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EX-99.4 - CONSENT OF RAYMOND J. KILMER TO BE NAMED AS A DIRECTOR - ExOne Cod461168dex994.htm
EX-23.1 - CONSENT OF PARENTEBEARD LLC - ExOne Cod461168dex231.htm
EX-10.07.02 - FORM OF AWARD AGREEMENTS UNDER 2013 EQUITY INCENTIVE PLAN - ExOne Cod461168dex100702.htm
EX-10.07.01 - 2013 EQUITY INCENTIVE PLAN - ExOne Cod461168dex100701.htm
EX-10.01.02 - FIRST AMENDMENT TO THE AMENDED AND RESTATED EXCLUSIVE PATENT LICENSE AGREEMENT - ExOne Cod461168dex100102.htm
EX-10.01.01 - AMENDED AND RESTATED EXCLUSIVE PATENT LICENSE AGREEMENT - ExOne Cod461168dex100101.htm
EX-10.16 - LEASING CONTRACT, AGREEMENT CONCERNING MACHINE USE, SALE & LEASEBACK AGREEMENT - ExOne Cod461168dex1016.htm
Table of Contents

As filed with the Securities and Exchange Commission on January 24, 2013

Registration No. 333-185933

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

The ExOne Company

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3599  

46-1684608

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

127 Industry Boulevard

North Huntingdon, Pennsylvania 15642

(724) 863-9663

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

S. Kent Rockwell

Chairman & CEO

The ExOne Company

127 Industry Boulevard

North Huntingdon, Pennsylvania 15642

(724) 863-9663

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Warren J. Archer

Morella & Associates, A Professional Corporation

706 Rochester Road

Pittsburgh, Pennsylvania 15237

(412) 369-9696

 

Jonathan H. Talcott

Nelson Mullins Riley & Scarborough LLP

101 Constitution Avenue, NW, Suite 900

Washington, DC 20001

(202) 712-2806

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Proposed
Maximum
Aggregate
Offering Price(1)(2)
  Amount of
Registration Fee(3)

Common Stock, par value $0.01 per share

  $92,000,000   $12,549

 

 

(1) Includes shares of common stock subject to an over-allotment option granted to the underwriters.
(2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) of the Securities Act.
(3) The registrant previously paid $10,230.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

EXPLANATORY NOTE

On January 1, 2013, The Ex One Company, LLC, a Delaware limited liability company, merged with and into a Delaware corporation, which survived and changed its name to The ExOne Company (the “Reorganization”). As a result of the Reorganization, The Ex One Company, LLC became the registrant, a Delaware corporation, the common and preferred interest holders of The Ex One Company, LLC became holders of common stock and preferred stock, respectively, of the registrant and the subsidiaries of The Ex One Company, LLC became the subsidiaries of the registrant. The preferred stock of the registrant will convert into common stock immediately prior to the consummation of this offering. Except as disclosed in the accompanying prospectus, the consolidated financial statements and selected historical consolidated financial data and other financial information included in this registration statement are those of The Ex One Company, LLC and its subsidiaries and variable interest entities and do not give effect to the Reorganization.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We and the selling stockholder may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we and the selling stockholder are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS    SUBJECT TO COMPLETION    DATED JANUARY     , 2013

Shares

 

LOGO

The ExOne Company

Common Stock

 

 

We are offering                      shares of our common stock. We will not receive any proceeds from the sale of shares by the selling stockholder.

This is our initial public offering, and prior to this offering, there has been no public market for our common stock. We anticipate that the initial public offering price of our common stock will be between $         and $         per share. We will apply to list our common stock on the Nasdaq Global Market under the symbol “XONE.”

 

 

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 14 of this prospectus to read about the risks you should consider before investing.

 

     Per Share      Total  

Public offering price

   $        $     

Underwriting discounts and commissions

   $        $     

Proceeds before expenses to us

   $        $     

Proceeds before expenses to the selling stockholder

   $        $     

We and the selling stockholder have granted the underwriters an option, exercisable within 30 days of the date of this prospectus, to purchase a maximum of              additional shares of our common stock from us and the selling stockholder at the initial public offering price, less the underwriting discount, to cover over-allotments of shares, if any.

The underwriters will reserve up to              shares from this offering for sale, directly or indirectly, to certain of our employees, directors and officers, and certain other investors related to us, at the public offering price without payment of an underwriting discount or commission.

Neither the Securities and Exchange Commission nor any state securities commission has 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 our common stock to purchasers against payment on or about             , 2013.

FBR

The date of this prospectus is             , 2013.


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     14   

CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS

     27   

MARKET AND INDUSTRY DATA

     28   

TRADEMARKS, SERVICE MARKS AND TRADE NAMES

     28   

USE OF PROCEEDS

     29   

DIVIDEND POLICY

     29   

CAPITALIZATION

     30   

DILUTION

     31   

SELECTED CONSOLIDATED FINANCIAL DATA

     33   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     36   

BUSINESS

     64   

MANAGEMENT

     87   

PRINCIPAL STOCKHOLDERS

     94   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     95   

SELLING STOCKHOLDER

     97   

DESCRIPTION OF CAPITAL STOCK

     98   

CERTIFICATE OF INCORPORATION AND BYLAWS

     100   

SHARES ELIGIBLE FOR FUTURE SALE

     103   

UNDERWRITING

     105   

U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

     110   

LEGAL MATTERS

     113   

EXPERTS

     113   

WHERE YOU CAN FIND MORE INFORMATION

     113   

INDEX TO FINANCIAL STATEMENTS

     F-1   


Table of Contents

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that is important to you or that you should consider before investing in our common stock. You should carefully read the entire prospectus, including the risk factors, financial data, and financial statements included herein, before making a decision about whether to invest in our common stock. All financial information included in this prospectus includes our variable interest entities, Troy Metal Fabricating, LLC (“TMF”) and Lone Star Metal Fabrication, LLC (“Lone Star”). Unless the context requires otherwise or we specifically indicate otherwise, the information in this prospectus assumes that the underwriters do not exercise their over-allotment option. As used in this prospectus, unless the context otherwise requires or indicates, the terms “ExOne,” “our company,” “we,” “our,” “ours,” and “us” refer to The ExOne Company and its subsidiaries.

Our Company

We are a global provider of three-dimensional (“3D”) printing machines and printed products to industrial customers. Our business primarily consists of manufacturing and selling 3D printing machines and printing products to specification for our customers using our in-house 3D printing machines. We offer pre-production collaboration and print products for customers through our Production Service Centers (“PSCs”), which are located in the United States, Germany and Japan. We build 3D printing machines at our facilities in the United States and Germany. We also supply the associated products, including consumables and replacement parts, and services, including training and technical support, necessary for purchasers of our machines to print products. We believe that our ability to print in a variety of industrial materials, as well as our industry-leading printing capacity (as measured by build box size and printhead speed), uniquely position us to serve the needs of industrial customers.

Our 3D printing machines use our technology, powdered materials, chemical binding agents and integrated software to print 3D products directly from computer models by repeatedly depositing very thin layers of powdered materials and selectively placing chemical binding agents to form the finished product. One of our key industry advantages is that our machines are able to print products in materials that are desired by industrial customers. Currently, our 3D printing machines are able to manufacture casting molds and cores from specialty silica sand and ceramics, which are the traditional materials for these casting products. We are capable of printing in silica sand, ceramics, stainless steel, bronze and glass, and we are in varying stages of qualifying additional industrial materials for printing, such as titanium, tungsten carbide, aluminum and magnesium.

We believe that we are a leader in providing 3D printing machines, 3D printed products and related services to industrial customers in the aerospace, automotive, heavy equipment, energy/oil/gas and other industries. Each of the following customers are among our top ten customers (based upon machine revenue in 2010, 2011 and 2012 through September 30, 2012 and non-machine revenue in 2011 through September 30, 2012) in the indicated industry; however, these customers do not necessarily account for ten percent or more of our revenue during that period. As an industrial 3D printing and emerging growth company, we believe that continued introduction and acceptance through use of our products and machines without regard to revenue volume, by leaders in various industries is critical to us obtaining more general acceptance of our technology by industrial companies. The following customers are a sample of companies that are using our industrial products and machines in the industries that we serve. Our customers in the aerospace industry include Magellan Aerospace Corporation, Boeing and Mitchell Aerospace Inc. Our customers in the automotive industry include Ford Motor Company, Bavarian Motor Works (“BMW”) and Tesla Motors, Inc. Our customers in the heavy equipment industry include Caterpillar, Inc., Deere & Company and Bosch Rexroth and our customers in the energy/oil/gas industry include ITT Corp. and the KSB Group.

Our business began as the advanced manufacturing business of Extrude Hone Corp., which manufactured its first 3D printing machine in 2003 using licensed technology developed by researchers at the Massachusetts

 

 

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Institute of Technology (“MIT”). In 2007, we were acquired by S. Kent Rockwell through his wholly-owned company Rockwell Forest Products, Inc. (“RFP”). Since 2007, when he purchased our company for approximately $7.2 million, Mr. Rockwell (through RFP and affiliated entities) and our other owners have funded our company and related entities, through January 23, 2013, with $41.7 million in either equity or debt. The primary goals of these investments were to: increase the scale, speed and efficiency of our 3D printing machines; expand the range of qualified materials in which our machines can print; and position us to compete in the rapidly evolving 3D printing market. As a result, we have significantly reduced our unit cost of production over time, thereby expanding the potential market for our machines and products.

Our revenues for the year ended December 31, 2011 were $15.3 million, as compared to $13.4 million for the prior year period, and for the first nine months of 2012 were $15.9 million, as compared to $12.6 million for the same period in 2011. Our EBITDA was ($8.9) million for the first nine months of 2012, as compared to ($2.3) million for the same period in 2011. Our EBITDA for the nine months ended September 30, 2012 includes a non-cash equity based compensation expense of $7.7 million. See note 7 to the table set forth in “— Summary Consolidated Financial Data” for a reconciliation of EBITDA to net loss.

 

     Twelve Months Ended
December 31,
     Nine Months Ended
September 30,
 
     2010      2011      2011      2012  
     (unaudited)  

Machine Units Sold(A)

           

S 15

     2             2             2         1   

S Max

     2         1         1         4   

S Print

     —           1         1         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4         4         4         5   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(A) See “Business — Our Machines and Machine Platforms” for a description of the machines.

During the nine months ended September 30, 2011 and 2012 and the twelve months ended December 31, 2010 and 2011, we conducted a significant portion of our business with a limited number of customers. Our top five customers represented approximately 46% and 42% of total revenue for the nine months ended September 30, 2011 and 2012, respectively, and approximately 43% and 47% of total revenue in 2010 and 2011, respectively. These customers primarily purchased 3D printing machines. Sales of 3D printed parts and consumables tend to be from repeat customers that may utilize the capability of our PSCs for three months or longer. Sales of 3D printing machines are low volume and generate significant revenue but the same customers do not necessarily buy machines in each period. Timing of customer purchases is dependent on the customer’s capital budgeting cycle, which may vary from period to period. The nature of the revenue from 3D printing machines, as described above, does not leave us dependent upon a single or a limited number of customers. Rather, the timing of the sales can have a material effect on period to period financial results.

We incurred a net loss of approximately $5.2 million and $7.6 million for the years ended December 31, 2010 and 2011, respectively, and had an accumulated deficit of approximately $15.6 million as of December 31, 2011. As shown in the accompanying unaudited condensed consolidated financial statements, we incurred a net loss of approximately $10.7 million for the nine months ended September 30, 2012, and had a working capital deficit of approximately $7.3 million. These conditions raise substantial doubt as to our ability to continue as a going concern. We believe that we will be able to raise additional equity or debt financing sufficient to support our ongoing operations either in connection with this offering or otherwise. However, we can give no assurance that profitable operations or sufficient cash flows will occur in the future.

Recent Developments

Machine Unit Shipments and Backlog

During the three month period ended December 31, 2012, we shipped eight machine units to end customers globally. We had no machine unit shipments to end customers during the three months ended December 31,

 

 

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2011. We believe the significant increase in machine unit shipments for the three month period ended December 31, 2012 is a strong indicator of the increased acceptance of our 3D printing technology in the marketplace and is significant to an investor’s understanding of our business.

The following is a summary of machine unit shipments by type for each of the respective periods:

 

      For the Three Months Ended
December 31,
     Period-over-
period change
 
     2011      2012     

Machine unit shipments(A)

        

S Max

     —           4         4   

S Print

     —           3         3   

Orion

     —           1         1   
  

 

 

    

 

 

    

 

 

 

Total

     —           8         8   
  

 

 

    

 

 

    

 

 

 
(A) See “Business — Our Machines and Machine Platforms” for a description of the machines.

We had six ordered and undelivered machine units at both December 31, 2012 and December 31, 2011 (five S Max units and one S Print unit at December 31, 2012 and four S Max units, one S Print unit and one Orion unit at December 31, 2011).

In connection with our financial statement close for the three month period ending December 31, 2012, we are presently evaluating each of the machine unit shipments cited above in order to determine the appropriate accounting period for revenue recognition under accounting principles generally accepted in the United States (“GAAP”). We are currently unable to provide financial data for the period ending December 31, 2012, based on the timing of our financial statement close and this offering.

MIT License Amendment

Effective January 22, 2013, we amended our license agreement with MIT related to the MIT Patents. See “Business—Intellectual Property.” The amendment provides, among other things, that we will pay MIT an annual fee of $100,000 for each of 2011, 2012, 2013, 2014, 2015 and 2016, in satisfaction of a license maintenance fee for such periods. In addition, we will make a one-time payment to MIT of $200,000 in satisfaction of all remaining royalty payments for licensed products, processes or consumables sold either before or after such amendment.

Global, Director of Finance

On January 2, 2013, we hired Douglas D. Zemba as Director of Finance, with responsibility for global accounting and financial reporting. From 2003 through 2012, Mr. Zemba was with PricewaterhouseCoopers LLP, a global accounting and auditing firm, for which he most recently served as a Senior Manager in the assurance practice. Mr. Zemba is a certified public accountant (CPA) in the state of Pennsylvania and has extensive experience in working with both public and private companies related to financial accounting matters and internal control over financial reporting. Mr. Zemba’s retention by us is one of several steps in our process of enhancing our internal control over financial reporting.

Our Industry and Recent Trends

3D printing is the most common type of an emerging manufacturing technology broadly referred to as additive manufacturing (“AM”). In general, AM is a term used to describe a manufacturing process that produces 3D objects directly from digital or computer models through the repeated deposit of very thin layers of material. 3D printing is

 

 

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the process of joining materials from a digital 3D model, usually layer by layer, to make objects using a printhead, nozzle or other printing technology. The terms “AM” and “3D printing” are increasingly used interchangeably as the media and marketplace have popularized the term 3D printing rather than AM, the industry term. AM represents a transformational shift from traditional forms of manufacturing (e.g., machining or tooling), sometimes referred to as “subtractive” manufacturing.

Our 3D printing process differs from other forms of 3D printing processes in that we use a chemical binding agent and focus on industrial products and materials. We believe that our industry advantage lies in the materials that our machines are able to print. We are capable of printing in silica sand, ceramics, stainless steel, bronze and glass, and we are in varying stages of qualifying additional industrial materials for printing, such as titanium, tungsten carbide, aluminum and magnesium. In contrast, the majority of the AM industry generally utilizes polymer materials.

According to estimates contained in the 2012 report of Wohlers Associates, Inc., “Additive Manufacturing and 3D Printing State of the Industry” (the “Wohlers Report”), the market for AM, including 3D printing, will achieve a compound annual growth rate (CAGR) in excess of 18% over the coming eight years and exceed $6.5 billion in revenue annually by 2019, up from $1.7 billion in 2011. The Wohlers Report defines the market for AM as (1) products, including “AM systems, system upgrades, materials, and aftermarket products” and (2) services, specifically including “revenues generated from parts produced on AM systems by service providers, system maintenance contracts, training, seminars, conferences, expositions, advertising, publications, contract research, and consulting.”

We believe that our market opportunity is much larger than the Wohlers Report estimates. In addition to the market described by the Wohlers Report, we believe that our potential market includes (1) the replacement of a substantial part of traditional manufacturing technology equipment sold globally, (2) the end market production of many industrial products and (3) tooling, parts made from tooling, and castings for industrial end markets.

Our 3D printing process provides several benefits over traditional design methods and manufacturing processes, the most critical of which are:

 

   

Design Freedom. 3D printing allows designers and engineers the freedom to manufacture a product that very closely matches their optimal design and expands design possibilities. Traditionally, designers of products have had to make design compromises based on the limitations of how products are created through subtractive manufacturing (i.e., the removal of material from a solid object). 3D printing, on the other hand, permits the manufacture of intricate and complex products which would not be possible or economically feasible to design and produce using subtractive manufacturing.

 

   

Reduced Cost of Complexity. 3D printing technology makes complex products in the same way, and at essentially the same cost, as simple ones. The 3D printing process of building parts by layering very small amounts of material can just as easily make a simple solid product as a highly complex and intricate product. Because a complex product can require less material than a simple solid product, the complex product may be even less expensive to make using 3D printing technology than a simple product.

 

   

Mass Customization. 3D printing allows products to be customized with little or no incremental cost because their manufacture is directed by computer-aided design (“CAD”) without the need for substantial retooling between prints. Each product printed using 3D printing can be identical to, or radically different from, other products that are printed concurrently. Conventional manufacturing, by contrast, does not provide this flexibility. For example, 3D printing permits us to manufacture products that are identical except each part can have a unique quick response code inscribed on the part to support product tracking.

 

 

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Co-Located/Just-in-Time Manufacturing. 3D printing facilities are able to be located in close geographic proximity to customers because, unlike traditional manufacturing methods, 3D printing is not labor intensive and has low tooling and set-up costs. When establishing a manufacturing facility for subtractive manufacturing, labor is often the most important cost variable. As a result, manufacturing operations are often located offshore or in geographically remote locations where labor is cheaper. The proximity of 3D printing facilities to customers’ operations improves integration and collaboration with product engineers and designers and reduces shipping costs. This proximity also provides customers with an important supply chain management tool by supporting just-in-time availability of products without large inventory buildup.

 

   

Reduced Time Between Design and Production. 3D printing reduces the time required between product conception and production. 3D printing designs may be altered quickly, remotely and inexpensively without costly extensive retooling as the design is refined. We believe that increasing the speed at which products can be designed, prototyped and integrated into full-scale production is a priority for our industrial customers.

Our Competitive Strengths

We believe that our competitive strengths include:

 

   

Volumetric Output Rate. We believe that our 3D printing machines provide us the highest rate of volume output per hour among competing AM technologies. Because of our early entrance into the industrial market for AM and our investment in our core 3D printing technology, we have been able to improve the printhead speed and build box size of our machines. As a result, we have made strides in improving the output efficiency of our machines as measured by volume output per unit of time. These efficiency gains and associated cost reductions have enabled us to shift our costs down and compete with traditional subtractive manufacturing technologies, effectively expanding our addressable market.

 

   

Printing Platform Size. The size of the build box area and the platform upon which we construct a product is important to industrial customers, who may want to either make a higher number of products per job run or make an industrial product that has large dimensions and is heavy in final form. Our 1,260-liter platform for our “S Max” machine is one of the largest commercially available 3D printing build platforms. We believe that our technology and experience give us the potential to develop even larger build platforms to meet the production demands of current and potential industrial customers. In addition, we have created machine platforms in four size ranges in order to cater to the varying demands of our customers.

 

   

Industrial Material. Currently, our 3D printing machines are able to manufacture casting molds and cores from specialty silica sand and ceramics, which are the traditional materials for these casting products. We are capable of printing in silica sand, ceramics, stainless steel, bronze, and glass, and we are in varying stages of qualifying additional industrial materials for printing, such as titanium, tungsten carbide, aluminum, and magnesium. There is significant demand for products made in these materials. Most AM companies, however, cannot print industrial products in these materials and focus instead on polymer applications.

 

   

Chemical Binding. We use liquid chemical binding agents during the printing process. We believe that our unique chemical binding agent technology can more readily achieve efficiency gains over time than other AM technologies such as laser-fusing technologies. For instance, in order to increase the print speed of laser-based technologies, another expensive industrial laser must be added to the manufacturing process, raising the unit cost of production.

 

   

International Presence. Since our inception, we have structured our business to cater to major international markets. We have established one or more PSCs in each of North America, Europe and

 

 

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Asia. Because many of our current or potential customers are global industrial companies, it is important that we have a presence in or near the areas where these companies have manufacturing facilities.

 

   

Co-location of High Value Production. Over the last few years, many U.S. industrial manufacturers have out-sourced parts supply or otherwise created long, relatively inflexible supply chains for their high-complexity, high-value parts. We believe that over the next few years, many of these companies will need to build these industrial parts in the United States, near their main manufacturing facilities, in order to be competitive nationally and internationally. We believe we are well positioned to help these manufacturers co-locate the production of parts so as to optimize customers’ supply chains.

Our Business Strategies

The principal elements of our growth strategy include:

 

   

Expand the Network of Production Service Centers. Our PSCs are centers for customer collaboration and provide customers with a direct contact point to learn about our 3D printing technology, buy products printed by us, and purchase our machines. By the end of 2015, we plan to expand our PSC network from the current five locations to fifteen locations. Like our current PSCs, we plan to locate the additional PSCs in major industrial centers near existing and potential customers. While we may adjust the final locations based upon market considerations, our initial plan includes opening a new PSC in South America and on the west coast of the United States by the third quarter of 2013, and opening two additional locations in Asia and Western Europe by the second quarter of 2014.

 

   

Qualify New Industrial Materials Printable In Our Systems. Currently, our 3D printing machines are capable of printing in silica sand, ceramics, stainless steel, bronze, and glass, and we are in varying stages of qualifying additional industrial materials for printing, such as titanium, tungsten carbide, aluminum, and magnesium. By expanding into these other materials, we believe we can expand our market share and better serve our industrial customer base. We established ExOne Materials Application Laboratory (“EXMAL”), which focuses on materials testing. We believe EXMAL will assist us in increasing the rate at which we are able to qualify new materials.

 

   

Increase the Efficiency of Our Machines to Expand the Addressable Market. We intend to invest in further developing our machine technology so as to increase the volume output per unit time that our machines can produce. We recently began selling a new second generation mid-sized platform, the S Print machine. In addition, we are marketing our new M Flex machine and expect to accept orders for it beginning in the fourth quarter of 2012. In both cases, the new machines are designed to increase the volume output per hour over the machines that they will replace through advances in printhead speed and build box size. Achieving improved production speed and efficiency will expand our potential market for our machines and for products made in our PSCs.

 

   

Focus Upon Customer Training and Education to Promote Awareness. We will continue to educate the marketplace about the advantages of 3D printing. We will use our regional PSCs to educate our potential customers. In addition, we have supplied 3D printing equipment to more than 20 universities and research institutions, in hopes of expanding the base of future adopters of our technology. We established the ExOne Training and Education Center (“EXTEC”) in our North Huntingdon headquarters. At EXTEC, technicians guide our current and prospective customers in the optimal use of 3D printing and customers gain digital access to our 3D printing knowledge database as it continues to evolve. We will make EXTEC accessible to universities, individual customers, employees/trainees, designers, engineers and others interested in 3D printing.

 

   

Achieve Revenue Balance and Geographic Diversification. Over the long-term, our goal is to balance revenue between machine sales and PSC production, service contracts, and consumables.

 

 

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Machine sales tend to be seasonal, less predictable and generally more heavily impacted by the macroeconomic cycle, as compared to PSC production, service contracts and consumables. We will focus on machine sales during up-swings in the economy and on the sales of other products and services during periods of declines in industrial capital investment. In addition, as we sell more machines, the machine sales portion of our business will be supplemented by related sales of service, replacement parts and consumables. To avoid being overly dependent on economic conditions in one part of the world, we intend to develop our customer base so that our revenues are balanced across the Americas, Europe and Asia. As overall revenues increase, maintaining that balance will largely be achieved by targeting specific customers and industries for machine sales and by establishing PSCs in each key region.

The Reorganization

On January 1, 2013, we merged our predecessor company, The Ex One Company, LLC, a Delaware limited liability company (sometimes referred to as the “LLC”), with and into a Delaware corporation (sometimes referred to herein as the “Corporation”), which changed its name to The ExOne Company (the “Reorganization”). To the extent that the LLC had undistributed earnings on January 1, 2013, such earnings will be included in the Company’s financial statements at December 31, 2012 as additional paid-in capital. This assumes a constructive distribution to the owners followed by a contribution to the capital of the corporation.

Historically, the LLC had not been taxed at the company level. Following the Reorganization, we will be taxed as a corporation for federal income tax purposes. As a result, for periods following the Reorganization, we will determine if a tax provision on our income, which will include U.S. federal income taxes and each state, local and foreign jurisdiction, will be required. The highest statutory rates in the United States (including state and local), Germany and Japan are currently 44%, 31% and 40%, respectively. In addition, we will recognize deferred taxes equal to the tax effect of the difference between the book and tax basis of our assets and liabilities as of January 1, 2013. The amount of additional deferred tax assets if the Reorganization had been completed as of September 30, 2012 would have been approximately $0.6 million, assuming a 40% tax rate. However, due to a history of operating losses, a valuation allowance of 100% of the deferred tax asset would be established.

For additional information about the Reorganization, please read “Certain Relationships and Related Party Transactions — Reorganization” and “Use of Proceeds.”

Transactions Prior to the Offering — Class A Preferred Stock

As of January 1, 2013, we had outstanding 18,983,602 shares of Class A preferred stock. See “Description of Capital Stock” for the rights and preferences of the Class A preferred stock. The Class A preferred stock accrues a cumulative dividend at the annual rate of eight percent (8%) per share, payable annually in arrears on the next business day following December 31st. The preferred stock dividend accrued through December 31, 2012 was settled on January 23, 2012. As of the consummation of this offering, we will owe a cumulative dividend from the period beginning as of January 1, 2013, through the date of this offering to the holders of the Class A preferred stock. Immediately prior to the consummation of this offering, the Class A preferred stock will convert into common stock on a 9.5 to 1 basis, or 1,998,272 shares of common stock (the “Conversion”). See “Related Relationships and Related Party Transactions — Rockwell Related Entities — Share Ownership.” While each holder of Class A preferred stock has the right to elect not to convert such preferred stock, they have waived their right to do so.

 

 

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Selling Stockholder and Majority Member

Our selling stockholder is Rockwell Holdings, Inc. (“RHI”). S. Kent Rockwell, our Chairman and Chief Executive Officer, is deemed to have beneficial ownership of our common or preferred units owned by RHI. (See “Certain Relationships and Related Party Transactions — Rockwell Related Entities — Share Ownership.”)

As used in this prospectus, references to the majority member refer to affiliates of S. Kent Rockwell, our Chairman and Chief Executive Officer, who is the indirect, sole shareholder of RHI and Rockwell Forest Products, Inc. (“RFP”). Each of RHI and RFP have provided funding to us. See “Certain Relationships and Related Party Transactions.”

Risks Affecting Us

We are subject to numerous risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects. Please read the section entitled “Risk Factors” beginning on page 12 for a discussion of some of the factors you should carefully consider before deciding to invest in our common stock.

Corporate Information

Our principal executive offices are located at 127 Industry Boulevard, North Huntingdon, Pennsylvania 15642, and our telephone number is (724) 863-9663. Our corporate website address is www.exone.com. The information contained on, or accessible from, our corporate website is not part of this prospectus and you should not consider information contained on our website to be a part of this prospectus or in deciding whether to purchase our common stock.

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company:

 

   

we may present only two years of audited financial statements and only two years of related Management’s Discussion & Analysis of Financial Condition and Results of Operations;

 

   

we are exempt from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;

 

   

we are permitted to provide less extensive disclosure about our executive compensation arrangements;

 

   

we are not required to give our stockholders non-binding advisory votes on executive compensation or golden parachute arrangements; and

 

   

we have elected to use an extended transition period for complying with new or revised accounting standards.

We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our common stock held by non-affiliates or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced burdens.

 

 

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The Offering

 

Common stock offered by us                 shares (             shares if the underwriters exercise the over-allotment option in full).
Common stock offered by the selling stockholder    shares (             shares if the underwriters exercise the over-allotment option in full).
Common stock to be outstanding after the offering                 shares (             shares if the underwriters exercise the over-allotment option in full)(1)
Common stock beneficially owned by the selling stockholder after the offering    1,366,694 shares by the selling stockholder (             shares if the underwriters exercise the over-allotment option in full).
Use of proceeds    We estimate that the net proceeds to us from this offering, after deducting underwriters’ discounts and commissions and our estimated offering expenses, will be approximately $            . We intend to use the net proceeds from this offering to invest in further improving the efficiency and capacity of our machines and expanding the number of materials from which we can make products, to increase the number of locations of our PSCs and for working capital and other general corporate purposes. We will also use approximately $9.8 million of the net proceeds to repay a revolving line of credit that we have with RFP, an entity controlled by our CEO, and approximately $3.0 million to purchase the business of TMF and Lone Star, our variable interest entities. We will not receive any proceeds from the sale of common stock by the selling stockholder.
Over-allotment option    We have granted the underwriters a 30-day option to purchase a maximum of              additional shares of our common stock from us and the selling stockholder at the initial public offering price to cover over-allotments.
Risk factors    You should consider carefully all of the information set forth in this prospectus and, in particular, the specific factors set forth under “Risk Factors” on page 14, before deciding whether to invest in our common stock.

 

 

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Dividend policy    We have not historically paid dividends and we do not intend to declare or pay regular dividends on our common stock in the foreseeable future.
Proposed Nasdaq Global Market symbol for our common stock   

XONE

 

 

Unless otherwise indicated, all information in this prospectus excludes:

(i) 500,000 shares of common stock reserved for issuance under our 2013 Equity Incentive Plan (the “Plan”). The Plan also provides for automatic annual increases in the number of shares reserved thereunder, as more fully described in “Executive Compensation — 2013 Equity Incentive Plan.” The maximum number of shares authorized pursuant to the Plan will not exceed             , (15% of the total number of shares outstanding immediately after the offering) subject to certain adjustments.

(ii) We have granted options to certain employees to purchase an aggregate of 180,000 of such reserved shares and restricted stock to our non-employee directors in an aggregate of 10,000 of such reserved shares, each effective upon and subject to the completion of this offering, at an exercise price equal to the public offering price per share indicated on the cover of this prospectus. References to the number of shares of common stock to be outstanding after the offering in this prospectus does not take these awards into account.

 

 

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Summary Consolidated Financial Data

The following table sets forth certain of our summary consolidated financial information for the periods represented. The financial data as of and for the years ended December 31, 2010 and 2011 have been derived from our audited consolidated financial statements and notes thereto. The financial data as of and for the nine months ended September 30, 2011 and 2012 have been derived from our unaudited condensed consolidated financial statements and notes thereto. We have prepared the unaudited consolidated financial information set forth below on the same basis as our audited consolidated financial statements and have included all adjustments, consisting of only normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for such periods. The interim results set forth below are not necessarily indicative of expected results for the year ending December 31, 2012 or for any other future period.

The data presented below should be read in conjunction with, and are qualified in their entirety by reference to, “Capitalization,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    Twelve Months Ended
December 31,
    Nine Months Ended
September 30,
 
        2010             2011             2011             2012      
                (unaudited)  
    $ in thousands, except per common unit
data
 

Income Data:

       

Revenue

  $ 13,440      $ 15,290      $ 12,571      $ 15,913   

Cost of sales

    10,374        11,647        9,327        10,018   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    3,066        3,643        3,244        5,895   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

       

Research and development

    1,153        1,531        1,146        1,179   

Selling, general and administrative (includes non-cash equity based compensation expense of $7.7 million for the nine months ended September 30, 2012)

    5,978        7,286        5,196        14,826   
 

 

 

   

 

 

   

 

 

   

 

 

 
    7,131        8,817        6,342        16,005   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (4,065     (5,174     (3,098     (10,110
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

    (1     (3     (2     (2

Interest expense

    1,115        1,569        1,188        542   

Other (income) expense, net

    (197     (154     34        (71
 

 

 

   

 

 

   

 

 

   

 

 

 
    917        1,412        1,220        469   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (4,982     (6,586     (4,318     (10,579

Provision for income taxes

    198        1,031        709        171   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to the controlling and the noncontrolling interests

    (5,180     (7,617     (5,027     (10,750

Less: Net income of noncontrolling interest

    328        420        244        320   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to the controlling interest(A)

  $ (5,508   $ (8,037   $ (5,271   $ (11,070
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common unit(B):

       

Basic

  $ (0.55   $ (0.80   $ (0.53   $ (1.21

Diluted

    (0.55     (0.80     (0.53     (1.21

Cash Flow Data:

       

Net cash used for operating activities

  $ (5,912   $ (2,435   $ (3,333   $ (9,084

Capital expenditures

    (1,795     (1,080     (232     (1,973

Net cash provided by financing activities

    7,811        5,931        3,795        9,050   

Other Data (unaudited):

       

EBITDA (A)(D)

  $ (2,993   $ (4,005   $ (2,267   $ (8,852

Machine Units Sold(C)

       

S 15

    2        2        2        1   

S Max

    2        1        1        4   

S Print

    —          1        1        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    4        4        4        5   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Net loss attributable to the controlling interest and EBITDA include a non-cash equity based compensation expense of $7.7 million for the nine months ended September 30, 2012.
(B) The loss per unit for the nine months ended September 30, 2012 reflects the effect of the dividend declared on the Class A preferred units of $1.0 million, or $0.10 per common unit.
(C) See “Business—Our Machines and Machine Platforms” for a description of the machines.

 

 

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(D) We define EBITDA (earnings before interest, taxes, depreciation and amortization) as net loss attributable to the controlling interest (as calculated under GAAP) plus income of the noncontrolling interest, taxes, interest, net, depreciation, and other (income) expense, net. Disclosure in this prospectus of EBITDA, which is a “non-GAAP financial measure,” as defined under the rules of the Securities and Exchange Commission (“SEC”), is intended as a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. EBITDA should not be considered as an alternative to net income, income from continuing operations or any other performance measure derived in accordance with GAAP.

We believe EBITDA is meaningful to our investors to enhance their understanding of our financial performance. Although EBITDA is not necessarily a measure of our ability to fund our cash needs, we understand that it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance and to compare our performance with the performance of other companies that report EBITDA. Our calculation of EBITDA may not be comparable to similarly titled measures reported by other companies.

The following table reconciles net loss attributable to the controlling interest to EBITDA for the periods presented in this table and elsewhere in this prospectus.

 

     Twelve Months Ended
December 31,
     Nine Months Ended
September 30,
 
   2010      2011      2011      2012  
     (unaudited)  
    

$ in thousands

 

Net loss attributable to the controlling interest

   $ (5,508    $ (8,037    $ (5,271    $ (11,070

Net income of noncontrolling interest

     328         420         244         320   

Taxes

     198         1,031         709         171   

Interest, net

     1,114         1,565         1,186         540   

Depreciation

     1,072         1,170         831         1,258   

Other (income) expense, net

     (197      (154      34         (71
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA(A)(D)

   $ (2,993    $ (4,005    $ (2,267    $ (8,852
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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    December 31,     September 30,  2012
(unaudited)
 
    2010     2011     Actual     Pro Forma
Conversion
and Offering(4)(5)
  Pro Forma
As Adjusted(4)(5)
 
    $ in thousands  

Financial Position Data:

         

Operating working capital (6)

  $ 4,998      $ 5,297      $ 9,335        $                

Cash and cash equivalents

    1,021        3,496        1,431       

Deferred revenue and customer deposits

    (1,098     (4,938     (2,994    

Accrued expenses and other current liabilities

    (2,345     (2,669     (3,954    

Dividends payable

    —          —         
(1,031
)(9) 
   

Line of credit

    —          —          (900 )(8)     

Current portion of long-term debt and capital lease obligations

    (808     (1,294     (2,464    

Demand note payable to member(1)

    (15,045     —   (1)      (7,266 )(7)     

All other, net

    24        (1,224     499       
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Working capital

  $ (13,253   $ (1,332   $ (7,344     $                
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Property and equipment

  $ 7,990      $ 7,919      $ 12,708        $                

Total assets

  $ 15,233      $ 18,968      $ 27,436        $                

Long-term debt and capital lease obligations – net of current portion

  $ 3,031      $ 4,135      $ 6,541        $                

Redeemable Class A preferred units

  $ —        $ 18,984 (1)    $ —   (3)      $                

Class A preferred units

  $ —        $ —        $ 18,984 (3)      $                

Total members’ deficit

  $ (8,277   $ (15,599 )(2)    $ (713     $                

Total stockholders’ equity

  $ —        $ —        $ —          $                

 

(1) Demand note payable to member was converted into Redeemable Class A preferred units on December 31, 2011.
(2) Excludes Redeemable Class A preferred units which are classified as a liability at December 31, 2011.
(3) Redeemable Class A preferred units were converted into Class A preferred units in February 2012 which are classified as equity at September 30, 2012.
(4) Reflects (a) the completion of the Reorganization as of January 1, 2013, including the issuance of 5,800,000 shares of our common stock and 18,983,602 shares of our preferred stock to the holders of limited liability company interests of The Ex One Company, LLC and (b) the Conversion of 18,983,602 shares of Class A preferred stock into 1,998,272 shares of common stock on a 9.5 to 1 basis, immediately prior to the consummation of this offering.
(5) These amounts reflect balance sheet data as of September 30, 2012, as adjusted for the sale of              shares of our common stock (excluding the additional shares offered by the selling stockholder) in this offering (based on an assumed offering price of $             per share and assuming the underwriters do not exercise their over-allotment option), underwriting discounts and commissions, estimated offering expenses payable by us and the application of the net proceeds received by us from this offering as described under “Use of Proceeds.”

 

(6) Operating working capital is a subset of total working capital and represents accounts receivable plus related party receivables plus inventories less accounts payable.

 

(7) Borrowings from majority member since January 1, 2012. Balance is $9.8 million as of January 23, 2013.

 

(8) We notified the bank in December 2012 that we are not in compliance with an equity-to-asset ratio covenant related to this facility. According to the terms of the agreement, the bank at its discretion may request additional security to maintain the facility.

 

(9) The balance on January 23, 2013 of $1.4 million was settled on January 23, 2013.

 

 

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RISK FACTORS

An investment in our common stock involves risks. You should carefully consider each of the following risks and all of the information set forth in this prospectus before deciding to invest in our common stock. The risks and uncertainties described below are not the only ones we face. If any of the following risks and uncertainties develops into actual events, our business, financial condition, results of operations and cash flows could be materially adversely affected. In that case, the price of our common stock could decline and you may lose all or part of your investment.

Risks Related to Our Business and Industry

We may not be able to significantly increase the number of materials in which we can print products fast enough to meet our business plan.

Our business plan is heavily dependent upon our ability to steadily increase the number of qualified materials in which our machines can print products, since this will increase our addressable market, both as to customers and products for customers. However, qualifying new materials is a complicated engineering task, and there is no way to predict whether, or when, any given material will be qualified. If we cannot hire sufficient skilled people to work on qualifying new materials for printing or if we lack the resources necessary to create a steady flow of new materials, we will not be able to meet our business plan goals and a competitor may emerge that is better at qualifying new materials, either of which would have an adverse effect on our business results.

Our future success in qualifying new materials for printing may attract more competitors into our markets, some which may be much larger than we are.

If we succeed in qualifying a growing number of materials for use in our 3D printing machines, that will increase our addressable market. However, as we create a larger addressable market, our market may become more attractive to other 3D printing companies or large companies that are not 3D printing companies but which may see an economic opportunity in the markets we have created. Because we are a supplier of 3D printed products to industrial companies, an increase in the number of competitors for our addressable market is likely to adversely affect our business and financial results.

We may not be able to adequately increase demand for our products.

Our business plan is built around a steady increase in the demand for our products. However, only a relatively small number of our potential customers know of the existence of AM and are familiar with its capabilities, and even fewer understand the potential benefits of using AM to manufacture products. If we do not develop effective strategies to raise awareness among potential customers of the benefits of AM, we may be unable to achieve our planned rate of growth, which could adversely affect our results of operations.

We may not be able to hire the number of skilled employees that we need to achieve our business plan.

For our business to grow in accordance with our business plan, we will need to hire and retain additional employees with the technical competence and engineering skills to operate our machines, improve our technology and processes and expand our technological capability to print using an increasing variety of materials. People with these skills are in short supply and may not be available in sufficient numbers to allow us to meet the goals of our business plan. If we cannot obtain the services of sufficient technically skilled employees, we may not be able to achieve our planned rate of growth, which could adversely affect our results of operations.

Our revenues and operating results may fluctuate.

Our revenues and operating results may fluctuate from quarter-to-quarter and year-to-year and are likely to continue to vary due to a number of factors, many of which are not within our control. A significant portion of

 

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our machine orders are typically received during the third or fourth quarter of the fiscal year as a result of the timing of capital expenditures of our customers. Our machines typically are shipped within the quarter or the next quarter after orders are received. Thus, revenues and operating results for any future period are not predictable with any significant degree of certainty. We also typically experience weaker demand for our machines in the first and second quarters. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance.

Fluctuations in our operating results and financial condition may occur due to a number of factors, including, but not limited to, those listed below and those identified throughout this “Risk Factors” section:

 

   

the degree of market acceptance of our products;

 

   

the mix of products that we sell during any period;

 

   

our long sales cycle;

 

   

generally weaker demand for machines in the first and second quarters;

 

   

development of competitive systems by others;

 

   

our response to price competition;

 

   

delays between our expenditures to develop and market new or enhanced machines and products and the generation of sales from those products;

 

   

changes in the amount we spend to promote our products and services;

 

   

the geographic distribution of our sales;

 

   

changes in the cost of satisfying our warranty obligations and servicing our installed base of products;

 

   

our level of research and development activities and their associated costs and rates of success;

 

   

general economic and industry conditions that affect end-user demand and end-user levels of product design and manufacturing, including the adverse effects of the current economic crisis affecting Europe;

 

   

changes in accounting rules and tax laws; and

 

   

changes in interest rates that affect returns on our cash balances and short-term investments.

Due to the foregoing factors, you should not rely on quarter-to-quarter or year-to-year comparisons of our operating results as an indicator of future performance.

We may not be able to generate operating profits.

Since our inception, we have not generated operating profits. In the event that we are unable to execute on our business plan, we may be unable to generate profits in the future.

We may not be able to introduce new machines and related industrial materials acceptable to the market or to improve the technology and industrial materials used in our current machines.

Our revenues are derived from the sale of machines for, and products manufactured using, AM. Our market is subject to innovation and technological change. A variety of technologies have the capacity to compete against one another in our market, which is, in part, driven by technological advances and end-user requirements and preferences, as well as the emergence of new standards and practices. Our ability to compete in the industrial AM market depends, in large part, on our success in enhancing and developing new machines, our success in enhancing our current machines, our success in enhancing and adding to our technology, and our success in developing and qualifying new industrial materials in which we can print. We believe that to remain competitive

 

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we must continuously enhance and expand the functionality and features of our products and technologies. However, we may not be able to:

 

   

Enhance our existing products and technologies;

 

   

Continue to leverage advances in industrial printhead technology;

 

   

Develop new products and technologies that address the increasingly sophisticated and varied needs of prospective end-users, particularly with respect to the physical properties of industrial materials and other consumables;

 

   

Respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis;

 

   

Develop products that are cost effective or that otherwise gain market acceptance; and

 

   

Adequately protect our intellectual property as we develop new products and technologies.

If the market does not develop as we expect, our revenues may stagnate or decline.

The marketplace for industrial manufacturing is dominated by conventional manufacturing methods that do not involve AM technology. If AM technology does not gain market acceptance as an alternative for industrial manufacturing, or if the marketplace adopts AM based on a technology other than our technology, we may not be able to increase or sustain the level of sales of our products and machines and our results of operations would be adversely affected as a result.

Loss of key management or sales or customer service personnel could adversely affect our results of operations.

Our future success depends to a significant extent on the skills, experience and efforts of our management and other key personnel. We must continue to develop and retain a core group of management individuals if we are to realize our goal of continued expansion and growth. While we have not previously experienced significant problems attracting and retaining members of our management team and other key personnel, there can be no assurance that we will be able to continue to retain these individuals, and the loss of any or all of these individuals could materially and adversely affect our business. We do not carry key-man insurance on any member of management.

Our international operations pose currency risks, which may adversely affect our operating results and net income.

Our operating results may be affected by volatility in currency exchange rates and our ability to effectively manage our currency transaction and translation risks. In general, we conduct our business, earn revenue and incur costs in the local currency of the countries in which we operate. As a result, our international operations present risks from currency exchange rate fluctuations. The financial condition and results of operations of each of our foreign operating subsidiaries are reported in the relevant local currency and then translated to U.S. dollars at the applicable currency exchange rate for inclusion in our combined consolidated financial statements. We do not manage our foreign currency exposure in a manner that would eliminate the effects of changes in foreign exchange rates. Therefore, changes in exchange rates between these foreign currencies and the U.S. dollar will affect the recorded levels of our foreign assets and liabilities, as well as our revenues, cost of goods sold, and operating margins, and could result in exchange losses in any given reporting period.

In the future, we may not benefit from favorable exchange rate translation effects, and unfavorable exchange rate translation effects may harm our operating results. In addition to currency translation risks, we incur currency transaction risks whenever we enter into either a purchase or a sale transaction using a different

 

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currency from the currency in which we receive revenues. In such cases we may suffer an exchange loss because we do not currently engage in currency swaps or other currency hedging strategies to address this risk.

Given the volatility of exchange rates, we can give no assurance that we will be able to effectively manage our currency transaction and/or translation risks or that any volatility in currency exchange rates will not have an adverse affect on our results of operations.

One of our principal stockholders will be able to exert substantial influence.

S. Kent Rockwell, our Chairman and Chief Executive Officer, will beneficially own approximately     % of our outstanding shares of common stock following this offering (    % if the underwriters exercise their overallotment in full) and may have effective control over the election of our Board of Directors and the direction of our affairs. As a result, he could exert considerable influence over the outcome of any corporate matter submitted to our stockholders for approval, including the election of directors and any transaction that might cause a change in control, such as a merger or acquisition. Any stockholders in favor of a matter that is opposed by Mr. Rockwell would have to obtain a significant number of votes to overrule the votes of Mr. Rockwell. See “Principal Stockholders.”

We may need to raise additional capital from time to time if we are going to meet our growth strategy and may be unable to do so on attractive terms.

Expanding our business to meet the growth strategy may require additional investments of capital from time to time, and our existing sources of cash and any funds generated from operations may not provide us with sufficient capital. For various reasons, including any current noncompliance with existing or future lending arrangements, additional financing may not be available when needed, or may not be available on terms favorable to us. If we fail to obtain adequate capital on a timely basis or if capital cannot be obtained at reasonable costs, we will not be able to achieve our planned rate of growth, which will adversely affect our results of operations.

We are highly dependent upon sales to certain industries.

For 2012, revenues of machines and products have been concentrated to companies in the aerospace (17%), automotive (34%), heavy equipment (21%) and energy/oil/gas (7%) industries and those industries’ respective suppliers. To the extent any of these industries experience a downturn, our results of operations may be adversely affected. Additionally, if any of these industries or their respective suppliers or other providers of manufacturing services develop new technologies or alternatives to manufacture the products that are currently manufactured using our machines, it may adversely affect our results of operations.

We are dependent on a single supplier of printheads.

We currently rely on a single source to supply the printheads used by our machines. While we believe that there are other suppliers of printheads upon which we could rely, we could experience delays and interruptions if our supply is interrupted that might temporarily impact the financial performance of our business.

All of the equipment at our Troy, Michigan and Houston, Texas PSCs is subject to a lien which secures certain loans.

All of the equipment at our Troy, Michigan and Houston, Texas PSCs is owned by our variable interest entities (“VIEs”) TMF and Lone Star, respectively, and leased to us. Each of these companies borrowed money from one or more lending institutions to fund the purchase of the equipment which is leased to us. Each of these loans is secured by a lien on the equipment leased to us. If any of those loans goes into default, the lender could repossess the equipment which is security for that loan, which would adversely affect our business at the affected PSC until the equipment could be replaced.

 

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We may not be able to manage the expansion of our operations effectively in order to achieve our projected levels of growth.

We have expanded our operations significantly in recent periods, and our business plan calls for further expansion over the next several years. We anticipate that further development of our infrastructure and an increase in the number of our employees will be required to achieve our planned broadening of our product offerings and client base, improvements in our machines and materials used in our machines, and our planned international growth. In particular, we must increase our marketing and services staff to support new marketing and service activities and to meet the needs of both new and existing customers. Our future success will depend in part upon the ability of our management to manage our growth effectively. If our management is unsuccessful in meeting these challenges, we may not be able to achieve our anticipated level of growth which would adversely affect our results of operations.

Our planned expansion of our international sales is subject to various risks, and failure to manage these risks could adversely affect our results of operations.

Our business is subject to certain risks associated with doing business globally. Our sales outside of the Americas were 70.7% and 70.0% of our total sales in 2010 and 2011, respectively, and were 63.0% for the nine months ended September 30, 2012. One of our growth strategies is to pursue opportunities for our business in several areas of the world outside of the United States, any or all of which could be adversely affected by the risks set forth below. Our operations outside of the United States are subject to risks associated with the political, regulatory and economic conditions of the countries in which we operate, such as:

 

   

fluctuations in foreign currency exchange rates;

 

   

potentially longer sales and payment cycles;

 

   

potentially greater difficulties in collecting accounts receivable;

 

   

potentially adverse tax consequences;

 

   

reduced protection of intellectual property rights in certain countries;

 

   

difficulties in staffing and managing foreign operations;

 

   

laws and business practices favoring local competition;

 

   

costs and difficulties of customizing products for foreign countries;

 

   

compliance with a wide variety of complex foreign laws, treaties and regulations;

 

   

tariffs, trade barriers and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets; and

 

   

becoming subject to the laws, regulations and court systems of many jurisdictions.

Any of these factors could materially adversely affect sales of our products to global customers or harm our reputation, which could adversely affect our results of operations.

Global economic, political and social conditions have adversely impacted our sales and may continue to do so.

The uncertain direction and relative strength of the global economy, difficulties in the financial services sector and credit markets, continuing geopolitical uncertainties and other macroeconomic factors all affect spending behavior of potential end-users of our products. The prospects for economic growth in the United States and other countries remain uncertain and may cause end-users to further delay or reduce technology purchases. In particular, a substantial portion of our sales are made to customers in countries in Europe, which is experiencing a significant economic crisis. If global economic conditions remain volatile for a prolonged period or if European economies experience further disruptions, our results of operations could be adversely affected. The global financial crisis affecting the banking system and financial markets has resulted in a tightening of credit markets,

 

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lower levels of liquidity in many financial markets and extreme volatility in fixed income, credit, currency and equity markets. These conditions may make it more difficult for our end-users to obtain financing.

Due to our plan to increase our global business activities, we may be adversely affected by violations of the FCPA, similar anti-bribery laws in other jurisdictions in which we currently or may in the future operate, or various international trade and export laws.

Our business plan envisions that we will conduct increasing amounts of business outside of the United States, which will create various domestic and foreign regulatory challenges. The Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), and similar anti-bribery laws in other jurisdictions generally prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We have policies and controls in place designed to ensure internal and external compliance with these and other anti-bribery laws. To ensure compliance, our anti-bribery policy and training on a global basis provides our employees with procedures, guidelines and information about anti-bribery obligations and compliance. Further, we require our partners, subcontractors, agents and others who work for us or on our behalf to comply with anti-bribery laws. We also have procedures and controls in place designed to ensure internal and external compliance. However, such anti-bribery policy, training, internal controls, and procedures will not always protect us from reckless, criminal or unintentional acts committed by our employees, agents or other persons associated with us. If we are found to be in violation of the FCPA or other anti-bribery laws (either due to acts or inadvertence of our employees, or due to the acts or inadvertence of others), we could suffer criminal or civil penalties or other sanctions, which could have a material adverse effect on our business. In addition, actual or alleged violations could damage our reputation and adversely affect our results of operations.

We rely on our information technology systems to manage numerous aspects of our business and customer and supplier relationships, and a disruption of these systems could adversely affect our results of operations.

We depend on our information technology, or “IT,” systems to manage numerous aspects of our business and provide analytical information to management. Our IT systems allow us to efficiently purchase products from our suppliers, provide procurement and logistic services, ship products to our customers on a timely basis, maintain cost-effective operations and provide superior service to our customers. Our IT systems are an essential component of our business and growth strategies, and a disruption to our IT systems could significantly limit our ability to manage and operate our business efficiently. These systems are vulnerable to, among other things, damage and interruption from power loss, including as a result of natural disasters, computer system and network failures, loss of telecommunication services, operator negligence, loss of data, security breaches and computer viruses. Any such disruption could adversely affect our results of operations.

We could be subject to personal injury, property damage, product liability, warranty and other claims involving allegedly defective products that we supply.

The products we supply are sometimes used in potentially hazardous applications, such as the assembled parts of an aircraft or automobile, that could result in death, personal injury, property damage, loss of production, punitive damages, and consequential damages. While we have not experienced any such claims to date, actual or claimed defects in the products we supply could result in our being named as a defendant in lawsuits asserting potentially large claims. Any such lawsuit, regardless of merit, could result in material expense, diversion of management time and efforts, and damage to our reputation, and could cause us to fail to retain or attract customers, which could adversely affect our results of operations.

We may not have adequate insurance for potential liabilities.

In the ordinary course of business, we may be subject to various product and non-product related claims, lawsuits and administrative proceedings seeking damages or other remedies arising out of our commercial operations. We maintain insurance to cover our potential exposure for most claims and losses. However, our

 

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insurance coverage is subject to various exclusions, self-retentions and deductibles, may be inadequate or unavailable to protect us fully, and may be cancelled or otherwise terminated by the insurer. Furthermore, we face the following additional risks under our insurance coverage:

 

   

we may not be able to continue to obtain insurance coverage on commercially reasonable terms, or at all;

 

   

we may be faced with types of liabilities that are not covered under our insurance policies, such as environmental contamination or terrorist attacks, and that exceed any amounts what we may have reserved for such liabilities;

 

   

the amount of any liabilities that we may face may exceed our policy limits and any amounts we may have reserved for such liabilities; and

 

   

we may incur losses resulting from interruption of our business that may not be fully covered under our insurance policies.

Even a partially uninsured claim of significant size, if successful, could materially adversely affect our business, financial condition, results of operations and liquidity. However, even if we successfully defend ourselves against any such claim, we could be forced to spend a substantial amount of money in litigation expenses, our management could be required to spend valuable time in the defense against these claims and our reputation could suffer, any of which could adversely affect our results of operations.

If any of our manufacturing facilities or PSCs are disrupted, sales of our products may be disrupted, which could result in loss of revenues and an increase in unforeseen costs.

We manufacture our machines at our facilities in Augsburg, Germany and North Huntingdon, Pennsylvania. Our PSCs are located in North Huntingdon, Pennsylvania; Houston, Texas; Troy, Michigan; Augsburg, Germany; and Kanagawa, Japan. If the operations of these facilities are materially disrupted, we would be unable to fulfill customer orders for the period of the disruption, we would not be able to recognize revenue on orders, and we might need to modify our standard sales terms to secure the commitment of new customers during the period of the disruption and perhaps longer. Depending on the cause of the disruption, we could incur significant costs to remedy the disruption and resume product shipments. Such a disruption could have an adverse effect on our results of operations.

Under applicable employment laws, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.

We generally enter into non-competition agreements with our employees. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors or clients for a limited period. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work, including Germany and Japan, and it may be difficult for us to restrict our competitors from benefitting from the expertise of our former employees or consultants developed while working for us. If we cannot demonstrate that our legally protectable interests will be harmed, we may be unable to prevent our competitors from benefiting from the expertise of our former employees or consultants and our ability to remain competitive may be diminished.

Risks Related to Our Intellectual Property

We may not be able to protect our trade secrets and intellectual property.

While some of our technology is licensed under patents belonging to others or is covered by process patents which are owned or applied for by us, much of our key technology is not protected by patents. Since we cannot legally prevent one or more other companies from developing similar or identical technology to our unpatented technology, it is likely that, over time, one or more other companies may be able to replicate our technology,

 

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thereby reducing our technological advantages. If we do not protect our technology or are unable to develop new technology that can be protected by patents or as trade secrets, we may face increased competition from other companies, which may adversely affect our results of operations.

We enjoy license rights and exclusivity of certain patents and intellectual property and cannot adequately estimate the effects of their expiration upon the entrance or advancement of competitors into the AM industrial market.

We have exclusive license and non-exclusive license rights to certain patents that we utilize in the industrial market. Some of these patents will expire as early as November 2012. We cannot adequately estimate the effect that the expiration of these patents will have upon the entrance or advancement of other AM manufacturers into the industrial market. See “Business — Intellectual Property.”

We may not be able to obtain patent protection or otherwise 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, 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 or other intellectual property rights will not be challenged, invalidated, or circumvented or will otherwise provide us with meaningful protection. We may not be able to obtain foreign patents corresponding to our U.S. or foreign patent applications. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. If our patents and other intellectual property protections do not adequately protect our technology, our competitors may be able to offer products similar to ours. We may not be able to detect the unauthorized use of our proprietary technology and processes or take appropriate steps to prevent such use. 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 margins, which would adversely affect our results of operations.

We may be subject to alleged 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 field of AM 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 technologies and processes, our market share, sales and profitability could suffer, which could adversely affect our results of operations.

Certain of our employees and patents are subject to German law.

Many of our employees work in Germany and are subject to German employment law. Ideas, developments, discoveries and inventions made by such employees and consultants are subject to the provisions of the German Act on Employees’ Inventions (Gesetz über Arbeitnehmererfindungen), which regulates the ownership of, and compensation for, inventions made by employees. We face the risk that disputes can occur between us and our employees or ex-employees pertaining to alleged non-adherence to the provisions of this act that may be costly to defend and take up our management’s time and efforts whether we prevail or fail in such dispute. In addition, under the German Act on Employees’ Inventions, certain employees retained rights to patents they invented or co-invented prior to 2009. Although most of these employees have subsequently assigned their interest in these patents to us, there is a risk that the compensation we provided to them may be deemed to be insufficient in the future and we

 

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may be required under German law to increase the compensation due to such employee for the use of their patent. In those cases where employees have not assigned their interests to us, we may need to pay compensation for the use of those patents. If we are required to pay additional compensation or face other disputes under the German Act on Employees’ Inventions, our results of operations could be adversely affected.

Risks Related to this Offering, the Securities Markets and Ownership of Our Common Stock

Prior to this offering, there has been no public market for our common stock, and we cannot assure you that a market for our common stock will develop or that the market price of shares of our common stock will not decline following the offering.

We cannot assure you that a trading market will develop for our common stock after this offering or, if one develops, that such trading market can be sustained. We intend to apply to have our common stock listed on the Nasdaq Global Market, but we cannot assure you that our application will be approved. In addition, we cannot predict the prices at which our common stock will trade. The initial public offering price for our common stock will be determined through our negotiations with the underwriters based on numerous factors, including the information set forth in this prospectus, our prospects and the prospects of our industry, an assessment of our management, our prospects for future earnings, the general condition of the securities markets, the recent market prices of, and demand for, publicly traded common stock of generally comparable companies and other factors deemed relevant by the underwriters and us. Neither we nor the underwriters can assure you that the initial public offer price will bear any relationship to the market price at which our common stock may trade after our initial public offering. Shares of companies offered in an initial public offering often trade at a discount to the initial offering price due to underwriting discounts and commissions and related offering expenses.

We have broad discretion as to the use of the net proceeds from this offering and may not use them effectively.

We cannot specify with certainty the particular uses to which we will put the net proceeds from this offering. Our management will have broad discretion in the application of the net proceeds, and we may use these proceeds in ways with which you may disagree or for purposes other than those contemplated at the time of the offering. The failure by our management to apply these funds effectively could have a material adverse effect on our business, financial condition and results of operation. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

The market price of our common stock may fluctuate significantly.

The market price and liquidity of the market for shares of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay and may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:

 

   

significant volatility in the market price and trading volume of securities of companies in our sector, which is not necessarily related to the operating performance of these companies;

 

   

the mix of products that we sell, and related services that we provide, during any period;

 

   

delays between our expenditures to develop and market new products and the generation of sales from those products;

 

   

changes in the amount that we spend to develop, acquire or license new products, technologies or businesses;

 

   

changes in our expenditures to promote our products and services;

 

   

changes in the cost of satisfying our warranty obligations and servicing our installed base of systems;

 

   

success or failure of research and development projects of us or our competitors;

 

   

announcements of acquisitions by us or one of our competitors;

 

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the general tendency towards volatility in the market prices of shares of companies that rely on technology and innovation;

 

   

changes in regulatory policies or tax guidelines;

 

   

changes or perceived changes in earnings or variations in operating results;

 

   

any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; and

 

   

general economic trends and other external factors.

Investors in this offering will experience immediate dilution upon the closing of the offering.

If you purchase shares of our common stock in this offering, you will experience immediate dilution of $    per share because the price that you pay will be greater than the pro forma net asset value per share of the common stock you acquire. This dilution is in large part due to the expenses incurred by us in connection with the consummation of this offering. You will experience additional dilution upon exercise of options to purchase common stock under any potential equity incentive plan or if we issue awards to our employees under any potential equity incentive plan, or if we otherwise issue additional shares of our common stock at a price below the initial public offering price. For more information, see “Dilution.”

If equity research analysts do not publish research or reports about our business, or if they issue unfavorable commentary or downgrade our shares, the price of our shares could decline.

The trading market for our shares will rely in part on the research and reports that equity research analysts publish about us and our business. We do not have control over these analysts, and we do not have commitments from them to write research reports about us. The price of our shares could decline if one or more equity research analysts downgrades our shares, issues other unfavorable commentary, or ceases publishing reports about us or our business.

Future sales of our shares could reduce the market price of our shares.

The price of our shares could decline if there are substantial sales of our common stock, particularly by our directors, their affiliates or our executive officers, or when there is a large number of shares of our common stock available for sale. The perception in the public market that our stockholders might sell our shares could also depress the market price of our shares. Substantially all of our existing stockholders prior to this offering are subject to lock-up agreements with the underwriters that restrict their ability to transfer their shares for at least 180 days after the date of this prospectus. Consequently, upon expiration of the lock-up agreements, an additional    of our shares will be eligible for sale in the public market. The market price of our shares may drop significantly when the restrictions on resale by our existing stockholders lapse and these stockholders are able to sell their shares into the market. If this occurs or continues it could impair our ability to raise additional capital through the sale of securities should we desire to do so. See “Shares Eligible for Future Sale.”

Raising additional capital by issuing securities may cause dilution to our stockholders.

We may need or desire to raise substantial additional capital in the future. Our future capital requirements will depend on many factors, including, among others:

 

   

Our degree of success in capturing a larger portion of the industrial products production market;

 

   

The costs of establishing or acquiring sales, marketing, and distribution capabilities for our products;

 

   

The costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our issued patents, and defending intellectual property-related claims;

 

   

The extent to which we acquire or invest in businesses, products, or technologies and other strategic relationships; and

 

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The costs of financing unanticipated working capital requirements and responding to competitive pressures.

If we raise additional funds by issuing equity or convertible debt securities, we will reduce the percentage ownership of our then-existing stockholders, and the holders of those newly-issued equity or convertible debt securities may have rights, preferences, or privileges senior to those possessed by our then-existing stockholders. Additionally, future sales of a substantial number of shares of our common stock or other equity-related securities in the public market could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity or equity-linked securities. We cannot predict the effect that future sales of our common stock or other equity-related securities would have on the market price of our common stock.

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company whose shares are listed on the Nasdaq Global Market, we will incur accounting, legal and other expenses that we did not incur as a private company. We will incur costs associated with our public company reporting requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act, as well as rules implemented by the SEC, the listing requirements of the Nasdaq Global Market and the Nasdaq Marketing Rules and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, introduce new costs such as investor relations, stock exchange listing fees and stockholder reporting, and will make some activities more time-consuming and costly. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial 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 management’s 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 their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, or Section 404, less extensive disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements to hold a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved and an extended transition period for complying with new or revised accounting standards. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We may remain an “emerging growth company” for up to five years. See “Summary — Implications of Being an Emerging Growth Company.”

 

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We have never paid cash dividends on our equity interests, and we do not anticipate paying any cash dividends in the foreseeable future. Therefore, if our share price does not appreciate, our investors may not gain and could potentially lose on their investment in our shares.

We have never declared or paid cash dividends on our common interests, nor do we anticipate paying any cash dividends on our share capital, after this offering and in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our shares will be investors’ sole source of gain for the foreseeable future.

As an emerging growth company, we intend to follow certain permitted corporate governance practices instead of the otherwise applicable SEC and Nasdaq requirements, which may result in less protection than is accorded to investors in a non-emerging growth company.

As an emerging growth company, we will be permitted, and intend to follow, certain permitted corporate governance practices instead of those otherwise required by the SEC and under the listing requirements of the Nasdaq Global Market. Following our emerging growth company governance practices as opposed to the requirements that would otherwise apply to a company listed on the Nasdaq Global Market may provide less protection to you than what is accorded to investors under the Listing Rules of the Nasdaq Stock Market applicable to non-emerging growth company issuers.

As an emerging growth company, we may delay adoption of new or revised accounting standards, which may make our stock less attractive and our trading price more volatile.

Pursuant to the JOBS Act, as an emerging growth company, we have elected to take advantage of an extended transition period for any new or revised accounting standards that may be issued by the Financial Accounting Standards Board (FASB) or the SEC, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can delay adoption of the standard until it applies to private companies. This may make a comparison of our financial statements with any other public company that is either not an emerging growth company or is an emerging growth company that has opted out of using the extended transition period difficult, as different or revised standards may be used. 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 and could decline. Some of the exceptions from disclosure provided for emerging growth companies are also available to smaller reporting companies. We will continue to make use of these overlapping exemptions so long as we are an emerging growth company, even if at some point in the future we are no longer a smaller reporting company.

If, after this offering, we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act as they apply to an emerging growth company that is listed on an exchange for the first time, or if our internal controls over financial reporting are not effective, the reliability of our financial statements may be questioned and our share price may suffer.

After the completion of this offering, we will become subject to the requirements of Section 404(a) of the Sarbanes-Oxley Act, which requires a company that is subject to the reporting requirements of the U.S. securities laws to conduct a comprehensive evaluation of its and its subsidiaries’ internal controls over financial reporting. To comply with this statute, we will be required to document and test our internal control procedures, and our management will be required to assess and issue a report concerning our internal controls over financial reporting.

We will need to prepare for compliance with Section 404 by strengthening, assessing and testing our system of internal controls to provide the basis for our management’s report. However, the continuous process of strengthening our internal controls and complying with Section 404(a) is complicated and time-consuming. Furthermore, as our business continues to grow internationally, our internal controls will become more complex and will require significantly more resources and attention to ensure that our internal controls remain effective overall. We have been made aware of a material weakness in our internal controls over financial reporting by our independent registered public accounting firm. We have taken steps to remediate this material weakness and plan to

 

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take further steps in the future. Section 404 requires annual management assessments of the effectiveness of our internal controls over financial reporting. Assuming that we continue to qualify as an emerging growth company for the next five years, we will be required to comply with Section 404(b) at the time we file our annual report for 2018 with the SEC. Over the course of testing our internal controls, our management may identify material weaknesses or significant deficiencies, which may not be remedied in a timely manner to meet the deadline imposed by the Sarbanes-Oxley Act. If our management cannot favorably assess the effectiveness of our internal controls over financial reporting, investor confidence in our financial results may weaken, and our share price may suffer.

Provisions in our charter documents or Delaware law may inhibit a takeover, which could adversely affect the value of our common stock.

Our certificate of incorporation and bylaws will contain, and Delaware corporate law contains, provisions that could delay or prevent a change of control or changes in our management. These provisions will apply even if some of our stockholders consider the offer to be beneficial or favorable. If a change of control or change in management is delayed or prevented, the market price of our common stock could decline. See “Description of Capital Stock.”

 

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CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS

We are including the following discussion to inform you of some of the risks and uncertainties that can affect us.

This prospectus contains various statements, including those that express a belief, expectation, or intention, as well as those that are not statements of historical fact, that are forward looking statements. The forward looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, revenue, income and capital spending. Our forward looking statements are generally accompanied by words such as “may,” “will,” “expect,” “intend,” “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. The forward looking statements in this prospectus speak only as of the date of this prospectus; we disclaim any obligation to update these statements (unless required by securities laws), and we caution you not to unduly rely on them. We have based these forward looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties include, but are not limited to, the following:

 

   

our ability to qualify more materials in which we can print;

 

   

the availability of skilled personnel;

 

   

our strategy, including the expansion and growth of our operations;

 

   

the impact of loss of key management;

 

   

our plans regarding increased international operations in additional international locations;

 

   

sufficiency of funds for required capital expenditures, working capital, and debt service;

 

   

the adequacy of sources of liquidity;

 

   

expectations regarding demand for our industrial products, operating revenues, operating and maintenance expenses, insurance expenses and deductibles, interest expenses, debt levels, and other matters with regard to outlook;

 

   

demand for aerospace, automotive, energy and other industrial products;

 

   

the impact of disruption of our manufacturing facilities or PSCs;

 

   

liabilities under laws and regulations protecting the environment;

 

   

the impact of governmental laws and regulations;

 

   

operating hazards, war, terrorism and cancellation or unavailability of insurance coverage;

 

   

the effect of litigation and contingencies; and

 

   

the adequacy of our protection of our intellectual property.

These and other important factors, including those discussed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus, may cause our actual results of operations to differ materially from any future results of operations expressed or implied by the forward looking statements contained in this prospectus. Before making a decision to purchase our common stock, you should carefully consider all of the factors identified in this prospectus that could cause actual results to differ from these forward looking statements.

You should rely only on the information contained or incorporated by reference in this prospectus and in any free writing prospectus that we have authorized for use in connection with this offering. Neither we nor the

 

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underwriters nor the selling stockholder have authorized any other person to provide you with additional or different information. If anyone provides you with different or inconsistent information, you should not rely on it. Neither we nor the underwriters nor the selling stockholder are making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including             , 2013 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

MARKET AND INDUSTRY DATA

This prospectus contains industry, market and competitive position data that are based on industry publications and studies conducted by third parties, including, but not limited to, the Wohlers Report, in which we were an industry participant in 2012. The industry publications and third-party studies generally state that the information that they contain has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that each of these publications and third-party studies is reliable, we have not independently verified the market and industry data obtained from these third-party sources.

TRADEMARKS, SERVICE MARKS AND TRADE NAMES

This prospectus includes our trademarks, service marks and trade names, such as “EXONE,” our logo, and “ExOne,” which are protected under applicable intellectual property laws and are the property of The ExOne Company and our subsidiaries. This prospectus also contains trademarks, service marks and trade names of other companies, which are the property of their respective owners. Solely for convenience, marks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these marks and trade names. Third-party marks and trade names used herein are for informational purposes only and in no way constitute or are intended to be a commercial use of such names and marks. The use of such third-party names and marks in no way constitutes or should be construed to be an approval, endorsement or sponsorship of us, or our products or services, by the owners of such third-party names and marks.

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of             shares of our common stock in this offering will be approximately $             (or $             if the underwriters exercise their over-allotment option in full), after deducting underwriting discounts and commissions and our estimated offering expenses of approximately $     million (or approximately $     million if the underwriters exercise their over-allotment option in full). This estimate assumes a public offering price of $            per share, which is the mid-point of the offering price range indicated on the cover of this prospectus. We will not receive any of the proceeds from any sale of shares of our common stock by the selling stockholder, although we will bear the costs, other than underwriting discounts and commissions, associated with the sale of these shares.

We intend to use the net proceeds of this offering to invest in further improving the efficiency and capacity of our machines and expanding the number of materials from which we can make products, to increase the number and locations of our PSCs and for working capital and other general corporate purposes. We will also use approximately $9.8 million of the net proceeds to repay a revolving line of credit that we have with RFP (the “Rockwell Line of Credit”) for working capital. S. Kent Rockwell, our Chairman and Chief Executive Officer, is the beneficiary of the S. Kent Rockwell Revocable Trust, which is the indirect, sole stockholder of RFP. See “Certain Relationships and Related Parties.” The Rockwell Line of Credit provides for borrowing, repayment and reborrowing from time to time. While no limit is specified, borrowings are subject to RFP’s approval. Borrowings under the Rockwell Line of Credit bear interest at the rate of 8% per annum and are repayable, in whole or part, upon demand of RFP. As of January 23, 2013, we had aggregate borrowings and interest of approximately $9.8 million outstanding under the Rockwell Line of Credit. Additionally, we intend to use up to approximately $3.0 million to acquire the assets and assume certain liabilities of TMF and Lone Star, our variable interest entities.

In the event that any net proceeds are not immediately applied, we may temporarily hold them as cash, deposit them in banks or invest them in cash equivalents or securities.

For additional information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

DIVIDEND POLICY

We do not anticipate that we will declare or pay regular dividends on our common stock in the foreseeable future, as we generally intend to invest any future earnings in the development and growth of our business. Future dividends, if any, will be at the discretion of our Board of Directors and will depend on many factors, including general economic and business conditions, our strategic plans, our financial results and conditions, legal requirements, any contractual obligations or limitations, and other factors that our Board of Directors deems relevant.

From the date of the Reorganization until consummation of this offering, the Class A preferred stock will accrue a dividend of 8% per annum. The Class A preferred stock is converted into common stock immediately prior to the consummation of this offering. See “Description of Capital Stock.” Immediately following this offering, there will be no Class A preferred stock outstanding.

 

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CAPITALIZATION

The following table presents our capitalization as of September 30, 2012:

 

   

on an actual basis;

 

   

on a pro forma basis after giving effect to the Reorganization and the Conversion; and

 

   

on a pro forma as adjusted basis after giving effect to the sale of                 shares in this offering at an initial public offering price of $             per share (the midpoint of the estimated initial public offering price range and assuming no exercise of the underwriters’ over-allotment option) after deducting underwriting discounts and commissions and estimated offering expenses and the application of the proceeds from this offering to repay certain indebtedness, as described under “Use of Proceeds.” We will not receive any proceeds from the sale of shares by the selling stockholder.

This table should be read in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

    As of September 30, 2012  
    The
Ex  One
Company,
LLC
    ExOne
Reorganization(1)
    The ExOne
Company
Pro Forma
    Pro Forma
Offering(2)(3)(4)
    The ExOne
Company
Pro Forma
As Adjusted
 
    (in thousands, except par values)  

Long-term debt and capital lease obligations (excluding current portion) (including consolidated variable interest entities of $2.4 million):

  $ 6,541      $ —        $ 6,541     $ —        $               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Members’/stockholders’ equity (deficit):

         

Class A preferred units, 18,983,602 units issued and outstanding, actual

  $ 18,984        (18,984            —       

Common units, 10,000,000 units issued and outstanding, actual

    10,000        (10,000            —       

Common stock, authorized to issue 200,000,000 shares, par value $0.01 per share; 5,800,000 issued and outstanding (pro-forma), actual

           58        58       

Preferred stock, authorized to issue 50,00,000 shares, par value $0.01 per share; 18,984,000 issued and outstanding (pro-forma), 0 issued and outstanding (actual)

           19        19       

Additional paid-in capital

           (2,944     (2,944    

Accumulated other comprehensive loss

    (273     —          (273     —       

Members’ deficit

    (31,851     31,851        —          —       

Retained earnings

    —          —          —          —       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total controlling interest in members’ deficit/stockholders’ equity attributable to Company

    (3,140     —          (3,140    

Non-controlling interest

    2,427        —          2,427        —       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total members’ deficit/stockholders’ equity

    (713     —          (713    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 5,828      $ —        $ 5,828      $                   $                
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Reflects the completion of the Reorganization as of January 1, 2013, including the issuance of 5,800,000 shares of our common stock and 18,983,602 shares of our preferred stock to the holders of limited liability company interests of The Ex One Company, LLC.
(2) Adjusts the pro forma information to give effect to this offering (assuming no exercise of the underwriters’ over-allotment option) and the conversion of the Class A preferred stock into common stock on a 9.5 to 1 basis immediately prior to the consummation of this offering.
(3) Assuming that we sell             shares of common stock, a $1.00 increase or decrease in the assumed initial public offering price would increase or decrease, as applicable, our total capitalization by approximately $            million.
(4) Unless otherwise indicated, all information in this prospectus excludes:

 

  (i) 500,000 shares of common stock reserved for issuance under our 2013 Equity Incentive Plan (the “Plan”). The Plan also provides for automatic annual increases in the number of shares reserved thereunder, as more fully described in “Executive Compensation — 2013 Equity Incentive Plan.” The maximum number of shares authorized pursuant to the Plan will not exceed             , (15% of the total number of shares outstanding immediately after the offering) subject to certain adjustments.
  (ii) We have granted options to certain employees to purchase an aggregate of 180,000 of such reserved shares and restricted stock to our non-employee directors in an aggregate of 10,000 of such reserved shares, each effective upon and subject to the completion of this offering, at an exercise price equal to the public offering price per share indicated on the cover of this prospectus. References to the number of shares of common stock to be outstanding after the offering in this prospectus does not take these awards into account.

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of the common stock to be sold in this offering will exceed the net tangible book value per share of common stock after this offering. If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.

After giving effect to the Reorganization and the Conversion, our pro forma net tangible book value as of September 30, 2012 was ($3.1) million, or ($0.40) per share of our common stock. We calculate net tangible book value per share by calculating our total tangible assets less liabilities, and dividing it by the number of outstanding shares of our common stock.

After giving effect to the sale of             shares of our common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the application of approximately $9.8 million of the proceeds of this offering to repay certain indebtedness described in “Use of Proceeds,” our net tangible book value, which we refer to as our pro forma net tangible book value, as of September 30, 2012 would have been approximately $             million, or $             per share of our common stock.

This amount represents an immediate increase in our pro forma net tangible book value of $             per share to our existing stockholders who will receive shares in the Reorganization and an immediate dilution in our pro forma net tangible book value of $             per share to new investors purchasing shares of our common stock at the initial public offering price. We calculate dilution per share to new investors by subtracting the pro forma net tangible book value per share from the initial public offering price paid by the new investor. The following table illustrates the dilution to new investors on a per share basis:

 

Assumed initial public offering price

      $            

Net tangible book value per share as of

   $               

Increase per share attributable to new investors

     
  

 

 

    

Pro forma net tangible book value per share after this offering

     
     

 

 

 

Dilution per share to new investors

      $     
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $            per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) our pro forma net tangible book value as of September 30, 2012 by approximately $            million, the pro forma net tangible book value per share by $            per share and the dilution in pro forma net tangible book value per share to new investors by $            per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The table below sets forth, as of January 15, 2013, the number of shares of our common stock issued, the total consideration paid and the average price per share paid by our existing stockholders and our new investors in this offering, after giving effect to the Reorganization, the Conversion and the issuance of              shares of common stock in this offering at the assumed initial public offering price of $            per share, before deducting underwriting discounts and commissions and our estimated offering expenses.

 

     Shares Purchased     Total Consideration    

Average

Price

 
     Number      Percent     Amount      Percent     Per Share  
                  (in millions)               

Existing stockholders

     7,798,276                $ 28,983,602                $ 3.72   

New investors

                          
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100     $                     100     $   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

If the underwriters’ over-allotment option to purchase additional shares from us and the selling stockholder is exercised in full, the net tangible book value as of September 30, 2012 would have been $         million, or $             per share of our common stock, representing dilution of $             per share to new investors. Assuming such exercise, the number of shares held and the percentage of total consideration paid by the existing stockholders after this offering would be reduced to     % and     %, respectively, and the number of shares held and the percentage of total consideration paid by new investors would increase to     % or     %, respectively.

 

 

Unless otherwise indicated, all information in this prospectus excludes:

(i) 500,000 shares of common stock reserved for issuance under our 2013 Equity Incentive Plan (the “Plan”). The Plan also provides for automatic annual increases in the number of shares reserved thereunder, as more fully described in “Executive Compensation — 2013 Equity Incentive Plan.” The maximum number of shares authorized pursuant to the Plan will not exceed             , (15% of the total number of shares outstanding immediately after the offering) subject to certain adjustments.

(ii) We have granted options to certain employees to purchase an aggregate of 180,000 of such reserved shares and restricted stock to our non-employee directors and certain employees in an aggregate of 10,000 of such reserved shares, each effective upon and subject to the completion of this offering, at an exercise price equal to the public offering price per share indicated on the cover of this prospectus. References to the number of shares of common stock to be outstanding after the offering in this prospectus does not take these awards into account.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth certain of our summary consolidated financial information for the periods represented. The financial data as of and for the years ended December 31, 2010 and 2011 have been derived from our audited consolidated financial statements and notes thereto. The financial data as of and for the nine months ended September 30, 2011 and 2012 have been derived from our unaudited condensed consolidated financial statements and notes thereto. We have prepared the unaudited consolidated financial information set forth below on the same basis as our audited consolidated financial statements and have included all adjustments, consisting of only normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for such periods. The interim results set forth below are not necessarily indicative of expected results for the year ending December 31, 2012 or for any other future period.

The data presented below should be read in conjunction with, and are qualified in their entirety by reference to, “Capitalization,” “Prospectus Summary—Summary Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     Twelve Months Ended      Nine Months Ended  
     December 31,      September 30,  
     2010      2011      2011      2012  
                   (unaudited)  
     $ in thousands, except per common unit data  

Income Data:

           

Revenue

   $ 13,440       $ 15,290       $ 12,571       $ 15,913   

Cost of sales

     10,374         11,647         9,327         10,018   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     3,066         3,643         3,244         5,895   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

           

Research and development

     1,153         1,531         1,146         1,179   

Selling, general and administrative

     5,978         7,286         5,196         14,826   
  

 

 

    

 

 

    

 

 

    

 

 

 
     7,131         8,817         6,342         16,005   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from operations

     (4,065      (5,174      (3,098      (10,110
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest income

     (1      (3      (2      (2

Interest expense

     1,115         1,569         1,188         542   

Other (income) expense, net

     (197      (154      34         (71
  

 

 

    

 

 

    

 

 

    

 

 

 
     917         1,412         1,220         469   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss before income taxes

     (4,982      (6,586      (4,318      (10,579

Provision for income taxes

     198         1,031         709         171   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss attributable to the controlling and the noncontrolling interests

     (5,180      (7,617      (5,027      (10,750

Less: Net income of noncontrolling interest

     328         420         244         320   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss attributable to the controlling interest (A)

   $ (5,508    $ (8,037    $ (5,271    $ (11,070
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss per common unit (B):

           

Basic

   $ (0.55    $ (0.80    $ (0.53    $ (1.21

Diluted

     (0.55      (0.80      (0.53      (1.21

Cash Flow Data:

           

Net cash used for operating activities

   $ (5,912    $ (2,435    $ (3,333    $ (9,084

Capital expenditures

     (1,795      (1,080      (232      (1,973

Net cash provided by financing activities

     7,811         5,931         3,795         9,050   

Other Data (unaudited):

           

EBITDA (A)(D)

   $ (2,993    $ (4,005    $ (2,267    $ (8,852

Machine Units Sold(C)

           

S 15

     2         2         2         1   

S Max

     2         1         1         4   

S Print

     —           1         1         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4         4         4         5   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(A) Net loss attributable to the controlling interest and EBITDA include a non-cash equity based compensation expense of $7.7 million for the nine months ended September 30, 2012.
(B) The loss per unit for the nine months ended September 30, 2012 reflects the effect of the dividend declared on the Class A preferred units of $1.0 million, or $0.10 per common unit.
(C) See “Business—Our Machines and Machine Platforms” for a description of the machines.

 

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(D) We define EBITDA (earnings before interest, taxes, depreciation and amortization) as net loss attributable to the controlling interest (as calculated under GAAP) plus income of the noncontrolling interest, taxes, interest, net, depreciation, and other (income) expense, net. Disclosure in this prospectus of EBITDA, which is a “non-GAAP financial measure,” as defined under the rules of the SEC, is intended as a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. EBITDA should not be considered as an alternative to net income, income from continuing operations or any other performance measure derived in accordance with GAAP.

We believe EBITDA is meaningful to our investors to enhance their understanding of our financial performance. Although EBITDA is not necessarily a measure of our ability to fund our cash needs, we understand that it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance and to compare our performance with the performance of other companies that report EBITDA. Our calculation of EBITDA may not be comparable to similarly titled measures reported by other companies.

The following table reconciles net loss attributable to the controlling interest to EBITDA for the periods presented in this table and elsewhere in this prospectus.

 

     Twelve Months Ended
December 31,
     Nine Months
Ended

September 30,
 
   2010      2011      2011      2012  
     (unaudited)  
     $ in thousands  

Net loss attributable to the controlling interest

   $ (5,508    $ (8,037    $ (5,271    $ (11,070

Net income of noncontrolling interest

     328         420         244         320   

Taxes

     198         1,031         709         171   

Interest, net

     1,114         1,565         1,186         540   

Depreciation

     1,072         1,170         831         1,258   

Other (income) expense, net

     (197      (154      34         (71
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA (A)(D)

   $ (2,993    $ (4,005    $ (2,267    $ (8,852
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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    December 31,     September 30, 2012 (unaudited)  
    2010     2011     Actual     Pro Forma
Conversion
and Offering(4)(5)
  Pro Forma
As Adjusted(4)(5)
 
    $ in thousands  

Financial Position Data:

         

Operating working capital (6)

  $ 4,998      $ 5,297      $ 9,335        $                

Cash and cash equivalents

    1,021        3,496        1,431       

Deferred revenue and customer deposits

    (1,098     (4,938     (2,994    

Accrued expenses and other current liabilities

    (2,345     (2,669     (3,954    

Dividends payable

    —          —          (1,031 )(9)     

Line of credit

    —          —          (900 )(8)     

Current portion of long-term debt and capital lease obligations

    (808     (1,294     (2,464    

Demand note payable to member (1)

    (15,045     —   (1)      (7,266 )(7)     

All other, net

    24        (1,224     499       
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Working capital

  $ (13,253   $ (1,332   $ (7,344     $                
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Property and equipment

  $ 7,990      $ 7,919      $ 12,708        $                

Total assets

  $ 15,233      $ 18,968      $ 27,436        $                

Long-term debt and capital lease obligations – net of current portion

  $ 3,031      $ 4,135      $ 6,541        $                

Redeemable Class A preferred units

  $ —        $ 18,984 (1)    $ —   (3)      $     

Class A preferred units

  $ —        $ —        $ 18,984 (3)      $                

Total members’ deficit

  $ (8,277 )    $ (15,599 )(2)    $ (713     $                

Total stockholders’ equity

  $ —        $ —        $ —          $                

 

(1) Demand note payable to member was converted into Redeemable Class A preferred units on December 31, 2011.
(2) Excludes Redeemable Class A preferred units which are classified as a liability at December 31, 2011.
(3) Redeemable Class A preferred units were converted into Class A preferred units in February 2012, which are classified as equity at September 30, 2012.
(4) Reflects (a) the completion of the Reorganization as of January 1, 2013, including the issuance of 5,800,000 shares of our common stock and 18,983,602 shares of our preferred stock to the holders of limited liability company interests of The Ex One Company, LLC, and (b) the Conversion of 18,983,602 shares of Class A preferred stock into 1,998,272 shares of common stock on a 9.5 to 1 basis, immediately prior to the consummation of this offering.
(5) These amounts reflect balance sheet data as of September 30, 2012, as adjusted for the sale of              shares of our common stock (excluding the additional shares offered by the selling stockholder) in this offering (based on an assumed offering price of $             per share and assuming the underwriters do not exercise their over-allotment option) underwriting discounts and commissions, estimated offering expenses payable by us and the application of the net proceeds received by us from this offering as described under “Use of Proceeds.”
(6) Operating working capital is a subset of total working capital and represents accounts receivable plus related party receivables plus inventories less accounts payable.
(7) Borrowings from majority member since January 1, 2012. Balance is $9.8 million as of January 23, 2013.
(8) We notified the bank in December 2012 that we are not in compliance with an equity-to-asset ratio covenant related to this facility. According to the terms of the agreement, the bank at its discretion may request additional security to maintain the facility.
(9) The balance on January 23, 2013 of $1.4 million was settled on January 23, 2013.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with “Selected Consolidated Financial Data” and our consolidated financial statements and related notes appearing elsewhere in this prospectus. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described under “Cautionary Statements Regarding Forward Looking Statements” and “Risk Factors.” We assume no obligation to update any of these forward looking statements.

Overview

We are a global provider of 3D printing machines and printed products to industrial customers. Our business primarily consists of manufacturing and selling 3D printing machines and printing products to specifications for our customers using our in-house 3D printing machines. We offer pre-production collaboration and print products for customers through our PSCs, which are located in the United States, Germany and Japan. We build 3D printing machines at our facilities in the United States and Germany. We also supply the associated products, including consumables and replacement parts, and services, including training and technical support, necessary for purchasers of our machines to print products.

As an additive manufacturer, we are an early entrant into an evolving manufacturing technology and marketplace. Our strategy has been to position our manufacturing assets, both in terms of our ability and capacity, to prepare for an anticipated increase of customer acceptance of this form of manufacturing. We have made financial support of this strategy a priority, including in 2012 and the preceding two years. We have invested in both our research and development and infrastructure, including capital investment in machines and hiring key personnel. This is reflected in our operating expense as operating expenses have continued to increase to support our anticipated growth.

As our infrastructure grows, we intend to shift our strategic focus to opening additional PSCs in order to broaden our potential global customer base and to expanding our 3D printing capability in an increasing variety of industrial materials. We therefore plan on continuing to increase our operating expense to support the anticipated increase in revenue.

Business Strategy

Our growth strategy focuses on growing our PSCs in order to print more products for our existing customers and gain new customers, as well as, using this introduction of our technology to facilitate 3D printing machine sales. An important part of reaching these goals is to increase our capability to print in a growing number of industrial materials and increase the job box sizes and production speeds (volumetric output) available to our potential customers which will increase the efficiency and usefulness of our technology.

We also believe expanding the location of our PSCs to high-growth economies and geographic regions that are readily accessible by a significant number of potential customers will help us to increase sales.

To better balance our business, we intend to develop our customer base so that revenue is not dependent on any one region (North America, Europe and Asia). Likewise we intend to balance revenue between our machine sales and revenue from 3D printed products, consumables and other.

Outlook

We believe that interest in 3D printing is increasing by virtue of commercialization of 3D printers generally and subsequent recent media attention. We occupy a defined space in the 3D printing market because of the size

 

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of our machines and their application for industrial products and qualified industrial materials. There are 3D printing companies in various sectors of the market, including art, home-printing, dental, biotech and other areas. While our 3D printing machines may differ from those of many other 3D printing companies in that our machines are designed to print industrial products from qualified industrial materials, we expect an increase in 3D printing to generally have a positive effect on the public’s awareness of our industry.

We have made investments in technology, material sciences, engineering resources, production capacity, marketing and sales force training and developing a global organization, as discussed above, in an attempt to improve financial performance.

Our growth prospects for 2013 are dependent upon our ability to access funds for working capital, capital investment and on-going operating expenses, which we believe will be substantially achieved by the proceeds from this offering, and the following external and internal factors:

 

   

Market Expansion. Our ability to penetrate new and larger industrial markets will be determined in part by our ability to qualify additional industrial materials that may be desired by industrial companies to print products. We currently print in silica sand, ceramic, stainless steel, bronze and glass. By expanding into other materials such as titanium, tungsten carbide, aluminum and magnesium, we believe we can expand our market share and better serve our industrial customer base. We established a new materials testing division called EXMAL, which may increase the rate at which new materials will be qualified.

 

   

Customer Demand. Demand is primarily affected by the capital expenditure purchasing cycle of our machine customers. We believe that demand for our products in Asia is likely to continue to improve over time. However, if the threat of a continued debt crisis in Europe lingers then industrial companies in that region may decrease capital spending. In the Americas (primarily the United States), the acceptance of the 3D printing of industrial products has not yet matured to the extent of the other regions in which we conduct business, but we expect demand to increase as awareness and acceptance of 3D printing of industrial products increases.

 

   

Capacity. Our installed capacity at our PSCs is increasing every year as we add additional machines and replace first generation machines with more efficient and productive second generation machines. We anticipate a higher utilization of our installed capacity at our facilities in expectation of higher current and future demand.

 

   

New Machines. We expect the M Flex machine to satisfy the demand of a large range of industrial customers that are interested in directly printing metal, ceramic and glass products. We plan to increase our production output at our German manufacturing facility to produce the new S Print machine and manufacture a greater number of S Max machines. Our S Print machine has been completely redesigned and is our current mid-sized machine platform. The S Print machine provides the same cutting edge technology available in the S Max platform, with an average price point of $800,000 (based upon average model options and exchange rates). The S Print machine is used by customers interested in printing objects made from silica sand, metals, glass and ceramics, with a particular focus on industrial applications for smaller casting cores that are often required for the aerospace industry, especially in hydraulic applications. The build box size of the S Print permits the use of exotic and expensive print materials, such as cerabeads, that are required for high heat/high strength applications.

 

   

PSCs. Our PSCs are centers for customer collaboration and provide customers with a direct contact point to learn about our 3D printing technology, buy products printed by us, and purchase our machines. By the end of 2015, we plan to expand our PSC network globally from the current five locations. Like our current PSCs, we plan to locate the additional PSCs in major industrial centers near existing and potential customers. While we may adjust the final locations based upon market considerations, our initial plan includes opening a new PSC in South America and on the west coast of the United States by the third quarter of 2013 and opening two additional locations in Asia and Western

 

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Europe by the second quarter of 2014. We will continue to explore additional worldwide opportunities for PSC locations.

How We Measure Our Business

We use several financial and operating metrics to measure our business. We use these metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments, and assess longer-term performance of our marketplace. The key metrics are as follows:

Revenue. Our revenue consists primarily of sales of our 3D printing machines, 3D printed products produced at our PSCs and consumables used to print products. Other sources of sales include services, spare parts and other ancillary items.

 

   

Machines. Machine sales are influenced by a number of factors, including, among other things, (i) the adoption rate of our machines, (ii) end-user product design and manufacturing activity, (iii) the capital expenditure budgets of end-users and potential end-users and (iv) the mix of products sold, all of which may be significantly influenced by macroeconomic factors. Purchases of our machines, especially our higher-end, higher-priced systems, typically involve long sales cycles. Our machine prices include machine installation, training, maintenance and the value of the warranty. Several factors can significantly affect revenue reported for our machines for the period involved, such as the overall low unit volume of machine sales in any particular period combined with the long lead times of our customers’ purchasing decisions, the acceleration or delay of orders and shipments of a small number of machines from one period to another. Revenue recognition rules prescribed by GAAP can also affect our reported revenue for machine sales in any particular period.

 

   

3D printed products, materials and other. 3D printed products revenue derive from our network of PSCs located in the Americas (3), Europe (1) and Asia (1). The PSCs utilize our machines to print products but are also full-service operations that provide support and services such as pre-production collaboration prior to printing the product. Revenue of materials depend upon the volume of consumables that we sell. Sales of our consumables are linked to the number of our machines that are installed and active worldwide. Sales of consumables are also driven by our customers’ machine usage, which is generally a function of the size of the particular machine and the habits and budget of the particular end-user. Larger machines generally use larger amounts of consumables due to their greater capacity and the higher levels of design and manufacturing activity that are typical of an end-user who utilizes a larger machine.

Costs of sales. Our costs of sales consist primarily of labor, parts and overhead to produce machines and 3D printed products. We also incur costs of consumables, services and spare parts. The license fee (based upon a percentage of revenue) for the use of intellectual properties, warranty costs as well as under-absorbed fixed manufacturing overhead are also included in our cost of sales. The production capacity at our PSCs (as well as our machine manufacturing facilities) exceeds the current customer demand and as such a portion of the fixed overhead associated with these facilities is being recognized as a period expense rather than being capitalized as a product cost (“under-absorbed overhead”). We expect our excess capacity to decrease as sales of machines and 3D printed products increase. Our machines are manufactured at our facilities in Germany and the United States, and the cost to manufacture machines consists of raw materials, components, production labor and direct and indirect production overhead. Each geographic region has an engineer dedicated to on-site installation, training and support. The direct cost of the engineers, as well as their travel costs, are included in our cost to manufacture machines. Our costs for a 3D printed product consist primarily of the facilities and personnel at our PSCs and the material of the printed product. The material cost of the printed product includes the purchase required for the consumable and the conversion cost to ready it for production.

Gross profit. Our gross profit and gross margin for our products are influenced by a number of factors. Most important of these is the mix of our machines sold, 3D products printed and consumables sold. Specifically, the

 

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direct product margins on our machines and on our consumables are typically higher than the direct product margins for 3D products printed at our PSCs. Although an increase in the percentage of sales by our PSCs may cause our profit margins to decrease, we believe that our new machines currently being introduced are more efficient, which should improve overall margins in the future.

Also, because machine sales are cyclical, we will seek to have a 50/50 balance in revenue of 3D printing of product, materials and other with machines so that we can maximize absolute margin in dollars while managing business risk.

Another important factor (mentioned above) is that a portion of the fixed overhead associated with our production facilities is being recognized as a period expense (“under-absorbed overhead”) rather than being capitalized into the product cost.

We will also seek to reduce our cost of sales by continued research and development directed towards achieving increased efficiencies in the production of machines. Our PSCs will seek to lower material cost and improve throughput.

In addition, we will be analyzing our supply chain to identify opportunities for better management of that process in partnership with our customers in order to reduce the overall cost as a percentage of revenue in this area.

Operating expenses. Our operating expenses consist of three components: research and development expenses, selling, general and administrative expenses and equity based compensation.

 

   

Research and development expenses. Our research and development expenses consist primarily of salaries and related personnel expenses aimed at developing new machinery and materials. Additional costs include the related software and materials, laboratory supplies, and costs for facilities and equipment. We charge all research and development expenses to operations as they are incurred, with the exception of expenses for specific equipment that we capitalize.

 

   

Selling, general and administrative expenses. Our selling, general and administrative expenses consist primarily of employee-related costs (salaries, employee benefits, equity based compensation, audit and professional services fees, education and training and travel and entertainment) of our managerial and administrative personnel, including executive officers and sales and marketing, finance, accounting, information technology and human resources personnel. Other significant general and administrative costs include the costs related to our headquarters in North Huntingdon, Pennsylvania (and the other four facilities where administrative personnel are located) and costs for legal, accounting, consulting and other professional services.

We expect our administrative expenses to increase in absolute terms and as a percentage of revenues as a result of the additional costs that we expect to incur as a result of being a public company. This will include, among other things, increased auditing and legal fees, reporting requirements, director fees, director and officer’s liability insurance and hiring additional accounting and legal personnel (or outsourcing the services required). However, we expect these expenses will decrease as a percentage of revenues over the long term.

Interest expense. Interest expense consists of the interest cost on the equipment, building loans and the redeemable Class A preferred units (until February 2012). These preferred units were classified as a liability through February 2012, at which time they were reclassified into equity. Upon consummation of the Reorganization, the Class A preferred units will convert into Class A preferred stock. Immediately prior to the consummation of this offering, the Class A preferred stock will convert into common stock.

Currency exchange rates. Due to our international operations, currency exchange rates impact our financial performance. For example, in the year ended December 31, 2011, approximately 30.0% of our sales were denominated in U.S. dollars and approximately 37.1% and 32.9% were denominated in Euros and Yen, respectively.

 

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Income taxes. Prior to January 1, 2013, we were treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, our taxable income or loss was passed through to and included in the tax returns of our members. Accordingly, the accompanying consolidated financial statements do not include a provision for federal and most state and local income taxes. We were subject to entity-level taxation in certain states, and certain domestic and foreign subsidiaries are subject to entity-level U.S. and foreign income taxes. As a result, the accompanying consolidated statements of operations and comprehensive loss include tax expense related to foreign jurisdictions where those subsidiaries operate. On January 1, 2013, The Ex One Company, LLC converted to a C-Corporation, The ExOne Company, which will be subject to U.S. federal, state, local and foreign income taxes at the prevailing applicable corporate tax rates. As a result, for periods following the Reorganization, we will determine if a tax provision on our income, which will include U.S. federal income taxes and each state, local and foreign jurisdiction, will be required. The highest statutory rates in the United States (including state and local), Germany and Japan are currently 44%, 31% and 40%, respectively. In addition, as of January 1, 2013, we recognized deferred taxes equal to the tax effect of the difference between the book and tax basis of our assets and liabilities as of that date. The amount of additional deferred tax assets if the Reorganization was completed as of September 30, 2012 would have been approximately $0.6 million, assuming a 40% tax rate. However, due to a history of operating losses, a valuation allowance of 100% of the deferred tax asset would be established.

Critical Accounting Policies, Significant Estimates and Judgements

The discussion and analysis of our results of operations and financial condition set forth in this prospectus are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make critical accounting estimates that directly impact our consolidated financial statements and related disclosures.

Critical accounting estimates are estimates that meet two criteria:

 

   

The estimates require that we use judgment about matters that are uncertain at the time the estimates are made; and

 

   

There exist different estimates that could reasonably be used in the current period, or changes in the estimates used are reasonably likely to occur from period to period, both of which would have a material impact on our results of operations or financial condition.

On an ongoing basis, we evaluate our estimates, including those related to equity based compensation, accrued license fees, the allowance for doubtful accounts, income taxes, inventories, long-lived assets and contingencies.

We base our estimates and assumptions on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The following paragraphs discuss the items that we believe are the critical accounting policies most affected by significant management estimates and judgments. Management has discussed and periodically reviews these critical accounting policies, the basis for their underlying assumptions and estimates and the nature of our related disclosures herein with the Audit Committee of our Board of Directors.

Revenue Recognition

We earn revenue primarily from the sale of 3D printing machines and 3D printed products. Revenue from the sale of 3D printing machines is recognized upon transfer of title, generally upon shipment. Revenue from the performance of contract services or production services is generally recognized when either the services are

 

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performed or the finished product is shipped. Revenue for all deliverables in a sales arrangement is recognized provided that persuasive evidence of a sales arrangement exists, both title and risk of loss have passed to the customer and collection is reasonably assured. Persuasive evidence of a sales arrangement exists upon execution of a written sales agreement or signed purchase order that constitutes a fixed and legally binding commitment between the us and our customer. In instances where revenue recognition criteria are not met, amounts are recorded as deferred revenue and customer deposits.

We enter into sales arrangements that may provide for multiple deliverables to a customer. Sales of machines may include consumables, maintenance services, and training and installation. We identify all goods and services that are to be delivered separately under a sales arrangement and allocate revenue to each deliverable based on relative fair values. Fair values are generally established based on the prices charged when sold separately by us. In general, revenues are separated between machines, consumables, maintenance services and installation and training services. The allocated revenue for each deliverable is then recognized ratably based on relative fair values of the components of the sale. We also evaluate the impact of undelivered items on the functionality of delivered items for each sales transaction and, where appropriate, defer revenue on delivered items when that functionality has been affected. Functionality requirements are determined to be met if the delivered products or services represent a separate earnings process. Revenue from maintenance services as well as installation is recognized at the time of performance.

We provide customers with a standard warranty agreement on all machines for up to one year. The warranty is not treated as a separate service because the warranty is an integral part of the sale of the machine. The liability associated with these warranty obligations was not significant in the periods presented. After the initial one-year warranty period, we offer machine customers optional maintenance contracts. Deferred maintenance service revenue is recognized when the maintenance services are performed because we have historical evidence that indicates that the costs of performing the services under the contracts are not incurred on a straight-line basis.

We sell equipment with embedded software to our customers. The embedded software is not sold separately and it is not a significant focus of our marketing effort. We do not provide post-contract customer support specific to the software or incur significant costs that are within the scope of FASB guidance on accounting for software to be leased or sold. Additionally, the functionality that the software provides is marketed as part of the overall product. The software embedded in the equipment is incidental to the equipment as a whole such that the FASB guidance referenced above is not applicable. Sales of these products are recognized in accordance with FASB guidance on accounting for multiple-element arrangements.

Shipping and handling costs billed to customers for machine sales and sales of consumables are included in revenue in the consolidated statements of operations and other comprehensive loss. Costs incurred by us associated with shipping and handling is included in cost of sales in the consolidated statements of operations and comprehensive loss.

Our terms of sale generally require payment within 30 to 60 days after shipment of a product, although we also recognize that longer payment periods are customary in some countries where we transact business. To reduce credit risk in connection with machine sales, we may, depending upon the circumstances, require significant deposits prior to shipment. In some circumstances, we may require payment in full for our products prior to shipment and may require international customers to furnish letters of credit. These deposits are reported as deferred revenue and customer deposits in the accompanying consolidated balance sheets. Production and contract services are billed on a time-and-materials basis. Services under maintenance contracts are billed to customers upon performance of services in accordance with the contract.

We incur a fee to third parties for the license of technology for certain of our products. We estimate our accrued license fees based upon net sales of licensed products.

 

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Allowance for Doubtful Accounts

In evaluating the collectability of our accounts receivable, we assess a number of factors, including a specific client’s ability to meet its financial obligations to us, such as whether a customer has declared bankruptcy. Other factors include the length of time the receivables are past due and historical collection experience. Based on these assessments, we record a reserve for specific customers as well as a general reserve based on our historical experience for bad debts. If circumstances related to specific customers change, or economic conditions deteriorate such that our past collection experience is no longer relevant, our estimate of the recoverability of our accounts receivable could be further reduced from the levels provided for in the consolidated financial statements.

Our estimate for the allowance for doubtful accounts related to trade receivables is based on two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved.

First, we evaluate specific accounts for which we have information that the customer may have an inability to meet their financial obligations (for example, aging over 90 days past due or bankruptcy). In these cases, we use our judgment, based on available facts and circumstances, and record a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are re-evaluated and adjusted as additional information is received that impacts the amount reserved. Second, a general reserve is established for all customers based on historical collection and write-off experience.

Our bad debt expense in 2010 and 2011 was not significant, while our allowance for bad debts was less than $0.1 million at each of December 31, 2010 and December 31, 2011.

We believe that our allowance for doubtful accounts is a critical accounting estimate because it is susceptible to change and dependent upon events that may or may not occur and because the impact of recognizing additional allowances for doubtful accounts may be material to the assets reported on our balance sheet and in our results of operations.

Inventories

Inventories are stated at the lower of cost or net realizable value, cost being determined predominantly on the first-in, first-out method. An inventory allowance is provided for slow-moving and obsolete inventory based on historical experience and current product demand. Our inventory allowance is $1.3 million at December 31, 2010 compared with $1.4 million at December 31, 2011.

We evaluate the adequacy of this allowance quarterly. Our determination of the inventory allowance is subject to change because it is based on management’s current estimates of the allowance required and potential adjustments.

We believe that the inventory allowance is a critical accounting estimate because it is susceptible to change and dependent upon events that may or may not occur and because the impact of recognizing an additional allowance may be material to the assets reported on our balance sheet and in our results of operations.

Long-lived Assets

We evaluate long-lived assets (primarily property, plant and equipment) other than goodwill that we have for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down is recorded to reduce the related asset to its estimated fair value.

 

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Income Taxes

We are organized as a Delaware limited liability company. Under the provisions of the Internal Revenue Code and similar state provisions, we are taxed as a partnership and are not liable for income taxes. Instead, our earnings and losses are included in the tax returns of our members. Therefore, the consolidated financial statements do not reflect a provision for U.S. federal or state income taxes.

Our subsidiaries in Germany and Japan are taxed as corporations under the taxing regulations of Germany and Japan, respectively. As a result, the accompanying consolidated statements of operations and comprehensive loss include tax expense related to those foreign jurisdictions.

We recognize deferred tax assets and liabilities for the differences between the financial statement carrying amounts and the tax basis of assets and liabilities of our wholly-owned subsidiaries in Germany and Japan using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized. Changes in the level and composition of earnings, tax laws or the deferred tax valuation allowance, as well as the results of tax audits, may materially impact our effective tax rate.

The calculation of the deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from an uncertain position and to establish a valuation allowance, require management to make estimates and assumptions. We believe that our assumptions and estimates are reasonable, although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances or net income.

Equity Based Compensation

During 2012, our majority member sold 1,300,000 common units to two employees and an existing unitholder for $1.25 per unit. Due to our majority member’s controlling interest in us, the sale of common units is deemed to be an action of the company. The excess of the fair market value on the measurement date over the sale price per unit was recognized as non-cash compensation expense. Determining the fair value of the common units required complex and subjective judgments. We used the sale of a similar security in an arms-length transaction with two separate unrelated parties to estimate the value of the enterprise at the measurement date, which included assigning a value to the similar security’s rights, preferences and privileges relative to the common units. The enterprise value was then allocated to our outstanding equity securities using the option pricing method. The option pricing method involves making estimates of the anticipated timing of a potential liquidity event, such as a sale of the company or an initial public offering (“IPO”), and estimates of the volatility of our equity securities. The anticipated timing is based on the plans of management. The volatility of the units was based on available information on the volatility of stocks of publicly traded companies in the industry. Change in these assumptions could materially impact the value assigned to the common units.

We met with a prospective underwriter in March of 2012 to initiate discussions regarding a potential IPO in the summer of 2012 which led to an organizational meeting in April 2012 to initiate this process. The underwriter spoke with us about what they believed was an initial and preliminary valuation at that time based on three factors: current projections, comparable company analysis and market conditions. Accordingly, we did not believe that it was proper to rely on the merely preliminary discussions about the possible pricing of a potential IPO to establish the fair value of common units in transactions entered into by third parties. The process continued into the summer and early fall with the underwriter performing due diligence during this period. The financial projections also changed over time, as well as the representation of historical financials based on a audit in accordance with U.S. generally accepted accounting principles, as well as market conditions and the valuation of the comparable companies. The current valuation, which was performed in early November by the underwriter, is based on it being substantially complete with due diligence, having audited financials as well as having a current financial forecast.

 

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For the purpose of determining the value per common unit as of January 1, 2011, we performed a valuation as of that date, which coincides with our year-end. The following table sets forth the measurement date value per common unit as determined based on the valuation methods discussed above for each valuation period:

 

January 1,
2011
    June 30,
2012
 
$ 1.25      $ 7.20   

Because our common units will be exchanged in the Reorganization for common shares on a 1 to 0.58 basis, the pro-forma valuation for the aboved reference value given the effect of the Reorganization is:

 

January 1,
2011
    June 30,
2012
 
$ 2.16      $ 12.41   

Contingencies

We account for contingencies in accordance with accounting guidance for contingencies, which requires that we record an estimated loss from a loss contingency when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies, such as legal matters, requires us to use our judgment. We are not aware of any such contingencies.

JOBS Act

We qualify as an “emerging growth company” pursuant to the JOBS Act. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying companies. As defined in the JOBS Act, a company whose initial public offering of common equity securities occurred after December 8, 2011 and whose annual gross revenues are less than $1.0 billion will, in general, qualify as an “emerging growth company” until the earliest of:

 

   

the last day of the fiscal year following the fifth anniversary of its initial public offering of common equity securities;

 

   

the last day of the fiscal year in which it has annual gross revenue of $1.0 billion or more;

 

   

the date on which it has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or

 

   

the date on which it is deemed to be a “large accelerated filer,” which will occur at such time as the company (a) has an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of its most recently completed second fiscal quarter, (b) has been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months, and (c) has filed at least one annual report pursuant to the Securities Act.

Under this definition, we will be an “emerging growth company” upon completion of this offering and could remain an “emerging growth company” until as late as December 31, 2018. Pursuant to Section 107(b) of the JOBS Act, as an “emerging growth company” we are electing to delay adoption of accounting pronouncements newly issued or revised after April 5, 2012 applicable to public companies until such pronouncements are made applicable to private companies.

As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Additionally, we are in the process of evaluating the benefits of relying on the other reduced reporting requirements provided by the JOBS Act.

 

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Changes in Financial Reporting of Future Results of Operations

Prior to the Reorganization, we were a limited liability company, and our owners elected to be taxed at the member unitholder level rather than at the company level. In connection with this offering, we are reorganizing our corporate structure to be a corporation. Following the Reorganization, we will be taxed as a corporation for federal income tax purposes.

Internal Control Over Financial Reporting

As a private company, we have relied on outside service providers for certain of our administrative support functions. In connection with this offering, we expect that we will incur annual incremental expenses to develop the infrastructure to design, implement and maintain a system of internal controls that is adequate to satisfy the reporting and compliance requirements necessitated by being a public company. These expenses will include: annual and quarterly reporting; Sarbanes-Oxley compliance expenses; expenses associated with listing on the Nasdaq Global Market; independent auditor fees; legal fees; investor relations expenses; registrar and transfer agent fees; director and officer liability insurance costs; and director compensation. The full year effect of these incremental general and administrative expenses cannot yet be estimated and are not reflected in our historical consolidated financial statements located elsewhere in this prospectus.

There can be no assurance that any actions we take will be completely successful. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis. We have not begun testing or documenting our internal control procedures in order to comply with the requirements of Section 404(a) of the Sarbanes-Oxley Act. However, we have been made aware of a material weakness in our internal controls over financial reporting by our independent registered public accounting firm. We have taken steps to remediate this material weakness and plan to take further steps in the future. Section 404 requires annual management assessments of the effectiveness of our internal control over financial reporting. Assuming that we continue to qualify as an emerging growth company for the next five years, we will be required to comply with Section 404(b) at the time we file our annual report for 2018 with the SEC. As part of this process, we may identify specific internal controls as being deficient.

 

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Results of Operations for the Nine Months ended September 30, 2011 and 2012

 

     Nine Months Ended
September 30, 2011
    Nine Months Ended
September 30, 2012
    Period-over-period change  
     (unaudited)     Nine months ended  
     Amount     of Revenue     Amount     of Revenue    

September 30, 2011 vs 2012

 
                 $ in thousands              

Income Data:

            

Revenue

   $ 12,571        100.0   $ 15,913        100.0   $ 3,342        26.6

Cost of sales

     9,327        74.2        10,018        63.0        691        7.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     3,244        25.8        5,895        37.0        2,651        81.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

            

Research and development

     1,146        9.1        1,179        7.4        33        2.9   

Selling, general and administrative (includes non-cash equity based compensation expense of $7.7 million for the nine months ended September 30, 2012)

     5,196        41.3        14,826        93.2        9,630        185.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     6,342        50.4        16,005        100.6        9,663        152.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (3,098     (24.6     (10,110     (63.6     (7,012     (226.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

     (2     —          (2     —          —          —     

Interest expense

     1,188        9.5        542        3.4        (646     (54.4

Other expense (income), net

     34        0.3        (71     (0.4     (105     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (4,318     (34.4     (10,579     (66.6     (6,261     (145.0

Provision for income taxes

     709        5.6        171        1.1        (538     (75.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to the controlling and the noncontrolling interests

     (5,027     (40.0     (10,750     (67.7     (5,723     (113.8

Less: Net income of noncontrolling interests

     244        1.9        320        2.0        76        31.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to the controlling interest

   $ (5,271     (41.9 )%    $ (11,070     (69.7 )%    $ (5,799     (110.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per unit(A):

            

Basic

   $ (0.53     $ (1.21      

Diluted

     (0.53       (1.21      

Machine Units Sold(B)

            

S 15

     2          1         

S Max

     1          4         

S Print

     1          —           
  

 

 

     

 

 

       

Total

     4          5         
  

 

 

     

 

 

       

 

(A) The loss per unit for the nine months ended September 30, 2012 reflects the effect of the dividend accruing on the Class A preferred units of $1.0 million, or $0.10 per common unit, since February 2012.
(B) See “Business—Our Machines and Machine Platforms” for a description of the machines.

 

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Summary

Revenues for the nine months ended September 30, 2012 increased $3.3 million compared to the same period in 2011 due to a higher volume of machine sales and 3D printed parts. These results reflected an increase of one machine sale period over period and higher volume sales at all our PSC locations. These changes are explained in greater detail in the “Revenues by Type” and “Revenue by Geographic Region” sections below.

Our gross profit for the nine months ended September 30, 2012 of $5.9 million improved by $2.7 million compared to the nine months ended September 30, 2011. Our gross profit margin percentage also improved to 37.0% for the nine months ended September 30, 2012 from 25.8% for the nine months ended September 30, 2011. See “Gross Profit and Gross Profit Margins.”

For the nine months ended September 30, 2012, our loss from operations of $10.1 million increased $7.0 million from $3.1 million for the nine months ended September 30, 2011, due to a $7.7 million non-cash charge for equity based compensation. Excluding this charge, our performance improved by $0.7 million primarily attributable to higher revenues and gross margins that were partially offset by our operating expense increase. See “Loss from Operations.”

Revenue

The volume of both our machines and 3D printed products produced at our PSCs is currently the primary driver of our revenue growth. For nine months ended September 30, 2012 we sold five units as compared to four units for nine months ended September 30, 2011. Price increases have affected our revenue to a lesser degree than volume however as a result of the introduction of our new higher priced S-Max model, which has resulted in an increase in the average revenue per machine. During the nine months ended September 30, 2012 we sold four S-Max machines as compared to one S-Max machine sold during the same period in 2011. As used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the price and mix effects below relate to changes in revenues that are not able to be specifically related to changes in unit volume.

Revenue by Type

The table below sets forth the major components of the change in revenues by type for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011:

 

     Machines    

3D Printed Parts,
Materials and Other

    Total  
    

$ in thousands

 

Revenue for the nine months ended September 30, 2011

   $ 5,147        40.9   $ 7,424        59.1   $ 12,571        100.0

Change in Revenue -

            
            

Volume

     1,534          1,994          3,528     
            

Price/Mix

     220          —            220     
  

 

 

     

 

 

     

 

 

   
     1,754          1,994          3,748     

Foreign currency translation

     (191       (215       (406  
  

 

 

     

 

 

     

 

 

   

Net change

     1,563          1,779          3,342     
  

 

 

     

 

 

     

 

 

   

Revenue for the nine months ended September 30, 2012

   $ 6,710        42.2   $ 9,203        57.8   $ 15,913        100.0
  

 

 

     

 

 

     

 

 

   

Revenue for machines increased by $1.6 million from $5.1 million for the nine months ended September 30, 2011 to $6.7 million for the nine months ended September 30, 2012. The increase is primarily a result of one additional machine sale for the nine months ended September 2012. We also saw an increase in price/mix of approximately $0.2 million as result of higher priced S-Max models being sold during the nine months ended September 30, 2012. The price/mix was enough to offset the negative impact of a $0.2 million decrease in foreign currency, which resulted from a relative decline in the Euro from nine months ended 2011 to nine months ended 2012.

 

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The revenue for 3D printed products, materials and other for the nine months ended September 30, 2012 increased $1.8 million to $9.2 million from $7.4 million for the same period in 2011. The increase in non-machine revenue was due to increased volume of customer 3D printed products at our PSCs of $1.8 million, which increased in all three of our global regions, the Americas, Europe and Asia, as further discussed below.

Revenue by Geographic Region

The table below sets forth the major components of the change in revenue by geographic region for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2012:

Revenue Variance – Geography

 

     Americas     Europe     Asia     Total  
                        $ in thousands                    

Revenue for the nine months ended September 30, 2011

   $ 3,455         27.5   $ 4,580        36.4   $ 4,536        36.1   $ 12,571        100.0

Change in revenue -

                 

Volume

     2,425           463          640          3,528     

Price/Mix

     —             798          (578       220     
  

 

 

      

 

 

     

 

 

     

 

 

   
     2,425           1,261          62          3,748     

Foreign currency translation

     —             (490       84          (406  
  

 

 

      

 

 

     

 

 

     

 

 

   

Net change

     2,425           771          146          3,342     
  

 

 

      

 

 

     

 

 

     

 

 

   

Revenue for the nine months ended September 30, 2012

   $ 5,880         37.0   $ 5,351        33.6   $ 4,682        29.4   $ 15,913        100.0
  

 

 

      

 

 

     

 

 

     

 

 

   

Our revenue for the nine months ended September 30, 2012 was approximately even amongst all three key geographic regions. The Americas accounted for a larger percentage of revenue for nine months ended September 30, 2012 as result of higher 3D printed product volume and one more machine sale. Europe’s contribution remained relatively stable, with higher volume and price/mix being offset by unfavorable foreign currency translation. Asia’s contribution to revenue declined to less than 30.0% for the nine months ended September 30, 2012 from 36.1% for the nine months ended September 30, 2011 as it sold one S-15 machine for less favorable pricing as compared to the same period in 2011.

Machine production has increased during the first nine months of this year at our German facility, both for machines being installed at our PSCs and third party sales. At September 30, 2012, our deferred revenue and customer deposits was approximately $3.0 million, compared to $4.9 million at December 31, 2011. Deferred revenue reflects customer requested deliveries and prepaid deposits and would approximate the minimum backlog for machines only. We estimate the backlog at our Americas PSCs to be $2.8 million at September 30, 2012 and $2.4 million at September 30, 2011.

Gross Profit and Gross Profit Margins

Our gross profit improved significantly from $3.2 million for the nine months ended September 30, 2011 to $5.9 million for the nine months ended September 30, 2012, which was an 81.7% period over period improvement. The gross profit margin increased from 25.8% to 37.0% for the nine months ended September 30, 2011 and September 30, 2012, respectively. The stronger performance was due to a heavier mix of higher margin machines and 3D printed products sales that were partially offset by lower overhead absorption as discussed below.

 

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The table below shows gross profit and gross profit margin for our machines and 3D printed product, consumables and other.

Gross Margin by Type

 

     Nine Months Ended
September 30, 2011
    Nine Months Ended
September 30, 2012
    Period-over-period change  
     Amount      Percentage
of Revenue
    Amount      Percentage
of Revenue
    Nine Months Ended
September 30, 2011 vs 2012
 
                  $ in thousands               

Machines

   $ 2,876          55.9   $ 4,237          63.1   $ 1,361          47.3

3D printed parts, materials and other

     2,567          34.6     4,507          49.0     1,940          75.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal - Gross profit

     5,443          43.3     8,744          54.9     3,301          60.6

Underabsorbed overhead and all other(1)

     (2,199)         (17.5 )%      (2,849)         (17.9 )%      (650)         29.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total - Gross profit

   $ 3,244          25.8   $ 5,895          37.0   $ 2,651          81.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) “Other” represents warranty, license fees, commissions and production variances.

Excluding overhead absorption, product margin increased $3.3 million, from $5.4 million, or 43.3% of revenue, to $8.7 million, or 54.9% of revenue, for the nine months ended September 30, 2011 and September 30, 2012, respectively.

The improvement in gross profit for 3D printed products, materials and other was due to increased printing of 3D products at our PSCs as gross profit improved by $1.8 million from $0.9 million to $2.7 million for the nine months ended September 30, 2011 and September 30, 2012, respectively. The primary reason for this improvement was the installation of more efficient machines (the new S-Max) at the PSCs to replace the first generation S-15 machines.

The increase in machine gross profit from 55.9% for the nine months ended September 30, 2011 to 63.1% for the nine months ended September 30, 2012, was due to the mix of machines sold. This resulted from the higher margin earned on the new S-Max as compared to the older S-15 model.

The under-absorbed overhead and all other was higher by $0.7 million, an increase of 29.5%, for the nine months ended September 30, 2012 compared to $2.2 million for the nine months ended September 30, 2011. Additionally, the unfavorable under-absorbed overhead variance of $0.7 million is due to the production capacity at our PSCs (as well as our machine manufacturing facilities in Germany and the United States) exceeding the current customer demand. Some PSC overcapacity is the result of installing new, high-capacity S-Max machines at our PSCs. While the short-term impact of S-Max machine installations is excess capacity, the new machines will enable us to take advantage of growing demand over time. A portion of the fixed overhead associated with these facilities is being recognized as a period expense rather than being capitalized into the product cost. We expect our volume of machines produced and 3D products printed to increase as our expected customer demand reduces excess capacity over time.

Operating Expenses

As shown in the table below, total operating expenses increased by $9.7 million to 100.6% of revenue for the nine months ended September 30, 2012 compared to 50.4% in for the nine months ended September 30, 2011, largely due to a $7.7 million non-cash charge for equity based compensation. Excluding this charge, total

 

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operating expenses increased by $1.9 million to $8.3 million or 52.0% of revenue for the nine months ended September 30, 2012 compared to 50.4% or $6.3 million for the nine months ended September 30, 2011, reflecting higher selling, general and administrative expenses discussed below.

 

     Nine Months Ended     Nine Months Ended             
     September 30, 2011     September 30, 2012     Period-over-period  change
Nine Months Ended
September 30, 2011 vs 2012
            Percentage            Percentage    
     Amount      of Revenue     Amount      of Revenue    
     $ in thousands

Research and development

   $ 1,146         9.1   $ 1,179         7.4   $ 33           2.9%

Selling, general and administrative

     5,196         41.3     14,826         93.2     9,630       185.3%
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

Total

   $ 6,342         50.4   $ 16,005         100.6   $ 9,663       152.4%
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

Selling, general and administrative expenses increased by $9.6 million to $14.8 million for the nine months ended September 30, 2012 primarily due to the $7.7 million non-cash charge for equity based compensation. As a percentage of revenue, selling, general and administrative expenses were 93.2% (44.6% excluding the non-cash charge for equity based compensation) and 41.3% for the nine months ended September 30, 2012 and for the nine months ended September 30, 2011, respectively. Additionally, the increase in selling, general and administrative expenses for the nine months ended September 30, 2012 is due to certain non-recurring professional services fees of $0.7 million and employee related benefits (salary, benefits, training and travel and entertainment), as a result of the increase in selling, general and administrative headcount from 54 at December 31, 2011 to 66 at September 30, 2012.

Loss from Operations

For the nine months ended September 30, 2012, our loss from operations of $10.1 million increased by $7.0 million compared to the nine months ended September 30, 2011. This reflects an increase in operating costs of $9.7 million (including the $7.7 million non-cash equity based compensation change) partially offset by the improved gross profit of $2.7 million.

The following table shows the loss from operations by geographic area for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011:

Income (Loss) from Operations

 

     Nine Months Ended
September 30,
    Period-over-period change  
     2011     2012     Amount     Percentage
of Revenue
 
     $ in thousands  

Americas

   $ (3,684   $ (10,834   $ (7,150     (194.1 )% 

Europe

     1,840        1,400        (440     (23.9 )% 

Asia

     (37     (133     (96     (259.5 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     (1,881     (9,567     (7,686     (408.6 )% 

Inter-segment elimination

     (1,217     (543     674        55.4
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (3,098   $ (10,110   $ (7,012     (226.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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All three geographic regions were impacted by continuing infrastructure investment, as additional resources continue to be added, resulting in higher selling, general and administrative costs. Additionally, the following factors are specific to the regions:

Americas: The higher operating loss of $10.8 million for the nine months ended September 30, 2012 compared to $3.7 million for the same period in 2011, an increase of $7.2 million, includes a non-cash equity based compensation charge of $7.7 million. Excluding this charge, the operating loss improved $0.6 million, due to a higher volume of machines and 3D printed product for the nine months ended September 30, 2012.

Europe and Asia: In general, variances resulted primarily from changes in machine sales volume, transfer pricing and foreign currency translation.

Factors specific to the regions include:

Europe — The lower income from operations was primarily the result of an increase in production and selling, general and administrative costs as resources were increased during 2012 to support the increasing demand for machines and 3D printed product.

Asia — The increase in the loss from operations was the result of a lower priced machine sale and an increase in production and selling, general and administrative costs as resources were increased during 2012 to support the increasing demand machines and 3D printed product.

The inter-region eliminations relate to the profit on inter-company sales of machines and 3D printed product and other between Europe, Americas, and Asia.

Interest Expense

Interest expense amounted to $0.5 million for the nine months ended September 30, 2012, a decrease of $0.6 million from the nine months ended September 30, 2011. The primary reason for the decrease was the conversion of the Redeemable Class A preferred units to Class A preferred units in February 2012. This was partially offset by the interest on the $2.7 million in loans for the purchase of our North Huntingdon, Pennsylvania headquarters facility and demand notes issued pursuant to the Rockwell Line of Credit. See “Certain Relationships and Related Party Transactions.”

Provision for Income Taxes

We recorded income tax expense of $0.7 million and $0.2 million for the nine months ended September 30, 2011 and 2012, respectively, primarily due to our German operations, which reported taxable income in both periods. The United States experienced significant operating losses but there were no income tax benefits for state and federal income taxes in the United States in either year because we are a limited liability company.

Net Loss Attributable to the Controlling Interest

We experienced a net loss of $5.3 million for the nine months ended September 30, 2011, compared to a net loss of $11.1 million for the nine months ended September 30, 2012. The principal reasons for the $5.8 million increase in our net loss for the nine months ended September 30, 2012 are discussed in more detail above. Excluding the non-cash equity based compensation charge of $7.7 million, the net loss would be $3.3 million for the nine months ended September 30, 2012. Our basic and diluted net loss per unit was ($0.53) and ($1.21) for the nine months ended September 30, 2011 and 2012, respectively.

 

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Results of Operations for 2010 and 2011

The following table sets forth certain consolidated statements of income data as a percentage of revenues for the periods indicated:

 

    Twelve Months Ended              
    December 31, 2010     December 31, 2011              
          Percentage           Percentage     Period-over-period
change
 
    Amount     of Revenues     Amount     of Revenues     2011 vs 2010  
    $ in thousands        

Income Data:

           

Revenue

  $ 13,440        100.0   $ 15,290        100.0   $ 1,850        13.8

Cost of sales

    10,374        77.2        11,647        76.2        1,273        12.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    3,066        22.8        3,643        23.8        577        18.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

           

Research and development

    1,153        8.6        1,531        10.0        378        32.8   

Selling, general and administrative

    5,978        44.5        7,286        47.7        1,308        21.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    7,131        53.1        8,817        57.7        1,686        23.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (4,065     (30.3     (5,174     (33.9     (1,109     (27.3

Interest income

    (1     —          (3     —          (2     (288.6

Interest expense

    1,115        8.3        1,569        10.3        454        40.8   

Other income

    (197     (1.5     (154     (1.0     43        21.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (4,982     (37.1     (6,586     (43.2     (1,604     (32.2

Provision for income taxes

    198        1.5        1,031        6.7        833        420.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to the controlling and the noncontrolling interests

    (5,180     (38.6     (7,617     (49.9     (2,437     (47.1

Less: Net income of noncontrolling interest

    328        2.4        420        2.7        92        28.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to the controlling interest

  $ (5,508     (41.0 )%    $ (8,037     (52.6 )%    $ (2,529     (45.9 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss per unit:

           

Basic

  $ (0.55     $ (0.80      

Diluted

    (0.55       (0.80      

Machine Units Sold(A)

           

S 15

    2          2         

S Max

    2          1         

S Print

    —            1         
 

 

 

     

 

 

       

Total

    4          4         
 

 

 

     

 

 

       

 

(A) See “Business — Our Machines and Machine Platforms” for a description of the machines.

Summary

Revenue for 2011 increased primarily due to higher revenue from 3D printed products, materials and other. Our revenue increased by $1.9 million or 13.8% to $15.3 million in 2011 from $13.4 million in 2010. We believe that the increased demand for our 3D printed products was principally due to an increase in familiarity with 3D printing due to our educational efforts. Also, we saw strong results from the automotive, aerospace, and energy/oil/gas industries because these industries were early adopters of this technology and to a lesser degree because of the continued worldwide economic recovery in those sectors in 2011. These changes are explained in greater detail in the “Revenue by Type” and “Revenue by Geographic Region,” below.

 

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Our gross profit for 2011 increased by $0.6 million or 18.8% to $3.6 million from $3.1 million in 2010. Our higher gross profit for 2011 arose primarily from an increase in revenue. In addition, our gross profit margin percentage increased a full percentage point to 23.8% in 2011 from 22.8% in 2010. See “Gross Profit and Gross Profit Margins,” below.

For 2011, our loss from operations increased by $1.1 million to $5.2 million compared to an operating loss of $4.1 million in 2010. This was primarily due to the $1.7 million increase in spending for operating expenses. See “Loss from Operations,” below.

Revenue by Type

The table below sets forth the major components of the change in Revenue by Type for 2010 compared to 2011:

 

     Machines     Percentage
of revenue
    3D Printed Parts,
Materials and
Other
     Percentage
of Revenue
    Total     Percentage
of Revenue
 
     $ in thousands        

2010 Revenue

   $ 5,622        41.8   $ 7,818         58.2   $ 13,440        100.0

Change in revenue -

             

Volume

     —            1,962           1,962     

Price/Mix

     (487       —             (487  
  

 

 

     

 

 

      

 

 

   
     (487       1,962           1,475     

Foreign currency translation

     271          104           375     
  

 

 

     

 

 

      

 

 

   

Net change

     (216       2,066           1,850     
  

 

 

     

 

 

      

 

 

   

2011 Revenue

   $ 5,406        35.4   $ 9,884         64.6   $ 15,290        100.0
  

 

 

     

 

 

      

 

 

   

Revenue from machines for 2011 decreased to $5.4 million from $5.6 million for 2010. The total number of units sold were the same in both periods (Asia sold one more machine and Europe one less machine), with a higher priced unit purchased by a customer in 2010.

Revenue from 3D printed products, materials and other for 2011 increased to $9.9 million from $7.8 million for 2010. The increase in non-machine revenue was due to increased volume of customer 3D printed products, totaling $1.2 million at our PSCs as all three of our geographic regions experienced increases.

 

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Revenue by Geographic Region

The table below sets forth the major components of the change in revenues by geographic area for 2010 compared to 2011:

 

     Americas     Europe     Asia     Total  
     $ in thousands  

2010 Revenue

   $ 3,936         29.3   $ 6,909        51.4   $ 2,595         19.3   $ 13,440         100.0

Change in revenue -

                   

Volume

     651           (1,212       1,811           1,250      

Price/Mix

     —             —                 —        
  

 

 

      

 

 

     

 

 

      

 

 

    
     651           (1,212       1,811           1,250      

Foreign currency translation

     —             (19       619           600      
  

 

 

      

 

 

     

 

 

      

 

 

    

Net change

     651           (1,231       2,430           1,850      
  

 

 

      

 

 

     

 

 

      

 

 

    

2011 Revenue

   $ 4,587         30.0   $ 5,678        37.1   $ 5,025         32.9   $ 15,290         100.0
  

 

 

      

 

 

     

 

 

      

 

 

    

Our revenue mix was almost equally balanced among our three geographic regions in 2011, while in 2010 Europe comprised more than half of our revenue. Asia revenue increased $2.4 million due to the sale of one more machine ($1.6 million) in 2011 compared to 2010 and higher production of customer products at its PSC ($0.4 million). This resulted in part from the installation of an additional machine at our Asia PSC. Also, the foreign currency translation of the Japanese Yen for the Asia region resulted in a favorable foreign currency impact. Revenue in the Americas improved by $0.7 million due to higher production of customer 3D printed products at its PSCs ($1.3 million) resulting in part from the installation of three additional machines. Europe’s decline in revenue of 17.8% or $1.2 million after a strong 2010 was a result of the sale of one less machine (at a price of $1.6 million) in 2011 compared to 2010.

Gross Profit and Gross Profit Margins

Total gross profit for 2011 increased by $0.6 million, reflecting the higher volume of 3D printing for customers at our PSCs in 2011 compared to 2010. Our gross profit margin increased by 1.0 percentage point from 2010 to 2011 because of the higher mix of 3D printing, materials and other in 2011 compared to 2010, the mix of machines purchased by customers in 2010 compared to 2011 partially offset by higher under-absorbed overhead in 2011 compared to 2010.

The table below sets forth gross profit and gross profit margin for our machines and services and consumables.

 

     Twelve Months Ended        
     December 31, 2010   December 31, 2011        
           Gross Margin         Gross Margin     Period-over-  
     Amount     Percentage   Amount     Percentage     period change  
     $ in thousands  

Machines

   $ 2,712      48.2%   $ 2,482        45.9   $ (230

3D printed parts, materials and other

     2,794      35.7%     3,814        38.6     1,020   
  

 

 

   

 

 

 

 

   

 

 

   

 

 

 

Subtotal - Gross profit

     5,506      41.0%     6,296        41.2     790   

Underabsorbed overhead and all other (1)

     (2,440   (18.2)%     (2,653     (17.4 )%      (213
  

 

 

   

 

 

 

 

   

 

 

   

 

 

 

Total - Gross profit

   $ 3,066      22.8%   $ 3,643        23.8   $ 577   
  

 

 

   

 

 

 

 

   

 

 

   

 

 

 

 

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(1) Other includes production variances, licensing fees and warranty costs.

Gross profit for machines decreased to $2.5 million in 2011 from $2.7 million in 2010, while the gross profit margin declined by 2.3 percentage points in 2011 to 45.9% from 48.2% in 2010. This decrease in gross profit margin resulted from the sale of a lower-priced, lower-margin machine in 2011.

Gross profit for 3D printed products, materials and other improved by $1.0 million with the gross profit margin increasing 2.9 percentage points to 38.6% from 35.7% in 2010. This was primarily due to the increase in sales volume and lower production costs of 3D printed parts for customers at our PSCs.

The under-absorbed overhead was due to the production capacity at our PSCs (as well as our machine manufacturing facilities in Germany and the United States) exceeding current customer demand. A portion of the fixed overhead associated with these facilities is being recognized as a period expense rather than being capitalized into the product cost. We expect our volume of machines produced and 3D products printed to increase as our expected customer demand reduces this excess capacity over time.

Operating Expenses

As shown in the table below, total operating expenses increased by $1.7 million to $8.8 million for 2011 from $7.1 million for 2010, and increased to 57.7% of revenue compared to 53.1% in 2010. This increase was due to a $0.4 million increase in research and development expenses and a $1.3 million increase in selling, general and administrative expenses, which is discussed below. Research and development spending increased due to continued investment to further develop our machine technology.

 

     Twelve Months Ended               
     December 31, 2010     December 31, 2011               
            Percentage            Percentage     Period-over-period
change
 
     Amount      of Revenue     Amount      of Revenue     Amount      Percentage  
     $ in thousands         

Operating expenses

               

Research and development

   $ 1,153         8.6   $ 1,531         10.0   $    378         32.8

Selling, general and administrative

       5,978         44.5       7,286         47.7       1,308         21.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     $7,131         53.1     $8,817         57.7     $1,686         23.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Selling, general and administrative expenses increased by $1.3 million to $7.3 million in 2011 from $6.0 million in 2010. As a percentage of revenue, selling, general and administrative expenses were 44.5% and 47.7% in 2010 and 2011, respectively.

The $1.3 million increase in selling, general and administrative expenses in 2011 was primarily due to a $1.0 million increase in employee related costs (salary, benefits, training and travel and entertainment) partially due to the increase in selling, general and administrative headcount.

Loss from Operations

Operating losses increased $1.1 million to $5.2 million in 2011 from $4.1 million in 2010. This was primarily due to the $1.3 million increase in selling, general and administrative expenses (see above) as we continue to invest in intellectual capital by recruiting, hiring, training and retaining personnel who will contribute to the planned growth of the company in the long-term.

 

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The following table sets forth income (loss) from operations by geographic region for 2010 and 2011.

 

     Twelve Months  Ended
December 31,
    Period-over-
period
change
 
    
     2010     2011    
     $ in thousands  

Americas

   $ (4,772   $ (3,532   $ 1,240   

Europe

     1,695        1,237        (458

Asia

     (490     (420     70   
  

 

 

   

 

 

   

 

 

 

Subtotal

     (3,567     (2,715     852   

Inter-region elimination

     (498     (2,459     (1,961
  

 

 

   

 

 

   

 

 

 
   $ (4,065   $ (5,174   $ (1,109
  

 

 

   

 

 

   

 

 

 

All three geographic regions are being impacted by our continuing infrastructure investment as additional resources continue to be added to the organization resulting in higher selling, general and administrative expenses, but with respect to factors specific to the individual regions:

Americas. The improvement of $1.2 million is a result of revenues from the printing of 3D parts increasing by over 50% as the PSCs’ operations are beginning to mature.

Europe and Asia. In general, variances resulted primarily from changes in machine sales volume, transfer pricing and foreign currency translation. Factors specific to the regions include:

Europe – The lower income from operations was the result of the sale of one less machine in 2011 compared to 2010.

Asia – The reduction in the loss from operations was the result of the sale of an additional machine in 2011 compared to 2010.

The inter-region eliminations relate to the profit on the sale of machines from Europe to Asia and the Americas.

Interest Expense

Interest expense amounted to $1.6 million for 2011, an increase of $0.5 million from $1.1 million in 2010. The primary reason for the increase was additional equipment loans in 2011 and an increase in outstanding borrowings from our majority member.

Provision for Income Taxes

We recorded income tax expense of $0.2 million and $1.0 million in 2010 and 2011, respectively, primarily due to Germany as it reported taxable income in both periods. Japan experienced operating losses in both periods and is in a net operating loss carryforward position. The United States experienced significant operating losses, but there were no income tax benefits for state and federal income taxes in the United States in either year because we are a limited liability company.

Net Loss Attributable to the Controlling Interest

In 2011 we experienced a net loss of $8.0 million, compared to a net loss of $5.5 million in 2010. The principal reasons for the $2.5 million increase in our net loss in 2011 are discussed in more detail above. Our basic and diluted net loss per unit was ($0.80) in 2011 and ($0.55) in 2010, respectively.

 

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Seasonality

Our results can be subject to seasonal factors due to our customers’ capital expenditure budget cycles resulting in machine orders being placed in the second half of the year (primarily our fourth quarter).

Liquidity and Capital Resources

We have continuously operated with negative working capital. This deficit has generally resulted from our inability to generate sufficient cash from our operations to offset our current liabilities, which consist primarily of obligations to vendors and other accounts payable, deferred revenues and borrowings required to be paid within 12 months from the date of determination. We are continuing our efforts to increase revenues from our operations and improve our gross margins, but to date these efforts have not been successful to eliminate our working capital deficit. We have been able to operate since inception due primarily to cash advances made on a regular basis by affiliates of our majority member. For the year ended December 31, 2011, our working capital deficit decreased by $12.0 million from $13.3 million to $1.3 million, primarily as a result of the conversion of the Demand Note Payable-Member (Rockwell Holdings, Inc.) to Redeemable Class A preferred units during the fiscal year. For the nine months ended September 30, 2012, our working capital deficit increased by $6.0 million from $1.3 million at December 31, 2011 to $7.3 million, primarily as a result of inventory increases due to higher production.

Our primary sources of cash are existing cash, a bank line of credit for our German operations and additional funding by the Rockwell Line of Credit provided by RFP (See Demand note payable member, below). A summary of the components of our liquidity is shown below:

 

     December 31,      September 30,  
     2010      2011      2012  
     $ in thousands  

Cash and cash equivalents

   $ 1,021       $ 3,496       $ 1,431   

Bank facility credit availability(A)

     600         600         100   
  

 

 

    

 

 

    

 

 

 
   $ 1,621       $ 4,096       $ 1,531   
  

 

 

    

 

 

    

 

 

 

 

(A) We notified the bank in December 2012 that we are not in compliance with an equity-to-asset ratio covenant related to this facility. According to the terms of the agreement, the bank at its discretion may request additional security to maintain the facility. In the event that the bank exercises its discretion and requests additional security related to the credit facility, we expect to fund this security through either existing cash, additional loans from the majority stockholder, or a combination thereof. There are no related impacts on other existing lending agreements and we do not expect an impact to our future financing capabilities as a result of our noncompliance. The equity-to-asset ratio covenant included in our line of credit facility requires that a calculation be performed as of December 31 on an annual basis, based upon our German subsidiary’s audited financial statements. Since the calculation is required on an annual basis only, we are not presently able to cure the lack of compliance until the German subsidiary’s 2012 audited financial statements are available, which will not be until after this prospectus is effective. We currently expect to be in compliance with the equity-to-asset ratio at December 31, 2012. In the event of further noncompliance, we will request a waiver of this covenant or seek to amend our existing arrangement.

The most significant components of our working capital (deficit) are accounts receivable, inventories (the production of machines for sale to customers), current portion of long term debt, accounts payable, accrued expenses, and deferred revenue. We also require cash to fund capital expenditures for the production of machines to be used in our PSCs.

 

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      December 31,     September 30,  
     2010     2011     2012  
     $ in thousands  

Our primary cash needs are for:

      

Normal working capital (deficit)(A)

   $ 771      $ (4,828   $ (1,509

Demand note payable member

     (15,045     —          (7,266
  

 

 

   

 

 

   

 

 

 
   $ (14,274   $ (4,828   $ (8,775
  

 

 

   

 

 

   

 

 

 

 

(A) We define normal working capital (deficit) as current assets, excluding cash, less current liabilities, excluding the demand note payable member.

Going Concern

Since our inception, we have incurred net losses and negative cash flows from our operations. We incurred a net loss of $5.2 million and $7.6 million for the years ended December 31, 2010 and December 31, 2011, respectively, resulting in an accumulated deficit of $15.6 million as of December 31, 2011. The conversion of the redeemable Class A preferred units (classified as a liability as of December 31, 2011) in February 2012, of $19.0 million to Class A preferred units (classified as members’ deficit as of September 30, 2012) combined with a $11.1 million net loss for the nine months ended September 30, 2012 has narrowed the accumulated deficit to $0.7 million as of September 30, 2012. Also, negative working capital of ($1.3) million as of December 31, 2011 has increased to ($7.3) million as of September 30, 2012.

As a result, there is still doubt as to our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our ability to continue as a going concern is dependent upon the continued financial support of our majority member and the ability to generate sufficient cash flows to meet our obligations on a timely basis and ultimately to attain sustainable profitable operations. However, there is no assurance that profitable operations or sufficient cash flows will occur in the future.

As of September 30, 2012, we had cash balances of $1.4 million, and $0.1 million was available under a bank line of credit to meet current obligations. We cannot provide certainty that our cash position and net cash provided by operating activities will be adequate to finance working capital needs and planned capital expenditures expected to be in the range of $15.0 million to $20.0 million for at least the next twelve months. We anticipate that we will have increased access to external funding sources, through equity financing or the incurrence of indebtedness or we will use additional investment from our majority member or a combination of these potential sources of liquidity. Excluding the proceeds from this offering, we believe that we will be able to raise additional capital or debt sufficient to support our operations. If we raise additional funds by issuing equity or convertible debt securities, the ownership percentages of existing stockholders would be reduced. In addition, the equity or debt securities that we may issue may have rights, preferences or privileges senior to those of our common stock.

Cash Flow

A summary of operating, investing and financing activities are shown in the following table:

 

     December 31,     Period-over-     September 30,     Period-over-
period change
 
     2010