; |
| successfully execute on our international strategy and expand into new geographic markets; |
| capitalize on product developer expectations for access to comprehensive, user-friendly e-commerce capabilities 24 hours per day/7 days per week; |
| increase the strength and awareness of our brand across geographies; |
| respond to changes in product developer needs, technology and our industry; and |
| react to challenges from existing and new competitors. |
We cannot assure you that we will be successful in continuing to grow our business and revenue, and in addressing the factors above.
Our operating results and financial condition may fluctuate on a quarterly and annual basis.
Our operating results and financial condition may fluctuate from quarter to quarter and year to year, and are likely to continue to vary due to a number of factors, some of which are outside of our control. And our actual or projected operating results may fail to match our past performance. These events could in turn cause the market price of our common stock to fluctuate. If our operating results do not meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical operating results, the market price of our common stock will likely decline.
Our operating results and financial condition may fluctuate due to a number of factors, including those listed below and those identified throughout this Risk Factors section:
| the development of new competitive systems or processes by others; |
| the entry of new competitors into our market whether by established companies or by new companies; |
| changes in the size and complexity of our organization, including our international operations; |
| levels of sales of our products and services to new and existing customers; |
| the geographic distribution of our sales; |
| changes in product developer preferences or needs; |
| changes in the amount that we invest to develop, acquire or license new technologies and processes, which we anticipate will generally increase and may fluctuate in the future; |
| delays between our expenditures to develop, acquire or license new technologies and processes, and the generation of sales related thereto; |
| our ability to timely and effectively scale our business during periods of sequential quarterly or annual growth; |
| limitations or delays in our ability to reduce our expenses during periods of declining sequential quarterly or annual revenue; |
| changes in our pricing policies or those of our competitors, including our responses to price competition; |
| changes in the amount we spend in our marketing and other efforts; |
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| unexpected increases in expenses as compared to our related accounting accruals or operating plan; |
| the volatile global economy; |
| general economic and industry conditions that affect customer demand and product development trends; |
| interruptions to or other problems with our website and interactive user interface, information technology systems, manufacturing processes or other operations; |
| changes in accounting rules and tax and other laws; and |
| plant shutdowns due to a health pandemic or weather conditions (for example, our Maple Plain, Minnesota facilities shut down for three days in December 2010 due to snow storms). |
Due to all of the foregoing factors and the other risks discussed in this Risk Factors section, you should not rely on quarter-to-quarter or year-to-year comparisons of our operating results as an indicator of future performance.
Interruptions to or other problems with our website and interactive user interface, information technology systems, manufacturing processes or other operations could damage our reputation and brand and substantially harm our business and results of operations.
The satisfactory performance, reliability, consistency, security and availability of our websites and interactive user interface, information technology systems, manufacturing processes and other operations are critical to our reputation and brand, and our ability to effectively service product developers. Any interruptions or other problems that cause any of our websites, interactive user interface or information technology systems to malfunction or be unavailable, or negatively impact our manufacturing processes or other operations, may damage our reputation and brand, result in lost revenue, cause us to incur significant costs seeking to remedy the problem and otherwise substantially harm our business and results of operations.
A number of factors or events could cause such interruptions or problems, including among others: human and software errors, design faults, challenges associated with upgrades, changes or new facets of our business, power loss, telecommunication failures, fire, flood, extreme weather, political instability, acts of terrorism, war, break-ins and security breaches, contract disputes, labor strikes and other workforce related issues, capacity constraints due to an unusually large number of product developers accessing our websites or ordering parts at the same time, and other similar events. These risks are augmented by the fact that our customers come to us largely for our quick-turn manufacturing capabilities and that accessibility and turnaround speed are often of critical importance to these product developers. We are dependent upon our facilities through which we satisfy all of our production demands and in which we house all of the computer hardware necessary to operate our websites and systems as well as managerial, customer service, sales, marketing and other similar functions, and we have not identified alternatives to these facilities or established fully redundant systems in multiple locations. We have back-up computing systems for our United States and Japanese operations, but we only have one computing system in the United Kingdom. In the event of a significant shutdown of our United Kingdom computing system, manufacturing operations in the United Kingdom could be affected for an extended period, delaying shipments and adversely affecting our operating results. In addition, we are dependent in part on third parties for the implementation and maintenance of certain aspects of our communications and production systems, and therefore preventing, identifying and rectifying problems with these aspects of our systems is to a large extent outside of our control.
Moreover, the business interruption insurance that we carry may not be sufficient to compensate us for the potentially significant losses, including the potential harm to the future growth of our business, that may result from interruptions in our service as a result of system failures.
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Global economic conditions may harm our ability to do business, increase our costs and negatively affect our stock price.
We believe the global recession in 2008 and 2009 was a major factor in our revenue decreasing 1.4% and our income from operations decreasing 25.8% in 2009 compared to 2008. Though we believe that we are emerging from this global recession, which caused failures of financial institutions and led to government intervention in the United States, Europe, Asia and other regions of the world, we currently face additional global challenges, including those associated with rising government debt levels in a number of countries. The prospects for economic growth in the United States and other countries remain uncertain and could worsen. Economic concerns and other issues such as reduced access to capital for businesses may cause product developers to further delay or reduce the product development projects that our business supports. Given the continued uncertainty concerning the global economy, we face risks that may arise from financial difficulties experienced by our suppliers and product developers and other related risks to our business.
We operate a global business that exposes us to additional risks.
We have established our operations in the United States, Europe and Japan and are seeking to further expand our international operations. As of September 30, 2012, we had sold products into more than 50 countries. In addition to English, our website is available in British English, French, German, Italian, Japanese and Spanish. Our international revenue accounted for approximately 26% of our total revenue in each of the years ended December 31, 2010 and 2011, and 25% and 24%, respectively, in the nine months ended September 30, 2011 and 2012. The future growth and profitability of our international business is subject to a variety of risks and uncertainties. Many of the following factors have adversely affected our international operations and sales to customers located outside of the United States and may again in the future:
| difficulties in staffing and managing foreign operations, particularly in new geographic locations; |
| challenges in providing solutions across a significant distance, in different languages and among different cultures; |
| rapid changes in government, economic and political policies and conditions, political or civil unrest or instability, terrorism or epidemics, and other similar outbreaks or events; |
| fluctuations in foreign currency exchange rates; |
| differences in product developer preferences and means of procuring parts; |
| compliance with and changes in foreign laws and regulations, as well as U.S. laws affecting the activities of U.S. companies abroad, including those associated with export controls, tariffs and embargoes, other trade restrictions and antitrust and data privacy concerns; |
| different, complex and changing laws governing intellectual property rights, sometimes affording companies lesser protection in certain areas; |
| lower levels of use of the Internet or 3D CAD software; |
| seasonal reductions in business activity in certain parts of the world, particularly during the summer months in Europe; |
| higher costs of doing business internationally; |
| interruptions resulting from any events affecting raw material supply or manufacturing capabilities abroad; |
| protectionist laws and business practices that favor local producers and service providers; |
| taxation; |
| energy costs; |
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| restrictions imposed by local labor practices and laws on our business and operations; |
| workforce uncertainty in countries where labor unrest is more common than in the United States; |
| transportation delays; and |
| increased payment risk and higher levels of payment fraud. |
Our business depends on product developers demand for our services, the general economic health of current and prospective customers, and companies desire or ability to make investments in new products. A deterioration of global, regional or local political, economic or social conditions could affect potential customers in ways that reduce demand for our services, disrupt our manufacturing and sales plans and efforts or otherwise negatively impact our business. Acts of terrorism, wars, public health issues and increased energy costs could disrupt commerce in ways that could impair our ability to get products to our customers and increase our manufacturing and delivery costs. We have not undertaken hedging transactions to cover our foreign currency exposure, and changes in foreign currency exchange rates may negatively impact reported revenue and expenses. In addition, our sales are often made on unsecured credit terms, and a deterioration of political, economic or social conditions in a given country or region could reduce or eliminate our ability to collect accounts receivable in that country or region. In any of these events, our results of operations could be materially and adversely affected.
We face risks in connection with changes in energy expenses and availability.
We depend on various energy products in processes used in our business. Generally, we acquire energy products at market prices and do not use financial instruments to hedge energy prices. As a result, we are exposed to market risks related to changes in energy prices. In addition, many of the customers and industries to whom we market our services are directly or indirectly dependent upon the cost and availability of energy resources. Our business and profitability may be materially and adversely affected to the extent that energy-related expenses increase, both as a result of higher costs of producing, and potentially lower profit margins in selling, our services and because increased energy costs may cause our customers to delay or reduce the product development projects that our business supports. In addition, events impacting the availability of energy required to operate our business, such as the recent earthquakes and tsunami in Japan, could disrupt our business and negatively impact our operating results.
If a natural or man-made disaster strikes any of our manufacturing facilities, we will be unable to manufacture our products for a substantial amount of time and our sales will decline.
We manufacture all of our products in six manufacturing facilities, three of which are located in Maple Plain, Minnesota and one of which is located in each of Rosemount, Minnesota, Telford, United Kingdom, and Yamato-Shi, Kanagawa, Japan. These facilities and the manufacturing equipment we use would be costly to replace and could require substantial lead time to repair or replace. Our facilities may be harmed by natural or man-made disasters, including, without limitation, earthquakes, floods, tornadoes, fires, tsunamis and nuclear disasters. Our Maple Plain facilities are within 25 miles of a nuclear power plant in Monticello, Minnesota and could be affected by an evacuation or accident at such plant. Recently, the earthquakes and tsunami and subsequent problems affecting nuclear power plants in Japan have dramatically impacted Japans manufacturing capacity and business activities. These events impacted our operations in Japan. The long-term effect of these events is still uncertain, and we may continue to experience operational challenges in Japan. In addition, if these circumstances should worsen, our business plan and future revenue and profitability could be further negatively affected.
In the event any of our facilities are affected by a disaster, we may:
| be unable to meet the shipping deadlines of our customers; |
| experience disruptions in our ability to process submissions and generate quotations, manufacture and ship parts, provide sales and marketing support and customer service, and otherwise operate our business, any of which could negatively impact our business; |
| be forced to rely on third-party manufacturers; |
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| need to expend significant capital and other resources to address any damage caused by the disaster; and |
| lose customers and we may be unable to regain those customers thereafter. |
Although we possess insurance for damage to our property and the disruption of our business from casualties, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.
We depend on the continued growth of product developers e-commerce expectations when working with their custom parts manufacturers and their migration from 2D to 3D CAD software.
The business of selling custom parts over the Internet via an interactive web-based and automated user interface and quoting system is not widespread in our industry. Moreover, many product developers still utilize 2D CAD software. Concerns about privacy and technological and other problems may discourage some product developers from adopting the Internet as the medium for procuring their custom parts or adopting 3D CAD software, particularly in countries where e-commerce and 3D CAD software are not as prevalent as they are in our current markets or with product developers in industries not well suited to utilize our services, such as architecture. In order to expand our customer base, we must appeal to and procure customers who historically have used more traditional means of commerce and/or 2D CAD drawings to purchase their customer parts. If product developers are not sufficiently attracted to the value proposition of or satisfied with our web-based interface and quotation system, or product developers do not continue to migrate to 3D CAD software as we currently anticipate, our business could be adversely impacted.
If our present single or limited source suppliers become unavailable or inadequate, our customer relationships, results of operations and financial condition may be adversely affected.
We acquire substantially all of the manufacturing equipment and certain of our materials that are critical to the ongoing operation and future growth of our business from just a few third parties. We do not have long-term supply contracts with any of our suppliers and operate on a purchase-order basis. While most manufacturing equipment and materials for our products are available from multiple suppliers, certain of those items are only available from single or limited sources. Should any of our present single or limited source suppliers for manufacturing equipment or materials become unavailable or inadequate, or impose terms unacceptable to us such as increased pricing terms, we could be required to spend a significant amount of time and expense to develop alternate sources of supply, and we may not be successful in doing so on terms acceptable to us, or at all. Natural disasters, such as hurricanes, may affect our supply of materials, particularly resins, from time to time, and we may purchase larger amounts of certain materials in anticipation of future shortages or increases in pricing. For instance, we purchased a two-year supply of carbide blanks, which are used to manufacture end mills used in our CNC machining equipment, because tungsten, a component of carbide, is expected to be in low supply globally for approximately two years. In the third and fourth quarters of 2011, we placed orders totaling approximately $1.3 million for two years worth of carbide blanks, based on projections at that time, to try to ensure that we have a continuous supply of end mills, but we may still run short and be required to purchase carbide blanks on the open market at likely much higher prices. In addition, if we were unable to find a suitable supplier for a particular type of manufacturing equipment or material, we could be required to modify our existing business processes and offerings to accommodate the situation. As a result, the loss of a single or limited source supplier could adversely affect our relationship with our customers and our results of operations and financial condition.
Our business depends on the development and maintenance of the Internet infrastructure.
The success of our services will depend largely on the development and maintenance of the Internet infrastructure. This includes maintenance of a reliable network backbone with the necessary speed, data capacity, and security, as well as timely development of complementary products, for providing reliable Internet access
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and services. The Internet has experienced, and is likely to continue to experience, significant growth in the numbers of users and amount of traffic. The Internet infrastructure may be unable to support such demands. In addition, increasing numbers of users, increasing bandwidth requirements, or problems caused by viruses, worms, malware and similar programs may harm the performance of the Internet. The backbone computers of the Internet have been the targets of such programs. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage generally as well as the level of usage of our services, which could adversely impact our business.
If the security of our customers confidential information stored in our systems is breached or otherwise subjected to unauthorized access, our reputation or brand may be harmed, and we may be exposed to liability.
Our system stores, processes and transmits our customers confidential information, including the intellectual property in their part designs, credit card information and other sensitive data. We rely on encryption, authentication and other technologies licensed from third parties, as well as administrative and physical safeguards, to secure such confidential information. Any compromise of our information security could damage our reputation and brand and expose us to a risk of loss, costly litigation and liability that would substantially harm our business and operating results. We may not have adequately assessed the internal and external risks posed to the security of our companys systems and information and may not have implemented adequate preventative safeguards or take adequate reactionary measures in the event of a security incident. In addition, most states have enacted laws requiring companies to notify individuals and often state authorities of data security breaches involving their personal data. These mandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our existing and prospective customers to lose confidence in the effectiveness of our data security measures. Any security breach, whether successful or not, would harm our reputation and brand and could cause the loss of customers.
We may not be able to adequately protect or enforce our intellectual property rights, which could impair our competitive position.
Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We rely primarily on patents, licenses, trademarks and trade secrets, as well as non-disclosure agreements and other methods, to protect our proprietary technologies and processes globally. Despite our efforts to protect our proprietary technologies and processes, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies and processes. We cannot assure you that any of our existing or future patents will not be challenged, invalidated or circumvented. As such, any rights granted under these patents may not provide us with meaningful protection. We may not be able to obtain foreign patents corresponding to our United States patents. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. If our patents and other intellectual property do not adequately protect our technology, our competitors may be able to offer services similar to ours. Our competitors may also be able to develop similar technology independently or design around our patents. Any of the foregoing events would lead to increased competition and lower revenue or gross margin, which would adversely affect our net income.
We may be subject to infringement claims.
We may be subject to intellectual property infringement claims from individuals, vendors and other companies who have acquired or developed patents in the fields of CNC machining, injection molding or part production for purposes of developing competing products or for the sole purpose of asserting claims against us. Any claims that our products or processes infringe the intellectual property rights of others, regardless of the merit or resolution of such claims, could cause us to incur significant costs in responding to, defending and resolving such claims, and may prohibit or otherwise impair our ability to commercialize new or existing products. If we are unable to effectively defend our processes, our market share, sales and profitability could be adversely impacted.
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Our failure to expand our intellectual property portfolio could adversely affect the growth of our business and results of operations.
Expansion of our intellectual property portfolio is one of the available methods of growing our revenue and our profits. This involves a complex and costly set of activities with uncertain outcomes. Our ability to obtain patents and other intellectual property can be adversely affected by insufficient inventiveness of our employees, by changes in intellectual property laws, treaties, and regulations, and by judicial and administrative interpretations of those laws treaties and regulations. Our ability to expand our intellectual property portfolio could also be adversely affected by the lack of valuable intellectual property for sale or license at affordable prices. There is no assurance that we will be able to obtain valuable intellectual property in the jurisdictions where we and our competitors operate or that we will be able to use or license that intellectual property.
We may be subject to product liability claims, which could result in material expense, diversion of management time and attention and damage to our business and reputation and brand.
The prototype parts we manufacture and the parts we manufacture in low volumes may contain undetected defects or errors that are not discovered until after the products have been installed and used by customers. This could result in claims from customers or others, damage to our business and reputation and brand, or significant costs to correct the defect or error.
We attempt to include provisions in our agreements with customers that are designed to limit our exposure to potential liability for damages arising from defects or errors in our products. However, it is possible that these limitations may not be effective as a result of unfavorable judicial decisions or laws enacted in the future.
The sale and support of our products entails the risk of product liability claims. Any product liability claim brought against us, regardless of its merit, could result in material expense, diversion of management time and attention, damage to our business and reputation and brand, and cause us to fail to retain existing customers or to fail to attract new customers.
Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and results of operations.
We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-commerce. Existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, restrictions on imports and exports, customs, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property use and ownership, sales and other taxes, fraud, libel and personal privacy apply to the Internet and e-commerce, especially where these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. Those laws that do reference the Internet are being interpreted by the courts and their applicability and reach are therefore uncertain. The costs of compliance with these regulations may increase in the future as a result of changes in the regulations or the interpretation of them. Further, any failures on our part to comply with these regulations may subject us to significant liabilities. Those current and future laws and regulations or unfavorable resolution of these issues may substantially harm our business and results of operations.
Changes in, or interpretation of, tax rules and regulations may impact our effective tax rate and future profitability.
We are a United States based, multinational company subject to tax in multiple United States and foreign tax jurisdictions. Our future effective tax rates could be adversely affected by changes in statutory tax rates or interpretation of tax rules and regulations in jurisdictions in which we do business, changes in the amount of
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revenue or earnings in the countries with varying statutory tax rates, or by changes in the valuation of deferred tax assets and liabilities.
In addition, we are subject to audits and examinations of previously filed income tax returns by the Internal Revenue Service, or IRS, and other domestic and foreign tax authorities. We regularly assess the potential impact of such examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from the current examinations. We believe such estimates to be reasonable; however, there is no assurance that the final determination of any examination will not have an adverse effect on our operating results and financial position.
We do not collect state sales, use or other taxes in all states in which we conduct business, which could subject us to liability for past sales and any imposition of an obligation to do so in the future could negatively impact our financial results.
We do not collect sales, use, or other state or local taxes on all sales of goods shipped to customers located in the United States. We interpret existing judicial rulings to prohibit states in which we are not physically present, and local tax jurisdictions located in such states, from imposing upon us a requirement to collect sales and use taxes. If our interpretation is not correct, or if legislation or future judicial rulings alter the law, including bills currently pending in the United States Congress, then we could be required to collect sales and use taxes in the future from all customers. In some cases such obligations could be retroactive. Currently, our customers may be obligated to file a use tax return and pay use tax on taxable purchases of items that we sell when we do not collect the tax. However, it may often be the case that use tax returns are not filed. Thus, if we were required to collect the tax, our customers might perceive the tax to be in the nature of a price increase, which would negatively impact our sales. Collecting the tax would also impose additional administrative burdens on us.
We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to complement our growth strategy, increase market share in our current markets or expand into other markets, or broaden our technology, intellectual property or service capabilities. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed.
Any acquisition, strategic relationship, joint venture or investment could disrupt our business and harm our operating results and financial condition.
Our business and our customer base have been built primarily through organic growth. However, from time to time, we may selectively pursue acquisitions, strategic relationships, joint ventures or investments that we believe may allow us to complement our growth strategy, increase market share in our current markets or expand into other markets, or broaden our technology, intellectual property or service capabilities. We cannot forecast the number, timing or size of such transactions, or the effect that any such transactions might have on our operating or financial results. We have very limited experience engaging in these types of transactions. And such
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transactions may be complex, time consuming and expensive, and may present numerous challenges and risks including:
| an acquired company, asset or technology not furthering our business strategy as anticipated; |
| difficulties entering and competing in new product or geographic markets and increased competition, including price competition; |
| integration challenges; |
| challenges in working with strategic partners and resolving any related disagreements or disputes; |
| overpayment for a company, asset or technology, or changes in the economic or market conditions or assumptions underlying our decision to make an acquisition; |
| significant problems or liabilities, including increased intellectual property and employment related litigation exposure, associated with acquired businesses, assets or technologies; and |
| requirements to record substantial charges and amortization expense related to certain purchased intangible assets, deferred stock compensation and other items, as well as other charges or expenses. |
Any one of these challenges or risks could impair our ability to realize any benefit from our acquisitions, strategic relationships, joint ventures or investments after we have expended resources on them, as well as divert our managements attention. And any failure to successfully address these challenges or risks could disrupt our business and harm our operating results and financial condition. Moreover, any such transaction may not be viewed favorably by investors or analysts.
In addition, from time to time we may enter into negotiations for acquisitions, relationships, joint ventures or investments that are not ultimately consummated. These negotiations could result in significant diversion of management time, as well as substantial out-of-pocket costs.
We rely on third parties for certain key services.
We rely on third-party service providers for shipment and certain other services critical to our business, including our phone system and maintenance of our CNC milling machines. If these third parties experience difficulty meeting our requirements or standards, it could damage our reputation and brand, or make it difficult for us to operate some aspects of our business. In addition, if such third parties were to cease operations, temporarily or permanently, face financial distress or other business disruption, we could suffer increased costs and delays in our ability to operate our business until an equivalent provider could be found or we could develop replacement technology or operations, and there is no assurance that we would be able to do so on acceptable financial terms, or at all. In addition, if we are unsuccessful in choosing high quality partners or we ineffectively manage these partners, it could have an adverse impact on our business and financial performance.
We depend in part on licenses of technologies from third parties in order to deliver our solutions, and, as a result, our business is dependent in part on the availability of such licenses on commercially reasonable terms.
We currently, and will continue to, license certain technologies from third parties. We cannot be certain that these third-party content licenses will be available to us on commercially reasonable terms or that we will be able to successfully integrate the technology into our solutions. These third-party in-licenses may expose us to increased risk, including risks associated with the assimilation of new technology sufficient to offset associated acquisition and maintenance costs. The inability to obtain any of these licenses could result in delays in solution development until equivalent technology can be identified and integrated. Any such delays in services could cause our business, operating results and financial condition to suffer.
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Our business involves the use of hazardous materials, and we and our suppliers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.
Our business involves the controlled storage, use and disposal of hazardous materials. We and our suppliers are subject to federal, state and local as well as foreign laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. Although we believe that the safety procedures utilized by us and our suppliers for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, state, federal or foreign authorities may curtail the use of these materials and interrupt our business operations. We do not currently maintain hazardous materials insurance coverage. If we are subject to any liability as a result of activities involving hazardous materials, our business and financial condition may be adversely affected and our reputation and brand may be harmed.
If we are unable to meet regulatory quality standards applicable to our manufacturing and quality processes for the parts we manufacture, our business, financial condition or operating results could be harmed.
As a manufacturer of CNC machined and injection molded custom parts, we are required to meet certain regulatory standards, including International Organization for Standardization, or ISO, 9001:2008 for our manufacturing facilities in Minnesota. If any regulatory inspection reveals that we are not in compliance with applicable standards, regulators may take action against us, including issuing a warning letter, imposing fines on us, requiring a recall of the parts we manufactured or closing our manufacturing facilities. If any of these actions were to occur, it could harm our reputation as well as our business, financial condition and operating results. In addition, we may need to obtain additional certifications in the future and there are no guarantees we would be able to do so on a timely basis, if at all. Moreover, obtaining and maintaining required regulatory certifications can be costly and divert managements attention.
We are subject to payment-related risks.
We accept payments using a variety of methods, including credit card, customer invoicing, physical bank check and payment upon delivery. As we offer new payment options to our customers, we may be subject to additional regulations, compliance requirements and fraud risk. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards or electronic checks, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected.
Risks Relating to this Offering and Ownership of Our Common Stock
Our principal existing shareholders will continue to own a large percentage of our voting stock after this offering, which may allow them to collectively control substantially all matters requiring shareholder approval.
As of September 30, 2012, our principal existing shareholders beneficially owned approximately 14.5 million shares, or 59.8% of our capital stock outstanding as of such date. Upon the completion of this offering, based on the number of shares outstanding on September 30, 2012 and assuming no exercise of the underwriters option to purchase additional shares, our principal existing shareholders will beneficially own approximately 45.6% of our outstanding shares of common stock. As of September 30, 2012, our principal existing shareholders consist of our founder, Chairman and Chief Technology Officer, Lawrence Lukis; our
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President and Chief Executive Officer, Bradley Cleveland; North Bridge Growth Equity I, L.P., or North Bridge, and Protomold Investment Company, LLC, or PIC, a company affiliated with Private Capital Management, Inc. Each of our principal existing shareholders either is or has designated one or more members of our board of directors. These shareholders could control us through their board representation or through their ability to determine the outcome of the election of our directors, to amend our articles of incorporation and by-laws and to take other actions requiring the vote or consent of shareholders, including mergers, going private transactions and other extraordinary transactions, and the terms of any of these transactions. The ownership positions of these shareholders may have the effect of delaying, deterring or preventing a change in control or a change in the composition of our board of directors. These shareholders may also use their large ownership positions to address their own interests, which may be different from those of investors in this offering. In addition, sales of shares beneficially owned by these shareholders could be viewed negatively by third parties and have a negative impact on our stock.
Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the price you pay.
Shares of our common stock were sold in our February 2012 initial public offering at a price of $16.00 per share, and, as of November 15, 2012, our common stock has subsequently traded as high as $41.10 and as low as $24.90. The market for our common stock may become less active, liquid or orderly, which could depress the trading price of our common stock. Some of the factors, many of which are outside of our control, that may cause the market price of our common stock to fluctuate include:
| fluctuations in our financial condition and operating results; |
| our ability to retain and attract customers and increase net sales; |
| pricing pressures due to competition or otherwise and changes in gross margins; |
| changes in general economic and market conditions, economic uncertainty and changes in product development activity levels; |
| announcements by us or our competitors of technological innovations or new product or service offerings or significant acquisitions; |
| timing, effectiveness, and costs of expansion and upgrades of our offerings, systems and infrastructure; |
| changes in key personnel; |
| success in entry into new markets and expansion efforts; |
| the publics response to press releases or other public announcements by us or third parties, including our filings with the Securities and Exchange Commission, or SEC, and announcements relating to litigation; |
| the projections we may provide to the public, any changes in these projections or our failure to meet these projections; |
| the issuance of new or updated research or reports by any securities or industry analysts who follow our common stock, changes in analysts financial estimates or ratings, and failure of securities analysts to initiate or maintain coverage of our common stock; |
| changes in the market valuations of similar companies; |
| significant lawsuits, including patent or shareholder litigation; |
| general economic and market conditions; |
| changes in laws or regulations applicable to us; |
| changes in accounting principles; |
| the sustainability of an active trading market for our common stock; |
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| future sales of our common stock by us or our shareholders, including sales by our officers, directors and significant shareholders; |
| share price and volume fluctuations attributable to inconsistent trading levels of our shares; |
| the expiration of contractual lock-up agreements; and |
| other events or factors, including those resulting from war, acts of terrorism, natural disasters or responses to these events. |
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. In the past, shareholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.
If securities or industry analysts publish inaccurate or unfavorable research or reports about our business, our stock price and trading volume could decline.
The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who covers us downgrades our common stock, changes their opinion of our shares or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease and we could lose visibility in the financial markets, which could cause our stock price and trading volume to decline.
Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.
Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Based on the number of outstanding shares as of September 30, 2012, upon the completion of this offering, we will have 24,402,437 shares of common stock outstanding.
Of our outstanding shares, all of the shares of common stock offered in this offering, all of the shares of common stock sold in our initial public offering, and all of the shares of common stock issued pursuant to awards and the exercise of stock options granted under the 2000 Stock Option Plan, 2012 Long-Term Incentive Plan, Employee Stock Purchase Plan, and a certain stock subscription warrant, each as registered on a Form S-8 as filed with the SEC in February 2012, will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in Rule 144 under the Securities Act. Those securities, and the remainder of our outstanding shares, may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available. Therefore, the shares of common stock held by existing shareholders as of the date of this prospectus will, from time to time after this offering, become eligible to be sold in the public market, subject to limitations imposed under federal securities laws. See Shares Eligible for Future Sale for a more detailed description of the restrictions on selling shares of our common stock after this offering.
In connection with this offering, we, each of our executive officers and directors, and each of the selling shareholders have agreed, subject to certain exceptions, with the underwriters of this offering not to dispose of or hedge any shares of common stock or securities convertible into or exchangeable for shares of common stock during a 90-day period continuing through the close of business on the 90th day after the date of this prospectus.
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Morgan Stanley & Co. LLC and Piper Jaffray & Co., as representatives of the underwriters of this offering, may, in their sole discretion, release some or all of these shares from these restrictions prior to the expiration of the lock-up period, as permitted by applicable FINRA rules. See Underwriters for a more detailed description of the lock-up arrangements with respect to outstanding shares of our common stock.
In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock.
The market price for shares of our common stock may drop significantly when the restrictions on resale by our existing stockholders lapse or if those restrictions on resale are waived. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.
We are an emerging growth company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, which was enacted in April 2012. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
The requirements of being a public company may strain our resources, divert managements attention and affect our ability to attract and retain qualified board members.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, the listing requirements of the New York Stock Exchange, or NYSE, and other applicable securities rules and regulations. Compliance with these rules and regulations has increased our legal, financial compliance and other costs, made some activities more difficult, time-consuming or costly and increased demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight is required. As a result, managements attention may be diverted from other business concerns, which could harm our business and operating results. Although we have employees responsible for ensuring we comply with these requirements, including our Chief Financial Officer, we may need to hire more employees in the future, which will increase our costs and expenses.
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In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal, financial and other compliance costs, and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of managements time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
As a result of being a public company and these new rules and regulations, it is more difficult and expensive for us to obtain director and officer liability insurance and we are required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These factors could make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees (particularly our audit committee and compensation committee), and as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.
As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition are visible to the public, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating results.
Compliance with new regulations and customer demands regarding conflict minerals could significantly increase costs and affect the products that we manufacture.
Section 1502 of the Dodd-Frank Act required the SEC to establish new disclosure and reporting requirements regarding specified minerals originating in the Democratic Republic of the Congo or an adjoining country that are necessary to the functionality or production of products manufactured by companies required to file reports with the SEC. The final rules implementing these requirements, as released recently by the SEC, could affect sourcing at competitive prices and availability in sufficient quantities of minerals used in the products that we manufacture. In addition, these rules could result in us incurring additional costs to perform and document supplier due diligence. Moreover, we may encounter challenges to satisfy those customers who require that all of the components of the products that we manufacture for them be certified as conflict free.
We are obligated to develop and maintain proper and effective internal controls over financial reporting and otherwise comply with Section 404 of the Sarbanes-Oxley Act. This will require significant expenditures and effort by our management, and may not complete our analysis of our internal controls over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act and related rules and regulations, and beginning with our Annual Report on Form 10-K for the year ending December 31, 2013, our management will be required to report on the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 10-K following the date on which we are no longer an emerging growth company, which may be up to five years following the date of our initial public offering. Our status as an
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emerging growth company is discussed in more detail in Managements Discussion and Analysis of Financial Condition and Results of Operations. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. We are currently in the very early stages of the costly and challenging process of reviewing, documenting and testing our internal control over financial reporting. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. We may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal control over financial reporting. In addition, in connection with the attestation process by our independent registered public accounting firm, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an unqualified opinion on the effectiveness of our internal controls, investors could lose confidence in the accuracy and completeness of our financial information and our stock price could decline.
Anti-takeover provisions in our charter documents and Minnesota law might discourage or delay acquisition attempts for us that you might consider favorable.
Our third amended and restated articles of incorporation and amended and restated by-laws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions:
| permit our board of directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and privileges as our board may designate, including the right to approve an acquisition or other change in our control; |
| provide that the authorized number of directors may be changed by resolution of the board of directors; |
| provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum; |
| provide that shareholders seeking to present proposals before a meeting of shareholders or to nominate candidates for election as directors at a meeting of shareholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of a shareholders notice; and |
| do not provide for cumulative voting rights. |
We are subject to the provisions of Section 302A.673 of the Minnesota Statutes, which regulates business combinations. Section 302A.673 generally prohibits any business combination by an issuing public corporation, or any of its subsidiaries, with an interested shareholder, which means any shareholder that purchases 10% or more of the corporations voting shares within four years following the date the person became an interested shareholder, unless the business combination is approved by a committee composed solely of one or more disinterested members of the corporations board of directors before the date the person became an interested shareholder.
These anti-takeover provisions could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our shareholders. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and to cause us to take other corporate actions you desire.
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An active public trading market for our common stock may not be sustained following this offering, which could limit your ability to sell your shares of our common stock at an attractive price, or at all.
We cannot predict the extent to which investor interest in our company will cause an active trading market in our common stock to continue or how liquid that market will be in the future. An active public market for our common stock may not develop or be sustained after the offering. If an active public market is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all, and that may reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to fund operations by selling shares and my impair our ability to acquire other companies, technologies or services by using our shares as consideration.
We do not expect to pay any cash dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock, and we do not anticipate that we will pay any such cash dividends for the foreseeable future. We anticipate that we will retain all of our future earning for use in the business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur.
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Some of the statements under Prospectus Summary, Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations, Business and elsewhere in this prospectus are forward-looking statements. In some cases, you can identify forward-looking statements by the following words: may, will, could, would, should, expect, intend, plan, anticipate, believe, estimate, predict, project, potential, continue, ongoing or the negative of these terms or other comparable terminology, although not all forward- looking statements contain these words. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including:
| the level of competition in our industry and our ability to compete; |
| our ability to continue to sell to existing customers and sell to new customers; |
| our ability to respond to changes in our industry; |
| our ability to meet the needs of product developers; |
| our ability to meet product developers expectations regarding quick turnaround time and price; |
| any failure to maintain and enhance our brand; |
| our ability to process a large volume of designs and identify significant opportunities in our business; |
| the adoption rate of e-commerce and 3D CAD software by product developers; |
| the loss of key personnel or failure to attract, integrate and retain additional personnel; |
| our ability to effectively grow our business and manage our growth; |
| our ability to scale our business; |
| our ability to maintain our gross margin and revenue growth; |
| system interruptions at our operating facilities, in particular our Minnesota locations; |
| our ability to maintain supplier relationships and obtain adequate supplies of equipment and materials; |
| global economic conditions and the rate of product development by our customers; |
| our ability to address global risks associated with our non-U.S. operations; |
| our ability to protect our intellectual property and not infringe others intellectual property; |
| our ability to effectively operate as a public company; and |
| other risk factors included under Risk Factors in this prospectus. |
In addition, you should refer to the Risk Factors section of this prospectus for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all.
The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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We estimate that the net proceeds from our sale of shares of common stock in this offering will be approximately $2.4 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares by the selling shareholders, including any shares sold pursuant to the underwriters option to purchase additional shares.
The principal purposes of this offering are to facilitate an orderly distribution of shares for the selling shareholders and to increase our public float. We intend to use the net proceeds to us from this offering to pay the expenses we will incur in connection with this offering and for working capital and general corporate purposes.
Our common stock has traded on the New York Stock Exchange under the symbol PRLB since February 24, 2012. Our initial public offering was priced at $16.00 per share. Prior to that date, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low intraday sales prices for our common stock as reported on the New York Stock Exchange:
High | Low | |||||||
Fiscal 2012 |
||||||||
First quarter (from February 24, 2012) |
$ | 35.93 | $ | 25.00 | ||||
Second quarter |
$ | 39.08 | $ | 24.90 | ||||
Third quarter |
$ | 41.10 | $ | 28.76 | ||||
Fourth quarter (through November 15, 2012) |
$ | 36.55 | $ | 27.96 |
On November 15, 2012, the last reported sale price of our common stock on the New York Stock Exchange was $31.78 per share. As of November 15, 2012, we had 16 holders of record of our common stock. The actual number of shareholders is greater than this number of record holders, and includes shareholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees.
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. In addition, unless waived, the terms of our existing debt facilities prohibit us from paying dividends on our common stock.
30
Selected Consolidated Financial Data
The following tables set forth selected consolidated financial data for the periods and at the dates indicated. The selected consolidated statements of comprehensive income data for the years ended December 31, 2007, 2008, 2009, 2010 and 2011 and selected consolidated balance sheet data as of December 31, 2007, 2008, 2009, 2010 and 2011 are derived from our audited consolidated financial statements. Our audited consolidated statements of comprehensive income for the years ended December 31, 2009, 2010 and 2011 and our audited consolidated balance sheets as of December 31, 2010 and 2011 are included elsewhere in this prospectus. Our audited consolidated statements of comprehensive income for the years ended December 31, 2007 and 2008 and our audited consolidated balance sheets as of December 31, 2007, 2008 and 2009 have not been included in this prospectus. The selected consolidated statements of comprehensive income data for the nine months ended September 30, 2011 and 2012 and the selected consolidated balance sheet data as of September 30, 2012 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus.
The historical results presented below are not necessarily indicative of the results to be expected for any future period. Our unaudited consolidated financial statements for the nine months ended September 30, 2011 and 2012 have been prepared on the same basis as the annual financial statements and include all adjustments, which include only normal recurring adjustments, necessary for fair presentation of this data. Our operating results for interim periods are not necessarily indicative of the results to be expected for a full-year period. You should read this selected consolidated financial data in conjunction with the consolidated financial statements and related notes and the information under Managements Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this prospectus.
31
Year Ended December 31, | Nine Months Ended September 30, |
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2007 | 2008 | 2009 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||
(in thousands, except share and per share amounts) | ||||||||||||||||||||||||||||
Consolidated Statements of Comprehensive Income Data |
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Revenue |
$ | 35,914 | $ | 44,440 | $ | 43,833 | $ | 64,919 | $ | 98,939 | $ | 73,302 | $ | 92,375 | ||||||||||||||
Cost of revenue |
14,255 | 17,738 | 18,559 | 25,443 | 39,324 | 28,251 | 37,242 | |||||||||||||||||||||
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Gross profit |
21,659 | 26,702 | 25,274 | 39,476 | 59,615 | 45,051 | 55,133 | |||||||||||||||||||||
Operating expenses: |
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Marketing and sales |
5,862 | 7,481 | 8,262 | 10,867 | 15,752 | 11,139 | 13,440 | |||||||||||||||||||||
Research and development |
2,293 | 3,125 | 3,140 | 4,281 | 5,222 | 3,639 | 6,622 | |||||||||||||||||||||
General and administrative |
5,102 | 5,438 | 5,965 | 7,629 | 11,772 | 8,297 | 10,394 | |||||||||||||||||||||
Loss on impairment of foreign subsidiary assets |
| | | 773 | | | | |||||||||||||||||||||
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Total operating expenses |
13,257 | 16,044 | 17,367 | 23,550 | 32,746 | 23,075 | 30,456 | |||||||||||||||||||||
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Income from operations |
8,402 | 10,658 | 7,907 | 15,926 | 26,869 | 21,976 | 24,677 | |||||||||||||||||||||
Other income (expense), net |
(20 | ) | (374 | ) | (517 | ) | (213 | ) | (114 | ) | 18 | (90 | ) | |||||||||||||||
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Income before income taxes |
8,382 | 10,284 | 7,390 | 15,713 | 26,755 | 21,994 | 24,587 | |||||||||||||||||||||
Provision for income taxes |
2,878 | 3,421 | 3,167 | 4,762 | 8,783 | 7,252 | 7,957 | |||||||||||||||||||||
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Net income |
5,504 | 6,863 | 4,223 | 10,951 | 17,972 | 14,742 | 16,630 | |||||||||||||||||||||
Less: dividends on redeemable preferred stock |
| (1,752 | ) | (4,180 | ) | (4,179 | ) | (4,179 | ) | (3,126 | ) | | ||||||||||||||||
Less: undistributed earnings allocated to preferred shareholders |
| (786 | ) | (16 | ) | (2,377 | ) | (4,507 | ) | (3,834 | ) | | ||||||||||||||||
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Net income attributable to common shareholders (1) |
$ | 5,504 | $ | 4,325 | $ | 27 | $ | 4,395 | $ | 9,286 | $ | 7,782 | $ | 16,630 | ||||||||||||||
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Basic |
$ | 0.34 | $ | 0.31 | $ | 0.00 | $ | 0.40 | $ | 0.75 | $ | 0.64 | $ | 0.72 | ||||||||||||||
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Diluted |
$ | 0. 26 | $ | 0.26 | $ | 0.00 | $ | 0.34 | $ | 0.67 | $ | 0.58 | $ | 0.68 | ||||||||||||||
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Weighted average shares outstanding (1) |
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Basic |
15,990,492 | 13,730,458 | 10,564,946 | 11,079,432 | 12,352,004 | 12,162,808 | 22,975,950 | |||||||||||||||||||||
Diluted |
20,997,928 | 16,803,360 | 13,201,762 | 13,051,458 | 13,939,072 | 13,496,238 | 24,356,785 | |||||||||||||||||||||
Other comprehensive income (loss), net of tax |
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Foreign currency translation adjustments |
$ | (73 | ) | $ | (299 | ) | $ | 152 | $ | (214 | ) | $ | (280 | ) | $ | (280 | ) | $ | 197 | |||||||||
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Comprehensive income |
$ | 5,431 | $ | 6,564 | $ | 4,375 | $ | 10,737 | $ | 17,692 | $ | 14,462 | $ | 16,827 | ||||||||||||||
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Other Financial Data: |
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Adjusted EBITDA (unaudited) (2) |
$ | 10,798 | $ | 13,393 | $ | 11,059 | $ | 20,513 | $ | 32,263 | $ | 25,727 | $ | 31,419 |
32
Stock-based compensation expense included in the statements of comprehensive income data above is as follows:
Year Ended December 31, | Nine Months Ended September 30, |
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2007 | 2008 | 2009 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Stock options and grants |
$ | 474 | $ | 123 | $ | 245 | $ | 331 | $ | 1,130 | $ | 742 | $ | 1,993 | ||||||||||||||
Employee stock purchase plan |
| | | | | | 369 | |||||||||||||||||||||
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Total stock-based compensation expense |
$ | 474 | $ | 123 | $ | 245 | $ | 331 | $ | 1,130 | $ | 742 | $ | 2,362 | ||||||||||||||
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Cost of revenue |
$ | 10 | $ | 16 | $ | 29 | $ | 39 | $ | 78 | $ | 58 | $ | 248 | ||||||||||||||
Operating expenses: |
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Marketing and sales |
20 | 48 | 70 | 84 | 215 | 154 | 300 | |||||||||||||||||||||
Research and development |
16 | 32 | 53 | 73 | 274 | 206 | 346 | |||||||||||||||||||||
General and administrative |
428 | 27 | 93 | 135 | 563 | 324 | 1,468 | |||||||||||||||||||||
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Total stock-based compensation expense |
$ | 474 | $ | 123 | $ | 245 | $ | 331 | $ | 1,130 | $ | 742 | $ | 2,362 | ||||||||||||||
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As of December 31, | As of September 30, 2012 |
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2007 | 2008 | 2009 | 2010 | 2011 | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Consolidated Balance Sheet Data: |
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Cash and cash equivalents |
$ | 2,475 | $ | 2,658 | $ | 2,703 | $ | 6,101 | $ | 8,135 | $ | 36,290 | ||||||||||||
Working capital |
5,640 | 5,203 | 4,533 | 10,424 | 18,138 | 72,078 | ||||||||||||||||||
Total assets |
23,162 | 27,389 | 28,797 | 38,354 | 62,326 | 156,921 | ||||||||||||||||||
Total liabilities |
8,525 | 16,543 | 13,297 | 11,730 | 15,675 | 16,188 | ||||||||||||||||||
Redeemable convertible preferred stock and redeemable common stock |
3,369 | 54,357 | 58,536 | 62,715 | 66,894 | | ||||||||||||||||||
Total shareholders equity (deficit) |
$ | 11,268 | $ | (43,511 | ) | $ | (43,036 | ) | $ | (36,091 | ) | $ | (20,243 | ) | $ | 140,733 |
(1) | See Note 3 of Notes to Consolidated Financial Statements for an explanation of the method used to calculate net income per basic and diluted share attributable to common shareholders and weighted average shares outstanding for the years ended December 31, 2010 and 2011 and the nine months ended September 30, 2011 and 2012, respectively. |
(2) | We define adjusted EBITDA as net income, plus provision for income taxes, other expense, net, depreciation and amortization, loss on impairment of foreign subsidiary assets and stock-based compensation. See Adjusted EBITDA below for more information and for a reconciliation of adjusted EBITDA to net income, the most directly comparable measure calculated and presented in accordance with GAAP. |
Adjusted EBITDA
To provide investors with additional information regarding our financial results, we have disclosed in the table above adjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation below of adjusted EBITDA to net income, the most directly comparable measure calculated and presented in accordance with GAAP.
We have included adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons
33
of our core business. Additionally, adjusted EBITDA has been a financial measure used by the compensation committee of our board of directors in connection with the payment of bonuses to our executive officers. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
| although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; |
| adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation; |
| adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and |
| other companies may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure. |
Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results. The following table presents a reconciliation of adjusted EBITDA to net income for each of the periods indicated:
Year Ended December 31, | Nine Months Ended September 30, |
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2007 | 2008 | 2009 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Reconciliation of Adjusted EBITDA to Net Income: |
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Net income |
$ | 5,504 | $ | 6,863 | $ | 4,223 | $ | 10,951 | $ | 17,972 | $ | 14,742 | $ | 16,630 | ||||||||||||||
Provision for income taxes |
2,878 | 3,421 | 3,167 | 4,762 | 8,783 | 7,252 | 7,957 | |||||||||||||||||||||
Other (income) expenses, net |
20 | 374 | 517 | 213 | 114 | (18 | ) | 90 | ||||||||||||||||||||
Depreciation and amortization |
1,922 | 2,612 | 2,907 | 3,483 | 4,264 | 3,009 | 4,380 | |||||||||||||||||||||
Loss on impairment of foreign subsidiary assets |
| | | 773 | | | | |||||||||||||||||||||
Stock-based compensation |
474 | 123 | 245 | 331 | 1,130 | 742 | 2,362 | |||||||||||||||||||||
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Adjusted EBITDA |
$ | 10,798 | $ | 13,393 | $ | 11,059 | $ | 20,513 | $ | 32,263 | $ | 25,727 | $ | 31,419 | ||||||||||||||
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34
Managements Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Selected Consolidated Financial Data and the consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward- looking statements as a result of various factors, including those set forth under Risk Factors and elsewhere in this prospectus. See Forward-Looking Statements.
Overview
We are a leading online and technology-enabled manufacturer of quick-turn CNC machined and injection molded custom parts for prototyping and short-run production. We provide Real Parts, Really Fast to product developers worldwide, who are under increasing pressure to bring their finished products to market faster than their competition. We believe low-volume manufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts in low volumes, and our customers conduct nearly all of their business with us over the Internet. We target our services to the millions of product developers who use 3D CAD software to design products across a diverse range of end-markets. Our primary manufacturing services currently include Firstcut, which is our CNC machining service, and Protomold, which is our plastic injection molding service. Through September 30, 2012, we have received over 940,000 uploaded part designs, sent over 800,000 part quotations and shipped over 190,000 unique parts to approximately 26,000 product developers representing over 12,000 customer companies across a wide range of industries.
We have experienced significant growth since our inception. Since we first introduced our Protomold injection molding service in 1999, we have steadily expanded the size and geometric complexity of the injection molded parts we are able to manufacture, and we continue to extend the diversity of materials we are able to support. Similarly, since first introducing our Firstcut CNC machining service in 2007, we have expanded the range of part sizes, design geometries and materials we can support. We are also continually seeking to enhance other aspects of our technology and manufacturing processes, including our interactive web-based and automated user interface and quoting system. We intend to continue to invest significantly in enhancing our technology and manufacturing processes and expanding the range of our existing capabilities with the aim of meeting the needs of a broader set of product developers. As a result of the factors described above, many of our customers tend to return to Proto Labs to meet their ongoing needs, with approximately 77%, 77%, 81%, and 85% of our revenue in 2009, 2010, 2011, and the nine months ended September 30, 2012, respectively, derived from existing customers who had placed orders with us in prior years.
We have established our operations in the United States, Europe and Japan, which we believe are three of the largest geographic markets where product developers are located. We entered the European market in 2005 and launched operations in Japan in late 2009. Our current international operations are not profitable in all markets due to the fixed costs associated with commissioning new manufacturing locations, especially in the early stages, such as those associated with managing foreign operations and the hiring and training of personnel, bringing the manufacturing facility on-line, translation of United States marketing materials to local languages, local brand marketing, compliance costs of laws and regulations, and the generally higher costs of doing business internationally, particularly as they relate to local labor practices and laws regulating employees costs. In addition, in the early life of new facilities, economies of scale are typically not realized resulting in lower operating margins. We believe that with revenue growth over time, gross margins in international markets will be generally consistent with those in the United States. As of September 30, 2012, we had sold products into more than 50 countries. Our sales outside of the United States accounted for approximately 26% of our consolidated
35
sales in each of 2010 and 2011 and 25% and 24%, respectively, in the nine months ended September 30, 2011 and 2012. We intend to continue to expand our international sales efforts and believe opportunities exist to serve the needs of product developers in select new geographic regions.
We have grown our total revenue from $35.9 million in 2007 to $98.9 million in 2011 and $92.4 million in the nine months ended September 30, 2012. During this period, our operating expenses increased from $13.3 million in 2007 to $32.7 million in 2011 and $30.5 million in the nine months ended September 30, 2012. We have grown our income from operations from $8.4 million in 2007 to $26.9 million in 2011 and $24.7 million in the nine months ended September 30, 2012. Our recent growth in revenue and income from operations has been accompanied by increased operating expenses, with the two most significant components being marketing and sales and increased general and administrative expenses. We expect to increasingly invest in our operations to support anticipated future growth and public company reporting and compliance obligations, as discussed more fully below.
In addition, we believe that a number of trends affecting our industry have affected our results of operations and may continue to do so. For example, we believe that many of our target product developer customers have increasing e-commerce expectations, are facing increased pressure to accelerate the time to market for their products and continue to migrate from using 2D CAD to using 3D CAD for their design needs. We believe we continue to be well positioned to benefit from these trends, given our proprietary technology that enables us to automate and integrate the majority of activities involved in procuring custom low-volume parts, starting with our elegant web interface through which a product developer submits a 3D CAD part design. While our business may be positively affected by these trends, our results may also be favorably or unfavorably impacted by other trends that affect product developer orders for custom parts in low volumes, including, among others, changes in product developer preferences or needs, developments in our industry and among our competitors and factors impacting new product development volume such as economic conditions. For a more complete discussion of the risks facing our business, see Risk Factors.
Key Financial Measures and Trends
Revenue
The Companys operations are comprised of three geographically-based operating segments in the United States, Europe and Japan included in the reportable segments of United States, Europe, and Other. Revenue within these segments is derived from our Firstcut and Protomold services. Firstcut revenue consists of sales of CNC machined custom parts. Protomold revenue consists of sales of custom injection molds and injection-molded parts. Our revenue is generated from a diverse customer base, with no single customer company representing more than approximately 1% of our total revenue in 2011. Our historical and current efforts to increase revenue have been directed at gaining new customers and selling to our existing customer base by increasing marketing and selling activities, offering additional services such as the introduction of our Firstcut service in 2007, expanding internationally such as the opening of our Japanese office in 2009, improving the usability of our services such as our web-centric applications, and expanding the breadth and scope of our products such as by adding more sizes and materials to our offerings. During 2011, we sold our services to approximately 3,430 customer companies from our existing customer base, an increase of 38% over the comparable period in 2010, and to approximately 2,600 new customer companies, an increase of 36% over the comparable period in 2010. During 2010, we sold our services to approximately 2,480 customer companies from our existing customer base, an increase of 37% over 2009, and to approximately 1,910 new customer companies, an increase of 49% over 2009. During 2009, we sold our services to approximately 1,800 customer companies from our existing customer base, an increase of 34% over 2008, and to approximately 1,280 new customer companies, no change from 2008. During the nine months ended September 30, 2012, we sold our services to approximately 4,400 customer companies from our existing customer base, an increase of 34% over the comparable period in 2011, and to approximately 2,250 new customer companies, an increase of 15% over the comparable period in 2011.
36
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue consists primarily of raw materials, employee salaries, bonuses, benefits, stock-based compensation, equipment depreciation and overhead allocations associated with the manufacturing process for molds and custom parts. We expect cost of revenue to increase in absolute dollars, but remain relatively constant as a percentage of total revenue.
During 2010 and 2011, we benefited from high utilization in both our factories and manufacturing equipment, especially in the United States. Our business model requires that we invest in our capacity well in advance of demand to ensure we can fulfill the expectations for quick service from our customers. Therefore, during 2012 we have made significant investments in additional factory space and infrastructure in the United States and Japan. We expect to continue to grow in future periods, which will result in the need for additional investments in factory space and equipment. We expect that these additional costs for factory and equipment expansion can be absorbed, and allow gross margins to remain relatively consistent over time.
We define gross profit as our revenue less our cost of revenue, and we define gross margin as gross profit expressed as a percentage of revenue. Our gross profit and gross margin are affected by many factors, including our pricing, our sales volume, our manufacturing costs, the costs associated with increasing production capacity, the mix between domestic and foreign revenue sources and foreign exchange rates.
Our gross margins vary between geographic markets due primarily to the costs associated with starting new factories and our operating maturity in these markets. We believe that over time and with growth and maturity of our international business, gross margins will be generally consistent through all our markets.
Operating Expenses
Operating expenses consist of marketing and sales, research and development and general and administrative expenses and loss on impairment of foreign subsidiary assets. Personnel-related costs are the most significant component of the marketing and sales, research and development and general and administrative expense categories.
Our recent growth in operating expenses is mainly due to higher headcounts to support our growth and expansion, and we expect that trend to continue. Our business strategy is to continue to be a leading online and technology-enabled manufacturer of quick-turn CNC machined and injection molded custom parts for prototyping and short-run production. For us to achieve our goals, we anticipate continued substantial investments in technology and personnel, resulting in increased operating expenses.
Marketing and sales. Marketing and sales expense consists primarily of employee salaries, commissions, bonuses, benefits, stock-based compensation, marketing programs such as print and pay-per-click advertising, trade shows, direct mail and other related overhead. We expect sales and marketing expense to increase in the future as we increase the number of marketing and sales professionals and marketing programs targeted to increase our customer base.
Research and development. Research and development expense consists primarily of employee salaries, bonuses, benefits, stock-based compensation, depreciation on equipment, outside services and other related overhead. All of our research and development costs have been expensed as incurred. We expect research and development expense to increase in the future as we seek to enhance and expand our service offerings.
General and administrative. General and administrative expense consists primarily of employee salaries, bonuses, benefits, stock-based compensation, professional service fees related to accounting, tax, legal and other related overhead. We expect general and administrative expense to increase on an absolute basis and as a percentage of revenue as we continue to grow and expand our operations and develop the infrastructure necessary to operate as a public company. These expenses will include increased audit and legal fees, costs of compliance with securities and other regulations, implementation costs for compliance with the provisions of the Sarbanes-Oxley Act, investor relations expense and higher insurance premiums.
37
Loss on impairment of foreign subsidiary assets. In 2010, we updated our forecasts for our Japanese subsidiary in accordance with Accounting Standards Codification (ASC) 360, Property, Plant and Equipment (ASC 360). Our original forecasts, prepared in 2008, did not anticipate the global recession and the slow recovery in Japan and the differences in customer preferences. Therefore, our revenues from our Japanese subsidiary were lower than projected and in accordance with ASC 360, we recorded a loss on impairment of selected property, plant and equipment in Japan. In the future we will make annual assessments on the carrying value of long-lived assets per ASC 360. If these assessments indicate an impairment exists, we will write down the assets to their fair value. The circumstances that may lead to future impairment charges are difficult to predict and we do not believe such circumstances currently exist.
Other income (expense), net
Other income (expense), net primarily consists of foreign currency-related gains and losses, interest income on cash balances and investments, and interest expense on borrowings. Our foreign currency-related gains and losses will vary depending upon movements in underlying exchange rates. Our interest income will vary each reporting period depending on our average cash balances during the period, composition of our marketable security portfolio and the current level of interest rates. Our interest expense will vary based on borrowings and interest rates.
Provision for income taxes
Provision for income taxes is comprised of federal, state, local and foreign taxes based on pre-tax income. We expect income taxes to increase as our taxable income increases and our effective tax rate to remain relatively constant.
In the fourth quarter of 2010, we made a qualified subsidiary election for our Japanese subsidiary. This qualified election resulted in a deemed liquidation of the subsidiary into the parent and created a current tax deduction for United States federal tax purposes during the fourth quarter of 2010. This election enabled us to deduct prior Japanese net losses and investments. In future periods, we will qualify for additional deductions if our Japanese subsidiary continues to experience net losses.
38
Results of Operations
The following table sets forth a summary of our results of operations and the related changes for the periods indicated. The results below are not necessarily indicative of the results for future periods, and our operating results for interim periods are not necessarily indicative of the results to be expected for a full-year period.
Year Ended December 31, |
Change | Year Ended December 31, |
Change | Nine Months Ended September 30, |
Change | |||||||||||||||||||||||||||||||||||||||||||
2009 | 2010 | $ | % | 2010 | 2011 | $ | % | 2011 | 2012 | $ | % | |||||||||||||||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Revenue |
$ | 43,833 | $ | 64,919 | $ | 21,086 | 48.1 | % | $ | 64,919 | $ | 98,939 | $ | 34,020 | 52.4 | % | $ | 73,302 | $ | 92,375 | $ | 19,073 | 26.0 | % | ||||||||||||||||||||||||
Cost of revenue |
18,559 | 25,443 | 6,884 | 37.1 | 25,443 | 39,324 | 13,881 | 54.6 | 28,251 | 37,242 | 8,991 | 31.8 | ||||||||||||||||||||||||||||||||||||
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Gross profit |
25,274 | 39,476 | 14,202 | 56.2 | 39,476 | 59,615 | 20,139 | 51.0 | 45,051 | 55,133 | 10,082 | 22.4 | ||||||||||||||||||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||||||||||||||||||||||||
Marketing and sales |
8,262 | 10,867 | 2,605 | 31.5 | 10,867 | 15,752 | 4,885 | 45.0 | 11,139 | 13,440 | 2,301 | 20.7 | ||||||||||||||||||||||||||||||||||||
Research and development |
3,140 | 4,281 | 1,141 | 36.3 | 4,281 | 5,222 | 941 | 22.0 | 3,639 | 6,622 | 2,983 | 82.0 | ||||||||||||||||||||||||||||||||||||
General and administrative |
5,965 | 7,629 | 1,664 | 27.8 | 7,629 | 11,772 | 4,143 | 54.3 | 8,297 | 10,394 | 2,097 | 25.3 | ||||||||||||||||||||||||||||||||||||
Loss on impairment of foreign subsidiary assets |
| 773 | 773 | * | 773 | | (773 | ) | * | | | | | |||||||||||||||||||||||||||||||||||
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|
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total operating expenses |
17,367 | 23,550 | 6,183 | 35.6 | 23,550 | 32,746 | 9,196 | 39.0 | 23,075 | 30,456 | 7,381 | 32.0 | ||||||||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||||
Income from operations |
7,907 | 15,926 | 8,019 | 101.4 | 15,926 | 26,869 | 10,943 | 68.7 | 21,976 | 24,677 | 2,701 | 12.3 | ||||||||||||||||||||||||||||||||||||
Other income (expense), net |
(517 | ) | (213 | ) | (304 | ) | (58.8 | ) | (213 | ) | (114 | ) | (99 | ) | (46.5 | ) | 18 | (90 | ) | (108 | ) | * | ||||||||||||||||||||||||||
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|
|||||||||||||||||||||||||
Income before income taxes |
7,390 | 15,713 | 8,323 | 112.6 | 15,713 | 26,755 | 11,042 | 70.3 | 21,994 | 24,587 | 2,593 | 11.8 | ||||||||||||||||||||||||||||||||||||
Provision for income taxes |
3,167 | 4,762 | 1,595 | 50.4 | 4,762 | 8,783 | 4,021 | 84.4 | 7,252 | 7,957 | 705 | 9.7 | ||||||||||||||||||||||||||||||||||||
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|
|
|
|
|||||||||||||||||||||||||
Net income |
$ | 4,223 | $ | 10,951 | $ | 6,728 | 159.3 | % | $ | 10,951 | $ | 17,972 | $ | 7,021 | 64.1 | % | $ | 14,742 | $ | 16,630 | $ | 1,888 | 12.8 | % | ||||||||||||||||||||||||
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|
* | Percentage change not meaningful. |
Stock-based compensation expense included in the statements of comprehensive income data above is as follows:
Year Ended December 31, | Nine Months Ended September 30, |
|||||||||||||||||||
2009 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Stock options and grants |
$ | 245 | $ | 331 | $ | 1,130 | $ | 742 | $ | 1,993 | ||||||||||
Employee stock purchase plan |
| | | | 369 | |||||||||||||||
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|
|
|
|
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|
|
|
|||||||||||
Total stock-based compensation expense |
$ | 245 | $ | 331 | $ | 1,130 | $ | 742 | $ | 2,362 | ||||||||||
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|
|
|
|
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|
|
|
|
|||||||||||
Cost of revenue |
$ | 29 | $ | 39 | $ | 78 | $ | 58 | $ | 248 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Marketing and sales |
70 | 84 | 215 | 154 | 300 | |||||||||||||||
Research and development |
53 | 73 | 274 | 206 | 346 | |||||||||||||||
General and administrative |
93 | 135 | 563 | 324 | 1,468 | |||||||||||||||
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|
|||||||||||
Total stock-based compensation expense |
$ | 245 | $ | 331 | $ | 1,130 | $ | 742 | $ | 2,362 | ||||||||||
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39
The following table sets forth selected statements of comprehensive income data as a percentage of revenue for the periods indicated:
Year Ended December 31, | Nine Months Ended September 30, |
|||||||||||||||||||
2009 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||
(unaudited) | ||||||||||||||||||||
Revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
Cost of revenue |
42.3 | 39.2 | 39.7 | 38.5 | 40.3 | |||||||||||||||
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|
|||||||||||
Gross profit |
57.7 | 60.8 | 60.3 | 61.5 | 59.7 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Marketing and sales |
18.9 | 16.7 | 15.9 | 15.2 | 14.5 | |||||||||||||||
Research and development |
7.2 | 6.6 | 5.3 | 5.0 | 7.2 | |||||||||||||||
General and administrative |
13.6 | 11.8 | 11.9 | 11.3 | 11.3 | |||||||||||||||
Loss on impairment of foreign subsidiary assets |
| 1.2 | | | | |||||||||||||||
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|
|||||||||||
Total operating expenses |
39.7 | 36.3 | 33.1 | 31.5 | 33.0 | |||||||||||||||
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|
|
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Income from operations |
18.0 | 24.5 | 27.2 | 30.0 | 26.7 | |||||||||||||||
Other income (expense), net |
(1.2 | ) | (0.3 | ) | (0.2 | ) | 0.0 | (0.1 | ) | |||||||||||
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Income before income taxes |
16.8 | 24.2 | 27.0 | 30.0 | 26.6 | |||||||||||||||
Provision for income taxes |
7.2 | 7.3 | 8.8 | 9.9 | 8.6 | |||||||||||||||
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|
|||||||||||
Net income |
9.6 | % | 16.9 | % | 18.2 | % | 20.1 | % | 18.0 | % | ||||||||||
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|
Comparison of Nine Months Ended September 30, 2011 and 2012
Revenue
Revenue and the related changes for the nine months ended September 30, 2011 and 2012 were as follows:
Nine Months Ended September 30, | ||||||||||||||||||||||||
2011 | 2012 | Change | ||||||||||||||||||||||
$ | % of Total Revenue |
$ | % of Total Revenue |
$ | % | |||||||||||||||||||
(unaudited, dollars in thousands) | ||||||||||||||||||||||||
Revenue |
||||||||||||||||||||||||
Protomold |
$ | 55,087 | 75.2 | % | $ | 66,697 | 72.2 | % | $ | 11,610 | 21.1 | % | ||||||||||||
First Cut |
18,215 | 24.8 | 25,678 | 27.8 | 7,463 | 41.0 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenue |
$ | 73,302 | 100.0 | % | $ | 92,375 | 100.0 | % | $ | 19,073 | 26.0 | % | ||||||||||||
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|
Revenue by geographic region, based on the billing location of the end customer, is summarized as follows:
Nine Months Ended September 30, | ||||||||||||||||||||||||
2011 | 2012 | Change | ||||||||||||||||||||||
$ | % of Total Revenue |
$ | % of Total Revenue |
$ | % | |||||||||||||||||||
(unaudited, dollars in thousands) | ||||||||||||||||||||||||
Revenue |
||||||||||||||||||||||||
United States |
$ | 54,723 | 74.7 | % | $ | 69,887 | 75.7 | % | $ | 15,164 | 27.7 | % | ||||||||||||
International |
18,579 | 25.3 | 22,488 | 24.3 | 3,909 | 21.0 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenue |
$ | 73,302 | 100.0 | % | $ | 92,375 | 100.0 | % | $ | 19,073 | 26.0 | % | ||||||||||||
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40
Our revenue increased $19.1 million, or 26.0%, for the nine months ended September 30, 2012 compared to the same period in 2011. Of this growth, approximately $5.5 million was attributable to sales to approximately 4,400 existing customer companies, and approximately $13.6 million was attributable to sales to approximately 2,250 new customer companies gained during the nine months ended September 30, 2012. Our overall revenue growth was driven by a 27.7% increase in U.S. revenue, a 21.0% increase in international revenue, a 21.1% increase in Protomold revenue and a 41.0% increase in Firstcut revenue, in each case for the nine months ended September 30, 2012 compared to the same period in 2011. Our revenue increases were primarily driven by greater spending on marketing and increases in selling personnel. The effect of pricing changes on revenue was immaterial for the nine months ended September 30, 2012 compared to the same period in 2011.
Revenue by reportable segment is summarized as follows:
Nine Months Ended September 30, | ||||||||||||||||||||||||
2011 | 2012 | Change | ||||||||||||||||||||||
$ | % of Total Revenue |
$ | % of Total Revenue |
$ | % | |||||||||||||||||||
(unaudited, dollars in thousands) | ||||||||||||||||||||||||
Revenue |
||||||||||||||||||||||||
United States |
$ | 57,510 | 78.5 | % | $ | 72,652 | 78.6 | % | $ | 15,142 | 26.3 | % | ||||||||||||
Europe |
13,941 | 19.0 | 16,305 | 17.7 | 2,364 | 17.0 | ||||||||||||||||||
Other |
1,851 | 2.5 | 3,418 | 3.7 | 1,567 | 84.7 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenue |
$ | 73,302 | 100.0 | % | $ | 92,375 | 100.0 | % | $ | 19,073 | 26.0 | % | ||||||||||||
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|
For our United States segment, revenue increased $15.1 million, or 26.3%, for the nine months ended September 30, 2012 compared to the same period in 2011. Of this growth, approximately $6.9 million was attributable to sales to approximately 3,350 existing customer companies, and approximately $8.2 million was attributable to sales to approximately 1,375 new customer companies gained during the nine months ended September 30, 2012. Our United States revenue increase was primarily driven by greater spending on marketing and increases in selling personnel.
For our Europe segment, revenue increased $2.4 million, or 17.0%, for the nine months ended September 30, 2012 compared to the same period in 2011. This growth was attributable to approximately $4.1 million in sales to approximately 625 new customer companies gained during the nine months ended September 30, 2012, partially offset by a period-over-period decline of approximately $1.7 million in sales attributable to approximately 825 existing customer companies. Our Europe revenue increase was primarily driven by greater spending on marketing and increases in selling personnel.
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue and gross profit and the related changes for the nine months ended September 30, 2011 and 2012 were as follows:
Nine Months Ended September 30, | ||||||||||||||||||||||||
2011 | 2012 | Change | ||||||||||||||||||||||
$ | % of Total Revenue |
$ | % of Total Revenue |
$ | % | |||||||||||||||||||
(unaudited, dollars in thousands) | ||||||||||||||||||||||||
Cost of revenue |
$ | 28,251 | 38.5 | % | $ | 37,242 | 40.3 | % | $ | 8,991 | 31.8 | % | ||||||||||||
Gross profit |
$ | 45,051 | 61.5 | % | $ | 55,133 | 59.7 | % | $ | 10,082 | 22.4 | % |
Cost of Revenue. Cost of revenue increased $9.0 million, or 31.8%, for the nine months ended September 30, 2012 compared to the same period in 2011 due to raw material and production cost increases of $3.1 million to support increased sales volumes, equipment and facility-related cost increases of $1.4 million and an increase in direct labor headcount resulting in personnel and related cost increases of $4.5 million.
41
Gross Profit and Gross Margin. Gross profit increased due to increases in revenue offset by the cost of revenue as discussed above. Gross margin decreased primarily as a result of increases in direct labor personnel and a slight decline in equipment utilization, which resulted from the increase in capacity related to capital equipment acquisition.
Operating Expenses, Other Income (Expense), net and Provision for Income Taxes
Operating expenses, other income (expense), net and provision for income taxes and the related changes for the nine months ended September 30, 2011 and 2012 were as follows:
Nine Months Ended September 30, | ||||||||||||||||||||||||
2011 | 2012 | Change | ||||||||||||||||||||||
$ | % of Total Revenue |
$ | % of Total Revenue |
$ | % | |||||||||||||||||||
(unaudited, dollars in thousands) | ||||||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Marketing and sales |
$ | 11,139 | 15.2 | % | $ | 13,440 | 14.5 | % | $ | 2,301 | 20.7 | % | ||||||||||||
Research and development |
3,639 | 5.0 | 6,622 | 7.2 | 2,983 | 82.0 | ||||||||||||||||||
General and administrative |
8,297 | 11.3 | 10,394 | 11.3 | 2,097 | 25.3 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total operating expenses |
23,075 | 31.5 | 30,456 | 33.0 | 7,381 | 32.0 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||||
Other income (expense), net |
18 | 0.0 | (90 | ) | (0.1 | ) | (108 | ) | * | |||||||||||||||
Provision for income taxes |
$ | 7,252 | 9.9 | % | $ | 7,957 | 8.6 | % | $ | 705 | 9.7 | % |
*Percentage | change not meaningful. |
Marketing and Sales. Marketing and sales expense increased $2.3 million, or 20.7%, for the nine months ended September 30, 2012 compared to the same period in 2011 due to a $0.6 million increase in marketing program costs and an increase in headcount resulting in personnel and related cost increases of $1.7 million.
Research and Development. Our research and development expense increased $3.0 million, or 82.0%, for the nine months ended September 30, 2012 compared to the same period in 2011 due to an increase in headcount resulting in personnel and related cost increases of $0.9 million, operating cost increases of $0.6 million and professional services of $1.5 million for outside consulting services.
General and Administrative. Our general and administrative expense increased $2.1 million, or 25.3%, for the nine months ended September 30, 2012 compared to the same period in 2011 due to stock-based compensation increases of $1.2 million, an increase in headcount resulting in personnel and related cost increases of $0.4 million, and professional services of $0.5 million for outside legal and accounting services.
Other Income (Expense), net. Other income (expense), net decreased $0.1 million for the nine months ended September 30, 2012 compared to the same period in 2011 due to changes in foreign currency rates.
Provision for Income Taxes. Our income tax provision increased $0.7 million to $8.0 million while our effective tax rate decreased to 32.4% for the nine months ended September 30, 2012 compared to our income tax provision of $7.3 million and effective tax rate of 33.0% for the nine months ended September 30, 2011. The decrease in effective tax rate is primarily attributable to an increase in the deduction for domestic manufacturing activities we are eligible to take in the current year.
42
Segment Income from Operations
Income from operations by segment and the related changes for the nine months ended September 30, 2011 and 2012 were as follows:
Nine Months Ended September 30, | ||||||||||||||||||||||||
2011 | 2012 | Change | ||||||||||||||||||||||
$ | % of Segment Revenue |
$ | % of Segment Revenue |
$ | % | |||||||||||||||||||
(unaudited, dollars in thousands) | ||||||||||||||||||||||||
Income from operations: |
||||||||||||||||||||||||
United States |
$ | 20,089 | 34.9 | % | $ | 22,396 | 30.8 | % | $ | 2,307 | 11.5 | % | ||||||||||||
Europe |
3,672 | 26.3 | 4,706 | 28.9 | 1,034 | 28.2 | ||||||||||||||||||
Other |
(1,785 | ) | (96.4 | ) | (2,425 | ) | (70.9 | ) | (640 | ) | (35.9 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total income from operations |
$ | 21,976 | 30.0 | % | $ | 24,677 | 26.7 | % | $ | 2,701 | 12.3 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations for the United States segment increased $2.3 million, or 11.5%, and as a percentage of segment revenue decreased to 30.8% from 34.9%, in each case for the nine months ended September 30, 2012 compared to the same period in 2011. Income from operations for the United States segment increased due to a 26.3% increase in revenue offset by increased costs as previously discussed.
Income from operations for the Europe segment increased $1.0 million, or 28.2%, and as a percentage of segment revenue increased to 28.9% from 26.3%, in each case for the nine months ended September 30, 2012 compared to the same period in 2011. Income from operations for the Europe segment increased due to a 17.0% increase in revenue, higher factory utilization and operating expenses growing at a slower rate than revenue.
Comparison of Years Ended December 31, 2010 and 2011
Revenue
Revenue and the related changes for 2010 and 2011 were as follows:
Year Ended December 31, | ||||||||||||||||||||||||
2010 | 2011 | |||||||||||||||||||||||
$ | % of Total Revenue |
$ | % of Total Revenue |
Change | ||||||||||||||||||||
$ | % | |||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Revenue |
||||||||||||||||||||||||
Protomold |
$ | 50,690 | 78.1 | % | $ | 74,090 | 74.9 | % | $ | 23,400 | 46.2 | % | ||||||||||||
Firstcut |
14,229 | 21.9 | 24,849 | 25.1 | 10,620 | 74.6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenue |
$ | 64,919 | 100.0 | % | $ | 98,939 | 100.0 | % | $ | 34,020 | 52.4 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic region, based on the billing location of the end customer, is summarized as follows:
Year Ended December 31, | ||||||||||||||||||||||||
2010 | 2011 | |||||||||||||||||||||||
$ | % of Total Revenue |
$ | % of Total Revenue |
Change | ||||||||||||||||||||
$ | % | |||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Revenue |
||||||||||||||||||||||||
United States |
$ | 48,059 | 74.0 | % | $ | 73,010 | 73.8 | % | $ | 24,951 | 51.9 | % | ||||||||||||
International |
16,860 | 26.0 | 25,929 | 26.2 | 9,069 | 53.8 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenue |
$ | 64,919 | 100.0 | % | $ | 98,939 | 100.0 | % | $ | 34,020 | 52.4 | % | ||||||||||||
|
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43
Our revenue increased $34.0 million, or 52.4%, for 2011 compared with 2010. Of this growth, approximately $15.6 million was attributable to sales to approximately 3,430 existing customer companies, and approximately $18.4 million was attributable to sales to approximately 2,600 new customer companies gained during 2011. Our overall revenue growth was driven by a 51.9% increase in United States revenue, a 53.8% increase in international revenue, a 46.2% increase in Protomold revenue and a 74.6% increase in Firstcut revenue, in each case for 2011 compared with 2010. Our revenue increases were primarily driven by greater spending on marketing and increases in selling personnel. International revenue was positively impacted by $0.9 million in 2011 compared to 2010 due to weakening of the United States dollar relative to certain foreign currencies. The effect of pricing changes on revenue was immaterial for 2011 compared to 2010.
Revenue by reportable segment is summarized as follows:
Year Ended December 31, | ||||||||||||||||||||||||
2010 | 2011 | |||||||||||||||||||||||
$ | % of Total Revenue |
$ | % of Total Revenue |
Change | ||||||||||||||||||||
$ | % | |||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Revenue |
||||||||||||||||||||||||
United States |
$ | 52,222 | 80.4 | % | $ | 76,634 | 77.4 | % | $ | 24,412 | 46.7 | % | ||||||||||||
Europe |
11,607 | 17.9 | 19,453 | 19.7 | 7,846 | 67.6 | ||||||||||||||||||
Other |
1,090 | 1.7 | 2,852 | 2.9 | 1,762 | 161.7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenue |
$ | 64,919 | 100.0 | % | $ | 98,939 | 100.0 | % | $ | 34,020 | 52.4 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For our United States segment, revenue increased $24.4 million, or 46.7%, for 2011 compared with 2010. Of this growth, approximately $13.8 million was attributable to sales to approximately 2,750 existing customer companies, and approximately $10.6 million was attributable to sales to approximately 1,670 new customer companies gained during 2011. Our revenue increase was primarily driven by greater spending on marketing and increases in selling personnel.
For our Europe segment, revenue increased $7.8 million, or 67.6%, for 2011 compared with 2010. Of this growth, approximately $1.2 million was attributable to sales to approximately 570 existing customer companies, and approximately $6.6 million was attributable to sales to approximately 730 new customer companies gained during 2011. Our revenue increase was primarily driven by greater spending on marketing and increases in selling personnel.
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue and gross profit and the related changes for 2010 and 2011 were as follows:
Year Ended December 31, | ||||||||||||||||||||||||
2010 | 2011 | |||||||||||||||||||||||
$ | % of Total Revenue |
$ | % of Total Revenue |
Change | ||||||||||||||||||||
$ | % | |||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Cost of revenue |
$ | 25,443 | 39.2 | % | $ | 39,324 | 39.7 | % | $ | 13,881 | 54.6 | % | ||||||||||||
Gross profit |
$ | 39,476 | 60.8 | % | $ | 59,615 | 60.3 | % | $ | 20,139 | 51.0 | % |
Cost of Revenue. Cost of revenue increased $13.9 million, or 54.6%, for 2011 compared with 2010, primarily due to the increased volume of molds and custom parts we manufactured and shipped driven by greater spending on marketing and increases in selling personnel.
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Gross Profit and Gross Margin. Gross profit increased due to revenue increasing faster than cost of revenue as discussed above. Gross margin increased primarily as a result of higher factory and equipment utilization and increased productivity.
Operating Expenses, Other Expense, net and Provision for Income Taxes
Operating expenses, other expense, net and provision for income taxes and the related changes for 2010 and 2011 were as follows:
Year Ended December 31, | ||||||||||||||||||||||||
2010 | 2011 | |||||||||||||||||||||||
$ | % of Total Revenue |
$ | % of Total Revenue |
Change | ||||||||||||||||||||
$ | % | |||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Operating expenses: |
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Marketing and sales |
$ | 10,867 | 16.7 | % | $ | 15,752 | 15.9 | % | $ | 4,885 | 45.0 | % | ||||||||||||
Research and development |
4,281 | 6.6 | 5,222 | 5.3 | 941 | 22.0 | ||||||||||||||||||
General and administrative |
7,629 | 11.8 | 11,772 | 11.9 | 4,143 | 54.3 | ||||||||||||||||||
Loss on impairment of foreign subsidiary assets |
773 | 1.2 | | | (773 | ) | * | |||||||||||||||||
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Total operating expenses |
$ | 23,550 | 36.3 | % | $ | 32,746 | 33.1 | % | $ | 9,196 | 39.0 | % | ||||||||||||
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Other expense, net |
$ | 213 | 0.3 | % | $ | 114 | 0.2 | % | $ | (99 | ) | (46.5 | )% | |||||||||||
Provision for income taxes |
$ | 4,762 | 7.3 | % | $ | 8,783 | 8.8 | % | $ | 4,021 | 84.4 | % |
* | Percentage change not meaningful. |
Marketing and Sales. Marketing and sales expense increased $4.9 million, or 45.0%, for 2011 compared with 2010 due to a $2.5 million increase in marketing program costs and an increase in headcount resulting in a $2.4 million increase in personnel and related costs. Marketing and sales expense as a percentage of revenue decreased to 15.9% for 2011 from 16.7% in 2010, primarily due to the fixed nature of certain marketing and sales costs.
Research and Development. Our research and development expense increased $0.9 million, or 22.0%, for 2011 compared with 2010 due to an increase in headcount.
General and Administrative. Our general and administrative expense increased $4.1 million, or 54.3%, for 2011 compared with 2010 due to an increase in headcount resulting in personnel and related cost increases of $2.3 million, administrative costs of $0.6 million, facilities-related expenses of $0.5 million, recruiting costs of $0.4 million and professional services of $0.3 million for outside legal and accounting.
Other Expense, net. Other expense, net decreased $0.1 million for 2011 compared with 2010 due to changes in foreign currency rates.
Provision for Income Taxes. Our income tax provision increased $4.0 million for 2011 compared with 2010 due to the increased taxable income. Our effective tax rate increased to 32.8% in 2011 from 30.3% in 2010 due primarily to an election made on our United States federal tax return during 2010 to treat our Japanese subsidiary as a qualified subsidiary, resulting in a reduction in our 2010 effective tax rate.
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Comparison of Years Ended December 31, 2009 and 2010
Revenue
Revenue and the related changes for 2009 and 2010 were as follows:
Year Ended December 31, | ||||||||||||||||||||||||
2009 | 2010 | |||||||||||||||||||||||
$ | % of Total Revenue |
$ | % of Total Revenue |
Change | ||||||||||||||||||||
$ | % | |||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Revenue |
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Protomold |
$ | 36,794 | 83.9 | % | $ | 50,690 | 78.1 | % | $ | 13,896 | 37.8 | % | ||||||||||||
Firstcut |
7,039 | 16.1 | 14,229 | 21.9 | 7,190 | 102.1 | ||||||||||||||||||
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Total revenue |
$ | 43,833 | 100.0 | % | $ | 64,919 | 100.0 | % | $ | 21,086 | 48.1 | % | ||||||||||||
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Revenue by geographic region, based on the billing location of the end customer, is summarized as follows:
Year Ended December 31, | ||||||||||||||||||||||||
2009 | 2010 | |||||||||||||||||||||||
$ | % of Total Revenue |
$ | % of Total Revenue |
Change | ||||||||||||||||||||
$ | % | |||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Revenue |
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United States |
$ | 33,343 | 76.1 | % | $ | 48,059 | 74.0 | % | $ | 14,716 | 44.1 | % | ||||||||||||
International |
10,490 | 23.9 | 16,860 | 26.0 | 6,370 | 60.7 | ||||||||||||||||||
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Total revenue |
$ | 43,833 | 100.0 | % | $ | 64,919 | 100.0 | % | $ | 21,086 | 48.1 | % | ||||||||||||
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Our revenue increased $21.1 million, or 48.1%, for 2010 compared to 2009. Of this growth, approximately $7.0 million was attributable to sales to approximately 2,480 existing customer companies, and approximately $14.1 million was attributable to sales to approximately 1,910 new customer companies gained during 2010. Our revenue growth was also driven by a 60.7% increase in international revenue, a 44.1% increase in United States revenue, a 37.8% increase in Protomold revenue and a 102.1% increase in Firstcut revenue, in each case for 2010 compared to 2009. Our revenue increases were primarily driven by greater spending on marketing and increases in selling personnel, and to a lesser extent an expansion in the range of parts we offer. The effect of foreign currency exchange rates was immaterial on the increase in revenue in 2010 compared to 2009. The effect of pricing changes on revenue was immaterial in 2010 compared to 2009.
Revenue by reportable segment is summarized as follows:
Year Ended December 31, | ||||||||||||||||||||||||
2009 | 2010 | |||||||||||||||||||||||
$ | % of Total Revenue |
$ | % of Total Revenue |
Change | ||||||||||||||||||||
$ | % | |||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Revenue |
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United States |
$ | 35,031 | 79.9 | % | $ | 52,222 | 80.4 | % | $ | 17,191 | 49.1 | % | ||||||||||||
Europe |
8,723 | 19.9 | 11,607 | 17.9 | 2,884 | 33.1 | ||||||||||||||||||
Other |
79 | 0.2 | 1,090 | 1.7 | 1,011 | 1,279.7 | ||||||||||||||||||
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Total revenue |
$ | 43,833 | 100.0 | % | $ | 64,919 | 100.0 | % | $ | 21,086 | 48.1 | % | ||||||||||||
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For our United States segment, revenue increased $17.2 million, or 49.1%, for 2010 compared to 2009. Of this growth, approximately $8.2 million was attributable to sales to approximately 2,077 existing customer companies, and approximately $9.0 million was attributable to sales to approximately 1,335 new customer companies gained during 2010. Our revenue increase was primarily driven by greater spending on marketing and increases in selling personnel.
For our Europe segment, revenue increased $2.9 million, or 33.1%, for 2010 compared to 2009. Of this growth, approximately $4.2 million was attributable to sales to approximately 410 new customer companies gained during 2010 and was offset by a decrease of $1.3 million of sales to approximately 378 existing customer companies. Our revenue increase was primarily driven by greater spending on marketing and increases in selling personnel.
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue and gross profit and the related changes for 2009 and 2010 were as follows:
Year Ended December 31, | ||||||||||||||||||||||||
2009 | 2010 | |||||||||||||||||||||||
$ | % of Total Revenue |
$ | % of Total Revenue |
Change | ||||||||||||||||||||
$ | % | |||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Cost of revenue |