# Proto Labs Inc: Form 10-Q for the period ended Mar 31, 2012

- Company: [Proto Labs Inc](/companies/prlb.md) (CIK 1443669)
- Form: 10-Q
- Filed: 2012-05-04
- Accepted by EDGAR: May 4, 2012, 14:40 ET
- Period: 2012-03-31
- Accession: 0001193125-12-211546
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1443669/000119312512211546/d319833d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1443669/000119312512211546/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-01-01 to 2012-03-31 | $30.0m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2012-01-01 to 2012-03-31 | $12.2m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2012-01-01 to 2012-03-31 | $17.7m | us-gaap:GrossProfit |
| Research and development | 3 months, 2012-01-01 to 2012-03-31 | $1.7m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2012-01-01 to 2012-03-31 | $7.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2012-01-01 to 2012-03-31 | $2.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-01-01 to 2012-03-31 | $4.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-01-01 to 2012-03-31 | $0.22 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-01-01 to 2012-03-31 | $0.23 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-01-01 to 2012-03-31 | 22,226,356 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2012-01-01 to 2012-03-31 | $7.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2012-01-01 to 2012-03-31 | $8.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2012-03-31 | $79.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-03-31 | $102.7m | us-gaap:AssetsCurrent |
| Total assets | at 2012-03-31 | $143.8m | us-gaap:Assets |
| Current liabilities | at 2012-03-31 | $13.7m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2012-03-31 | $124.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,262 characters.

*The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.*

### Forward-Looking Statements

Statements contained in this report regarding matters that are not historical or current facts are “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. 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 which may cause our results to be materially different than those expressed or implied in such statements. Certain of these risk factors and others are described in the “Risk Factors” section of the final prospectus relating to our IPO dated February 23, 2012, as filed with the SEC, as well as in our subsequent reports filed with the SEC. Other unknown or unpredictable factors also could have material adverse effects on our future results. We cannot guarantee future results, levels of activity, performance or achievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, we expressly disclaim any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances.

### 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 three-dimensional computer-aided design (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.

### Key Financial Measures and Trends

### Revenue

The Company’s 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 the three months ended March 31, 2012. 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 the three months ended March 31, 2012, we sold our services to approximately 2,900 customer companies from our existing customer base, an increase of 36% over the comparable period in 2011, and to approximately 750 new customer companies gained during the three months ended March 31, 2012, an increase of 36% over the comparable period in 2011.

### 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.

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. 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 and 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 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 and 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.

### Other Income (Expense), net

Other income (expense), net primarily consists of foreign currency-related gains and losses, interest income on cash balances 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 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.

### 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.

*(dollars in thousands)*

|  | Three Months Ended March 31, 2012 |  | 2011 |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenue | $29,970 | 100.0% | $22,335 | 100.0% | $7,635 | 34.2% |
| Cost of revenue | 12,243 | 40.9 | 8,429 | 37.7 | 3,814 | 45.2 |
| Gross profit | 17,727 | 59.1 | 13,906 | 62.3 | 3,821 | 27.5 |
| Operating expenses: |  |  |  |  |  |  |
| Marketing and sales | 4,441 | 14.8 | 3,215 | 14.4 | 1,226 | 38.1 |
| Research and development | 1,660 | 5.5 | 1,112 | 5.0 | 548 | 49.3 |
| General and administrative | 3,988 | 13.3 | 2,506 | 11.2 | 1,482 | 59.1 |
| Total operating expenses | 10,089 | 33.6 | 6,833 | 30.6 | 3,256 | 47.7 |
| Income from operations | 7,638 | 25.5 | 7,073 | 31.7 | 565 | 8.0 |
| Other expense, net | 577 | 1.9 | 81 | 0.4 | 496 | 612.3 |
| Income before income taxes | 7,061 | 23.6 | 6,992 | 31.3 | 69 | 1.0 |
| Provision for income taxes | 2,279 | 7.6 | 2,269 | 10.1 | 10 | 0.4 |
| Net income | $4,782 | 16.0% | $4,723 | 21.2% | $59 | 1.2% |

18

Stock-based compensation expense included in the statements of operations data above is as follows:

*(dollars in thousands)*

|  | Three months ended March 31, 2012 | 2011 |
| --- | ---: | ---: |
| Stock options and grants | $797 | $198 |
| Employee stock purchase plan | 53 | — |
| Total stock-based compensation expense | $850 | $198 |
| Cost of revenue | $45 | $19 |
| Operating expenses: |  |  |
| Marketing and sales | 73 | 46 |
| Research and development | 78 | 69 |
| General and administrative | 654 | 64 |
| Total stock-based compensation expense | $850 | $198 |

### Comparison of Three Months Ended March 31, 2012 and 2011

#### Revenue

Revenue and the related changes for the three months ended March 31, 2012 and 2011 were as follows:

*(dollars in thousands)*

| Revenue | Three Months Ended March 31, 2012 $% of Total Revenue |  | 2011 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Protomold | $21,793 | 72.7% | $16,921 | 75.8% | $4,872 | 28.8% |
| First Cut | 8,177 | 27.3 | 5,414 | 24.2 | 2,763 | 51.0 |
| Total revenue | $29,970 | 100.0% | $22,335 | 100.0% | $7,635 | 34.2% |

Revenue by geographic region, based on the billing location of the end customer, is summarized as follows:

*(dollars in thousands)*

| Revenue | Three Months Ended March 31, 2012 $% of Total Revenue |  | 2011 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| United States | $22,175 | 74.0% | $17,432 | 78.0% | $4,743 | 27.2% |
| International | 7,795 | 26.0 | 4,903 | 22.0 | 2,892 | 59.0 |
| Total revenue | $29,970 | 100.0% | $22,335 | 100.0% | $7,635 | 34.2% |

Our revenue increased $7.6 million, or 34.2%, for the three months ended March 31, 2012 compared to the same period in 2011. Of this growth, approximately $4.7 million was attributable to sales to approximately 2,900 existing customer companies, and approximately $2.9 million was attributable to sales to approximately 750 new customer companies acquired during the three months ended March 31, 2012. Our overall revenue growth was driven by a 27.2% increase in U.S. revenue, a 59.0% increase in international revenue, a 28.8% increase in Protomold revenue and a 51.0% increase in Firstcut revenue, in each case for the three months ended March 31, 2012 compared to the same period in 2011. Our revenue increases were primarily driven by greater spending on marketing and increases in selling personnel. International revenue was adversely impacted by $0.5 million in the three months ended March 31, 2012 compared to the same period in 2011 due to strengthening of the U.S. dollar relative to certain foreign currencies, particularly the Japanese Yen. The effect of pricing changes on revenue was immaterial for the three months ended March 31, 2012 compared to the same period in 2011.

Revenue by reportable segment is summarized as follows:

*(dollars in thousands)*

| Revenue | Three Months Ended March 31, 2012 $% of Total Revenue |  | 2011 $% of Total Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| United States | $23,132 | 77.2% | $18,200 | 81.5% | $4,932 | 27.1% |
| Europe | 5,480 | 18.3 | 3,796 | 17.0 | 1,684 | 44.4 |
| Other | 1,358 | 4.5 | 339 | 1.5 | 1,019 | 300.6 |
| Total revenue | $29,970 | 100.0% | $22,335 | 100.0% | $7,635 | 34.2% |

For our United States segment, revenue increased $4.9 million, or 27.1%, for the three months ended March 31, 2012 compared to the same period in 2011. Of this growth, approximately $3.1 million was attributable to sales to approximately 2,200 existing customer companies, and approximately $1.8 million was attributable to sales to approximately 450 new customer companies acquired during the first three months ended March 31, 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 $1.7 million, or 44.4%, for the three months ended March 31, 2012 compared to the same period in 2011. Of this growth, approximately $0.9 million was attributable to sales to approximately 530 existing customer companies, and approximately $0.8 million was attributable to sales to approximately 200 new customer companies acquired during the first three months ended March 31, 2012. 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.* Cost of revenue increased $3.8 million, or 45.2%, for the three months ended March 31, 2012 compared to the same period in 2011 due to raw material and production cost increases of $1.5 million to support increased sales volumes, equipment and facility-related cost increases of $0.5 million and an increase in direct labor headcount resulting in personnel and related cost increases of $1.8 million.

*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

*Marketing and Sales.* Marketing and sales expense increased $1.2 million, or 38.1%, for the three months ended March 31, 2012 compared to the same period in 2011 due to a $0.4 million increase in marketing program costs and an increase in headcount resulting in personnel and related cost increases of $0.8 million.

*Research and Development.* Our research and development expense increased $0.5 million for the three months ended March 31, 2012 compared to the same period in 2011 due to an increase in headcount resulting in personnel and related cost increases of $0.3 million, operating cost increases of $0.1 million and professional services of $0.1 million for outside consulting service.

*General and Administrative.* Our general and administrative expense increased $1.5 million for the three months ended March 31, 2012 compared to the same period in 2011 due to stock-based compensation increases of $0.6 million, an increase in headcount resulting in personnel and related cost increases of $0.5 million, administrative costs of $0.1 million and professional services of $0.3 million for outside legal and accounting.

*Other Income (Expense), net.* Other expense, net increased $0.5 million for the three months ended March 31, 2012 compared to the same period in 2011 due to changes in foreign currency rates.

*Provision for Income Taxes.* Our income tax provision and effective tax rates were materially consistent for the three months ended March 31, 2012 compared to the same period in 2011. Our effective tax rate was 32.3% for the three months ended March 31, 2012 compared to 32.5% for the same period in 2011.

#### Segment Income from Operations

Income from operations by segment and the related changes for the three months ended March 31, 2012 and 2011 were as follows:

*(dollars in thousands)*

| Income from operations: | Three Months Ended March 31, 2012 $% of Segment Revenue |  | 2011 $% of Segment Revenue |  | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| United States | $7,021 | 30.4% | $6,875 | 37.8% | $146 | 2.1% |
| Europe | 1,460 | 26.6 | 849 | 22.4 | 611 | 72.0 |
| Other | (843) | (62.1) | (651) | (192.0) | (192) | (29.5) |
| Total income from operations | $7,638 | 25.5% | $7,073 | 31.7% | $565 | 8.0% |

Income from operations for the United States segment increased $0.1 million, or 2.1%, and as a percentage of segment revenue decreased to 30.4% from 37.8%, in each case for the three months ended March 31, 2012 compared to the same period in 2011. Income from operations for the United States segment increased due to a 27.1% increase in revenue offset by increased costs as previously discussed.

Income from operations for the Europe segment increased $0.6 million, or 72.0%, and as a percentage of segment revenue increased to 26.6% from 22.4%, in each case for the three months ended March 31, 2012 compared to the same period in 2011. Income from operations for the Europe segment increased due to a 44.4% increase in revenue, higher factory utilization and operating expenses growing at a slower rate than revenue.

### Liquidity and Capital Resources

#### Cash Flows

The following table summarizes our cash flows for the three months ended March 31, 2012 and 2011:

*(dollars in thousands)*

|  | Three Months Ended March 31, 2012 | 2011 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $7,411 | $5,996 |
| Net cash used in investing activities | (8,014) | (2,012) |
| Net cash provided by (used in) financing activities | 71,611 | (425) |
| Effect of exchange rates on cash | 536 | 27 |
| Net increase in cash | $71,544 | $3,586 |

#### Sources of Liquidity

Historically we have financed our operations and capital expenditures through operations, lease financing and the use of bank loans. In addition, we have financed our common stock repurchases through issuance of preferred stock, bank loans and cash balances. In February 2012, we completed the IPO of our common stock, which provided us with $71.6 million of cash, net of underwriting discounts and commissions and offering expenses payable by us. We had cash of $79.7 million as of March 31, 2012, an increase of $71.5 million from December 31, 2011. The increase in our cash was due primarily to cash received from the IPO of our common stock.

#### Cash Flows from Operating Activities

Cash generated by operating activities was $7.4 million for the three months ended March 31, 2012. We had net income of $4.8 million, which included non-cash charges consisting of $1.3 million in depreciation and $0.9 million in stock-based compensation. Other sources of cash in operating activities totaled $0.4 million, which included an increase in income taxes payable of $2.0 million, an increase in accounts payable of $1.3 million and an increase in accrued liabilities of $0.4 million, which were partially offset by an increase in accounts receivable of $3.2 million and an increase in inventory of $0.1 million. The increase in accounts receivable reflects increases in revenue.

Cash generated by operating activities was $6.0 million for the three months ended March 31, 2011. We had net income of $4.7 million, which included non-cash charges consisting of $0.9 million in depreciation and $0.2 million in stock-based compensation expense. Other sources of cash in operating activities totaled $0.2 million, which included an increase in income taxes payable of $1.2 million, an increase in accounts payable of $0.7 million, an increase in accrued liabilities of $0.7 million and a decrease in pre-paid expenses of $0.1 million, which were partially offset by an increase in accounts receivable of $2.3 million and an increase in inventory of $0.2 million. The increase in accounts receivable reflects increases in revenue.

#### Cash Flows from Investing Activities

Cash used in investing activities was $8.0 million for the three months ended March 31, 2012, consisting of $8.3 million for the purchase of property and equipment and a net reduction of short-term investments of $0.3 million.

Cash used in investing activities was $2.0 million for the three months ended March 31, 2011, consisting of $2.3 million for the purchase of property and equipment and a net reduction of short-term investments of $0.3 million.

#### Cash Flows from Financing Activities

Cash generated in financing activities was $71.6 million for the three months ended March 31, 2012, consisting primarily of $71.7 million from the IPO of our common stock reduced by $0.1 million for payments of debt.

Cash used in financing activities was $0.4 million for the three months ended March 31, 2011. The primary use of funds was for net payments on debt of $0.6 million, which was partially offset by stock option and warrant exercises of $0.2 million.

### Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

### Critical Accounting Policies and Use of Estimates

We have adopted various accounting policies to prepare the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Our most significant accounting policies are discussed herein.

The preparation of the consolidated financial statements, in conformity with U.S. GAAP, requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying Notes. Our estimates and assumptions, including those related to revenue recognition, the allowance for doubtful accounts, inventory valuation, stock-based compensation and income taxes, are updated as appropriate, which in most cases is quarterly.

We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Management has discussed the development, selection and disclosure of these estimates with the audit committee of our board of directors. Our actual results may differ significantly from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments used in the preparation of our consolidated financial statements.

#### Revenue Recognition

We recognize revenue in accordance with ASC 605, *Revenue Recognition*, or ASC 605, which states that revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price to the buyer is fixed or determinable, and (4) collectability is reasonably assured.

Revenue is generally recognized upon transfer of title and risk of loss, which for us is upon shipment of parts.

#### Allowance for Doubtful Accounts

We carry our accounts receivable at their face amount less an allowance for doubtful accounts. On a periodic basis, we evaluate our accounts receivable and establish an allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditions taking into account the history of write-offs and collections. A receivable is considered past due if payment has not been received within the period agreed upon in the invoice. Accounts receivable are written off after all collection efforts have been exhausted. To date, we have not incurred any write-offs of accounts receivable significantly different than the amounts reserved. We believe appropriate reserves have been established, but they may not be indicative of future write-offs. Our allowance for doubtful accounts as of March 31, 2012 and December 31, 2011 was $0.1 million and $0.1 million, respectively. Our allowance for doubtful accounts has decreased as a percentage of accounts receivable due to improvements in account aging driven by stronger credit policies.

We also record a provision for estimated product returns and allowances in the period in which the related revenue is recorded. This provision against current gross revenue is based principally on historical rates of sales returns.

#### Inventory Valuation and Inventory Reserves

Inventory consists primarily of raw materials, which are recorded at the lower of cost or market, using the average-cost method, which approximates first-in, first-out, or FIFO, cost. We periodically review our inventory for slow-moving, damaged and discontinued items and provide reserves to reduce such items identified to their recoverable amounts. Our inventory allowance for obsolescence is not material as of March 31, 2012 or December 31, 2011.

#### Stock-Based Compensation

We determine our stock-based compensation in accordance with ASC 718, *Compensation—Stock Compensation* (ASC 718), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors based on the grant date fair value of the award.

Determining the appropriate fair value model and calculating the fair value of stock option grants requires the input of highly subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. Stock-based compensation expense is significant to our consolidated financial statements and is calculated using our best estimates, which involve inherent uncertainties and the application of management’s judgment. Significant estimates include our expected term, stock price volatility and forfeiture rates. If different estimates and assumptions had been used, our common stock valuations could be significantly different and related stock-based compensation expense may be materially impacted.

The Black-Scholes option pricing model requires inputs such as the risk-free interest rate, expected term, expected volatility and expected dividend yield. We base the risk-free interest rate that we use in the Black-Scholes option pricing model on zero coupon U.S. Treasury instruments with maturities similar to the expected term of the award being valued. The expected term represents the weighted average period that our stock options are expected to be outstanding. The expected term is based on the observed and expected time to post-vesting exercise of options by employees and non-employee directors and considers the impact of post-vesting award forfeitures. As we have been operating as a private company with a limited market for our stock since inception to the completion of our IPO in February 2012, we estimate the volatility of our common stock based on volatility of a peer group of comparable publicly traded companies for which historical information is available. We have never paid and do not anticipate paying any cash dividends in the foreseeable future and, therefore, we use an expected dividend yield of zero in the option pricing model. In order to properly attribute compensation expense, we are required to estimate pre-vesting forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest. If our actual forfeiture rate is materially different from our estimate, stock-based compensation expense could be significantly different from what has been recorded.

We allocate stock-based compensation expense on a straight-line basis over the requisite service period.

#### Income Taxes

We account for income taxes in accordance with ASC 740, *Income Taxes* (ASC 740). Under this method, the Company determines tax assets and liabilities based upon the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current year’s financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities and equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax basis of assets or liabilities and their reported amounts in the financial statements. Because we assume that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, giving rise to a deferred tax asset or liability.

ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. Additionally, ASC 740 provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

### Recent Accounting Pronouncements

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act), which establishes a new category of issuer called an emerging growth company (EGC). Under the JOBS Act, an EGC is defined as an issuer with total annual gross revenues less than $1 billion during its most recently completed fiscal year. An issuer continues to be eligible for EGC status until the earliest of (1) the last day of the fiscal year during which it had total annual gross revenues of $1 billion or more (as indexed for inflation in the manner set forth in the JOBS Act), (2) the last day of the fiscal year of the issuer following the fifth anniversary of the date of its IPO, (3) the date on which it issued more than $1 billion in non-convertible debt in the previous three-year period, or (4) the date on which it became a large accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934.

The JOBS Act exempts an EGC from the following requirements during the period of eligibility:

- Having an independent auditor assess its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act. However, an EGC would still have to comply with the Section 404(a) requirement that management assess its internal control over financial reporting, generally beginning with its second annual report on Form 10-K.
- Adopting new or revised accounting standards that are effective for public companies. Instead, the effective dates of such accounting standards for private companies would apply.
- Complying with “say-on-pay” vote requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act. An EGC would satisfy executive compensation disclosures in a manner consistent with a smaller reporting company.
- Complying with future changes to PCAOB auditing standards related to mandatory audit firm rotation and an Auditors Discussion & Analysis statement (if adopted). Other new standards would not apply to audits of EGCs unless the SEC decides that they should after considering the protection of investors and whether the action will promote efficiency, competition and capital formation.

With the exception of the treatment for accounting standards, each of these exemptions is voluntary and an EGC may choose to operate as an EGC as it deems appropriate. Section 107(b) of the JOBS Act permits an EGC to “opt out” of the exemption to adopt new or revised accounting standards when they are effective for private companies and instead apply such standards on the same basis as a public company. Under section 107(b)(3), such decision to opt-out is irrevocable, and the EGC must continue to comply with such standards to the same extent that a public company is required for as long as the company remains an EGC.

Under the JOBS Act, we meet the definition of an EGC. During the period we continue to be eligible for EGC status, we will apply new or revised accounting standards following the effective dates for private companies.

For information on recent accounting pronouncements, see Note 2 to the consolidated financial statements appearing in Part I, Item 1 in this Quarterly Report on Form 10-Q.

## Market risk

As filed, 830 characters.

### Foreign Currency Risk

As a result of our foreign operations, we have revenue and expenses, assets and liabilities that are denominated in foreign currencies. A number of our employees are located in Europe and Japan. Therefore, a portion of our payrolls and operating expenses are paid and incurred in the British Pound, Euro and Yen. Our operating results and cash flows are adversely impacted when the U.S. dollar depreciates relative to other foreign currencies. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk. Foreign currency risk can be quantified by estimating the change in cash flows resulting from a hypothetical 10% adverse change in foreign exchange rates. We believe such a change would not have a material impact on our results of operations.

## Controls and procedures

As filed, 1,437 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures are effective and provided reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the time frames specified in the SEC’s rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 219 characters.

There have been no material changes from the risk factors we previously disclosed under the heading “Risk Factors” in our final prospectus for our IPO dated February 23, 2012 and filed with the SEC on February 27, 2012.

Filed May 4, 2012.
Source: SEC EDGAR, the filing index for accession 0001193125-12-211546. Last ingested by Listed: Nov 4, 2026, 18:20 ET. No prices; not investment advice.