Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the fiscal year ended December 31, 2012or ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the transition period from to Commission File Number: 001-35435 Proto Labs, Inc.(Exact name of Registrant as specified in its charter) Minnesota 41-1939628(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.)5540 Pioneer Creek Drive Maple Plain, Minnesota 55359(Address of principal executive offices) (Zip Code)(763) 479-3680(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock, Par Value $0.001 Per Share New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No ¨Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required tosubmit and post such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. ¨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. Large accelerated filer ¨ Accelerated filer ¨Non-accelerated filer x (Do not check if a smaller reporting company) Smaller reporting company ¨Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No xAs of June 29, 2012 (the last business day of the Registrant’s most recently completed second fiscal quarter), the aggregate market value of voting stock heldby non-affiliates of the Registrant was approximately $162.7 million.As of March 8, 2013, there were 25,120,156 shares of the Registrant’s common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s Proxy Statement for its 2013 Annual Meeting of Shareholders are incorporated by reference to Part III of this Annual Report on Form10-K. Table of ContentsTable of Contents Page PART I Item 1. Business 4 Item 1A. Risk Factors 14 Item 1B. Unresolved Staff Comments 28 Item 2. Properties 28 Item 3. Legal Proceedings 28 Item 4. Mine Safety Disclosures 29 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 30 Item 6. Selected Financial Data 32 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 50 Item 8. Financial Statements and Supplementary Data 51 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 75 Item 9A. Controls and Procedures 75 Item 9B. Other Information 75 PART III Item 10. Directors, Executive Officers and Corporate Governance 76 Item 11. Executive Compensation 76 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 76 Item 13. Certain Relationships and Related Transactions and Director Independence 76 Item 14. Principal Accountant Fees and Services 76 PART IV Item 15. Exhibits and Financial Statement Schedules 77 2 Table of ContentsSpecial Note Regarding Forward Looking StatementsStatements contained in this Annual Report on Form 10-K regarding matters that are not historical or current facts are “forward-looking statements”within the meaning of The Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by the followingwords: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,”“continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Thesestatements involve known and unknown risks, uncertainties and other factors which may cause our results to be materially different than those expressed orimplied in such statements. In particular, some of the risks associated with our business include: •the level of competition in our industry and our ability to compete; •our ability to continue to sell to existing customers and sell to new customers; •our ability to respond to changes in our industry; •our ability to meet the needs of product developers; •our ability to meet product developers’ expectations regarding quick turnaround time and price; •any failure to maintain and enhance our brand; •our ability to process a large volume of designs and identify significant opportunities in our business; •the adoption rate of e-commerce and 3D CAD software by product developers; •the loss of key personnel or failure to attract, integrate and retain additional personnel; •our ability to effectively grow our business and manage our growth; •system interruptions at our operating facilities, in particular our Maple Plain, Minnesota location; •our ability to protect our intellectual property and not infringe others’ intellectual property; and •our ability to effectively operate as a public company.Certain of these factors and others are described in the discussion on risk factors that appear in Part I, Item 1A: “Risk Factors” of this Annual Report onForm 10-K and uncertainties detailed in this and other reports and filings with the Securities and Exchange Commission (SEC). Other unknown orunpredictable factors also could have material adverse effects on our future results. We cannot guarantee future results, levels of activity, performance orachievements. Accordingly, you should not place undue reliance on these forward-looking statements. Finally, we expressly disclaim any intent or obligation toupdate any forward-looking statements to reflect subsequent events or circumstances. 3 Table of ContentsPART IItem 1. BusinessOverviewProto Labs, Inc. was incorporated in Minnesota in 1999. The terms “Proto Labs,” the “Company,” “we,” “us,” and “our” as used herein refer to thebusiness and operations of Proto Labs, Inc. and its subsidiaries. We are a leading online and technology-enabled quick-turn manufacturer of custom parts forprototyping and short-run production. We provide “Real Parts, Really Fast” to product developers worldwide, who are under increasing pressure to bring theirfinished products to market faster than their competition. We utilize computer numerical control (CNC) machining and injection molding to manufacturecustom parts for our customers. Our proprietary technology eliminates most of the time-consuming and expensive skilled labor conventionally required toquote and manufacture parts in low volumes. Our customers conduct nearly all of their business with us over the Internet. We target our services to themillions of product developers who use three-dimensional computer-aided design (3D CAD) software to design products across a diverse range of end-markets.We have established our operations in the United States, Europe and Japan, which we believe are three of the largest geographic markets where these productdevelopers are located. We believe our use of advanced technology enables us to offer significant advantages at competitive prices to many product developersand is the primary reason we have become a leading supplier of low-volume custom parts.We believe low-volume manufacturing has historically been an underserved market due to the inefficiencies inherent in the quotation, equipment set-upand non-recurring engineering processes required to produce custom parts. Our customers typically order low volumes of custom parts because they need aprototype to confirm the form, fit and function of one or more components of a product under development, or because they need an initial supply of parts tosupport pilot production while their high-volume production mold is being prepared, or because their product will only be released in a limited quantity. Ineach of these instances, we believe our solution provides product developers with an exceptional combination of speed, competitive pricing, ease of use andreliability that they typically cannot find among conventional custom parts manufacturers. Our technology enables us to ship parts in as little as one businessday after receipt of a customer’s design submission.Our proprietary technology enables us to automate and integrate the majority of activities involved in procuring custom low-volume parts, starting withour web interface through which a product developer submits a 3D CAD part design. We have developed complex algorithms to quickly analyze the geometryof the design to analyze its manufacturability. In many cases, our software provides suggested design modifications to enhance manufacturability, presented tothe product developer in a color-coded 3D representation of the part. Our automated pricing algorithm generates a firm price that is incorporated into a highlyinteractive web-based quotation, which allows the product developer to change a variety of parameters and instantly receive an updated price. Once the order isentered online, our manufacturing software calculates the required instructions for a CNC machine to make the part or related mold. Our system is highlyscalable and capable of processing a large number of design submissions. As a result of the factors described above, we have significantly reduced many ofthe inefficiencies involved in serving the low-volume manufacturing market, while scaling our business to generate quotations on over 310,000 designsubmissions in 2012. And, as a further result, many of our customers tend to return to Proto Labs to meet their ongoing needs, with approximately 84%, 81%and 77% of our revenue in 2012, 2011 and 2010, respectively, derived from existing customers who had placed orders with us in prior years.Our manufacturing services currently include CNC machining and plastic injection molding. We continually seek to expand the range of size andgeometric complexity of the parts we can make with these processes, to extend the variety of materials we are able to support and to identify additionalmanufacturing processes to which we can apply our technology in order to better serve the evolving preferences and needs of product developers. See “RiskFactors—If our present single or limited source suppliers become unavailable or inadequate, our customer relationships, results of operations and financialcondition may be adversely affected” for a discussion of the sourcing and availability of materials. We also plan to grow our business by further penetratingthe universe of product developers at the customer companies we have already served, attracting new customer companies in the geographic markets in whichwe already have an established presence, and selectively entering new geographic markets.We have experienced significant growth since our inception in 1999. We have grown our total revenue from $44.4 million in 2008 to $126.0 million in2012. We have grown our income from operations from $10.7 million in 2008 to $34.9 million in 2012. 4 Table of ContentsIndustry OverviewOur IndustryWe serve product developers worldwide who bring new ideas to market in the form of products containing one or more custom mechanical parts. Manyof these product developers use 3D CAD software to create digital models representing their custom part designs that are then used to create physical parts forprototyping, functional testing, market evaluation or eventual production. Custom prototype parts play a critical role in the product development process, asthey provide product developers with the ability to confirm their intended performance requirements and explore design alternatives. From the inception of ourcompany in 1999 through December 31, 2012, we have filled orders for approximately 28,000 product developers.Early in the product development process, “additive rapid prototyping” processes such as stereolithography, selective laser sintering, fused depositionmodeling or 3D printing can be used to quickly produce an approximate physical representation of a part, but these representations often do not meet productdevelopers’ requirements for dimensional accuracy, cosmetics and material properties. As an alternative or supplement to additive rapid prototyping, CNCmachining can be used to produce low volumes of high-quality custom parts in either metal or plastic, while for follow-on functional testing, marketevaluation and production runs, plastic parts are typically manufactured using injection molding. Both CNC machining and injection molding yield a partwith the look, feel and performance of the finished product.Trends Affecting the Product Development ProcessThere are several important trends impacting product developers worldwide.Increasing E-Commerce ExpectationsThe Internet is a tool that is deeply integrated into the everyday activities of product developers, many of whom have come to expect a comprehensive setof integrated web-based capabilities and 24 hours a day, seven days a week access from their vendors. As product developers increasingly work with partnersand vendors across various geographies and time zones, the Internet allows them to work collaboratively and immediately access information at any time andfrom anywhere in the world.Accelerating Time to MarketProduct developers are facing increased pressure from global competitors to be first to market with their finished products. In addition, rapid advancesin technology and consumer demand for the latest products are driving shorter product life cycles in many industries. This makes it ever more critical toobtain prototype parts quickly and identify problems in a product design early to minimize delays.Increasing Adoption of 3D CAD SoftwareFor product developers involved in mechanical part design, 3D CAD has inherent advantages over 2D CAD because it provides a complete descriptionof the part’s geometric design. As a result, many of these product developers continue to migrate from using 2D CAD to using 3D CAD for their design needs.Challenges Confronting Product DevelopersThe trends affecting our industry create a variety of challenges for product developers. 5 Table of ContentsInadequate Turnaround TimeWe believe most conventional custom parts manufacturers do not have the automated capability to analyze a design and then quote, manufacture andship custom parts fast enough to satisfy the time-to-market needs of many product developers. Quotation and order placement from these custom partsmanufacturers can take anywhere from a few days to weeks, and frequently require face-to-face interaction. In addition, once an order is placed, conventionalcustom parts manufacturers typically require a significant amount of manual engineering before manufacturing can begin.Difficulty in Sourcing Low-Volume Custom PartsWe believe many custom parts manufacturers prefer the higher asset utilization inherent in high-volume production and therefore may decline or assign alower priority to low-volume orders. In addition, those custom parts manufacturers that do take low-volume orders often lack the scale to produce significantnumbers of different parts at the same time. This is particularly problematic for product developers with products requiring multiple custom parts, as thesedevelopers consequently may need to disperse and coordinate orders among several manufacturers.Most Custom Parts Manufacturers Lack an Interactive Web-Based InterfaceWe believe most custom parts manufacturers lack the technology to offer an interactive web-based interface and quoting system, which can result insignificant inconveniences for product developers. Business can typically be transacted only during the business day, frequently requires face-to-faceinteractions and is generally conducted without the web-centric convenience that product developers have come to expect in other aspects of their professionaland personal lives.High CostMany product developers find low-volume custom parts manufacturing to be expensive due to the manufacturer’s significant up-front non-recurringengineering costs and the additional costs incurred to support high-volume production, both of which must be absorbed over a small quantity of parts.Therefore, we believe most custom parts manufacturers are not well equipped to fulfill significant numbers of low-volume orders at competitive prices.Our SolutionWe have developed proprietary software and advanced manufacturing processes that automate much of the skilled labor conventionally required inquoting, production engineering and manufacturing custom parts. We believe our interactive web-based interface and highly automated processes address thedesires of many product developers for a fast, efficient and cost-effective means of obtaining low-volume custom parts. We also believe the use of ouradvanced technology to bring speed and efficiency at competitive prices to product developers is the primary reason we have become a leading supplier of low-volume custom CNC-machined and injection molded parts.Key elements of our solution include:Sophisticated Technology that Reduces Turnaround TimeOur web-based interface and proprietary software automate many of the manual and time-consuming processes typically required to obtain customCNC-machined or injection molded parts from conventional suppliers. Our platform automates many aspects of the entire process from design submissionthrough manufacturability analysis and feedback, quotation, order submission, mold design, tool path generation and mold or part manufacture. Ourprospective customers upload a 3D CAD file of their required part through our website, and often within minutes our software analyzes the manufacturabilityof the product and, if we are able to make the part, returns a firm price quotation with any recommendations for design modifications. Our quoting system ishighly interactive, enabling our prospective customers to change the material, finish, quantity or shipping schedule of orders, and to instantly receive anupdated quotation. Once an order is received, our software automates much of the mold design, tool path generation and mold or part manufacture thatnormally require skilled labor. As a result, in many cases we are able to quote orders in minutes and ship parts in as little as one business day.Enhanced Customer ExperienceOur web-based customer interface provides a straightforward means of submitting 3D CAD part designs. Our proprietary manufacturability analysisthen quickly analyzes whether a part design falls within our manufacturing capabilities. In many cases, our software provides suggested design modificationsto enhance manufacturability, presented to the product developer in an interactive quotation containing a color-coded 3D representation of the part. This allowsproduct developers to quickly determine the manufacturability of their parts, what they will cost and when they can be shipped. Our interactive quotationsprovide instant visibility into the impact of changing an order’s various parameters such as material, finish, quantity or shipping schedule. As a result, weprovide product developers with an easy-to-use and consistent means of obtaining custom parts. 6 Table of ContentsAttractive Low-Volume PricingBased on internal market research, we believe we generally have competitive pricing on low-volume orders. We believe this is a direct result of ourtechnology and the efficiency of our operations, both of which were designed specifically for low-volume production. By automating and integrating many ofthe manual processes conventionally involved in quoting and manufacturing low-volume custom CNC-machined and injection molded parts, we havesignificantly reduced or eliminated most of the non-recurring engineering labor costs associated with these processes. These costs are typically a significantportion of the total costs in the low-volume custom parts manufacturing environment, and as a result, we can typically offer product developers competitiveprices on low-volume custom manufactured parts.Scale to Process Large Numbers of Unique Part DesignsOur proprietary, highly scalable quoting technology addresses the manual processes conventionally involved in submitting a design, analyzing itsmanufacturability, making design revision recommendations and generating price quotations. This enables us to quickly analyze high volumes of 3D CADpart design submissions and provide feedback to our prospective product developer customers. In 2012 alone, we generated quotations for over 310,000 designsubmissions. Our proprietary manufacturing automation technology is also highly scalable, enabling us to process large numbers of unique designs andefficiently manufacture the related parts to meet the needs of product developers.Our Competitive AdvantagesWe believe our leadership position is based on a number of distinct competitive advantages:Advanced Proprietary TechnologyOur proprietary technology automates much of the skilled labor conventionally required to quote and manufacture low-volume custom parts, includingthe often time-consuming steps of design submission, manufacturability analysis and feedback, quotation, order submission, mold design, tool pathgeneration, mold or part manufacture, and production management. This technology has been developed and continually expanded and refined over our 13years of providing custom mold and part manufacturing services to our customers. We believe our proprietary technology gives us significant advantages overour competitors, who typically lack the expertise and resources to develop similar technology.Turnaround SpeedWe believe we are generally the fastest provider of low-volume custom CNC-machined or injection molded parts.By automating many of the manual and time-consuming steps conventionally required to obtain low-volume custom parts, we have established a uniqueadvantage over our competitors that lack similar capabilities. Our proprietary technology and advanced manufacturing processes allow product developers tosubmit designs at any time and enable us to ship parts to our customers in as little as one business day. Our competitors often require several days just togenerate a price quotation and may take even more time if the order parameters are subsequently changed by the product developer.Operations Designed for Low-Volume ManufacturingUnlike conventional custom parts manufacturers, our operating model is specifically designed for efficient low- volume production. Our customerinteractions occur primarily online, and our proprietary technology eliminates much of the skilled labor conventionally required for manufacturabilityanalysis and feedback, quotation, order submission, mold design, tool path generation and mold or part manufacture. These functions typically account for asignificant portion of the total costs in the low-volume custom parts manufacturing environment. Our automation enables us to quote many thousands ofCNC-machined or injection molded part designs per month, which we believe few of our competitors can match. 7 Table of ContentsMarketing and Sales StrengthWe have developed expertise in marketing to product developers, both within our existing customer companies and at companies we have not yet served.We attract customers by using a variety of marketing tactics, resulting in both lead generation and brand reinforcement. Through December 31, 2012, we havegenerated a database of over 295,000 product developers that represent current or potential future users of our services.We have also built a professionally-led international sales organization focused on quickly following up on marketing leads and quotation requests,understanding our customers’ internal initiatives, converting prospects into customers by conveying our value proposition, and finding additional leadswithin our existing customer companies. We believe that our marketing and sales organization is a key competitive advantage and that most of our competitorslack the expertise and resources to establish and maintain an organized, international program of similar scale.Deep Industry KnowledgeWe believe that the volume of new custom part designs we process and the size and diversity of our customer base give us unique insight into the needsof our prospective customers. This has allowed us to focus our development resources on areas that we believe represent significant opportunities for ourbusiness. Through December 31, 2012, we have received over 1,000,000 uploaded part designs, sent over 875,000 part quotations and shipped over 200,000unique parts to approximately 28,000 product developers representing over 13,000 customer companies across a wide range of industries.Our Growth StrategyThe principal elements of our growth strategy are to:Increase Penetration of Existing Customer CompaniesWe plan to expand our customer base to include more product developers within the companies that have already used our services. Individual productdevelopers typically make or influence the choice of vendor when sourcing low-volume custom parts. We believe a significant opportunity exists for us toleverage highly satisfied product developers to encourage others within the same organization to utilize our services. We have historically generated a significantnumber of new customers through word-of-mouth referrals from other product developers, and we plan to combine these referrals with the efforts of ourmarketing and sales force to identify and market our services to the colleagues of our existing customers.Gain New Customer Companies in Existing Geographic MarketsWe plan to use our marketing and sales capabilities to continue to pursue product developers within companies who have not yet used our services. Ourpresence in geographic regions that have high populations of 3D CAD users provides us with a broad universe of potential new customer companies on whichto focus our marketing and sales efforts.Expand the Range of Parts We OfferWe regularly analyze the universe of customer design submissions that we are currently unable to manufacture and focus a significant portion of ourresearch and development efforts on expanding the range of parts that we can produce. Since we first introduced our Protomold injection molding service in1999, we have steadily expanded the size and geometric complexity of the injection molded parts we are able to manufacture, and we continue to extend thediversity of materials we are able to support. Similarly, since first introducing our Firstcut CNC machining service in 2007, we have expanded the range ofpart sizes, design geometries and materials we can support. For example, during 2012 we expanded the number of materials we offer to include a variety ofhigh temperature resins available through our Protomold injection molding service and steel, stainless steel, magnesium and copper in our Firstcut machiningservice. As we continue to expand the range of our existing process capabilities, we believe we will meet the needs of a broader set of product developers andconsequently convert a higher number of quotation requests into orders.Introduce New Manufacturing ProcessesWe seek to identify additional manufacturing processes to which we can apply our technology and expertise to meet a greater range of productdevelopers’ needs. Introducing new manufacturing processes can both attract new customers and provide us with a significant opportunity to cross-sell withour existing services to our existing customer base. As an example of a new manufacturing process, our Firstcut service was first introduced in the UnitedStates in 2007 and has grown to represent 28% of our total revenue in the year ended December 31, 2012. We regularly evaluate new manufacturing processesto offer product developers and introduce such new processes when we are confident that a sufficient market need exists and that we can offer the sameadvantages our customers have come to expect from us. For example, during 2012 two of our largest research and development initiatives have revolved aroundthixomolding of 8 Table of Contentsmagnesium and metal injection molding of steel alloys. During the fourth quarter of 2012, we were successful in launching the operation of the thixomoldingprocess and have shipped molded magnesium parts to a small group of customers. As it relates to metal injection molding of steel alloys, we have installed acomplete manufacturing line and have begun the process of manufacturing and testing sample parts. In 2013, we plan to continue to progress on each of theseinitiatives towards commercialization as a product offering to our customers. See “Selected Consolidated Financial Data” for disclosure of our historicalresearch and development expenses.Expand into New Geographic MarketsWe believe there may be opportunities to grow by identifying and expanding into select additional geographic markets. We currently operate in the UnitedStates, Europe and Japan, where we believe a substantial portion of the world’s product developers are located. We entered the European market in 2005, andby 2012, this region represents approximately 18% of our total revenue. We launched operations in Japan in late 2009 and, while still in the development stage,have achieved enough growth there to prompt a move into a larger facility in early 2012. While we currently do not have specific plans to expand into anyparticular geographic markets, we believe opportunities exist to serve the needs of product developers in select new geographic regions and we will continue toevaluate such opportunities if and when they arise. For discussion of our financial information about the geographic markets where we operate, see Item 7.“Management’s Discussion and Analysis of Financial Condition and Results of Operation” and “Note 16 – Segment and Geographic Information” in ourconsolidated financial statements.Capitalize on Increasing Customer Expectations for 24/7 Access to Comprehensive, User-Friendly E- Commerce CapabilitiesWe plan to further enhance the functionality and ease of use of our platform and expand the capabilities of our technology in order to further increaseautomation and meet the evolving needs of product developers worldwide. We believe product developers have come to expect advanced web-based tools and afully integrated Internet platform from their vendors. We will continue to use the Internet to provide product developers with a standardized interface throughwhich they can upload their 3D CAD models and obtain firm, interactive quotations quickly and efficiently.Our ServicesOur Firstcut and Protomold services offer many product developers the ability to quickly and efficiently outsource their low-volume, quick-turn customparts manufacturing. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the historical revenue generated byeach of Firstcut and Protomold.FirstcutOur Firstcut service uses commercially-available CNC machines to cut plastic or metal blocks into one or more custom parts based on the 3D CADmodel uploaded by the product developer. Our efficiencies derive from the automation of the programming of these machines and a proprietary fixturingprocess. The Firstcut service is well suited to produce small quantities, typically in the range of one to ten parts.ProtomoldOur Protomold service uses our 3D CAD-to-CNC machining technology for the automated design and manufacture of aluminum injection molds, whichare then used to produce custom injection-molded plastic parts on commercially-available equipment. Our Protomold service is used for both prototype andshort-run production. Prototype quantities typically range from 25 to 100 parts. Because we retain possession of the molds, customers who need short-runproduction often come back to Protomold for additional quantities typically ranging up to 10,000 parts. They do so either to support pilot production whiletheir tooling for high-volume production is being prepared or because their product will only be released in a limited quantity. These additional part orderstypically occur on approximately 50% of the molds that we make, typically accounting for approximately half of our total Protomold revenue.The process for both Firstcut and Protomold begins when the product developer uploads one or more 3D CAD models representing the desired partgeometry. Our proprietary software uses complex algorithms to analyze the 3D CAD geometry, analyze its manufacturability and support the creation of aninteractive, web-based quotation containing pricing and manufacturability information. A link to the quotation is then e-mailed to the product developer, whocan access the quotation, change a variety of order parameters and instantly see the effect on price before finalizing the order. For Firstcut, the tool paths arethen reviewed and routed to our high-speed CNC machining centers for execution. In the case of Protomold, our proprietary software supports the creation ofthe mold design and the tool paths required to manufacture the mold components, which are then routed to our CNC machining centers for execution. Once themold is assembled, it is placed in one of our injection molding presses to create the required parts. For both our Firstcut and Protomold services, we ship partsin as little as one business day from design submission. We ship our parts via small parcel common carriers on standard terms and conditions. 9 Table of ContentsThe following diagram summarizes the technology-enabled processes described above: Our TechnologyOur technology eliminates much of the skilled labor conventionally associated with quoting and preparing a new part design for manufacture. Ourproprietary software largely automates the areas of manufacturability analysis and feedback, price quotation, order submission, mold design, tool pathgeneration, mold or part manufacture and production management. The more computationally intensive aspects of this software utilize a proprietary parallelprocessing software environment running on our in-house compute cluster servers.Manufacturability AnalysisOur proprietary software analyzes the 3D CAD models submitted by our customers to determine the extent to which they are suitable for ourstandardized manufacturing processes. In the case of CNC machining, this manufacturability analysis identifies features that may be too fragile to bemachined and areas that cannot be machined at all. For injection molding, problematic features such as undercuts, thin areas, thick areas and areas requiringgeometry adjustments to allow the part to be ejected from the mold are identified. Many of our customers find this analysis particularly helpful, as it diagnosesand prevents potential problems prior to manufacturing. We can also provide a flow analysis to identify parts that may be so thin and large that plastic willsolidify before the mold can be completely filled. Our manufacturability analysis plays a major role in our automated pricing algorithms.Web-Based QuotationWe have branded our Firstcut and Protomold automated quotation systems as FirstQuote and ProtoQuote. Both deliver an interactive graphical quotationto the customer in the form of a web page that includes a color-coded 3D representation of the part highlighting features relevant to manufacturability. In somecases, features are indicated that must be changed to be compatible with our process. We also highlight and recommend design improvements that might bemade to improve the manufacturability of the part, or to indicate any possible deviations between the part as it was designed and how it will be manufactured.The web-based quotation allows the customer to change material, finish, quantity or shipping schedule of orders. Pricing indicated on the web-based quoteinstantly updates after each of these changes.Mold DesignOur software technology and mold manufacturing system have co-evolved over more than 13 years of development, resulting in a standardized andefficient process for taking a customer’s 3D CAD model and creating the physical mold needed to make plastic parts. Our software enables our mold designersto quickly create the mold geometry specific to the customer’s part and automates the design of most other mold features, thus eliminating much of the skilledlabor normally associated with mold design in a conventional environment. 10 Table of ContentsAutomated Tool Path GenerationIn support of both our Firstcut and Protomold services, our proprietary software automates much of the skilled labor conventionally needed to generatethe tool paths necessary to machine the required parts and mold components. Our software automation allows our users to do in minutes what can oftenrequire hours or days of labor for manufacturers using commercial computer-aided manufacturing (CAM) software.Parallel ProcessingThe mathematical algorithms required to analyze manufacturability and generate tool paths are computationally intensive. We have developed aproprietary parallel processing software environment to accelerate the processing of individual jobs and allow straightforward scalability to a large number ofjobs. This software system typically runs on a cluster of industry-standard 64-bit computers connected to each other and to our internal users’ computers overan isolated gigabit Ethernet local area network. We currently have clusters in multiple manufacturing facilities, two in the United States and one each in theUnited Kingdom and Japan.Monitoring and ControlWe have developed a proprietary, intranet-based monitoring and control system that allows us to monitor key aspects of our entire worldwide operationsin real time using an easy to understand management dashboard. This system provides us with the ability to quickly react to new information across ourorganization.MarketingOur international, integrated marketing effort generates leads for our sales teams and seeks to strengthen our reputation as a leader in the field of quickturn, low-volume custom manufacturing. Much of our marketing activities occur over the Internet. We use marketing automation software to enhance theproductivity of our sales and marketing teams and to track results of all campaigns to enhance our marketing return on investment.We maintain brand awareness with product developers through the regular distribution of technical information including design guidelines, engineeringwhite papers and a quarterly journal targeted at product developers. We also send out product giveaways that highlight technical aspects of injection moldingwe feel would be of interest to product developers. We believe these educational materials are key aspects of our lead generation efforts. In our Cool Idea!marketing program, we plan to award up to a total of $250,000 of our services to entrepreneurs with “cool ideas.” In addition to supporting entrepreneurs andinnovative product development, we believe this program can generate good will, press coverage and word-of-mouth brand awareness.Sales and Customer ServiceWe maintain an internal sales team trained in the basics of part design and the capabilities of our manufacturing services, as well as the key advantagesof our services over alternative methods of low-volume custom parts manufacturing. We organize our sales team into two complementary roles: businessdevelopment and account management, the former focused on selling to new customer companies and the latter focused on expanding sales within existingcustomer companies. We believe our sales staff is adept at researching customer companies and networking to find additional product developers that mayhave a need for our services. We also have a team of customer service engineers who can support highly technical engineering discussions with productdevelopers as required during the sales process. Our revenue is generated from a diverse customer base, with no single customer company representing morethan approximately 2% of our total revenue in 2012.CompetitionThe market for low-volume custom parts manufacturing is fragmented, highly competitive and subject to rapid and significant technological change.Our potential competitors include: •Captive in-house services. Many larger companies undertaking product development have established CNC machining, injection molding oradditive rapid prototyping capabilities internally to support the prototyping requirements of their product developers. 11 Table of Contents •Other custom manufacturers. There are thousands of machine shops and plastic injection molding suppliers worldwide. The size and scale ofthese businesses range from very small specialty shops to large, high-volume production manufacturers. •Alternative manufacturing vendors. Various manufacturing processes, other than CNC machining and injection molding, are offered by othervendors. We generically refer to the most well known of these processes as “additive rapid prototyping,” which have been commercialized underlabels such as stereolithography, selective laser sintering, fused deposition modeling and 3D printing.We believe that the key competitive factors in our industry include: •Speed: turnaround time for quotations and parts; •Price: mold and piece part pricing; •Quality: dimensional accuracy, surface finish, material properties, color and cleanliness; •Capability: size and dimensional complexity of the part, materials supported and post-processing provided; •Capacity: ability to support multiple part designs in parallel; and •Service: overall customer experience, from web interface to post-sales support.We believe that we have competitive strengths that position us favorably and have enabled us to become a leader in our markets. We also believe thatsubstantially all of our current direct competitors are relatively small in terms of size of operations, revenue, number of customers and volume of parts sold,and generally lack our technological capabilities. However, our industry is evolving rapidly and other companies, including potentially larger and moreestablished companies with developed technological capabilities, may begin to focus on low-volume custom parts manufacturing. These companies could moredirectly compete with us, along with our existing competitors, and both could also launch new products and services that we do not offer that may quicklygain market acceptance. Any of the foregoing could adversely affect our ability to attract customers.Intellectual PropertyWe regard our patents, trademarks, service marks, trade dress, trade secrets, copyrights, domain names and other intellectual property as valuable toour business and rely on patent, trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees,customers, vendors and others to protect our proprietary rights. We register our patents, trademarks and service marks in the United States and otherjurisdictions, as we deem appropriate. As of December 31, 2012, we own and have applications pending for patents relating to various aspects of our quotingand manufacturing processes as follows: Jurisdiction IssuedPatents ApplicationsPending United States 15 1 United Kindgom 2 0 Germany 0 2 Our patents have expiration dates ranging from 2022 to 2031. We also own approximately 11 registered United States trademarks or service marks as ofDecember 31, 2012, with corresponding registered protection in Europe and Japan for the most important of these marks such as PROTO LABS,PROTOMOLD, FIRSTCUT, PROTOQUOTE, FIRSTQUOTE and PROTOFLOW and corresponding registered protection in Australia, Canada andMexico for PROTOMOLD. There can be no assurance that the steps we take to protect our proprietary rights will be adequate or that third parties will notinfringe or misappropriate such rights. We have been subject to claims and expect to be subject to legal proceedings and claims from time to time in theordinary course of our business. In particular, we may face claims from third parties that we have infringed their patents, trademarks or other intellectualproperty rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Any unauthorizeddisclosure or use of our intellectual property could make it more expensive to do business and harm our operating results. 12 Table of ContentsEmployeesAs of December 31, 2012, we had 622 full-time employees. None of our employees is covered by a collective bargaining agreement. We consider ourcurrent relationship with our employees to be good. We also regularly use independent contractors and other temporary employees across the organization toaugment our regular staff. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel.Available InformationOur principal executive offices are located 5540 Pioneer Creek Drive, Maple Plan, Minnesota 55359 and our telephone number is (763) 479-3680. Ourwebsite address is www.protolabs.com. Information on our website does not constitute part of this Annual Report on Form 10-K or any other report we file orfurnish with the SEC. We provide free access to various reports that we file with or furnish to the SEC through our website as soon as reasonably practicableafter they have been filed or furnished. These reports include, but are not limited to, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K and any amendments to these reports. Our SEC reports can be accessed through the investor relations section of our website orthrough the SEC’s website at www.sec.gov.Executive Officers of the RegistrantSet forth below are the names of our current executive officers, their ages, titles, the year first appointed as an executive officer, and employment for thepast five years: Lawrence J. Lukis 64 Chairman and Chief Technology OfficerBradley A. Cleveland 52 President, Chief Executive Officer and DirectorEdward E. Bolton 46 Vice President of CultureWilliam M. Dietrick 56 Vice President of MarketingJohn R. Judd 56 Chief Financial OfficerDonald G. Krantz 57 Chief Operating OfficerThomas H. Pang 52 Managing Director of Proto Labs G.K.Jacqueline D. Schneider 47 Vice President of Sales and Customer ServiceJohn B. Tumelty 42 Managing Director of Proto Labs, LimitedExecutive officers of the Company are elected at the discretion of the Board of Directors with no fixed terms. There are no family relationships between oramong any of the executive officers or directors of the Company.Lawrence J. Lukis. Mr. Lukis founded our company in 1999 and has served as our Chairman and Chief Technology Officer since November 2001.In 1985, Mr. Lukis co-founded LaserMaster Corp. (later ColorSpan), an innovator in laser printing products for desktop publishers and large format colorinject printers, and served as a director and Chief Technology Officer from 1985 to 1997. ColorSpan was acquired by MacDermid Inc. in 2000 and wassubsequently resold to Hewlett-Packard in 2007. Mr. Lukis currently serves on the board of directors of Karbon Kinetics Ltd., a manufacturer of electricbicycles.Bradley A. Cleveland. Mr. Cleveland has served as our President and Chief Executive Officer since November 2001. Prior to November 2001,Mr. Cleveland co-founded and was Vice President of AeroMet Corporation, a laser additive manufacturing subsidiary of MTS Systems Corporation.Edward E. Bolton. Mr. Bolton has served as our Vice President of Culture since September 2011. From September 2006 to September 2011,Mr. Bolton served as Corporate Human Resources Director at Ryt-Way Industries, LLC, a packaging company.William M. Dietrick. Mr. Dietrick has served as our Vice President of Marketing since May 2008 and as an interim President of our subsidiary inJapan from April 2010 to October 2010. From June 2005 to May 2008, Mr. Dietrick was a partner with Premise Immersive Marketing, a marketing consultingfirm. From December 2005 to February 2008, Mr. Dietrick served as General Manager of Witt Vending Co., a vending and catering company. From 2002 to2005, Mr. Dietrick was Vice President and General Manager of Landscape Structures, a commercial playground equipment manufacturer.John R. Judd. Mr. Judd has served as our Chief Financial Officer since June 2011. From June 2006 to June 2011, Mr. Judd served as Chief FinancialOfficer of Compellent Technologies, Inc., a network-storage company. From October 2003 to July 2006, Mr. Judd served as Chief Financial Officer of ATSMedical, Inc., a medical device manufacturer. From June 2000 to October 2003, Mr. Judd served as Controller of American Medical Systems Holdings, Inc., amedical device manufacturer. From 1997 to 1999, Mr. Judd served as Chief Financial Officer of the Autoglass Division of Apogee Enterprises, Inc., a glasstechnology company.Donald G. Krantz. Dr. Krantz has served as our Chief Operating Officer since January 2007. From November 2005 to January 2007, Dr. Krantzserved as our Vice President of Development. Prior to joining our company, Dr. Krantz served in various roles at MTS Systems, Inc., a builder of customprecision testing and advanced manufacturing systems, including as a business unit Vice President, Vice President of Engineering, and most recently, ChiefTechnology Officer. Dr. Krantz was an Engineering Fellow at Alliant Techsystems and Honeywell, Inc., and was named the 2005 Distinguished Alumnus ofthe Department of Computer Science and Engineering at the University of Minnesota. 13 Table of ContentsThomas H. Pang. Dr. Pang has served as the Managing Director of Proto Labs G.K. (Japan) since November 2010. Dr. Pang leads our company’soperations in Japan. From June 1999 to November 2010, Dr. Pang held various positions at 3D Systems, Inc., a 3D content-to-print solutions company, mostrecently as Managing Director and as General Manager and Vice President of Asia-Pacific Operations at 3D Systems Japan K.K. and 3D Systems, Inc.,respectively.Jacqueline D. Schneider. Ms. Schneider has served as our Vice President of Sales and Customer Service since February 2007. From November 2005to February 2007, Ms. Schneider served as National Sales Director for Comm-Works, LLC, a global technology provider.John B. Tumelty. Mr. Tumelty has served as the Managing Director of Proto Labs, Limited, our subsidiary in the United Kingdom, since its inceptionin July 2005. Mr. Tumelty leads our company’s operations in Europe. From March 1997 to June 2005, Mr. Tumelty held various positions at WesternThomson Plastics Ltd, an automotive systems supplier, most recently as Managing Director.Item 1A. Risk FactorsThe following are the significant factors that could materially adversely affect our business, financial condition, or operating results, as well asadversely affect the value of an investment in our common stock.Risks Relating to Our BusinessWe face significant competition and expect to face increasing competition in many aspects of our business, which could cause our operatingresults to suffer.The market for low-volume custom parts manufacturing is fragmented and highly competitive. We compete for customers with a wide variety of customparts manufacturers and methods. Some of our current and potential competitors include captive in-house services, other custom manufacturers, andalternative manufacturing vendors such as those utilizing stereolithography, selective laser sintering, fused deposition modeling and 3D printing. Moreover,some of our existing and potential competitors are researching, designing, developing and marketing other types of products and services. We also expect thatfuture competition may arise from the development of allied or related techniques for custom parts manufacturing that are not encompassed by our patents,from the issuance of patents to other companies that may inhibit our ability to develop certain products and from improvements to existing technologies. Andour competitors may attempt to adopt and improve upon key aspects of our business model, such as development of technology that automates much of themanual labor conventionally required to quote and manufacture low-volume custom parts, implementation of interactive web-based and automated userinterface and quoting systems and/or building scalable operating models specifically designed for efficient low-volume production. Third-party CAD softwarecompanies may develop software that mold-makers, injection molders and CNC machine shops could use to compete with our business model. Additivemanufacturers may develop stronger, higher temperature resins or introduce other improvements that could more effectively compete with us on part quality.We may also, from time to time, establish alliances or relationships with other competitors or potential competitors. To the extent companies terminate suchrelationships and establish alliances and relationships with our competitors, our business could be harmed.Existing and potential competitors may have substantially greater financial, technical, sales and marketing, manufacturing, distribution and otherresources and name recognition than us, as well as experience and expertise in intellectual property rights and operating within certain international locations,any of which may enable them to compete effectively against us.Though we plan to continue to expend resources to develop new technologies, processes and services, we cannot assure you that we will be able tomaintain our current position or continue to compete successfully against current and future sources of competition. Our challenge in developing new servicesis finding services for which our automated quotation and manufacturing processes offer an attractive value proposition, and we may not be able to find anynew services with potential economies of scale similar to our molding and machining services. If we do not keep pace with technological change and introducenew technologies, processes and services, the demand for our products and services may decline and our operating results may suffer. 14 Table of ContentsOur success depends on our ability to deliver products and services that meet the needs of product developers and to effectively respond to changesin our industry.We derive almost all of our revenue from the manufacture and sale to product developers of quick-turn low volumes of custom parts for prototyping,support of internal manufacturing and limited quantity product release. Our business has been and we believe will continue to be affected by changes inproduct developer requirements and preferences, rapid technological change, new product and service introductions and the emergence of new standards andpractices, any of which could render our technology, products and services less attractive, uneconomical or obsolete. To the extent that our customers’ need forquick-turn parts decreases for any reason, it would likely have a material adverse effect on our business and operating results and harm our competitiveposition. In addition, CAD simulation and other technologies may reduce the demand for physical prototype parts. Therefore, we believe that to remaincompetitive, we must continually expend resources to enhance and improve our technology, product offerings and services.In particular, we plan to increase our research and development efforts and to continue to focus a significant portion of those efforts to further developour technology in areas such as our interactive user interface and manufacturing processes, potentially introduce new manufacturing processes within theresearch and development initiative we refer to as Protoworks, and broaden the range of parts that we are able to manufacture. We believe successful executionof this part of our business plan is critical for our ability to compete in our industry and grow our business, and there are no guarantees we will be able to doso in a timely fashion, or at all. Broadening the range of parts we offer is of particular importance since limitations in manufacturability are the primaryreason we are not able to fulfill many quotation requests. There are no guarantees that the resources devoted to executing on this aspect of our business planwill improve our business and operating results or result in increased demand for our products and services. Failures in this area could adversely impact ouroperating results and harm our reputation and brand. And even if we are successful in executing in these areas, our industry is subject to rapid and significanttechnological change, and our competitors may develop new technologies, processes and services that are superior to ours. Research and development costswere approximately $9.1 million, $5.2 million and $4.3 million for the years ended December 31, 2012, 2011 and 2010, respectively. Refer to Item 7.“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K for additional discussionrelated to research and development costs.Any failure to properly meet the needs of product developers or respond to changes in our industry on a cost-effective and timely basis, or at all, wouldlikely have a material adverse effect on our business and operating results and harm our competitive position.Our failure to meet our product developers’ expectations regarding quick turnaround time would adversely affect our business and results ofoperations.We believe many product developers are facing increased pressure from global competitors to be first to market with their finished products, oftenresulting in a need for quick turnaround of custom parts. We believe our ability to quickly quote, manufacture and ship custom parts has been an importantfactor in our results to date. There are no guarantees we will be able to meet product developers’ increasing expectations regarding quick turnaround time,especially as we increase the scope of our operations. If we fail to meet our customers’ expectations regarding turnaround time in any given period, ourbusiness and results of operations will likely suffer.Our failure to meet our product developers’ price expectations would adversely affect our business and results of operations.Demand for our services is sensitive to price. We believe our competitive pricing has been an important factor in our results to date. Therefore, changesin our pricing strategies can have a significant impact on our business and ability to generate revenue. Many factors, including our production and personnelcosts and our competitors’ pricing and marketing strategies, can significantly impact our pricing strategies. If we fail to meet our customers’ price expectationsin any given period, demand for our products and services could be negatively impacted and our business and results of operations could suffer.The strength of our brand is important to our business, and any failure to maintain and enhance our brand would hurt our ability to retain andexpand our customer base as well as further penetrate existing customers.Since our products and services are sold primarily through our websites, the success of our business depends upon our ability to attract new and repeatcustomers to our websites in order to increase business and grow our revenue. Customer awareness of, and the perceived value of, our brand will dependlargely on the success of our marketing efforts, as well as our ability to consistently provide quality custom parts within the required timeframes and positivecustomer experiences, which we may not do successfully. A primary component of our business strategy is the continued promotion and strengthening of ourbrand, and we have incurred and plan to continue to incur substantial expense related to advertising and other marketing efforts directed toward enhancing ourbrand. We have initiated marketing efforts through social media, but this method of marketing may not be successful and subjects us to a greater risk ofinconsistent messaging and bad publicity. We may choose to increase our branding expense materially, but we cannot be sure that this investment will beprofitable. If we are unable to successfully maintain and enhance our brand, this could have a negative impact on our business and ability to generate revenue. 15 Table of ContentsOur business depends in part on our ability to process a large volume of new part designs from a diverse group of product developers andsuccessfully identify significant opportunities for our business based on those submissions.We believe the volume of new part designs we process and the size and diversity of our customer base give us valuable insight into the needs of ourprospective customers. We utilize this industry knowledge to determine where we should focus our development resources. If the number of new part designswe process or the size and diversity of our customer base decrease, our ability to successfully identify significant opportunities for our business and meet theneeds of product developers could be negatively impacted. In addition, even if we do continue to process a large number of new part designs and work with asignificant and diverse customer base, there are no guarantees that any industry knowledge we extract from those interactions will be successfully utilized tohelp us identify significant business opportunities or better understand the needs of product developers.The loss of one or more key members of our management team or personnel, or our failure to attract, integrate and retain additional personnel inthe future, could harm our business and negatively affect our ability to successfully grow our business.We are highly dependent upon the continued service and performance of the key members of our management team and other personnel. The loss of anyof these individuals, each of whom is “at will” and may terminate his or her employment relationship with us at any time, could disrupt our operations andsignificantly delay or prevent the achievement of our business objectives. We believe that our future success will also depend in part on our continued ability toidentify, hire, train and motivate qualified personnel. We conduct our operations in the United States at our facilities located in the greater metropolitan areas ofMinneapolis and St. Paul, Minnesota. A possible shortage of qualified individuals in this region might require us to pay increased compensation to attract andretain key employees, thereby increasing our costs. In addition, we face intense competition for qualified individuals from numerous companies, many ofwhom have substantially greater financial and other resources and name recognition than us. We may be unable to attract and retain suitably qualifiedindividuals who are capable of meeting our growing operational, managerial and other requirements, or we may be required to pay increased compensation inorder to do so. Our failure to attract, hire, integrate and retain qualified personnel could impair our ability to achieve our business objectives.If we fail to grow our business as anticipated, our net sales, gross margin and operating margin will be adversely affected.We are attempting to grow our business substantially. To this end, we have made and expect to continue to make significant investments in ourbusiness, including investments in our infrastructure, technology, and sales and marketing efforts. These investments include dedicated facilities expansionand increased staffing, both domestic and international. If our business does not generate the level of revenue required to support our investment, our net salesand profitability will be adversely affected.If we are unable to manage our growth and expand our operations successfully, our reputation and brand may be damaged, and our businessand results of operations may be harmed.Over the past several years, we have experienced rapid growth. For example, we have grown from approximately 230 full-time employees as ofJanuary 1, 2008 to 622 full-time employees as of December 31, 2012. We have expanded internationally, including establishing manufacturing operations inEurope in 2005 and in Japan in late 2009. In 2011, we added a number of key individuals to our organization. We expect this growth to continue and thenumber of countries and facilities from which we operate to continue to increase in the future. Our ability to effectively manage our anticipated growth andexpansion of our operations will require us to do, among other things, the following: •enhance our operational, financial and management controls and infrastructure, human resource policies, and reporting systems and procedures,in particular as we continue our transition as a public company; •effectively scale our operations, including accurately predicting the need for additional staffing; •successfully identify, recruit, hire, train, maintain, motivate and integrate additional employees; •expand our international resources; and •expand our facilities and equipment. 16 Table of ContentsThese enhancements and improvements will require significant capital expenditures and allocation of valuable management and employee resources. Andour growth, combined with the geographical dispersion of our operations, has placed, and will continue to place, a strain on our operational, financial andmanagement infrastructure. Our future financial performance and our ability to execute on our business plan will depend, in part, on our ability to effectivelymanage any future growth and expansion. There are no guarantees we will be able to do so in an efficient or timely manner, or at all. Our failure to effectivelymanage growth and expansion could have a material adverse effect on our business, results of operations, financial condition, prospects, and reputation andbrand, including impairing our ability to perform to our customers’ expectations.We may not timely and effectively scale and adapt our existing technology, processes and infrastructure to meet the needs of our business.A key element to our continued growth is the ability to quickly and efficiently quote an increasing number of product developer submissions acrossgeographies and to manufacture the related parts. This will require us to timely and effectively scale and adapt our existing technology, processes andinfrastructure to meet the needs of our business. With respect to our websites and quoting technology, it may become increasingly difficult to maintain andimprove their performance, especially during periods of heavy usage and as our solutions become more complex and our user traffic increases acrossgeographies. Similarly, our manufacturing automation technology may not enable us to process the large numbers of unique designs and efficientlymanufacture the related parts in a timely fashion to meet the needs of product developers as our business continues to grow. Any failure in our ability to timelyand effectively scale and adapt our existing technology, processes and infrastructure could negatively impact our ability to retain existing customers and attractnew customers, damage our reputation and brand, result in lost revenue, and otherwise substantially harm our business and results of operations.Numerous factors may cause us not to maintain the revenue growth that we have historically experienced.Although our revenue has grown from $44.4 million for the year ended December 31, 2008 to $126.0 million for the year ended December 31, 2012, welikely will not be able to maintain our historical rate of revenue growth. We believe that our continued revenue growth will depend on many factors, a numberof which are out of our control, including among others, our ability to: •retain and further penetrate existing customer companies, as well as attract new customer companies; •consistently execute on custom part orders in a manner that satisfies product developers’ needs and provides them with a superior experience; •develop new technologies or manufacturing processes, and broaden the range of parts we offer; •successfully execute on our international strategy and expand into new geographic markets; •capitalize on product developer expectations for access to comprehensive, user-friendly e-commerce capabilities 24 hours per day/7 days per week; •increase the strength and awareness of our brand across geographies; •respond to changes in product developer needs, technology and our industry; and •react to challenges from existing and new competitors.We cannot assure you that we will be successful in continuing to grow our business and revenue, and in addressing the factors above.Our operating results and financial condition may fluctuate on a quarterly and annual basis.Our operating results and financial condition may fluctuate from quarter to quarter and year to year, and are likely to continue to vary due to a numberof factors, some of which are outside of our control. In addition, our actual or projected operating results may fail to match our past performance. These eventscould in turn cause the market price of our common stock to fluctuate. If our operating results do not meet the expectations of securities analysts or investors,who may derive their expectations by extrapolating data from recent historical operating results, the market price of our common stock will likely decline. 17 Table of ContentsOur operating results and financial condition may fluctuate due to a number of factors, including those listed below and those identified throughout this“Risk Factors” section: •the development of new competitive systems or processes by others; •the entry of new competitors into our market whether by established companies or by new companies; •changes in the size and complexity of our organization, including our international operations; •levels of sales of our products and services to new and existing customers; •the geographic distribution of our sales; •changes in product developer preferences or needs; •changes in the amount that we invest to develop, acquire or license new technologies and processes, which we anticipate will generally increase andmay fluctuate in the future; •delays between our expenditures to develop, acquire or license new technologies and processes, and the generation of sales related thereto; •our ability to timely and effectively scale our business during periods of sequential quarterly or annual growth; •limitations or delays in our ability to reduce our expenses during periods of declining sequential quarterly or annual revenue; •changes in our pricing policies or those of our competitors, including our responses to price competition; •changes in the amount we spend in our marketing and other efforts; •unexpected increases in expenses as compared to our related accounting accruals or operating plan; •the volatile global economy; •general economic and industry conditions that affect customer demand and product development trends; •interruptions to or other problems with our website and interactive user interface, information technology systems, manufacturing processes orother operations; •changes in accounting rules and tax and other laws; and •plant shutdowns due to a health pandemic or weather conditions.Due to all of the foregoing factors and the other risks discussed in this “Risk Factors” section, you should not rely on quarter-to-quarter or year-to-yearcomparisons of our operating results as an indicator of future performance. 18 Table of ContentsInterruptions to or other problems with our website and interactive user interface, information technology systems, manufacturing processes orother operations could damage our reputation and brand and substantially harm our business and results of operations.The satisfactory performance, reliability, consistency, security and availability of our websites and interactive user interface, information technologysystems, manufacturing processes and other operations are critical to our reputation and brand, and our ability to effectively service product developers. Anyinterruptions or other problems that cause any of our websites, interactive user interface or information technology systems to malfunction or be unavailable,or negatively impact our manufacturing processes or other operations, may damage our reputation and brand, result in lost revenue, cause us to incursignificant costs seeking to remedy the problem and otherwise substantially harm our business and results of operations.A number of factors or events could cause such interruptions or problems, including among others: human and software errors, design faults,challenges associated with upgrades, changes or new facets of our business, power loss, telecommunication failures, fire, flood, extreme weather, politicalinstability, acts of terrorism, war, break-ins and security breaches, contract disputes, labor strikes and other workforce related issues, capacity constraintsdue to an unusually large number of product developers accessing our websites or ordering parts at the same time, and other similar events. These risks areaugmented by the fact that our customers come to us largely for our quick-turn manufacturing capabilities and that accessibility and turnaround speed areoften of critical importance to these product developers. We are dependent upon our facilities through which we satisfy all of our production demands and inwhich we house all of the computer hardware necessary to operate our websites and systems as well as managerial, customer service, sales, marketing andother similar functions, and we have not identified alternatives to these facilities or established fully redundant systems in multiple locations. However, wehave back-up computing systems for each of our United States, United Kingdom and Japanese operations. In addition, we are dependent in part on thirdparties for the implementation and maintenance of certain aspects of our communications and production systems, and therefore preventing, identifying andrectifying problems with these aspects of our systems is to a large extent outside of our control.Moreover, the business interruption insurance that we carry may not be sufficient to compensate us for the potentially significant losses, including thepotential harm to the future growth of our business, that may result from interruptions in our service as a result of system failures.We depend on the continued growth of product developers’ e-commerce expectations when working with their custom parts manufacturers andtheir migration from 2D to 3D CAD software.The business of selling custom parts over the Internet via an interactive web-based and automated user interface and quoting system is not widespread inour industry. Moreover, many product developers still utilize 2D CAD software. Concerns about privacy and technological and other problems maydiscourage some product developers from adopting the Internet as the medium for procuring their custom parts or adopting 3D CAD software, particularly incountries where e-commerce and 3D CAD software are not as prevalent as they are in our current markets or with product developers in industries not wellsuited to utilize our services, such as architecture. In order to expand our customer base, we must appeal to and procure customers who historically have usedmore traditional means of commerce and/or 2D CAD drawings to purchase their customer parts. If product developers are not sufficiently attracted to the valueproposition of or satisfied with our web-based interface and quotation system, or product developers do not continue to migrate to 3D CAD software as wecurrently anticipate, our business could be adversely impacted.Our business depends on the development and maintenance of the Internet infrastructure.The success of our services will depend largely on the development and maintenance of the Internet infrastructure. This includes maintenance of areliable network backbone with the necessary speed, data capacity, and security, as well as timely development of complementary products, for providingreliable Internet access and services. The Internet has experienced, and is likely to continue to experience, significant growth in the numbers of users andamount of traffic. The Internet infrastructure may be unable to support such demands. In addition, increasing numbers of users, increasing bandwidthrequirements, or problems caused by “viruses,” “worms,” malware and similar programs may harm the performance of the Internet. The backbonecomputers of the Internet have been the targets of such programs. The Internet has experienced a variety of outages and other delays as a result of damage toportions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage generally aswell as the level of usage of our services, which could adversely impact our business.If the security of our customers’ confidential information stored in our systems is breached or otherwise subjected to unauthorized access, ourreputation or brand may be harmed, and we may be exposed to liability.Our system stores, processes and transmits our customers’ confidential information, including the intellectual property in their part designs, credit cardinformation and other sensitive data. We rely on encryption, authentication and other technologies licensed from third parties, as well as administrative andphysical safeguards, to secure such confidential information. Any compromise of our information security could damage our reputation and brand and exposeus to a risk of loss, costly litigation and liability that would substantially harm our business and operating results. We may not have adequately assessed theinternal and external risks posed to the security of our company’s systems and 19 Table of Contentsinformation and may not have implemented adequate preventative safeguards or take adequate reactionary measures in the event of a security incident. Inaddition, most states have enacted laws requiring companies to notify individuals and often state authorities of data security breaches involving their personaldata. These mandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our existing and prospectivecustomers to lose confidence in the effectiveness of our data security measures. Any security breach, whether successful or not, would harm our reputationand brand and could cause the loss of customers.Global economic conditions may harm our ability to do business, increase our costs and negatively affect our stock price.The prospects for economic growth in the United States and other countries remain uncertain and could worsen. Economic concerns and other issuessuch as reduced access to capital for businesses may cause product developers to further delay or reduce the product development projects that our businesssupports. Given the continued uncertainty concerning the global economy, we face risks that may arise from financial difficulties experienced by our suppliersand product developers and other related risks to our business.We operate a global business that exposes us to additional risks.We have established our operations in the United States, Europe and Japan and are seeking to further expand our international operations. As ofDecember 31, 2012, we had sold products into more than 50 countries. In addition to English, our website is available in British English, French, German,Italian, Japanese and Spanish. Our international revenue accounted for approximately 25% of our total revenue in the year ended December 31, 2012, and26% of our total revenue in the years ended December 31, 2011 and 2010, respectively. The future growth and profitability of our international business issubject to a variety of risks and uncertainties. Many of the following factors have adversely affected our international operations and sales to customers locatedoutside of the United States and may again in the future: •difficulties in staffing and managing foreign operations, particularly in new geographic locations; •challenges in providing solutions across a significant distance, in different languages and among different cultures; •rapid changes in government, economic and political policies and conditions, political or civil unrest or instability, terrorism or epidemics, andother similar outbreaks or events; •fluctuations in foreign currency exchange rates; •differences in product developer preferences and means of procuring parts; •compliance with and changes in foreign laws and regulations, as well as U.S. laws affecting the activities of U.S. companies abroad, includingthose associated with export controls, tariffs and embargoes, other trade restrictions and antitrust and data privacy concerns; •different, complex and changing laws governing intellectual property rights, sometimes affording companies lesser protection in certain areas; •lower levels of use of the Internet or 3D CAD software; •seasonal reductions in business activity in certain parts of the world, particularly during the summer months in Europe; •higher costs of doing business internationally; •interruptions resulting from any events affecting raw material supply or manufacturing capabilities abroad; •protectionist laws and business practices that favor local producers and service providers; •taxation; 20 Table of Contents •energy costs; •restrictions imposed by local labor practices and laws on our business and operations; •workforce uncertainty in countries where labor unrest is more common than in the United States; •transportation delays; and •increased payment risk and higher levels of payment fraud.Our business depends on product developers’ demand for our services, the general economic health of current and prospective customers, andcompanies’ desire or ability to make investments in new products. A deterioration of global, regional or local political, economic or social conditions couldaffect potential customers in ways that reduce demand for our services, disrupt our manufacturing and sales plans and efforts or otherwise negatively impactour business. Acts of terrorism, wars, public health issues and increased energy costs could disrupt commerce in ways that could impair our ability to getproducts to our customers and increase our manufacturing and delivery costs. We have not undertaken hedging transactions to cover our foreign currencyexposure, and changes in foreign currency exchange rates may negatively impact reported revenue and expenses. In addition, our sales are often made onunsecured credit terms, and a deterioration of political, economic or social conditions in a given country or region could reduce or eliminate our ability to collectaccounts receivable in that country or region. In any of these events, our results of operations could be materially and adversely affected.If a natural or man-made disaster strikes any of our manufacturing facilities, we will be unable to manufacture our products for a substantialamount of time and our sales will decline.We manufacture all of our products in six manufacturing facilities, three of which are located in Maple Plain, Minnesota and one of which is located ineach of Rosemount, Minnesota, Telford, United Kingdom, and Yamato-Shi, Kanagawa, Japan. These facilities and the manufacturing equipment we usewould be costly to replace and could require substantial lead time to repair or replace. Our facilities may be harmed by natural or man-made disasters,including, without limitation, earthquakes, floods, tornadoes, fires, tsunamis and nuclear disasters.In the event any of our facilities are affected by a disaster, we may: •be unable to meet the shipping deadlines of our customers; •experience disruptions in our ability to process submissions and generate quotations, manufacture and ship parts, provide sales and marketingsupport and customer service, and otherwise operate our business, any of which could negatively impact our business; •be forced to rely on third-party manufacturers; •need to expend significant capital and other resources to address any damage caused by the disaster; and •lose customers and be unable to regain those customers.Although we possess insurance for damage to our property and the disruption of our business from casualties, this insurance may not be sufficient tocover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.If our present single or limited source suppliers become unavailable or inadequate, our customer relationships, results of operations andfinancial condition may be adversely affected.We acquire substantially all of the manufacturing equipment and certain of our materials that are critical to the ongoing operation and future growth ofour business from just a few third parties. We do not have long-term supply contracts with any of our suppliers and operate on a purchase-order basis. Whilemost manufacturing equipment and materials for our products are available from multiple suppliers, certain of those items are only available from single orlimited sources. Should any of our present single or limited source suppliers for manufacturing equipment or materials 21 Table of Contentsbecome unavailable or inadequate, or impose terms unacceptable to us such as increased pricing terms, we could be required to spend a significant amount oftime and expense to develop alternate sources of supply, and we may not be successful in doing so on terms acceptable to us, or at all. Natural disasters, suchas hurricanes, may affect our supply of materials, particularly resins, from time to time, and we may purchase larger amounts of certain materials inanticipation of future shortages or increases in pricing. In addition, if we were unable to find a suitable supplier for a particular type of manufacturingequipment or material, we could be required to modify our existing business processes and offerings to accommodate the situation. As a result, the loss of asingle or limited source supplier could adversely affect our relationship with our customers and our results of operations and financial condition.We may not be able to adequately protect or enforce our intellectual property rights, which could impair our competitive position.Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We rely primarily on patents, licenses,trademarks and trade secrets, as well as non-disclosure agreements and other methods, to protect our proprietary technologies and processes globally. Despiteour efforts to protect our proprietary technologies and processes, it is possible that competitors or other unauthorized third parties may obtain, copy, use ordisclose our technologies and processes. We cannot assure you that any of our existing or future patents will not be challenged, invalidated or circumvented. Assuch, any rights granted under these patents may not provide us with meaningful protection. We may not be able to obtain foreign patents corresponding to ourUnited States patents. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. If our patents and other intellectualproperty do not adequately protect our technology, our competitors may be able to offer services similar to ours. Our competitors may also be able to developsimilar technology independently or design around our patents. Any of the foregoing events would lead to increased competition and lower revenue or grossmargin, which would adversely affect our net income.We may be subject to infringement claims.We may be subject to intellectual property infringement claims from individuals, vendors and other companies who have acquired or developed patentsin the fields of CNC machining, injection molding or part production for purposes of developing competing products or for the sole purpose of assertingclaims against us. Any claims that our products or processes infringe the intellectual property rights of others, regardless of the merit or resolution of suchclaims, could cause us to incur significant costs in responding to, defending and resolving such claims, and may prohibit or otherwise impair our ability tocommercialize new or existing products. If we are unable to effectively defend our processes, our market share, sales and profitability could be adverselyimpacted.Our failure to expand our intellectual property portfolio could adversely affect the growth of our business and results of operations.Expansion of our intellectual property portfolio is one of the available methods of growing our revenue and our profits. This involves a complex andcostly set of activities with uncertain outcomes. Our ability to obtain patents and other intellectual property can be adversely affected by insufficientinventiveness of our employees, by changes in intellectual property laws, treaties, and regulations, and by judicial and administrative interpretations of thoselaws treaties and regulations. Our ability to expand our intellectual property portfolio could also be adversely affected by the lack of valuable intellectualproperty for sale or license at affordable prices. There is no assurance that we will be able to obtain valuable intellectual property in the jurisdictions where weand our competitors operate or that we will be able to use or license that intellectual property.We may be subject to product liability claims, which could result in material expense, diversion of management time and attention and damage toour business and reputation and brand.The prototype parts we manufacture and the parts we manufacture in low volumes may contain undetected defects or errors that are not discovered untilafter the products have been installed and used by customers. This could result in claims from customers or others, damage to our business and reputationand brand, or significant costs to correct the defect or error.We attempt to include provisions in our agreements with customers that are designed to limit our exposure to potential liability for damages arising fromdefects or errors in our products. However, it is possible that these limitations may not be effective as a result of unfavorable judicial decisions or laws enactedin the future.The sale and support of our products entails the risk of product liability claims. Any product liability claim brought against us, regardless of its merit,could result in material expense, diversion of management time and attention, damage to our business and reputation and brand, and cause us to fail to retainexisting customers or to fail to attract new customers. 22 Table of ContentsGovernment regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply with these regulationscould substantially harm our business and results of operations.We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-commerce. Existing andfuture laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, restrictions onimports and exports, customs, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and othercommunications, consumer protection, the provision of online payment services, broadband residential Internet access and the characteristics and quality ofproducts and services. It is not clear how existing laws governing issues such as property use and ownership, sales and other taxes, fraud, libel and personalprivacy apply to the Internet and e-commerce, especially where these laws were adopted prior to the advent of the Internet and do not contemplate or address theunique issues raised by the Internet or e-commerce. Those laws that do reference the Internet are being interpreted by the courts and their applicability and reachare therefore uncertain. The costs of compliance with these regulations may increase in the future as a result of changes in the regulations or the interpretation ofthem. Further, any failures on our part to comply with these regulations may subject us to significant liabilities. Those current and future laws and regulationsor unfavorable resolution of these issues may substantially harm our business and results of operations.Changes in, or interpretation of, tax rules and regulations may impact our effective tax rate and future profitability.We are a multinational company based in the United States and subject to tax in multiple tax jurisdictions, both domestic and abroad. Our futureeffective tax rates could be adversely affected by changes in statutory tax rates or interpretation of tax rules and regulations in jurisdictions in which we dobusiness, changes in the amount of revenue or earnings in the countries with varying statutory tax rates, or by changes in the valuation of deferred tax assetsand liabilities.In addition, we are subject to audits and examinations of previously filed income tax returns by the Internal Revenue Service, or IRS, and other domesticand foreign tax authorities. We regularly assess the potential impact of such examinations to determine the adequacy of our provision for income taxes and havereserved for potential adjustments that may result from the current examinations. We believe such estimates to be reasonable; however, there is no assurancethat the final determination of any examination will not have an adverse effect on our operating results and financial position.We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges,including the need to complement our growth strategy, increase market share in our current markets or expand into other markets, or broaden our technology,intellectual property or service capabilities. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additionalfunds through future issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equitysecurities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing we secure in the futurecould involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for usto obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on termsfavorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue tosupport our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed.Any acquisition, strategic relationship, joint venture or investment could disrupt our business and harm our operating results and financialcondition.Our business and our customer base have been built primarily through organic growth. However, from time to time, we may selectively pursueacquisitions, strategic relationships, joint ventures or investments that we believe may allow us to complement our growth strategy, increase market share inour current markets or expand into other markets, or broaden our technology, intellectual property or service capabilities. We cannot forecast the number,timing or size of such transactions, or the effect that any such transactions might have on our operating or financial results. We have very limited experienceengaging in these types of transactions. And such transactions may be complex, time consuming and expensive, and may present numerous challenges andrisks including: 23 Table of Contents •an acquired company, asset or technology not furthering our business strategy as anticipated; •difficulties entering and competing in new product or geographic markets and increased competition, including price competition; •integration challenges; •challenges in working with strategic partners and resolving any related disagreements or disputes; •overpayment for a company, asset or technology, or changes in the economic or market conditions or assumptions underlying our decision tomake an acquisition; •significant problems or liabilities, including increased intellectual property and employment related litigation exposure, associated with acquiredbusinesses, assets or technologies; and •requirements to record substantial charges and amortization expense related to certain purchased intangible assets, deferred stock compensationand other items, as well as other charges or expenses.Any one of these challenges or risks could impair our ability to realize any benefit from our acquisitions, strategic relationships, joint ventures orinvestments after we have expended resources on them, as well as divert our management’s attention. And any failure to successfully address these challengesor risks could disrupt our business and harm our operating results and financial condition. Moreover, any such transaction may not be viewed favorably byinvestors or analysts.In addition, from time to time we may enter into negotiations for acquisitions, relationships, joint ventures or investments that are not ultimatelyconsummated. These negotiations could result in significant diversion of management time, as well as substantial out-of-pocket costs.We depend in part on licenses of technologies from third parties in order to deliver our solutions, and, as a result, our business is dependent inpart on the availability of such licenses on commercially reasonable terms.We currently, and will continue to, license certain technologies from third parties. While these licenses are not material to our financial results, theirfunction in our business is integral to our operations. We cannot be certain that these third-party content licenses will be available to us on commerciallyreasonable terms or that we will be able to successfully integrate the technology into our solutions. These third-party in-licenses may expose us to increasedrisk, including risks associated with the assimilation of new technology sufficient to offset associated acquisition and maintenance costs. The inability toobtain any of these licenses could result in delays in solution development until equivalent technology can be identified and integrated. Any such delays inservices could cause our business, operating results and financial condition to suffer.Our business involves the use of hazardous materials, and we and our suppliers must comply with environmental laws and regulations, whichcan be expensive and restrict how we do business.Our business involves the controlled storage, use and disposal of hazardous materials. We and our suppliers are subject to federal, state and local aswell as foreign laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. Although we believe that thesafety procedures utilized by us and our suppliers for handling and disposing of these materials comply with the standards prescribed by these laws andregulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, state, federal or foreignauthorities may curtail the use of these materials and interrupt our business operations. We do not currently maintain hazardous materials insurance coverage.If we are subject to any liability as a result of activities involving hazardous materials, our business and financial condition may be adversely affected and ourreputation and brand may be harmed. 24 Table of ContentsIf we are unable to meet regulatory quality standards applicable to our manufacturing and quality processes for the parts we manufacture, ourbusiness, financial condition or operating results could be harmed.As a manufacturer of CNC machined and injection molded custom parts, we are required to meet certain regulatory standards, including InternationalOrganization for Standardization, or ISO, 9001:2008 for our manufacturing facilities in Minnesota. If any regulatory inspection reveals that we are not incompliance with applicable standards, regulators may take action against us, including issuing a warning letter, imposing fines on us, requiring a recall of theparts we manufactured or closing our manufacturing facilities. If any of these actions were to occur, it could harm our reputation as well as our business,financial condition and operating results. In addition, we may need to obtain additional certifications in the future and there are no guarantees we would be ableto do so on a timely basis, if at all. Moreover, obtaining and maintaining required regulatory certifications can be costly and divert management’s attention.We are subject to payment-related risks.We accept payments using a variety of methods, including credit card, customer invoicing, physical bank check and payment upon delivery. As weoffer new payment options to our customers, we may be subject to additional regulations, compliance requirements and fraud risk. For certain paymentmethods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lowerprofitability. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards or electronic checks, and itcould disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card associationoperating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult orimpossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability toaccept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our businessand operating results could be adversely affected.Risks Relating to Ownership of Our Common StockControl by our existing shareholders could allow them to collectively control substantially all matters requiring shareholder approval.Currently, our executive officers, directors and our principal existing shareholder, North Bridge Growth Equity I, L.P. (North Bridge), beneficially ownapproximately 35% of our outstanding common stock. Bradley A. Cleveland, our Chief Executive Officer, and Lawrence J. Lukis, our founder and ChiefTechnology Officer, are each on our Board of Directors and among our largest shareholders. In addition, Matt Blodgett, one of our directors, is a Principal atNorth Bridge Growth Equity, which is an entity affiliated with North Bridge. These shareholders could control us through their board representation orthrough their ability to determine the outcome of the election of our directors, to amend our articles of incorporation and by-laws and to take other actionsrequiring the vote or consent of shareholders, including mergers, going private transactions and other extraordinary transactions, and the terms of any of thesetransactions. The ownership positions of these shareholders may have the effect of delaying, deterring or preventing a change in control or a change in thecomposition of our Board of Directors. These shareholders may also use their large ownership positions to address their own interests, which may be differentour other investors. In addition, sales of shares beneficially owned by these shareholders could be viewed negatively by third parties and have a negativeimpact on our stock.Our stock price has been and may continue to be volatile.Shares of our common stock were sold in our February 2012 initial public offering at a price of $16.00 per share, and, as of December 31, 2012, ourcommon stock had traded as high as $41.10 and as low as $24.90 following our initial public offering. The market for our common stock may become lessactive, liquid or orderly, which could depress the trading price of our common stock. Some of the factors, many of which are outside of our control, that maycause the market price of our common stock to fluctuate include: •fluctuations in our financial condition and operating results; •our ability to retain and attract customers and increase net sales; •pricing pressures due to competition or otherwise and changes in gross margins; •changes in general economic and market conditions, economic uncertainty and changes in product development activity levels; •announcements by us or our competitors of technological innovations or new product or service offerings or significant acquisitions; •timing, effectiveness, and costs of expansion and upgrades of our offerings, systems and infrastructure; •changes in key personnel; 25 Table of Contents •success in entry into new markets and expansion efforts; •the public’s response to press releases or other public announcements by us or third parties, including our filings with the Securities andExchange Commission, or SEC, and announcements relating to litigation; •the projections we may provide to the public, any changes in these projections or our failure to meet these projections; •the issuance of new or updated research or reports by any securities or industry analysts who follow our common stock, changes in analysts’financial estimates or ratings, and failure of securities analysts to initiate or maintain coverage of our common stock; •changes in the market valuations of similar companies; •significant lawsuits, including patent or shareholder litigation; •general economic and market conditions; •changes in laws or regulations applicable to us; •changes in accounting principles; •the sustainability of an active trading market for our common stock; •future sales of our common stock by us or our shareholders, including sales by our officers, directors and significant shareholders; •share price and volume fluctuations attributable to inconsistent trading levels of our shares; •the expiration of contractual lock-up agreements; and •other events or factors, including those resulting from war, acts of terrorism, natural disasters or responses to these events.In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices ofequity securities of many companies. In the past, shareholders have instituted securities class action litigation following periods of market volatility. If we wereto become involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from ourbusiness.If securities or industry analysts publish inaccurate or unfavorable research or reports about our business, our stock price and trading volumecould decline.The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or ourbusiness. We do not have any control over these analysts. If one or more of the analysts who covers us downgrades our common stock, changes their opinionof our shares or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceasescoverage of us or fails to publish reports on us regularly, demand for our common stock could decrease and we could lose visibility in the financial markets,which could cause our stock price and trading volume to decline.We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companieswill make our common stock less attractive to investors.We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (JOBS Act), which was enacted in April 2012. For aslong as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to otherpublic companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 ofthe Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), reduced disclosure obligations regarding executive compensation in our periodic reports and proxystatements and exemptions from the requirements of holding a nonbinding advisory vote 26 Table of Contentson executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth companyfor up to five years, although circumstances could cause us to lose that status earlier. We cannot predict if investors will find our common stock less attractivebecause we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for ourcommon stock and our stock price may be more volatile.Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards issued subsequent to the enactment ofthe JOBS Act until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revisedaccounting standards and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerginggrowth companies.We are obligated to develop and maintain proper and effective internal controls over financial reporting and otherwise comply with Section 404 ofthe Sarbanes-Oxley Act. This will require significant expenditures and effort by our management, and may not complete our analysis of ourinternal controls over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adverselyaffect investor confidence in our company and, as a result, the value of our common stock.Pursuant to Section 404 of the Sarbanes-Oxley Act and related rules and regulations, and beginning with our Annual Report on Form 10-K for theyear ending December 31, 2013, our management will be required to report on the effectiveness of our internal control over financial reporting. In addition, ourindependent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with ourAnnual Report on Form 10-K following the date on which we are no longer an emerging growth company, which may be up to five years following the date ofour initial public offering, but could occur as early as our fiscal year ending December 31, 2013. Our status as an emerging growth company is discussed inmore detail in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The rules governing the standards thatmust be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possibleremediation. We are currently in the very early stages of the costly and challenging process of reviewing, documenting and testing our internal control overfinancial reporting. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testingprocess, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls areeffective. We may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internalcontrol over financial reporting. In addition, in connection with the attestation process by our independent registered public accounting firm, we may encounterproblems or delays in completing the implementation of any requested improvements and receiving a favorable attestation. If we are unable to assert that ourinternal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an unqualified opinion on theeffectiveness of our internal controls, investors could lose confidence in the accuracy and completeness of our financial information and our stock price coulddecline.Anti-takeover provisions in our charter documents and Minnesota law might discourage or delay acquisition attempts for us that you mightconsider favorable.Our third amended and restated articles of incorporation and amended and restated by-laws contain provisions that may make the acquisition of ourcompany more difficult without the approval of our board of directors. These provisions: •permit our board of directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and privileges as our board maydesignate, including the right to approve an acquisition or other change in our control; •provide that the authorized number of directors may be changed by resolution of the board of directors; •provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of amajority of directors then in office, even if less than a quorum; •provide that shareholders seeking to present proposals before a meeting of shareholders or to nominate candidates for election as directors at ameeting of shareholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of ashareholder’s notice; and •do not provide for cumulative voting rights. 27 Table of ContentsWe are subject to the provisions of Section 302A.673 of the Minnesota Statutes, which regulates business combinations. Section 302A.673 generallyprohibits any business combination by an issuing public corporation, or any of its subsidiaries, with an interested shareholder, which means any shareholderthat purchases 10% or more of the corporation’s voting shares within four years following the date the person became an interested shareholder, unless thebusiness combination is approved by a committee composed solely of one or more disinterested members of the corporation’s board of directors before the datethe person became an interested shareholder.These anti-takeover provisions could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so wouldbenefit our shareholders. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors ofyour choosing and to cause us to take other corporate actions you desire.We do not expect to pay any cash dividends for the foreseeable future.We have never declared or paid any cash dividends on our common stock, and we do not anticipate that we will pay any such cash dividends for theforeseeable future. We anticipate that we will retain all of our future earnings for use in the business and for general corporate purposes. Any determination topay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractualrestrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, if you purchase shares in thisoffering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur.Item 1B. Unresolved Staff CommentsNone.Item 2. PropertiesUnited StatesOur corporate headquarters are located in Maple Plain, Minnesota in a facility we own encompassing approximately 95,000 square feet of office andmanufacturing space. We also own a nearby facility encompassing approximately 35,000 square feet of manufacturing space. We lease an additional facilityon a property adjacent to our headquarters that encompasses approximately 40,000 square feet of manufacturing space. The lease for this facility expires in2017, subject to our option to renew for up to two additional five-year terms. We also own a facility in Rosemount, Minnesota that encompasses approximately130,000 square feet of manufacturing and office space.EuropeOur European operations are headquartered in Telford, United Kingdom in a leased facility encompassing approximately 135,000 square feet of officeand manufacturing space. The lease for this facility expires in 2016.We also lease office space in Mosbach, Germany and Chambery, France for sales and customer service and technical support staff. We expect that theexisting European production facilities will provide sufficient space for our European operations for the foreseeable future.JapanOur Japan operations are headquartered in Yamato-Shi, Kanagawa, Japan (southwest of Tokyo) in a leased facility encompassing approximately 30,000square feet of office and manufacturing space. The lease expires in November 2021 and has a cancellation clause with six months’ prior notice withoutpenalty. We believe that this facility will provide sufficient space for our Japan operations for the foreseeable future.Item 3. Legal ProceedingsFrom time to time, we are subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the resultsof litigation and claims cannot be predicted with certainty, as of the date of this Annual Report on Form 10-K, we do not believe we are party to any litigationthe outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on ourbusiness. 28 Table of ContentsItem 4. Mine Safety DisclosuresNot applicable. 29 Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock has traded on the New York Stock Exchange (NYSE) under the symbol “PRLB” since February 24, 2012. Our initial publicoffering was priced at $16.00 per share. Prior to that date, there was no public market for our common stock. The following table sets forth, for the periodsindicated, the high and low intraday sales prices for our common stock as reported on the NYSE: High Low Fiscal 2012 First quarter (from February 24, 2012) $35.93 $25.00 Second Quarter $39.08 $24.90 Third Quarter $41.10 $28.76 Fourth Quarter $39.80 $27.96 On March 8, 2013, the last reported sale price of our common stock on the NYSE was $48.23 per share. As of March 8, 2013, we had 16 holders ofrecord of our common stock. The actual number of shareholders is greater than this number of record holders, and includes shareholders who are beneficialowners, but whose shares are held in street name by brokers and other nominees.We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings tosupport our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for theforeseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors and will depend on then-existingconditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our boardof directors may deem relevant. In addition, unless waived, the terms of our existing debt facilities prohibit us from paying dividends on our common stock.Performance GraphThe following graph shows a comparison from February 24, 2012 (the date our common stock commenced trading on the NYSE) throughDecember 31, 2012 of the cumulative total return for our common stock, the S&P 500 Index and the Russell 2000 Index. We have selected the Russell 2000Index because the Russell 2000 Index measures the performance of the small market capitalization segment of U.S. equity instruments and we are a membercompany included in the Russell 2000 Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the S&P500 Index and the Russell 2000 Index assume reinvestment of dividends. 30 Table of Contents Period Ending Index 02/23/12 02/29/12 03/31/12 04/30/12 05/31/12 06/30/12 07/31/12 08/31/12 09/30/12 10/31/12 11/30/12 12/31/12 Proto Labs, Inc. 100.00 192.19 213.06 231.88 230.56 179.75 236.44 196.63 211.38 216.88 228.00 246.38 S&P 500 100.00 100.16 103.30 102.53 96.10 99.90 101.16 103.16 105.66 103.57 103.87 104.60 Russell 2000 100.00 97.79 100.13 98.51 91.87 96.29 94.90 97.93 100.99 98.73 99.12 102.43 Unregistered Sales of Equity Securities and Use of ProceedsOn February 23, 2012, our registration statement on Form S-1 (No. 333-175745) was declared effective for our IPO, and on February 29, 2012 weconsummated the IPO consisting of 4,945,000 shares of our common stock for $16.00 per share, including the underwriters’ exercise of their IPO over-allotment option for an additional 645,000 shares issued and sold by us for $16.00 per share. The underwriters of the offering were Jefferies & Company,Inc., Piper Jaffray & Co., William Blair & Company, L.L.C. and Craig-Hallum Capital Group, LLC. Following the sale of the shares in connection with theclosing of the IPO, the offering terminated. As a result of the IPO, including the underwriters’ over-allotment option, we received total net proceeds ofapproximately $71.5 million, after deducting total expenses of $7.6 million, consisting of underwriting discounts and commissions of $5.5 million andoffering-related expenses of approximately $2.1 million. No payments for such expenses were made directly or indirectly to (i) any of our officers or directorsor their associates, (ii) any persons owning 10% or more of any class of our equity securities, or (iii) any of our affiliates.On November 15, 2012, our registration statement on Form S-1 (No. 333-184673) was declared effective for our follow-on offering, and onNovember 21, 2012 we consummated the follow-on offering consisting of 100,000 shares of our common stock for $31.00 per share. The underwriters of thefollow-on offering were Morgan Stanley & Co. LLC, Piper Jaffray & Co., William Blair & Company, L.L.C., Needham & Company, LLC, Craig-HallumCapital Group, LLC and Dougherty & Company LLC. Following the sale of the shares in connection with the closing of the follow-on offering, the offeringterminated. As a result of the follow-on offering, we received total net proceeds of approximately $2.5 million, after deducting total expenses of $0.6 million,consisting of underwriting discounts and commissions of $0.1 million and offering-related expenses of approximately $0.5 million. No payments for suchexpenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of ourequity securities, or (iii) any of our affiliates. 31 Table of ContentsThere have been no material differences between the actual and intended use of proceeds as originally described in our IPO or follow-on offering. Basedon our current cash and cash equivalents balance together with cash generated from operations, we do not expect that we will have to utilize any of the netproceeds to fund our operations for the foreseeable future. As such, we have invested the net proceeds from our initial and follow-on offerings in investment-grade interest-bearing marketable securities, such as money market funds, corporate debt, commercial paper, certificates of deposit, municipal securities andgovernment agency securities.Item 6. Selected Financial DataThe following tables set forth selected consolidated financial data for the periods and at the dates indicated. The selected consolidated statements ofcomprehensive income data for the years ended December 31, 2012, 2011 and 2010 and selected consolidated balance sheets data as of December 31, 2012and 2011 are derived from our audited consolidated financial statements included in Item 8. “Financial Statement and Supplementary Data” of this AnnualReport on Form 10-K. The selected consolidated statements of comprehensive income data for the years ended December 31, 2009 and 2008 and selectedconsolidated balance sheet data as of December 31, 2010, 2009 and 2008 are derived from our audited consolidated financial statements not included in thisreport.The historical results presented below are not necessarily indicative of the results to be expected for any future period. You should read this selectedconsolidated financial data in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and theconsolidated financial statements and related notes appearing in Item 8. “Financial Statements and Supplementary Date” of this Annual Report on Form 10-K. Year Ended December 31, (in thousands, except share and per share amounts) 2012 2011 2010 2009 2008 Consolidated Statements of Comprehensive IncomeData Revenue $125,991 $98,939 $64,919 $43,833 $44,440 Cost of revenue 49,853 39,324 25,443 18,559 17,738 Gross profit 76,138 59,615 39,476 25,274 26,702 Operating expenses: Marketing and sales 18,098 15,752 10,867 8,262 7,481 Research and development 9,137 5,222 4,281 3,140 3,125 General and administrative 13,957 11,772 7,629 5,965 5,438 Loss on impairment of foreign subsidiary assets — — 773 — — Total operating expenses 41,192 32,746 23,550 17,367 16,044 Income from operations 34,946 26,869 15,926 7,907 10,658 Other income (expense), net 23 (114) (213) (517) (374) Income before income taxes 34,969 26,755 15,713 7,390 10,284 Provision for income taxes 10,944 8,783 4,762 3,167 3,421 Net income 24,025 17,972 10,951 4,223 6,863 Less: dividends on redeemable preferred stock — (4,179) (4,179) (4,180) (1,752) Less: undistributed earnings allocated to preferredshareholders — (4,507) (2,377) (16) (786) Net income attributable to common shareholders $24,025 $9,286 $4,395 $27 $4,325 Net income per share Basic $1.03 $0.75 $0.40 $0.00 $0.31 Diluted $0.98 $0.67 $0.34 $0.00 $0.26 Weighted average shares outstanding Basic 23,373,593 12,352,004 11,079,432 10,564,946 13,730,458 Diluted 24,443,665 13,939,072 13,051,458 13,201,762 16,803,360 Other comprehensive income (loss) (net of tax) Foreign currency translation adjustments $(190) $(280) $(214) $152 $(299) Comprehensive income $23,835 $17,692 $10,737 $4,375 $6,564 Other Financial Data: Non-GAAP net income (unaudited) $26,220 $18,764 $11,226 $4,435 $6,974 32(1)(1)(1)(2) Table of ContentsStock-based compensation expense included in the statements of comprehensive income data above is as follows: Year Ended December 31, (in thousands) 2012 2011 2010 2009 2008 Stock options and grants $2,539 $1,130 $331 $245 $123 Employee stock purchase plan 500 — — — — Total stock-based compensation expense $3,039 $1,130 $331 $245 $123 Cost of revenue $335 $78 $39 $29 $16 Operating expenses: Marketing and sales 418 215 84 70 48 Research and development 486 274 73 53 32 General and administrative 1,800 563 135 93 27 Total stock-based compensation expense $3,039 $1,130 $331 $245 $123 Year Ended December 31, (in thousands) 2012 2011 2010 2009 2008 Consolidated Balance Sheets Data Cash and cash equivalents $36,759 $8,135 $6,101 $2,703 $2,658 Working capital 78,617 18,138 10,424 4,533 5,203 Total assets 172,722 62,326 38,354 28,797 27,389 Total liabilities 16,023 15,675 11,730 13,297 16,543 Redeemable convertible preferred stock and redeemable common stock — 66,894 62,715 58,536 54,357 Total shareholders’ equity (deficit) $156,699 $(20,243) $(36,091) $(43,036) $(43,511) (1)See Note 3 of Notes to Consolidated Financial Statements for an explanation of the method used to calculate net income per basic and diluted shareattributable to common shareholders and weighted average shares outstanding for the years ended December 31, 2012, 2011 and 2010, respectively.(2)The measure of non-GAAP net income presented is net income adjusted for stock-based compensation expense. See “Non-GAAP net income” below formore information and for a reconciliation of non-GAAP net income to net income, the most directly comparable measure calculated and presented inaccordance with GAAP.Non-GAAP net incomeTo provide investors with additional information regarding our financial results, we have disclosed in the table above non-GAAP net income, adjustedfor stock-based compensation expense, which is a non-GAAP financial measure. We have provided a reconciliation below of non-GAAP net income, adjustedfor stock-based compensation expense, to net income, the most directly comparable measure calculated and presented in accordance with GAAP.We have included non-GAAP net income, adjusted for stock-based compensation expense, in this Annual Report on Form 10-K because it is a keymeasure used by our management and Board of Directors to understand and evaluate operating performance and trends and provides a useful measure forperiod-to-period comparisons of our business. Accordingly, we believe that non-GAAP net income, adjusted for stock-based compensation expense, providesuseful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board ofDirectors. 33 Table of ContentsThe following table presents a reconciliation of non-GAAP net income, adjusted for stock-based compensation expense, to net income for each of theperiods indicated: Year Ended December 31, 2012 2011 2010 2009 2008 (in thousands) (unaudited) Non-GAAP net income, adjusted for stock-based compensation expense: GAAP net income $24,025 $17,972 $10,951 $4,223 $6,863 Add back: Stock-based compensation expense Cost of revenue 335 78 39 29 16 Marketing and sales 418 215 84 70 48 Research and development 486 274 73 53 32 General and administrative 1,800 563 135 93 27 Total stock-based compensation expense 3,039 1,130 331 245 123 Less: Tax benefit on stock-based compensation (844) (338) (56) (33) (12) Non-GAAP net income $26,220 $18,764 $11,226 $4,435 $6,974 34 Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidatedfinancial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-lookingstatements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward- looking statements asa result of various factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.OverviewWe are a leading online and technology-enabled manufacturer of quick-turn CNC machined and injection molded custom parts for prototyping andshort-run production. We provide “Real Parts, Really Fast” to product developers worldwide, who are under increasing pressure to bring their finishedproducts to market faster than their competition. We believe low-volume manufacturing has historically been an underserved market due to the inefficienciesinherent in the quotation, equipment set-up and non-recurring engineering processes required to produce custom parts. Our proprietary technology eliminatesmost of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts in low volumes, and our customers conductnearly all of their business with us over the Internet. We target our services to the millions of product developers who use 3D CAD software to design productsacross a diverse range of end-markets. Our primary manufacturing services currently include Firstcut, which is our CNC machining service, and Protomold,which is our plastic injection molding service. Through December 31, 2012, we have received over 1,000,000 uploaded part designs, sent over 875,000 partquotations and shipped over 200,000 unique parts to approximately 28,000 product developers representing over 13,000 customer companies across a widerange of industries.We have experienced significant growth since our inception. Since we first introduced our Protomold injection molding service in 1999, we have steadilyexpanded the size and geometric complexity of the injection molded parts we are able to manufacture, and we continue to extend the diversity of materials we areable to support. Similarly, since first introducing our Firstcut CNC machining service in 2007, we have expanded the range of part sizes, design geometriesand materials we can support. We are also continually seeking to enhance other aspects of our technology and manufacturing processes, including ourinteractive web-based and automated user interface and quoting system. We intend to continue to invest significantly in enhancing our technology andmanufacturing processes and expanding the range of our existing capabilities with the aim of meeting the needs of a broader set of product developers. As aresult of the factors described above, many of our customers tend to return to Proto Labs to meet their ongoing needs, with approximately 84%, 81% and 77%of our revenue in 2012, 2011 and 2010, respectively, derived from existing customers who had placed orders with us in prior years.We have established our operations in the United States, Europe and Japan, which we believe are three of the largest geographic markets where productdevelopers are located. We entered the European market in 2005 and launched operations in Japan in late 2009. Our current international operations are notprofitable in all markets due to the fixed costs associated with commissioning new manufacturing locations, especially in the early stages, such as thoseassociated with managing foreign operations and the hiring and training of personnel, bringing the manufacturing facility on-line, translation of United Statesmarketing materials to local languages, local brand marketing, compliance costs of laws and regulations, and the generally higher costs of doing businessinternationally, particularly as they relate to local labor practices and laws regulating employees costs. In addition, in the early life of new facilities, economiesof scale are typically not realized resulting in lower operating margins. We believe that with revenue growth over time, gross margins in international marketswill be generally consistent with those in the United States. As of December 31, 2012, we had sold products into more than 50 countries. Our sales outside ofthe United States accounted for approximately 25% of our consolidated sales in 2012 and approximately 26% of our consolidated sales in 2011 and 2010,respectively. We intend to continue to expand our international sales efforts and believe opportunities exist to serve the needs of product developers in select newgeographic regions.We have grown our total revenue from $44.4 million in 2008 to $126.0 million in 2012. During this period, our operating expenses increased from$16.0 million in 2008 to $41.2 million in 2012. We have grown our income from operations from $10.7 million in 2008 to $34.9 million in 2012. Our recentgrowth in revenue and income from operations has been accompanied by increased operating expenses, with the two most significant components beingmarketing and sales and general and administrative expenses. We expect to increasingly invest in our operations to support anticipated future growth andpublic company reporting and compliance obligations, as discussed more fully below. 35 Table of ContentsIn addition, we believe that a number of trends affecting our industry have affected our results of operations and may continue to do so. For example, webelieve that many of our target product developer customers have increasing e-commerce expectations, are facing increased pressure to accelerate the time tomarket for their products and continue to migrate from using 2D CAD to using 3D CAD for their design needs. We believe we continue to be well positioned tobenefit from these trends, given our proprietary technology that enables us to automate and integrate the majority of activities involved in procuring customlow-volume parts, starting with our elegant web interface through which a product developer submits a 3D CAD part design. While our business may bepositively affected by these trends, our results may also be favorably or unfavorably impacted by other trends that affect product developer orders for customparts in low volumes, including, among others, changes in product developer preferences or needs, developments in our industry and among our competitorsand factors impacting new product development volume such as economic conditions. For a more complete discussion of the risks facing our business, see“Risk Factors.”Key Financial Measures and TrendsRevenueThe Company’s operations are comprised of three geographically-based business units in the United States, Europe and Japan. Revenue within each ofour subsidiaries is derived from our Firstcut and Protomold services. Firstcut revenue consists of sales of CNC-machined custom parts. Protomold revenueconsists of sales of custom injection molds and injection-molded parts. Our revenue is generated from a diverse customer base, with no single customercompany representing more than approximately 2% of our total revenue in 2012. Our historical and current efforts to increase revenue have been directed atgaining new customers and selling to our existing customer base by increasing marketing and selling activities, offering additional services such as theintroduction of our Firstcut service in 2007, expanding internationally such as the opening of our Japanese office in 2009, improving the usability of ourservices such as our web-centric applications, and expanding the breadth and scope of our products such as by adding more sizes and materials to ourofferings. During 2012, we sold our services to approximately 4,760 customer companies from our existing customer base, an increase of 39% over thecomparable period in 2011, and to approximately 2,990 new customer companies, an increase of 15% over the comparable period in 2011. During 2011, wesold our services to approximately 3,430 customer companies from our existing customer base, an increase of 38% over the comparable period in 2010, and toapproximately 2,600 new customer companies, an increase of 36% over the comparable period in 2010. During 2010, we sold our services to approximately2,480 customer companies from our existing customer base, an increase of 37% over 2009, and to approximately 1,910 new customer companies, an increaseof 49% over 2009.Cost of Revenue, Gross Profit and Gross MarginCost of revenue consists primarily of raw materials, equipment depreciation, employee salaries, benefits, stock-based compensation, bonuses andoverhead allocations associated with the manufacturing process for molds and custom parts. We expect cost of revenue to increase in absolute dollars, butremain relatively constant as a percentage of total revenue.During 2010 and 2011, we benefited from high utilization in both our factories and manufacturing equipment, especially in the United States. Ourbusiness model requires that we invest in our capacity well in advance of demand to ensure we can fulfill the expectations for quick service from ourcustomers. Therefore, during 2012 we have made significant investments in additional factory space and infrastructure in the United States and Japan. Weexpect to continue to grow in future periods, which will result in the need for additional investments in factory space and equipment. We expect that theseadditional costs for factory and equipment expansion can be absorbed by revenue growth, and allow gross margins to remain relatively consistent over time.We define gross profit as our revenue less our cost of revenue, and we define gross margin as gross profit expressed as a percentage of revenue. Ourgross profit and gross margin are affected by many factors, including our pricing, sales volume and manufacturing costs, the costs associated with increasingproduction capacity, the mix between domestic and foreign revenue sources and foreign exchange rates.Our gross margins vary between geographic markets due primarily to the costs associated with starting new factories and our operating maturity in thesemarkets. We believe that over time and with growth and maturity of our international business, gross margins will be generally consistent through all ourmarkets.Operating ExpensesOperating expenses consist of marketing and sales, research and development and general and administrative expenses and loss on impairment offoreign subsidiary assets. Personnel-related costs are the most significant component of the marketing and sales, research and development and general andadministrative expense categories. 36 Table of ContentsOur recent growth in operating expenses is mainly due to higher headcounts to support our growth and expansion, and we expect that trend to continue.Our business strategy is to continue to be a leading online and technology-enabled manufacturer of quick-turn CNC machined and injection molded customparts for prototyping and short-run production. For us to achieve our goals, we anticipate continued substantial investments in technology and personnel,resulting in increased operating expenses.Marketing and sales. Marketing and sales expense consists primarily of employee salaries, benefits, commissions, stock-based compensation andbonuses, marketing programs such as print and pay-per-click advertising, trade shows, direct mail and other related overhead. We expect sales and marketingexpense to increase in the future as we increase the number of marketing and sales professionals and marketing programs targeted to increase our customerbase.Research and development. Research and development expense consists primarily of employee salaries, benefits, stock-based compensation, bonuses,depreciation on equipment, outside services and other related overhead. All of our research and development costs have been expensed as incurred. We expectresearch and development expense to increase in the future as we seek to enhance and expand our service offerings.General and administrative. General and administrative expense consists primarily of employee salaries, benefits, stock-based compensation,bonuses, professional service fees related to accounting, tax, legal and other related overhead. We expect general and administrative expense to increase on anabsolute basis and as a percentage of revenue as we continue to grow and expand our operations and develop the infrastructure necessary to operate as a publiccompany. These expenses will include increased audit and legal fees, costs of compliance with securities and other regulations, implementation costs forcompliance with the provisions of the Sarbanes-Oxley Act, investor relations expense and higher insurance premiums.Loss on impairment of foreign subsidiary assets. In 2010, we updated our forecasts for our Japanese subsidiary in accordance with AccountingStandards Codification (ASC) 360, Property, Plant and Equipment (ASC 360). Our original forecasts, prepared in 2008, did not anticipate the globalrecession and the slow recovery in Japan and the differences in customer preferences. Therefore, our revenues from our Japanese subsidiary were lower thanprojected and in accordance with ASC 360, we recorded a loss on impairment of selected property, plant and equipment in Japan. In 2012, we performed ananalysis in accordance with ASC 360 using current forecast and asset information, and concluded that no additional impairment exists. In the future we willcontinue to make annual assessments on the carrying value of long-lived assets per ASC 360. If these assessments indicate an impairment exists, we will writedown the assets to their fair value. The circumstances that may lead to future impairment charges are difficult to predict and we do not believe suchcircumstances currently exist.Other income (expense), netOther income (expense), net primarily consists of foreign currency-related gains and losses, interest income on cash balances and investments, andinterest expense on borrowings. Our foreign currency-related gains and losses will vary depending upon movements in underlying exchange rates. Our interestincome will vary each reporting period depending on our average cash balances during the period, composition of our marketable security portfolio and thecurrent level of interest rates. Our interest expense will vary based on borrowings and interest rates.Provision for income taxesProvision for income taxes is comprised of federal, state, local and foreign taxes based on pre-tax income. We expect income taxes to increase as ourtaxable income increases and our effective tax rate to remain relatively constant.In the fourth quarter of 2010, we made a qualified subsidiary election for our Japanese subsidiary. This qualified election resulted in a deemedliquidation of the subsidiary into the parent and created a current tax deduction for United States federal tax purposes during the fourth quarter of 2010. Thiselection enabled us to deduct prior Japanese net losses and investments. In future periods, we will qualify for additional deductions if our Japanese subsidiarycontinues to experience net losses.Segment resultsWe previously reported segments on a geographic basis. In 2012 as our operations have evolved, the CEO, who is the Company’s chief operating decisionmaker, began reviewing operating results only at the consolidated level, which is how the CEO makes decisions to operate the business and allocate resources.As a result, we have determined that we have only one operating segment, and have revised our historical segment presentation to align with the current yearpresentation. 37 Table of ContentsResults of OperationsThe following table sets forth a summary of our results of operations and the related changes for the periods indicated. The results below are notnecessarily indicative of the results for future periods. Year Ended Year Ended December 31, Change December 31, Change (dollars in thousands) 2012 2011 $ % 2011 2010 $ % Revenue $125,991 100.0% $98,939 100.0% $27,052 27.3% $98,939 100.0% $64,919 100.0% $34,020 52.4% Cost of revenue 49,853 39.6 39,324 39.7 10,529 26.8 39,324 39.7 25,443 39.2 13,881 54.6 Gross profit 76,138 60.4 59,615 60.3 16,523 27.7 59,615 60.3 39,476 60.8 20,139 51.0 Operating expenses: Marketing and sales 18,098 14.4 15,752 15.9 2,346 14.9 15,752 15.9 10,867 16.7 4,885 45.0 Research and development 9,137 7.2 5,222 5.3 3,915 75.0 5,222 5.3 4,281 6.6 941 22.0 General and administrative 13,957 11.1 11,772 11.9 2,185 18.6 11,772 11.9 7,629 11.8 4,143 54.3 Loss on impairment of foreign subsidiary assets — — — — — — — — 773 1.2 (773) * Total operating expenses 41,192 32.7 32,746 33.1 8,446 25.8 32,746 33.1 23,550 36.3 9,196 39.0 Income from operations 34,946 27.7 26,869 27.2 8,077 30.1 26,869 27.2 15,926 24.5 10,943 68.7 Other income (expense), net 23 0.1 (114) (0.2) 137 * (114) (0.2) (213) (0.3) 99 (46.5) Income before income taxes 34,969 27.8 26,755 27.0 8,214 30.7 26,755 27.0 15,713 24.2 11,042 70.3 Provision for income taxes 10,944 8.7 8,783 8.8 2,161 24.6 8,783 8.8 4,762 7.3 4,021 84.4 Net income $24,025 19.1% $17,972 18.2% $6,053 33.7% $17,972 18.2% $10,951 16.9% $7,021 64.1% *Percentage change not meaningfulStock-based compensation expense included in the statements of comprehensive income data above is as follows: Year Ended December 31, (dollars in thousands) 2012 2011 2010 Stock options and grants $2,539 $1,130 $331 Employee stock purchase plan 500 — — Total stock-based compensation expense $3,039 $1,130 $331 Cost of revenue $335 $78 $39 Operating expenses: Marketing and sales 418 215 84 Research and development 486 274 73 General and administrative 1,800 563 135 Total stock-based compensation expense $3,039 $1,130 $331 38 Table of ContentsComparison of Years Ended December 31, 2012 and 2011RevenueRevenue and the related changes for 2012 and 2011 were as follows: Year Ended December 31, 2012 2011 Change (dollars in thousands) $ % of TotalRevenue $ % of TotalRevenue $ % Revenue Protomold $90,371 71.7% $74,090 74.9% $16,281 22.0% First Cut 35,620 28.3 24,849 25.1 10,771 43.3 Total revenue $125,991 100.0% $98,939 100.0% $27,052 27.3% Revenue by geographic region, based on the billing location of the end customer, is summarized as follows: Year Ended December 31, 2012 2011 Change (dollars in thousands) $ % of TotalRevenue $ % of TotalRevenue $ % Revenue United States $94,866 75.3% $73,010 73.8% $21,856 29.9% International 31,125 24.7 25,929 26.2 5,196 20.0 Total revenue $125,991 100.0% $98,939 100.0% $27,052 27.3% Our revenue increased $27.1 million, or 27.3%, for 2012 compared with 2011. Of this growth, approximately $20.8 million was attributable to sales toapproximately 2,990 new customer companies gained during 2012, and approximately $6.3 million was attributable to sales to approximately 4,760 existingcustomer companies. By geographic region in which we operate, our revenue growth was attributable to approximately $12.4 million in sales to approximately1,800 new customers and approximately $9.6 million in sales to approximately 3,620 existing customers in the United States; approximately $6.8 million insales to approximately 860 new customers offset by a decline of approximately $3.7 million in sales to approximately 910 existing customers in Europe; andapproximately $1.6 million in sales to approximately 330 new customers and $0.4 million in sales to approximately 230 existing customers in Japan. Ouroverall revenue growth was driven by a 29.9% increase in United States revenue, a 20.0% increase in international revenue, a 22.0% increase in Protomoldrevenue and a 43.3% increase in Firstcut revenue, in each case for 2012 compared with 2011.Our revenue increases were primarily driven by increases in sales personnel and marketing activities. Our sales personnel focus on gaining newcustomer accounts and expanding the depth and breadth into existing customer accounts. Our marketing personnel focus on trade show and marketingactivities that have proven to result in the greatest number of customer leads to support sales activity. International revenue was negatively impacted by $0.3million in 2012 compared to 2011 due to strengthening of the United States dollar relative to certain foreign currencies. The effect of pricing changes onrevenue was immaterial for 2012 compared to 2011.Cost of Revenue, Gross Profit and Gross MarginCost of Revenue. Cost of revenue increased $10.5 million, or 26.8%, for 2012 compared to 2011, which was slightly slower than the rate of revenueincrease of 27.3 % for 2012 compared to 2011. The increase in cost of revenue was due to raw material and production cost increases of $2.9 million tosupport increased sales volumes, equipment and facility-related cost increases of $2.4 million and an increase in direct labor headcount resulting in personneland related cost increases of $5.2 million.Gross Profit and Gross Margin. Gross profit increased from $59.6 million, or 60.3% of revenues, in 2011 to $76.1 million, or 60.4% of revenues,in 2012 primarily due to revenue increasing faster than cost of revenue as discussed above. Gross margin remained consistent primarily as a result ofincreased productivity offset by the cost of additional capacity added during the year, primarily additional manufacturing space and facilities. 39 Table of ContentsOperating Expenses, Other Expense, net and Provision for Income TaxesMarketing and Sales. Marketing and sales expense increased $2.3 million, or 14.9%, for 2012 compared to 2011 due to an increase in headcountresulting in personnel and related cost increases of $2.1 million and marketing program cost increases of $0.2 million. The marginal increase in marketingprogram costs is the result of our focus and concentration on funding those programs which have proven to be the most effective in growing our business.Marketing and sales expense as a percentage of revenue decreased to 14.4% for 2012 from 15.9% in 2011, primarily due to the fixed nature of certainmarketing and sales costs as well as focus on effective marketing spending as previously discussed.Research and Development. Our research and development expense increased $3.9 million, or 75.0%, for 2012 compared to 2011 due to an increase inheadcount resulting in personnel and related cost increases of $1.0 million, operating cost increases of $0.8 million and professional services of $2.1 foroutside development services.General and Administrative. Our general and administrative expense increased $2.2 million, or 18.6%, for 2012 compared to 2011 due to stock-basedcompensation increases of $1.2 million, facility and administrative cost increases of $0.2 million and professional service cost increases of $0.8 million foroutside legal and accounting services. These professional service cost increases are connected to our becoming a public company during 2012.Other Income (Expense), net. Other income (expense), net decreased $0.1 million for 2012 compared with 2011 due to changes in foreign currencyrates.Provision for Income Taxes. Our income tax provision increased $2.2 million for 2012 compared to 2011 due an increase of taxable income. Oureffective tax rate decreased to 31.3% in 2012 from 32.8% in 2011 due primarily to the mix of revenue earned in domestic and foreign tax jurisdictions and anincrease in manufacturing activity that qualified for the domestic manufacturing deduction in 2012.Comparison of Years Ended December 31, 2011 and 2010RevenueRevenue and the related changes for 2011 and 2010 were as follows: Year Ended December 31, 2011 2010 Change (dollars in thousands) $ % of TotalRevenue $ % of TotalRevenue $ % Revenue Protomold $74,090 74.9% $50,690 78.1% $23,400 46.2% First Cut 24,849 25.1 14,229 21.9 10,620 74.6 Total revenue $98,939 100.0% $64,919 100.0% $34,020 52.4% 40 Table of ContentsRevenue by geographic region, based on the billing location of the end customer, is summarized as follows: Year Ended December 31, 2011 2010 Change (dollars in thousands) $ % of TotalRevenue $ % of TotalRevenue $ % Revenue United States $73,010 73.8% $48,059 74.0% $24,951 51.9% International 25,929 26.2 16,860 26.0 9,069 53.8 Total revenue $98,939 100.0% $64,919 100.0% $34,020 52.4% Our revenue increased $34.0 million, or 52.4%, for 2011 compared with 2010. Of this growth, approximately $18.4 million was attributable to sales toapproximately 2,600 new customer companies gained during 2011 and approximately $15.6 million was attributable to sales to approximately 3,430 existingcustomer companies. By geographic region in which we operate, our revenue growth was attributable to approximately $10.6 million in sales to approximately1,670 new customers and approximately $13.8 million in sales to approximately 2,750 existing customers in the United States; approximately $6.6 millionin sales to approximately 730 new customers approximately $1.2 million in sales to approximately 570 existing customers in Europe; and approximately $1.2million in sales to approximately 190 new customers and $0.6 million in sales to approximately 100 existing customers in Japan. Our overall revenue growthwas driven by a 51.9% increase in United States revenue, a 53.8% increase in international revenue, a 46.2% increase in Protomold revenue and a 74.6%increase in Firstcut revenue, in each case for 2011 compared with 2010.Our revenue increases were primarily driven by greater spending on marketing and increases in selling personnel. International revenue was positivelyimpacted by $0.9 million in 2011 compared to 2010 due to weakening of the United States dollar relative to certain foreign currencies. The effect of pricingchanges on revenue was immaterial for 2011 compared to 2010.Cost of Revenue, Gross Profit and Gross MarginCost of Revenue. Cost of revenue increased $13.9 million, or 54.6%, for 2011 compared with 2010, primarily due to the increased volume of moldsand custom parts we manufactured and shipped driven by greater spending on marketing and increases in selling personnel.Gross Profit and Gross Margin. Gross profit increased from $39.5 million, or 60.8% of revenues, in 2010 to $59.6 million, or 60.3% of revenues,in 2011 primarily due to revenue increasing faster than cost of revenue as discussed above. Gross margin decreased primarily as a result of increasedproduction capacity due to capital investment for which efficiencies through utilization and productivity gains had not been fully realized.Operating Expenses, Other Expense, net and Provision for Income TaxesMarketing and Sales. Marketing and sales expense increased $4.9 million, or 45.0%, for 2011 compared with 2010 due to a $2.5 million increase inmarketing program costs and an increase in headcount resulting in a $2.4 million increase in personnel and related costs. Marketing and sales expense as apercentage of revenue decreased to 15.9% for 2011 from 16.7% in 2010, primarily due to the fixed nature of certain marketing and sales costs.Research and Development. Our research and development expense increased $0.9 million, or 22.0%, for 2011 compared with 2010 due to an increasein headcount.General and Administrative. Our general and administrative expense increased $4.1 million, or 54.3%, for 2011 compared with 2010 due to anincrease in headcount resulting in personnel and related cost increases of $2.3 million, administrative costs of $0.6 million, facilities-related expenses of $0.5million, recruiting costs of $0.4 million and professional services of $0.3 million for outside legal and accounting.Other Income (Expense), net. Other income (expense), net decreased $0.1 million for 2011 compared with 2010 due to changes in foreign currencyrates.Provision for Income Taxes. Our income tax provision increased $4.0 million for 2011 compared with 2010 due to the increased taxable income. Oureffective tax rate increased to 32.8% in 2011 from 30.3% in 2010 due primarily to an election made on our United States federal tax return during 2010 to treatour Japanese subsidiary as a qualified subsidiary, which resulted in a reduction in our 2010 effective tax rate. 41 Table of ContentsSelected Quarterly Results of Operations DataThe following tables set forth selected unaudited quarterly results of operations data for 2012 and 2011 as well as the percentage that each line itemrepresents of total revenue. This unaudited quarterly information has been prepared on the same basis as our annual audited consolidated financial statementsappearing elsewhere in this Annual Report on Form 10-K and includes all adjustments, consisting only of normal recurring adjustments, that we considernecessary to present fairly the financial information for the fiscal quarters presented. The quarterly data should be read in conjunction with our selectedfinancial data and consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. Operating results for anyquarter are not necessarily indicative of results for a full-year period, and the historical results presented below are not necessarily indicative of the results to beexpected in any future period. Three Months Ended (in thousands, except share and pershare amounts) Dec. 31,2012 Sep. 30,2012 Jun. 30,2012 Mar. 31,2012 Dec. 31,2011 Sep. 30,2011 Jun. 30,2011 Mar. 31,2011 (unaudited) Consolidated Statements of Comprehensive Income Data: Revenue $33,616 $32,454 $29,951 $29,970 $25,637 $26,915 $24,052 $22,335 Cost of revenue 12,611 12,760 12,239 12,243 11,073 10,305 9,517 8,429 Gross profit 21,005 19,694 17,712 17,727 14,564 16,610 14,535 13,906 Operating expenses: Marketing and sales 4,658 4,442 4,557 4,441 4,612 4,001 3,924 3,215 Research and development 2,515 2,561 2,401 1,660 1,584 1,303 1,223 1,112 General and administrative 3,564 3,118 3,288 3,988 3,475 3,038 2,753 2,506 Total operating expenses 10,737 10,121 10,246 10,089 9,671 8,342 7,900 6,833 Income from operations 10,268 9,573 7,466 7,638 4,893 8,268 6,635 7,073 Other income (expense), net 114 314 173 (577) (132) 21 78 (81) Income before income taxes 10,382 9,887 7,639 7,061 4,761 8,289 6,713 6,992 Provision for income taxes 2,987 3,185 2,493 2,279 1,531 2,801 2,182 2,269 Net income 7,395 6,702 5,146 4,782 3,230 5,488 4,531 4,723 Less: dividends on redeemable preferred stock — — — — (1,053) (1,053) (1,042) (1,031) Less: undistributed earnings allocated to preferredshareholders — — — — (673) (1,415) (1,160) (1,259) Net income attributable to common shareholders $7,395 $6,702 $5,146 $4,782 $1,504 $3,020 $2,329 $2,433 Net income per share: Basic $0.30 $0.28 $0.22 $0.23 $0.12 $0.23 $0.19 $0.21 Diluted $0.29 $0.26 $0.20 $0.22 $0.11 $0.22 $0.17 $0.19 Shares used to compute net income per share: Basic 24,557,878 24,052,409 23,929,886 20,934,948 12,895,918 12,895,918 12,007,674 11,581,430 Diluted 25,359,071 25,312,643 25,280,835 22,226,356 14,045,402 13,560,400 13,364,610 12,868,254 42 Table of Contents Three Months Ended Dec. 31,2012 Sep. 30,2012 Jun. 30,2012 Mar. 31,2012 Dec. 31,2011 Sep. 30,2011 Jun. 30,2011 Mar. 31,2011 (unaudited) Consolidated Statements of Comprehensive Income Data: Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue 37.5 39.3 40.9 40.9 43.2 38.3 39.6 37.7 Gross profit 62.5 60.7 59.1 59.1 56.8 61.7 60.4 62.3 Operating expenses: Marketing and sales 13.9 13.7 15.2 14.8 18.0 14.9 16.3 14.4 Research and development 7.5 7.9 8.0 5.5 6.2 4.8 5.1 5.0 General and administrative 10.6 9.6 11.0 13.3 13.5 11.3 11.4 11.2 Total operating expenses 32.0 31.2 34.2 33.6 37.7 31.0 32.8 30.6 Income from operations 30.5 29.5 24.9 25.5 19.1 30.7 27.6 31.7 Other income (expense), net 0.4 1.0 0.6 (1.9) (0.5) 0.1 0.3 (0.4) Income before income taxes 30.9 30.5 25.5 23.6 18.6 30.8 27.9 31.3 Provision for income taxes 8.9 9.8 8.3 7.6 6.0 10.4 9.1 10.2 Net income 22.0% 20.7% 17.2% 16.0% 12.6% 20.4% 18.8% 21.1% Liquidity and Capital ResourcesCash FlowsThe following table summarizes our cash flows for the years ended December 31, 2012, 2011 and 2010: Year Ended December 31, (dollars in thousands) 2012 2011 2010 Net cash provided by operating activities $25,306 $23,535 $14,012 Net cash used in investing activities (79,248) (18,503) (6,041) Net cash provided by (used in) financing activities 82,786 (2,845) (4,229) Effect of exchange rates on cash and cash equivalents (220) (153) (344) Net increase in cash and cash equivalents $28,624 $2,034 $3,398 Sources of LiquidityHistorically, we have financed our operations and capital expenditures through operations, lease financing and the use of bank loans. In February 2012,we completed the initial public offering of our common stock, which provided us with $71.5 million of cash, net of underwriting discounts and commissionsand offering expenses payable by us. In November 2012, we completed a follow-on offering of our common stock, which provided us with $2.5 million ofcash, net of underwriting discounts and commissions and offering expenses payable by us. We had cash and cash equivalents of $36.8 million as ofDecember 31, 2012, an increase of $28.6 million from December 31, 2011. The increase in our cash was due primarily to cash received from the initialpublic offering and follow-on offering of our common stock and generated through operations and partially reduced by investment activity. We had cash andcash equivalents of $8.1 million as of December 31, 2011, an increase of $2.0 million from December 31, 2010. The increase in our cash was due to cashgenerated by operations. The December 31, 2010 cash balance represented an increase of $3.4 million from the December 31, 2009 cash balance of $2.7million, and this increase was also due to cash generated by operations.As of December 31, 2012, the amount of cash and cash equivalents held by foreign subsidiaries was $4.9 million. If these funds are needed for ourdomestic operations, we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these fundsoutside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our domestic operations. We believe that our existing cash and cashequivalents together with cash generated from operations will be sufficient to meet our working capital expenditure requirements for at least the next 12 months. 43 Table of ContentsCash Flows from Operating ActivitiesCash provided by operating activities was $25.3 million for the year ended December 31, 2012. We had net income of $24.0 million, which includednon-cash charges consisting of $6.1 million in depreciation, $3.0 million in stock-based compensation and $0.2 million in loss on the disposal of propertyand equipment, which was partially offset by $6.2 million of excess tax benefit on stock-based compensation and $0.6 million in deferred taxes. Other usesof cash in operating activities totaled $1.2 million, which included an increase in accounts receivable of $4.4 million, increase in prepaid expenses and other of$1.9 million, and increase in inventory of $0.8 million, which were partially offset by an increase in income taxes payable of $4.3 million, increase inaccrued liabilities and other of $1.3 million and increase in accounts payable of $0.3 million. The excess tax benefit on stock-based compensation is the resultof dispositions of stock options during the year by our employees, the reciprocal of which is presented as an increase in financing cash flows described below.The impact of deferred taxes and taxes payable are due to the composition of our earnings, including revenue earned in domestic or foreign jurisdictions. Theexcess tax benefit on stock-based compensation reduces the payment of taxes owed. Due to this benefit, while we recognized an increase in taxes payable as aresult of our operations, the volume of tax benefit on stock option activity resulted in a net tax receivable position for the year. As it relates to other accounts, theincreases in accounts receivable, inventory and accounts payable reflect the growth of our business and support the increase in revenue in 2012 compared to2011 as previously discussed. The increase in prepaid expenses and other and accrued liabilities and other were primarily driven by transactions in ourEuropean subsidiary created as a result of stock option activity during the year.Cash provided by operating activities was $23.5 million for the year ended December 31, 2011. We had net income of $18.0 million, which includednon-cash charges consisting of $4.3 million in depreciation, $2.2 million in deferred taxes and $1.1 million in stock-based compensation expense partiallyoffset by excess tax benefit from stock-based compensation of $0.7 million. Other uses of cash in operating activities totaled $1.4 million, which included anincrease in accounts receivable of $3.4 million, an increase in inventory of $2.2 million and an increase in prepaid expenses and other of $0.6 million. Thesewere partially offset by an increase in accrued liabilities of $3.3 million and an increase in accounts payable of $1.5 million. The impact of deferred taxes isdue to the composition of our earnings, including revenue earned in domestic or foreign jurisdictions. The excess tax benefit on stock-based compensation isthe result of dispositions of stock options during the year by our employees, the reciprocal of which is presented as an increase in financing cash flowsdescribed below. As it relates to other accounts, the increases in accounts receivable, inventory and accounts payable reflect the growth of our business andsupport the increase in revenue in 2011 compared to 2010 as previously discussed. The increase in prepaid expenses and other was primarily attributable tocosts incurred as we prepared for our initial public offering. The increase in accrued liabilities and other was primarily driven by employee compensationaccruals for amounts earned in 2011 but paid in early 2012.Cash provided by operating activities was $14.0 million for the year ended December 31, 2010. We had net income of $11.0 million, which includednon-cash charges consisting of $3.5 million in depreciation, an asset impairment charge of $0.8 million, an increase in deferred income taxes of $0.5 millionand $0.3 million in stock-based compensation expense. Other uses of cash in operating activities totaled $2.1 million, which included an increase in accountsreceivable of $3.0 million, an increase of $0.8 million in prepaid expenses, an increase in inventory of $0.5 million and a decrease in income taxes payable of$0.1 million. These were partially offset by an increase in accrued liabilities of $1.2 million and an increase in accounts payable of $1.1 million. The increasein accounts receivable reflects increased revenue. The increase in accounts payable was due to an increased level of operations.Cash Flows from Investing ActivitiesCash used in investing activities was $79.2 million for the year ended December 31, 2012, consisting of $17.4 million for the purchase of property andequipment primarily to expand our production capacity and $84.2 million for the purchase of marketable securities, which were partially offset by $22.4million in proceeds from the maturities and call redemption of marketable securities. The purchase of marketable securities is primarily the result of proceedsreceived in connection with the initial public offering and follow-on offering, which are described in more detail in Item 5. “Market for Registrant’s CommonEquity, Related Stockholder Matters and Issuer Purchases of Equity Securities” and Item 8. “Financial Statements and Supplementary Data.”Cash used in investing activities was $18.5 million for the year ended December 31, 2011, consisting of $19.0 million for the purchase of property andequipment and a net reduction of short-term investments of $0.5 million.Cash used in investing activities was $6.0 million for the year ended December 31, 2010, consisting of $7.0 million for the purchase of property andequipment and a net reduction of short-term investments of $1.0 million. 44 Table of ContentsCash Flows from Financing ActivitiesCash provided by financing activities was $82.8 million for the year ended December 31, 2012, consisting of $71.5 million from the initial publicoffering of our common stock, $2.5 million from the follow-on offering of our common stock, excess tax benefit on stock-based compensation of $6.2 millionand $3.0 million in proceeds from exercises of stock options and warrants, which were partially offset by $0.4 million for payments of debt.Cash used in financing activities was $2.8 million for the year ended December 31, 2011. The primary use of funds was for net payments on debt of$4.0 million, which was offset by the excess tax benefit from stock-based compensation of $0.7 million and stock option and warrant exercises of $0.5million.Cash used in financing activities was $4.2 million for the year ended December 31, 2010. The primary use of funds was for payments on debt of $4.3million, which was partially offset by stock option and warrant exercises of $0.1 million.Operating and Capital Expenditure RequirementsWe believe, based on our current operating plan, that our cash balances and cash generated through operations and interest income, will be sufficient tomeet our anticipated cash requirements through at least the next 12 months. From time to time we may seek to sell equity or convertible debt securities or enterinto credit facilities. The sale of equity and convertible debt securities may result in dilution to our shareholders. If we raise additional funds through theissuance of convertible debt securities or enter into credit facilities, these securities and debt holders could have rights senior to those of our common stock,and this debt could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Anysuch required additional capital may not be available on terms acceptable to us, or at all.Our future capital requirements will depend on many factors, including the following: •the revenue generated by Firstcut and Protomold services; •costs of operations, including costs relating to expansion and growth; •the emergence of competing or complementary technological developments; •the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual product rights, or participating in litigation-relatedactivities; and •the acquisition of businesses, products and technologies, although we currently have no commitments or agreements relating to any of these typesof transactions.Our annual capital expenditures generally have varied between approximately 8% and 19% of annual revenue. We believe future capital expenditures,excluding any expenditures for buildings we might purchase for our operations, are likely to vary between approximately 8% and 12% of annual revenue.Contractual ObligationsAs of December 31, 2012, our contractual obligations and the effect such obligations are expected to have on our liquidity and cash flows in futureperiods were as follows: Payment Due by Period (in thousands) Total Less than1 Year 1-3Years 3-5Years More than5 Years Operating leases $7,132 $1,289 $2,517 $1,267 $2,059 Capital leases 690 311 368 11 — Total $7,822 $1,600 $2,885 $1,278 $2,059 45 Table of ContentsThe table above reflects only payment obligations that are fixed and determinable. Our commitments for operating leases relate to one of our UnitedStates manufacturing facilities as well as our European and Japanese facilities. Our commitments for capital leases relate to equipment financing for ourEuropean and Japanese operations. There have been no new material lease agreements entered into during the year ended December 31, 2012.Financing ArrangementsIn August 2008, we established a $5.0 million revolving credit facility, or revolving note, and a $10.0 million term loan, or term note, with Wells FargoBank, N.A. In November 2009, we amended the credit agreement, revolving note, and term note, which then had an outstanding principal amount of $6.7million. We paid off the term note in May 2011, and we have had no borrowings under the revolving note during 2011 or 2012. The revolving note bearsinterest at either (i) the fixed rate equal to the sum of 2.0% per annum and LIBOR, in effect from time to time, or (ii) the fluctuating rate equal to the sum of2.0% per annum and the daily one-month LIBOR in effect from time to time. The revolving note is secured by a first lien on substantially all of our personalproperty and on the real property at our Maple Plain, Minnesota facility. The credit agreement contains covenants limiting capital expenditures and investmentsin foreign subsidiaries and includes certain financial thresholds. In September 2011, we amended and restated the credit agreement and revolving note,increasing the maximum amount that can be borrowed under the note to $10.0 million. The amended revolving note bears interest at either (i) the fixed rateequal to the sum of 1.5% per annum and LIBOR, in effect from time to time, or (ii) the fluctuating rate equal to the sum of 1.5% per annum and the daily one-month LIBOR in effect from time to time. The amended credit agreement does not contain a covenant limiting capital expenditures but does limit investments inforeign subsidiaries exceeding $10.0 million. The amended credit agreement also includes certain financial thresholds such as requiring us to maintain tangiblenet worth as of the end of each quarter of not less than $20.0 million and net income after taxes each quarter of not less than $0.5 million. On December 31,2012, there were no advances outstanding under the amended revolving note and we were in compliance with all terms and conditions of the amended creditagreement. Our amended revolving note terminates on September 30, 2013.The following table summarizes our financing arrangements as of December 31, 2012 and 2011: December 31, (in thousands) 2012 2011 Various obligations under capital leases, with interest rates from 4.5% to 7.4%, due in various monthlyinstallments, including interest, through various dates through January 2016, secured by equipment $629 $1,003 Less current portion 273 390 Long-term obligation $356 $613 InflationWe believe that inflation and changing prices have not had a material effect on our financial condition during the three most recent fiscal years.Off-Balance Sheet ArrangementsSince our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities orvariable interest entities.Critical Accounting Policies and Use of EstimatesThe discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to makeestimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenue, expenses and related disclosures. On an ongoing basis, weevaluate our estimates, including those related to revenue recognition, the allowance for doubtful accounts, inventory valuation, stock-based compensation andincome taxes. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances. In many cases, we could reasonably have used different accounting policies and estimates. In some cases,changes in the accounting estimates are reasonably likely to occur from period to period. Management has discussed the development, selection and disclosureof these estimates with the audit committee of our board of directors. Our actual results may differ significantly from these estimates under differentassumptions or conditions. 46 Table of ContentsWe believe the following critical accounting policies affect our more significant judgments used in the preparation of our consolidated financialstatements. See the Notes to Consolidated Financial Statements included in Item 8 “Financial Statements and Supplementary Data” in this Annual Report onForm 10-K for additional information about these critical accounting policies, as well as a description of our other accounting policies.Revenue RecognitionWe recognize revenue in accordance with ASC 605, Revenue Recognition (ASC 605) which states that revenue is realized or realizable and earnedwhen all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) theprice to the buyer is fixed or determinable, and (4) collectability is reasonably assured.Revenue is generally recognized upon transfer of title and risk of loss, which for us is upon shipment of parts in our Firstcut product line and shipmentof the parts made from the mold in our Protomold product line. We also record a provision for estimated product returns and allowances in the period in whichthe related revenue is recorded. This provision against current gross revenue is based principally on historical rates of sales returns.Allowance for Doubtful AccountsWe carry our accounts receivable at the invoiced amount less an allowance for doubtful accounts. On a periodic basis, we evaluate our accountsreceivable and establish an allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditions taking intoaccount the history of write-offs and collections. A receivable is considered past due if payment has not been received within the period agreed upon in theinvoice. Accounts receivable are written off after all collection efforts have been exhausted. To date, we have not incurred any write-offs of accounts receivablesignificantly different than the amounts reserved. We believe appropriate reserves have been established, but they may not be indicative of future write-offs.Our allowance for doubtful accounts as of December 31, 2012 and 2011 was $0.2 million and $0.1 million, respectively. Our allowance for doubtfulaccounts has decreased as a percentage of accounts receivable due to improvements in account aging driven by stronger credit policies.The following table summarizes changes to the allowance for doubtful accounts for the years ended December 31, 2012 and 2011: (in thousands) Balance atBeginning ofPeriod Charged toExpenses Write-offs Balance atEnd of Period Year ended December 31, 2012 $97 $94 $37 $154 Year ended December 31, 2011 $158 $71 $132 $97 Inventory Valuation and Inventory ReservesInventory consists primarily of raw materials, which are recorded at the lower of cost or market, using the average-cost method, which approximatesfirst-in, first-out, or FIFO, cost. We periodically review our inventory for slow-moving, damaged and discontinued items and provide reserves to reduce suchitems identified to their recoverable amounts. Our inventory allowance for obsolescence was $0.1 million as of December 31, 2012 and 2011, respectively.Stock-Based CompensationWe determine our stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation (ASC 718) which requires themeasurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors based on the grantdate fair value of the award.Determining the appropriate fair value model and calculating the fair value of stock option grants requires the input of highly subjective assumptions.We use the Black-Scholes option pricing model to value our stock option awards. Stock-based compensation expense is significant to our consolidatedfinancial statements and is calculated using our best estimates, which involve inherent uncertainties and the application of management’s judgment.Significant estimates include our expected term, stock price volatility and forfeiture rates. If different estimates and assumptions had been used, our commonstock valuations could be significantly different and related stock-based compensation expense may be materially impacted. 47 Table of ContentsThe Black-Scholes option pricing model requires inputs such as the risk-free interest rate, expected term, expected volatility and expected dividend yield.We base the risk-free interest rate that we use in the Black-Scholes option pricing model on zero coupon U.S. Treasury instruments with maturities similar tothe expected term of the award being valued. The expected term represents the weighted average period that our stock options are expected to be outstanding. Theexpected term is based on the observed and expected time to post-vesting exercise of options by employees and non-employee directors and considers the impactof post-vesting award forfeitures. As we operated as a private company with a limited market for our stock from our inception to the completion of our initialpublic offering on February 29, 2012, we have estimated the volatility of stock price using outside valuation services and an estimate of the volatility of ourcommon stock based on volatility of a peer group of comparable publicly traded companies for which historical information is available. We have never paidand do not anticipate paying any cash dividends in the foreseeable future and, therefore, we use an expected dividend yield of zero in the option pricing model.In order to properly attribute compensation expense, we are required to estimate pre-vesting forfeitures at the time of grant and revise those estimates insubsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures and record stock-basedcompensation expense only for those awards that are expected to vest. If our actual forfeiture rate is materially different from our estimate, stock-basedcompensation expense could be significantly different from what has been recorded.The fair value of each new employee and non-employee director option awarded was estimated on the date of grant for the periods below using the Black-Scholes option pricing model with the following assumptions: Year Ended December 31, 2012 2011 2010 Risk-free interest rate 0.95—1.16% 3.68% 3.35% Expected life (years) 5.5—6.5 5 10 Expected volatility 53.00—53.14% 47.32% 38.05% Expected dividend yield 0% 0% 0% Weighted average grant date fair value $ 14.79 $8.99 $4.27 There are significant differences among option valuation models, and this may result in a lack of comparability with other companies that use differentmodels, methods and assumptions. If factors change and we employ different assumptions in the application of ASC 718 in future periods, or if we decide touse a different valuation model, such as a lattice model, the stock-based compensation expense that we record in the future under ASC 718 may differsignificantly from what we have recorded using the Black-Scholes option pricing model and could materially affect our operating results.We recognize stock-based compensation expense on a straight-line basis over the requisite service period. We recorded stock-based compensation expenseof $3.0 million, $1.1 million and $0.3 million during the years ended December 31, 2012, 2011 and 2010, respectively. As of December 31, 2012, we had$5.6 million of unrecognized stock-based compensation costs related to unvested stock options, net of estimated forfeitures, that is expected to be recognizedover a weighted average period of 2.7 years. We issued options to purchase 259,800, 224,000 and 658,000 shares of our common stock in 2012, 2011 and2010, respectively.In future periods, our stock-based compensation expense is expected to increase due to the issuance of additional stock-based awards to continue toattract and retain employees and non-employee directors and our existing unrecognized stock-based compensation.Income TaxesWe account for income taxes in accordance with ASC 740, Income Taxes (ASC 740). Under this method, we determine tax assets and liabilities basedupon the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year inwhich the differences are expected to affect taxable income. The tax consequences of most events recognized in the current year’s financial statements areincluded in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition andmeasurement of assets, liabilities and equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financialincome for a year and between the tax basis of assets or liabilities and their reported amounts in the financial statements. Because we assume that the reportedamounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or liability and its reported amount inthe balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assetsare recovered, giving rise to a deferred tax asset or liability. 48 Table of ContentsASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by defining a criterion that anindividual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. Additionally, ASC 740provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We haveestablished a liability for uncertain tax positions of $0.4 million as of December 31, 2012.Recent Accounting PronouncementsIn April 2012, President Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act), which establishes a new category of issuer calledan emerging growth company. Under the JOBS Act, an emerging growth company is defined as an issuer with total annual gross revenues less than $1 billionduring its most recently completed fiscal year. An issuer continues to be eligible for emerging growth company status until the earliest of (1) the last day of thefiscal year during which it had total annual gross revenues of $1 billion or more (as indexed for inflation in the manner set forth in the JOBS Act), (2) the lastday of the fiscal year of the issuer following the fifth anniversary of the date of its initial public offering, (3) the date on which it issued more than $1 billionin non-convertible debt in the previous three-year period, or (4) the date on which it became a large accelerated filer as defined in Rule 12b-2 of the ExchangeAct.The JOBS Act exempts an emerging growth company from the following requirements during the period of eligibility: •Having an independent auditor assess its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act. However, anemerging growth company would still have to comply with the Section 404(a) requirement that management assess its internal control overfinancial reporting, generally beginning with its second annual report on Form 10-K. •Adopting new or revised accounting standards that are effective for public companies. Instead, the effective dates of such accounting standardsfor private companies would apply. •Complying with “say-on-pay” vote requirements under the Dodd-Frank Act. An emerging growth company would satisfy executive compensationdisclosures in a manner consistent with a smaller reporting company. •Complying with future changes to Public Company Accounting Oversight Board auditing standards related to mandatory audit firm rotation andan Auditors Discussion & Analysis statement (if adopted). Other new standards would not apply to audits of emerging growth companies unlessthe SEC decides that they should after considering the protection of investors and whether the action will promote efficiency, competition andcapital formation.With the exception of the treatment for accounting standards, each of these exemptions is voluntary and an emerging growth company may choose tooperate as an emerging growth company as it deems appropriate. Section 107(b) of the JOBS Act permits an emerging growth company to “opt out” of theexemption to adopt new or revised accounting standards when they are effective for private companies and instead apply such standards on the same basis asa public company. Under Section 107(b)(3), such decision to opt-out is irrevocable, and the emerging growth company must continue to comply with suchstandards to the same extent that a public company is required for as long as the company remains an emerging growth company.Under the JOBS Act, we meet the definition of an emerging growth company. During the period we continue to be eligible for emerging growth companystatus, we will apply new or revised accounting standards following the effective dates for private companies, which may make our financial statements anddisclosures not comparable to other registrants. In the event a new or revised accounting standard, that we feel provides value to our business, investors orusers of our financial statements, becomes effective for public companies prior to private companies and does not permit early adoption, we will invoke the“opt out” under the JOBS act and, from that point forward, adopt new or revised accounting standards on the same basis as a public company.In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.GAAP and IFRSs. This accounting update generally aligns the principles for fair value measurements and the related disclosure requirements under U.S.GAAP and International Financial Reporting Standards. From a U.S. GAAP perspective, the amendments are largely clarifications, but some could have asignificant effect on certain companies. A number of new disclosures also are required. Except for certain disclosures, the guidance applies to public andnonpublic companies and is to be applied prospectively. For public and nonpublic companies, the amendments are effective during interim and annual periodsbeginning after December 15, 2011. We adopted this accounting guidance effective January 1, 2012. The adoption of ASU 2011-04 did not result in a materialimpact to our financial statements. 49 Table of ContentsIn June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. This accounting update requires entities to present items of netincome and other comprehensive income either in a single continuous statement, or in separate, but consecutive, statements of net income and othercomprehensive income. The new requirements do not change which components of comprehensive income are recognized in net income or other comprehensiveincome, or when an item of other comprehensive income must be reclassified to net income. However, the current option under existing standards to reportother comprehensive income and its components in the statement of changes in equity is eliminated. In December 2011, the FASB issued ASU 2011-12,Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income inAccounting Standards Update No. 2011-05 (ASU 2011-12). The updated guidance defers the requirement in ASU 2011-05 to present on the face of thefinancial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensiveincome. The amendments apply to public and nonpublic companies and are to be applied retrospectively. For public entities, the amendments are effective forfiscal years, and interim periods within those years, beginning after December 15, 2011. We adopted this accounting guidance effective January 1, 2012 andhave presented the items of net income and other comprehensive income in a single continuous statement in this Annual Report on Form 10-K. The adoption ofASU 2011-05 and ASU 2011-12 did not result in a material impact to our financial statements.Item 7A. Quantitative and Qualitative Disclosures About Market RiskQuantitative and Qualitative Disclosure of Market RisksOur exposure to market risk is confined to our cash and cash equivalent balances and short-term investments. The primary goals of our investmentpolicy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and cash equivalent balances. We also seek to maximize incomefrom our investments without assuming significant risk. To achieve our goals, we maintain a portfolio of short-term and highly liquid time deposits. The timedeposits in our portfolio, due to their very short-term nature, are subject to minimal interest rate risk. In future periods, we will continue to evaluate ourinvestment policy in order to continue our overall goals.Foreign Currency RiskAs a result of our foreign operations, we have revenue and expenses, assets and liabilities that are denominated in foreign currencies. A number of ouremployees are located in Europe and Japan. Therefore, a portion of our payrolls and operating expenses are paid and incurred in the British Pound, Euro andYen. Our operating results and cash flows are adversely impacted when the United States dollar depreciates relative to other foreign currencies. As we expandinternationally, our results of operations and cash flows will become increasingly subject to changes in foreign exchange rates. We have not used any forwardcontracts or currency borrowings to hedge our exposure to foreign currency exchange risk. Foreign currency risk can be quantified by estimating the change incash flows resulting from a hypothetical 10% adverse change in foreign exchange rates. We believe such a change would not have a material impact on ourresults of operations. 50 Table of ContentsItem 8. Financial Statements and Supplementary DataProto Labs, Inc.Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm 52 Consolidated Balance Sheets at December 31, 2012 and 2011 53 Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010 54 Consolidated Statements of Shareholders’ Equity (Deficit) for the years ended December 31, 2012, 2011 and 2010 55 Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010 56 Notes to Consolidated Financial Statements 57 51 Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and ShareholdersProto Labs, Inc.We have audited the accompanying consolidated balance sheets of Proto Labs, Inc. as of December 31, 2012 and 2011, and the related consolidated statementsof comprehensive income, shareholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2012. These financialstatements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged toperform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Proto Labs, Inc. atDecember 31, 2012 and 2011 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,2012, in conformity with U.S. generally accepted accounting principles./s/ Ernst & Young LLPMinneapolis, MinnesotaMarch 22, 2013 52 Table of ContentsProto Labs, Inc.Consolidated Balance Sheets(In thousands, except share and per share amounts) December 31, 2012 2011 Assets Current assets Cash and cash equivalents $36,759 $8,135 Short-term marketable securities 25,137 250 Accounts receivable, net of allowance for doubtful accounts of $154 and $97 as of December 31, 2012 and December 31, 2011, respectively 15,791 11,533 Inventory 4,619 3,797 Prepaid expenses and other current assets 5,364 3,430 Deferred tax assets 609 932 Income taxes receivable 1,877 — Total current assets 90,156 28,077 Property and equipment, net 45,316 34,249 Long-term marketable securities 36,965 — Other assets 285 — Total assets $172,722 $62,326 Liabilities, redeemable convertible preferred stock, redeemable common stock and shareholders’ equity(deficit) Current liabilities Accounts payable $4,758 $4,431 Accrued compensation 5,995 4,767 Accrued liabilities and other 513 318 Income taxes payable — 33 Current portion of long-term debt obligations 273 390 Total current liabilities 11,539 9,939 Deferred tax liabilities 3,346 4,252 Long-term debt obligations 356 613 Other 782 871 Redeemable convertible stock Redeemable convertible preferred stock, $0.001 par value, authorized, issued and outstanding 0 and 427,985shares as of December 31, 2012 and December 31, 2011, respectively — 66,075 Redeemable common stock, $0.001 par value, issued and outstanding 0 and 3,189,648 shares as of December31, 2012 and December 31, 2011, respectively — 819 Shareholders’ equity (deficit) Preferred stock, $0.001 par value, authorized 10,000,000 and 0 shares; issued and outstanding 0 shares as ofDecember 31, 2012 and December 31, 2011, respectively — — Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 24,803,640 and9,706,270 shares as of December 31, 2012 and December 31, 2011, respectively 25 10 Additional paid in capital 147,032 8,229 Accumulated equity (deficit) 10,570 (27,744) Accumulated other comprehensive income (loss) (928) (738) Total shareholders’ equity (deficit) 156,699 (20,243) Total liabilities, redeemable convertible preferred stock, redeemable common stock and shareholders’ equity (deficit) $172,722 $62,326 The accompanying notes are an integral part of these consolidated financial statements. 53 Table of ContentsProto Labs, Inc.Consolidated Statements of Comprehensive Income(In thousands, except share and per share amounts) Year Ended December 31, 2012 2011 2010 Statements of Operations: Revenue $125,991 $98,939 $64,919 Cost of revenue 49,853 39,324 25,443 Gross profit 76,138 59,615 39,476 Operating expenses Marketing and sales 18,098 15,752 10,867 Research and development 9,137 5,222 4,281 General and administrative 13,957 11,772 7,629 Loss on impairment of foreign subsidiary assets — — 773 Total operating expenses 41,192 32,746 23,550 Income from operations 34,946 26,869 15,926 Other income (expense), net 23 (114) (213) Income before income taxes 34,969 26,755 15,713 Provision for income taxes 10,944 8,783 4,762 Net income 24,025 17,972 10,951 Less: dividends on redeemable preferred stock — (4,179) (4,179) Less: undistributed earnings allocated to preferred shareholders — (4,507) (2,377) Net income attributable to common shareholders $24,025 $9,286 $4,395 Net income per share: Basic $1.03 $0.75 $0.40 Diluted $0.98 $0.67 $0.34 Shares used to compute net income per share: Basic 23,373,593 12,352,004 11,079,432 Diluted 24,443,665 13,939,072 13,051,458 Other Comprehensive Income, net of tax Foreign currency translation adjustments $(190) $(280) $(214) Comprehensive income $23,835 $17,692 $10,737 The accompanying notes are an integral part of these consolidated financial statements. 54 Table of ContentsProto Labs, Inc.Consolidated Statements of Shareholders’ Equity (Deficit)(In thousands, except share and per share amounts) Common Stock Shares Amount AdditionalPaid-InCapital AccumulatedEarnings (Deficit) Accumulated OtherComprehensiveIncome (Loss) Total Balance at January 1, 2010 7,397,922 $7 $5,510 $ (48,309) $ (244) $(43,036) Common shares issued on exercise of options 615,328 1 55 — — 56 Preferred stock dividends — — — (4,179) — (4,179) Stock-based compensation expense — — 331 — — 331 Net income — — — 10,951 — 10,951 Other comprehensive income Foreign currency translation adjustment — — — — (214) (214) Comprehensive income 10,737 Balance at December 31, 2010 8,013,250 8 5,896 (41,537) (458) (36,091) Common shares issued on exercise of options 166,838 — 706 — — 706 Common shares issued on exercise of warrants 1,526,182 2 497 — — 499 Preferred stock dividends — — — (4,179) — (4,179) Stock-based compensation expense — — 1,130 — — 1,130 Net income — — — 17,972 — 17,972 Other comprehensive income Foreign currency translation adjustment — — — — (280) (280) Comprehensive income 17,692 Balance at December 31, 2011 9,706,270 10 8,229 (27,744) (738) (20,243) Common shares issued upon initial public offering 4,945,000 5 71,525 — — 71,530 Common shares issued upon follow-on offering 100,000 — 2,451 — — 2,451 Common shares issued upon conversion ofredeemable convertible preferred stock 5,991,790 6 66,069 — — 66,075 Common shares issued upon conversion ofredeemable common stock 3,189,648 3 816 — — 819 Common shares issued on exercise of options andother 870,932 1 2,974 — — 2,975 Excess tax benefit from stock option exercises — — 6,218 — — 6,218 Preferred stock dividends — — (14,289) 14,289 — — Stock-based compensation expense — — 3,039 — — 3,039 Net income — — — 24,025 — 24,025 Other comprehensive income Foreign currency translation adjustment — — — — (190) (190) Comprehensive income 23,835 Balance at December 31, 2012 24,803,640 $25 $147,032 $10,570 $ (928) $156,699 The accompanying notes are an integral part of these consolidated financial statements. 55 Table of ContentsProto Labs, Inc.Consolidated Statements of Cash Flows(In thousands) Year Ended December 31, 2012 2011 2010 Operating activities Net income $24,025 $17,972 $10,951 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,080 4,264 3,483 Stock-based compensation expense 3,039 1,130 331 Deferred taxes (583) 2,230 561 Excess tax benefit from stock-based compensation (6,218) (657) — Loss on impairment of foreign subsidiary assets — — 773 Loss (gain) on disposal of property and equipment 154 (10) 26 Changes in operating assets and liabilities: Accounts receivable (4,372) (3,457) (2,993) Inventories (829) (2,195) (537) Prepaid expenses and other (1,887) (591) (801) Income taxes 4,314 37 (104) Accounts payable 306 1,545 1,148 Accrued liabilities and other 1,277 3,267 1,174 Net cash provided by operating activities 25,306 23,535 14,012 Investing activities Proceeds from sale of property and equipment — — 30 Purchases of property and equipment (17,397) (19,003) (7,069) Purchases of marketable securities (84,219) — (1,504) Proceeds from maturities of marketable securities 22,368 500 2,502 Net cash used in investing activities (79,248) (18,503) (6,041) Financing activities Proceeds from initial public offering, net of offering costs 71,530 — — Proceeds from follow-on offering, net of offering costs 2,451 — — Proceeds from issuance of debt — — 417 Payments on debt (388) (4,049) (4,702) Proceeds from exercises of warrants and stock options 2,975 547 56 Excess tax benefit from stock-based compensation 6,218 657 — Net cash provided by (used in) financing activities 82,786 (2,845) (4,229) Effect of exchange rate changes on cash and cash equivalents (220) (153) (344) Net increase in cash and cash equivalents 28,624 2,034 3,398 Cash and cash equivalents, beginning of period 8,135 6,101 2,703 Cash and cash equivalents, end of period $36,759 $8,135 $6,101 Supplemental cash flow disclosure Cash paid for interest $63 $140 $256 Cash paid for taxes $7,990 $5,358 $4,663 The accompanying notes are an integral part of these consolidated financial statements. 56 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial StatementsNote 1 – Nature of BusinessOrganization and businessProto Labs, Inc. and its subsidiaries (Proto Labs, the Company, we, us, or our) is an online and technology-enabled manufacturer of quick-turncomputer numerical control (CNC) machined and injection molded custom parts for prototyping and short-run production. The Company’s customers areproduct developers worldwide who require a faster and less expensive way to obtain low volumes of parts. The Company’s proprietary technology eliminatesmost of the time-consuming and expensive skilled labor conventionally required to quote and manufacture parts in low volumes, and its customers conductnearly all of their business with the Company over the Internet. The Company targets its services to the millions of product developers who use three-dimensional (3D) computer-aided design (CAD) software to design products across a diverse range of end-markets. The Company has established operationsin the United States, Europe and Japan, which the Company believes, are three of the largest geographic markets where these product developers are located.The Company’s primary manufacturing services currently include Firstcut, which is a CNC machining service, and Protomold, which is a plastic injectionmolding service. Proto Labs, Inc. is located in Maple Plain, Minnesota. The Company’s subsidiaries, Proto Labs Limited and Proto Labs G.K. are located inTelford, United Kingdom and Yamato-Shi, Kanagawa, Japan, respectively.Note 2 – Summary of Significant Accounting PoliciesPrinciples of consolidationThe consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Proto Labs Limited and Proto LabsG.K. All significant intercompany accounts and transactions have been eliminated in consolidation.Public offeringsIn February 2012, the Company issued 4.9 million shares of common stock (including the exercise of the underwriters’ over-allotment shares) inconjunction with its initial public offering (IPO). The public offering price of the shares sold in the offering was $16.00 per share. The total gross proceedsfrom the IPO to the Company were $79.1 million. After deducting underwriting discounts and commissions and offering expenses payable by the Company,the aggregate net proceeds received by the Company totaled approximately $71.5 million. As of December 31, 2012, all offering costs have been recorded.Immediately prior to the consummation of the IPO, all outstanding shares of redeemable convertible preferred stock and redeemable common stock wereconverted into shares of common stock. Shares of redeemable convertible preferred stock were converted into 5,991,790 shares of common stock. Allpreviously accrued dividends on the preferred stock have been released back into retained earnings as of December 31, 2012. Shares of redeemable commonstock were converted into 3,189,648 shares of common stock.In November 2012, the Company issued 100,000 shares of common stock in connection with a follow-on offering. The public offering price of theshares sold in the offering was $31.00 per share. The total gross proceeds from the follow-on offering to the Company were $3.1 million. After deductingunderwriting discounts and commissions and offering expenses payable by the Company, the aggregate net proceeds received by the Company totaledapproximately $2.5 million. As of December 31, 2012, all offering costs have been recorded.Stock splitOn February 21, 2012, the Company executed a 14-for-1 forward stock split of the Company’s common stock. The consolidated financial statementsfor all periods and dates presented give retroactive effect to the stock split.Comprehensive incomeComponents of comprehensive income include net income and foreign currency translation adjustments. Comprehensive income is disclosed in theaccompanying consolidated statements of comprehensive income and consolidated statements of shareholders’ equity (deficit). 57 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements Accounting estimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP)requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures at the date of thefinancial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.Cash and cash equivalentsCash and cash equivalents include cash and other highly liquid investments with maturities of three months or less at the date of purchase. Cashequivalents are stated at fair value. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. TheCompany has not experienced any losses on such accounts.Accounts receivable and allowance for doubtful accountsAccounts receivable are reported at the invoiced amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates itsaccounts receivable and establishes an allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditionstaking into account the history of write-offs and collections. A receivable is considered past due if payment has not been received within the period agreed uponin the invoice. Accounts receivable are written off after all collection efforts have been exhausted. Recoveries of trade receivables previously written off arerecorded when received.InventoryInventory consists primarily of raw materials, which are recorded at the lower of cost or market, using the average-cost method, which approximatesfirst-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving, damaged and discontinued items and provides allowances toreduce such items identified to their recoverable amounts.Property, equipment and leasehold improvementsProperty, equipment and leasehold improvements are stated at cost. Major improvements that substantially extend an asset’s useful life are capitalized.Repairs, maintenance and minor improvements are charged to operations as incurred. Depreciation, including amortization of leasehold improvements andassets recorded under capital leases, is calculated using the straight-line method over the estimated useful lives of the individual assets and ranges from 3 to39 years. Manufacturing equipment is depreciated over 3 to 7 years, office furniture and equipment are depreciated over 3 to 7 years, computer hardware andsoftware are depreciated over 3 to 5 years, building costs are depreciated over 39 years, leasehold improvements are depreciated over the estimated lives of therelated assets or the life of the lease, whichever is shorter, and building and land improvements are depreciated over 10 to 39 years. Assets not in service arenot depreciated until the related asset is put into use.Accounting for long-lived assetsThe Company periodically reviews the carrying amount of its property, equipment and leasehold improvements to determine if circumstances existindicating an impairment or if depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the Company willprepare a projection of the undiscounted future cash flows of the specific assets to determine if the assets are recoverable. If impairment exists based on theseprojections, an adjustment will be made to reduce the carrying amount of the specific assets to fair value.Revenue recognitionThe Company recognizes revenue when it is realized or realizable and earned when all of the following criteria are met: persuasive evidence of anarrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed or determinable, and collectability is reasonablyassured. Revenue is recognized upon transfer of title 58 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements and risk of loss, which is generally upon the shipment of parts in our Firstcut product line and upon the shipment of the parts made from the mold in ourProtomold product line. Freight billed to customers is included in revenues, and all freight expenses paid by the Company are included in cost of revenue. TheCompany also records a provision for estimated product returns and allowances in the period in which the related revenue is recorded. This provision againstcurrent gross revenue is based principally on historical rates of sales returns.Income taxesThe Company accounts for income taxes in accordance with Accounting Standards Codification (ASC) 740, Income Taxes (ASC 740). Under thismethod, the Company determines tax assets and liabilities based upon the differences between the financial statement carrying amounts and the tax basis ofassets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of mostevents recognized in the current year’s financial statements are included in determining income taxes currently payable. However, because tax laws andfinancial accounting standards differ in their recognition and measurement of assets, liabilities and equity, revenues, expenses, gains and losses, differencesarise between the amount of taxable income and pretax financial income for a year and between the tax basis of assets or liabilities and their reported amountsin the financial statements. Because the Company assumes that the reported amounts of assets and liabilities will be recovered and settled, respectively, adifference between the tax basis of an asset or liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in somefuture years when the related liabilities are settled or the reported amounts of the assets are recovered, giving rise to a deferred tax asset or liability.ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by defining a criterion that anindividual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. Additionally, ASC 740provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.Stock-based compensationThe Company accounts for stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation (ASC 718). Under the fairvalue recognition provisions of ASC 718, the Company measures stock-based compensation cost at the grant date fair value and recognizes the compensationexpense over the requisite service period, which is the vesting period, using a straight-line attribution method. The amount of stock-based compensationexpense recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates pre-vesting awardforfeitures at the time of grant by analyzing historical data and revises those estimates in subsequent periods if actual forfeitures differ from those estimates.Ultimately, the total expense recognized over the vesting period will only be for those awards that vest. The Company’s awards are not eligible to vest early inthe event of retirement, however, the awards vest early in the event of a change in control.In determining the compensation cost of the options granted, the fair value of options granted has been estimated on the date of grant using the Black-Scholes option-pricing model.Advertising costsAdvertising is expensed as incurred and was approximately $5.9 million, $5.8 million and $3.6 million for the years ended December 31, 2012, 2011and 2010, respectively.Research and developmentResearch and development expenses consist primarily of personnel and outside service costs related to the development of new processes and services,enhancement of existing services, quality assurance, and testing. The Company follows ASC 350-40, Internal Use Software (ASC 350-40), in accounting forinternally developed software. At December 31, 2012, 2011 and 2010, all internal use software projects were in the post-implementation/operation stage andtherefore, no software development costs were capitalized. Research and development costs were approximately $9.1 million, $5.2 million and $4.3 million forthe years ended December 31, 2012, 2011 and 2010, respectively. 59 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements Foreign currency translation/transactionsThe Company translated the balance sheets of its foreign subsidiaries, Proto Labs Limited and Proto Labs G.K., at period-end exchange rates and theincome statement at the average exchange rates in effect throughout the period. The Company has recorded the translation adjustment as a separate componentof consolidated shareholders’ equity (deficit). Foreign currency transaction gains and losses are recognized in the consolidated statements of comprehensiveincome.Recent accounting pronouncementsIn April 2012, President Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act), which establishes a new category of issuer calledan emerging growth company. Under the JOBS Act, an emerging growth company is defined as an issuer with total annual gross revenues less than $1 billionduring its most recently completed fiscal year. An issuer continues to be eligible for emerging growth company status until the earliest of (1) the last day of thefiscal year during which it had total annual gross revenues of $1 billion or more (as indexed for inflation in the manner set forth in the JOBS Act), (2) the lastday of the fiscal year of the issuer following the fifth anniversary of the date of its IPO, (3) the date on which it issued more than $1 billion in non-convertibledebt in the previous three-year period, or (4) the date on which it became a large accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of1934.The JOBS Act exempts an emerging growth company from the following requirements during the period of eligibility: • Having an independent auditor assess its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002.However, an emerging growth company would still have to comply with the Section 404(a) requirement that management assess its internal controlover financial reporting, generally beginning with its second annual report on Form 10-K. • Adopting new or revised accounting standards that are effective for public companies. Instead, the effective dates of such accounting standardsfor private companies would apply. • Complying with “say-on-pay” vote requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act. An emerging growthcompany would satisfy executive compensation disclosures in a manner consistent with a smaller reporting company. • Complying with future changes to Public Company Accounting Oversight Board auditing standards related to mandatory audit firm rotation andan Auditors Discussion & Analysis statement (if adopted). Other new standards would not apply to audits of emerging growth companies unlessthe SEC decides that they should after considering the protection of investors and whether the action will promote efficiency, competition andcapital formation.With the exception of the treatment for accounting standards, each of these exemptions is voluntary and an emerging growth company may choose tooperate as an emerging growth company as it deems appropriate. Section 107(b) of the JOBS Act permits an emerging growth company to “opt out” of theexemption to adopt new or revised accounting standards when they are effective for private companies and instead apply such standards on the same basis asa public company. Under Section 107(b)(3), such decision to opt-out is irrevocable, and the emerging growth company must continue to comply with suchstandards to the same extent that a public company is required for as long as the company remains an emerging growth company.Under the JOBS Act, we meet the definition of an emerging growth company. During the period we continue to be eligible for emerging growth companystatus, we will apply new or revised accounting standards following the effective dates for private companies. In the event a new or revised accountingstandard, that we feel provides value to our business, investors or users of our financial statements, becomes effective for public companies prior to privatecompanies and does not permit early adoption, we will invoke the “opt out” under the JOBS act and, from that point forward, adopt new or revised accountingstandards on the same basis as a public company. 60 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, Amendments to AchieveCommon Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (ASU 2011-04). This accounting update generally aligns theprinciples for fair value measurements and the related disclosure requirements under U.S. GAAP and International Financial Reporting Standards. From aU.S. GAAP perspective, the amendments are largely clarifications, but some could have a significant effect on certain companies. A number of newdisclosures also are required. Except for certain disclosures, the guidance applies to public and nonpublic companies and is to be applied prospectively. Forpublic and nonpublic companies, the amendments are effective during interim and annual periods beginning after December 15, 2011. The Company adoptedthis accounting guidance effective January 1, 2012. The adoption of ASU 2011-04 did not result in a material impact to the Company’s financial statements.In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (ASU 2011-05). This accounting update requires entities topresent items of net income and other comprehensive income either in a single continuous statement, or in separate, but consecutive, statements of net incomeand other comprehensive income. The new requirements do not change which components of comprehensive income are recognized in net income or othercomprehensive income, or when an item of other comprehensive income must be reclassified to net income. However, the current option under existingstandards to report other comprehensive income and its components in the statement of changes in equity is eliminated. In December 2011, the FASB issuedASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated OtherComprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). The updated guidance defers the requirement in ASU 2011-05 topresent on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net incomeand other comprehensive income. The amendments apply to public and nonpublic companies and are to be applied retrospectively. For public entities, theamendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this accountingguidance effective January 1, 2012 and has presented the items of net income and other comprehensive income in a single continuous statement in this report.The adoption of ASU 2011-05 and ASU 2011-12 did not result in a material impact to the Company’s financial statements.Note 3 – Net Income Per Common ShareBasic and diluted net income or loss per common share for 2012 is presented in conformity with the single-class method, and for 2011 and 2010,respectively, is presented in conformity with the two-class method required for participating securities. Prior to the Company’s IPO, the Company hadoutstanding redeemable convertible preferred stock. The holder of the Company’s redeemable convertible preferred stock was entitled to receive cumulativedividends at the rate of 8% per annum, payable prior and in preference to any dividends on any shares of the Company’s common stock. In addition, in theevent a dividend was paid on common stock, the holder of redeemable convertible preferred stock was entitled to a proportionate share of any such dividend asif it was a holder of common stock (on an as-if converted basis). The Company considered its redeemable preferred stock to be participating securities and, inaccordance with the two-class method, earnings allocated to preferred stock in 2011 and 2010, respectively, have been excluded from the computation of basicand diluted net income or loss per common share for those years.Basic net income per share is computed based on the weighted average number of common shares outstanding. Diluted net income per share is computedbased on the weighted average number of common shares outstanding, increased by the number of additional shares that would have been outstanding had thepotentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuanceof the potentially dilutive shares. Potentially dilutive shares of common stock include stock options and other stock-based awards granted under stock-basedcompensation plans and shares committed to be purchased under the employee stock purchase plan. 61 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements The following table presents the calculation of net income per basic and diluted share attributable to common shareholders: Year Ended December 31, (in thousands, except share and per share amounts) 2012 2011 2010 Net Income $24,025 $17,972 $10,951 Less: dividends on redeemable convertible preferred stock — (4,179) (4,179) Less: undistributed earnings allocated to preferred shareholders — (4,507) (2,377) Net income attributable to common shareholders $24,025 $9,286 $4,395 Basic—weighted-average shares outstanding: 23,373,593 12,352,004 11,079,432 Effect of dilutive securities: Employee stock options, warrants and other 1,070,072 1,587,068 1,972,026 Diluted—weighted-average shares outstanding: 24,443,665 13,939,072 13,051,458 Net income per share attributable to common shareholders: Basic $1.03 $0.75 $0.40 Diluted $0.98 $0.67 $0.34 Weighted-average diluted shares for the years ended December 31, 2011 and 2010, respectively, excludes redeemable convertible preferred stock as it wasanti-dilutive for the period. 62 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements The following table sets forth the calculation of unaudited pro forma net income per basic and diluted share which gives effect to the conversion of alloutstanding shares of redeemable convertible preferred stock as if the conversion had occurred on January 1, 2010: Year Ended December 31, (in thousands, except share and per share amounts) 2012 2011 2010 Net income attributable to common shareholders, as reported $24,025 $9,286 $4,395 Dividends on redeemable convertible preferred stock — 4,179 4,179 Undistributed earnings allocated to preferred shareholders — 4,507 2,377 Pro forma net income $24,025 $17,972 $10,951 Basic—weighted-average shares outstanding, as reported 23,373,593 12,352,004 11,079,432 Add: common shares from conversion of redeemable convertiblepreferred shares — 5,991,790 5,991,790 Pro forma basic weighted average shares outstanding 23,373,593 18,343,794 17,071,222 Effect of dilutive securities: Employee stock options, warrants and other 1,070,072 1,587,068 1,972,026 Pro forma diluted—weighted-average shares outstanding: 24,443,665 19,930,862 19,043,248 Pro forma net income per share attributable to commonshareholders: Basic $1.03 $0.98 $0.64 Diluted $0.98 $0.90 $0.58 Note 4 – Fair Value MeasurementsASC 820, Fair Value Measurement (ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on themeasurement date. ASC 820 also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs whenmeasuring fair value. There are three levels of inputs that may be used to measure fair value:Level 1—Quoted prices in active markets for identical assets or liabilities.Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are notactive; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets orliabilities.Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.The Company’s cash consists of bank deposits. The Company’s cash equivalents measured at fair value as of December 31, 2012 consist of moneymarket mutual funds. The Company’s short-term marketable securities measured at fair value as of December 31, 2011 consisted of domestic certificates ofdeposits at various banks and treasury notes. The Company determines the fair value of these financial assets using Level I inputs. 63 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements A summary of financial assets measured at fair value on a recurring basis is as follows: December 31, 2012 December 31, 2011 (in thousands) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Financial Assets: Cash and cash equivalents Money market mutual fund $16,164 $— $— $— $— $— Short-term marketable securities Certificates of deposit and treasury notes — — — 250 — — Total $16,164 $— $— $250 $— $— Note 5 – Marketable SecuritiesThe Company invests in short-term and long-term agency, municipal, corporate commercial paper and other debt securities. The securities arecategorized as held-to-maturity and are recorded at amortized cost. Categorization as held-to-maturity is based on the Company’s ability and intent to hold thesesecurities to maturity. Information regarding the Company’s short-term and long-term marketable securities as of December 31, 2012 is as follows: December 31, 2012 (in thousands) AmortizedCost UnrealizedGains UnrealizedLosses FairValue U.S. government agency securities $23,011 $2 $(4) $23,009 Corporate debt securities 14,675 18 (14) 14,679 Commercial paper 1,500 — — 1,500 U.S. municipal securities 17,971 3 (12) 17,962 Certificates of deposit/time deposits 4,945 3 (1) 4,947 Total marketable securities $62,102 $26 $(31) $62,097 Fair values for the U.S. government agency and corporate debt securities are primarily determined based on quoted market prices (Level 1). Fair valuesfor the U.S. municipal securities, certificates of deposit and commercial paper are primarily determined using dealer quotes or quoted market prices for similarsecurities (Level 2).The Company tests for other than temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary innature. The investment policy adopted by the Company dictates that only investments in quality, highly rated debt securities are permitted. Those unrealizedlosses displayed above are the result of macroeconomic factors and are not indicative of the quality of the underlying security nor the issuer’s ability to pay itsdebt. The Company intends, and has the ability, to hold the investments to maturity and recover the full principal.Classification of marketable securities as current or non-current is based upon the security’s maturity date as of the date of these financial statements.The December 31, 2012 balance of held-to-maturity debt securities by contractual maturity is shown in the following table at amortized cost. Actualmaturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. 64 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements December 31, (in thousands) 2012 Due in one year or less $25,137 Due after one year through five years 36,965 Total marketable securities $62,102 Note 6 – Property and EquipmentProperty and equipment consists of the following: December 31, (in thousands) 2012 2011 Land $2,830 $2,830 Buildings and improvements 13,114 8,794 Machinery and equipment 39,209 28,178 Computer hardware and software 5,019 4,102 Leasehold improvements 2,921 1,811 Construction in progress 1,903 2,521 Capital leases 1,512 1,493 66,508 49,729 Accumulated depreciation and amortization (21,192) (15,480) Property and equipment, net $45,316 $34,249 Depreciation and amortization expense for the years ended December 31, 2012, 2011 and 2010 was $6.1 million, $4.3 million and $3.5 million,respectively.During 2010, the Company determined that certain equipment held by Proto Labs G.K. was impaired. This resulted in an impairment charge of $0.8million for the year ended December 31, 2010.Note 7 – InventoryInventory consists primarily of raw materials, which are recorded at the lower of cost or market using the average-cost method, which approximatesfirst-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving, damaged and discontinued items and provides allowances toreduce such items identified to their recoverable amounts.The Company’s inventory consists of the following: December 31, (in thousands) 2012 2011 Raw materials $4,174 $3,463 Work in process 530 418 Total inventory 4,704 3,881 Allowance for obsolescence (85) (84) Inventory, net of allowance $4,619 $3,797 65 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements Note 8 – Financing ObligationsThe Company’s debt consists of the following: December 31, (in thousands) 2012 2011 Various obligations under capital leases, with interest rates from 4.5% to 7.4%, due in various monthlyinstallments, including interest, through various dates through January 2016, secured by equipment $629 $1,003 Less current portion 273 390 Long-term obligation $356 $613 Maturities on long-term debt obligations at December 31, 2012 are as follows: Years Ending December 31, (in thousands) 2013 $273 2014 200 2015 146 2016 10 $629 The Company has a revolving line of credit expiring September 30, 2013, if not renewed. Under this revolving line of credit, the Company can borrow amaximum amount of $10 million at an interest rate equal to LIBOR plus 1.5% (1.75% on December 31, 2012). The revolving line of credit is secured bysubstantially all assets of the Company. The revolving line of credit includes a covenant limiting investments in foreign subsidiaries exceeding $10 millionand includes certain financial thresholds such as net income and tangible net worth. As of December 31, 2012, there were no advances outstanding under therevolving line of credit and the Company was in compliance with all terms and conditions of the revolving line of credit.Note 9 – Employee Benefit PlansThe Company maintains a 401(k) retirement plan that covers most of its employees. Under the plan, a full-time or regular part-time (over 20hours/week) employee becomes a participant after completing six months of employment. Employees may elect to contribute up to 50 percent of regular grosspay, subject to federal law limits on the dollar amount that participants may contribute to the plan, each calendar year. The Company matches part of theemployee contributions and may make a discretionary contribution to the plan. Total employer contributions were approximately $0.5 million for the yearended December 31, 2012, $0.4 million for the year ended December 31, 2011 and $0.3 million for the year ended December 31, 2010.The Company also sponsors a defined contribution retirement plan that covers the employees of Proto Labs Limited. Total employer contributions wereimmaterial for the years ended December 31, 2012, 2011 and 2010, respectively.Note 10 – Stock-Based CompensationThe Company has two equity incentive plans: the 2000 Stock Option Plan (2000 Plan) and the 2012 Long-Term Incentive Plan (2012 Plan). Upon theadoption of the 2012 Plan on February 21, 2012, all shares that were reserved under the 2000 Plan but not issued were assumed by the 2012 Plan. Noadditional shares will be issued under the 2000 66 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements Plan. Under the 2012 Plan, the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, stock units, other stock-based awards and cash incentive awards. Awards under the 2012 Plan will have a maximum term of ten years from the date of grant. The compensationcommittee of the Board of Directors may provide that the vesting or payment of any award will be subject to the attainment of specified performance measuresin addition to the satisfaction of any continued service requirements, and the compensation committee will determine whether such measures have beenachieved. The per share exercise price of stock options and SARs granted under the 2012 Plan generally may not be less than the fair market value of a shareof our common stock on the date of the grant.The Company’s 2012 Employee Stock Purchase Plan (ESPP) became effective on February 23, 2012. The ESPP allows eligible employees to purchaseshares of the Company’s common stock at a discount through payroll deductions of up to 15 percent of their eligible compensation, subject to planlimitations. The ESPP provides for six-month offering periods, and at the end of each offering period, employees are able to purchase shares at 85 percent ofthe lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last trading day of the offeringperiod. Due to the timing of the IPO, the initial offering period under the ESPP was approximately eight-and-a-half months from the offering date ofFebruary 23, 2012 ending on November 15, 2012.The Company determines its stock-based compensation in accordance with ASC 718, which requires the measurement and recognition of compensationexpense for all share-based payment awards made to employees and non-employee directors based on fair value.Determining the appropriate fair value model and calculating the fair value of stock option grants requires the input of highly subjective assumptions.The Company uses the Black-Scholes option pricing model to value its stock option awards. Stock-based compensation expense is calculated using theCompany’s best estimates, which involve inherent uncertainties and the application of management’s judgment. Significant estimates include its expectedterm, fair value of Company common stock, stock price volatility and forfeiture rates.The expected term represents the weighted average period that the Company’s stock options are expected to be outstanding. The expected term is based onthe observed and expected time to post-vesting exercise of options by employees and non-employee directors and considers the impact of post-vesting awardforfeitures. Prior to its IPO, the Company estimated the fair value of its common stock using the assistance of an independent third-party valuation specialistusing the income and market approach. As the Company operated as a private company with a limited market for its stock from the Company’s inception tothe completion of its IPO on February 29, 2012, the Company based its assumptions on the volatility of stock price using outside valuation services and anestimate of the volatility of its common stock based on volatility of a peer group of comparable publicly traded companies for which historical information isavailable. The Company bases the risk-free interest rate that it uses in the Black-Scholes option pricing model on U.S. Treasury instruments with maturitiessimilar to the expected term of the award being valued. The Company has never paid and does not anticipate paying, any cash dividends in the foreseeablefuture and, therefore, the Company uses an expected dividend yield of zero in the option pricing model. In order to properly attribute compensation expense, theCompany is required to estimate pre-vesting forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ fromthose estimates. The Company uses historical data to estimate pre-vesting forfeitures and record stock-based compensation expense for those awards that areexpected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, stock-based compensation expense could be significantlydifferent from what has been recorded. The Company allocates stock-based compensation expense on a straight-line basis over the requisite service period. 67 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements The following table summarizes stock-based compensation expense for the years ended December 31, 2012, 2011 and 2010, respectively: Year Ended December 31, (in thousands) 2012 2011 2010 Cost of revenue $335 $78 $39 Operating expenses: Marketing and sales 418 215 84 Research and development 486 274 73 General and administrative 1,800 563 135 Total stock-based compensation expense 3,039 1,130 331 Income tax benefits (844) (338) (56) Total stock-based compensation expense, net of tax $2,195 $792 $275 The following table provides the assumptions used in the Black-Scholes option pricing model for the years ended December 31, 2012, 2011 and 2010: Year Ended December 31, 2012 2011 2010 Risk-free interest rate 0.95 - 1.16% 3.68% 3.35% Expected life (years) 5.5 - 6.5 5 10 Expected volatility 53.00 - 53.14% 47.32% 38.05% Expected dividend yield 0% 0% 0% Weighted average grant date fair value $ 14.79 $8.99 $4.27 The following table summarizes stock option activity and the weighted average exercise price for the years ended December 31, 2012, 2011 and 2010: Stock Options Weighted-AverageExercise Price Options outstanding at January 1, 2010 2,080,666 $1.83 Granted 658,000 7.86 Exercised (615,328) 0.09 Cancelled (84,000) 4.02 Options outstanding at December 31, 2010 2,039,338 5.25 Granted 224,000 20.07 Exercised (164,038) 0.29 Cancelled — — Options outstanding at December 31, 2011 2,099,300 6.18 Granted 259,800 28.67 Exercised (667,243) 2.41 Cancelled (500) 30.58 Options outstanding at December 31, 2012 1,691,357 $11.11 Exercisable at December 31, 2012 802,990 $5.91 68 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements The outstanding options generally have a term of 10 years. For employees, options that have been granted become exercisable ratably over the vestingperiod, which is generally a 5-year period, beginning on the first anniversary of the grant date, subject to the employee’s continuing service to the Company.For directors, options generally become exercisable in full on the first anniversary of the grant date.The total intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was $19.6 million, $2.5 million and $3.4million, respectively. The aggregate intrinsic value represents the cumulative difference between the fair market value of the underlying common stock and theoption exercise prices.For options outstanding at December 31, 2012, the weighted-average remaining contractual term was 7.0 years and the aggregate intrinsic value was$47.9 million. For options exercisable at December 31, 2012, the weighted-average remaining contractual term was 5.5 years and the aggregate intrinsic valuewas $26.9 million. Refer to the table below for additional information.The following table summarizes information about stock options outstanding at December 31, 2012: Options Outstanding, Vested and Expected to Vest Options Exercisable Range ofExercise Prices NumberOutstanding WeightedAverage RemainingContractual Life WeightedAverageExercisePrice ($) NumberExercisable WeightedAverageExercisePrice ($) $0.50 to $1.79 162,850 2.17 $1.12 162,850 $1.12 $2.66 to $5.00 283,852 4.30 3.53 255,852 3.40 $5.56 127,005 6.34 5.56 62,605 5.56 $7.86 635,750 7.97 7.86 254,950 7.86 $16.00 to $20.07 264,600 8.58 19.42 66,733 20.07 $30.58 to $36.41 217,300 9.40 31.12 — — The fair value of share-based payment transactions is recognized in the statements of comprehensive income. As of December 31, 2012, there was $5.6million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 2.7years. The total fair value of options vested was $1.3 million, $5.6 million and $1.2 million for the years ended December 31, 2012, 2011 and 2010,respectively.The following table presents the assumptions used to estimate the fair value of the ESPP during the year ended December 31, 2012: Year endedDecember 31, 2012 Risk-free interest rate 0.13 - 0.16% Expected life (months) 6 - 8.5 Expected volatility 53.00 - 53.14% Expected dividend yield 0% Note 11 – CommitmentsThe Company leases property from third parties. The Company leases a portion of its U.S. facilities, and the lease term expires in July 2017. TheCompany leases office and manufacturing space in the United Kingdom, and the initial term expires in February 2016. The Company leases an office andmanufacturing space in Japan, and the initial term expires in November 2021. The Company has the ability to terminate this lease, with no penalty, upon sixmonths’ notice. 69 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements As a condition of the lease of the UK facility, the Company received a rent holiday for the full year of 2011. The expense related to the full term of thelease is being recognized on a straight-line basis in accordance with ASC 840, Leases (ASC 840).In addition to those property leases described above, the Company has acquired capital equipment under capital leases.Future minimum commitments under non-cancelable leases at December 31, 2012, are as follows: Years Ending December 31, CapitalLeases OperatingLeases (in thousands) 2013 $311 $1,289 2014 217 1,262 2015 151 1,255 2016 11 723 2017 — 544 After 2017 — 2,059 Total future minimum lease payments 690 $7,132 Less interest cost 61 Net present value of minimum lease payments $629 Rental expense was approximately $1.3 million, $0.8 million and $0.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.Note 12 – Income TaxesThe Company is subject to income tax in multiple jurisdictions and the use of estimates is required to determine the provision for income taxes. For theyears ended December 31, 2012, 2011 and 2010 the Company recorded an income tax provision of $10.9 million, $8.8 million, and $4.8 million,respectively. The income tax provision is based on the estimated annual effective tax rate for the year applied to pre-tax income. The effective income tax rate forthe years ended December 31, 2012, 2011, and 2010 was 31.3 percent, 32.8 percent, and 30.3 percent, respectively.The provision for income taxes is based on income (loss) before income taxes reported for financial statement purposes. The components of income(loss) before income taxes are as follows: Year Ended December 31, (in thousands) 2012 2011 2010 United States $34,653 $26,699 $17,073 International 316 56 (1,360) Total $34,969 $26,755 $15,713 70 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements Significant components of the provision for income taxes for the following periods are as follows: Year Ended December 31, (in thousands) 2012 2011 2010 Current: Federal $10,288 $5,561 $3,493 State 217 291 185 Foreign 761 700 528 Deferred Federal (398) 2,211 627 State 65 9 8 Foreign (1,060) (1,018) (1,227) Valuation Allowance 1,071 1,029 1,148 Total $10,944 $8,783 $4,762 A reconciliation of the federal statutory income tax rate to the effective tax rate is as follows: Year Ended December 31, 2012 2011 2010 Federal tax statutory rate 35.0% 35.0% 34.0% State tax (net of federal benefit) 0.8 0.7 1.0 Qualified subsidiary election (3.5) (3.8) (11.0) Research and development credit (0.4) (0.3) (0.9) Valuation allowance against deferred tax assets 3.5 3.8 7.3 Foreign rate differential (1.1) (0.7) (1.7) Tax reserves 0.0 0.0 2.3 Domestic manufacturing deduction (2.9) (1.7) (1.9) Provision to return (0.1) (0.1) 0.5 Miscellaneous 0.0 (0.1) 0.7 Total 31.3% 32.8% 30.3% On January 2, 2013, the American Taxpayer Relief Act of 2012 (the Act) was signed into law. Included in the Act was the extension of the research anddevelopment credit for years 2012 and 2013. As the Act was enacted during 2013, the impacts of this law are not included in the 2012 financial results; theamount of research and development credit presented in the table above relates to state credits only. The Company anticipates a beneficial impact on theeffective tax rate in 2013 for both the 2012 and 2013 research and development credit. 71 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements Significant components of deferred tax assets and liabilities are as follows: December 31, (in thousands) 2012 2011 Deferred tax assets: Accrued expenses $251 $151 Warrants and stock options 963 353 Intangibles 117 110 Inventories 114 127 Net operating loss 4,565 3,270 Less valuation allowance (4,341) (3,270) Total deferred tax assets 1,669 741 Deferred tax liabilities: Depreciation (4,406) (4,061) Total deferred tax liabilities (4,406) (4,061) Net deferred tax liability $(2,737) $(3,320) The Company has recorded no U.S. deferred taxes related to the undistributed earnings of its non-U.S. subsidiaries as of December 31, 2012. Suchamounts are intended to be reinvested outside of the United States indefinitely. It is not practicable to estimate the amount of additional tax that might bepayable on the foreign earnings. At December 31, 2012, 2011 and 2010, the Company had accumulated undistributed earnings in non-U.S. subsidiaries of$6.4 million, $3.6 million and $1.7 million, respectively.The valuation allowances established for foreign subsidiaries are due to lack of sufficient positive evidence to realize the deferred tax assets associatedwith the net operating losses. At December 31, 2012, 2011 and 2010, the Company has operating loss carry forwards of $11.2 million, $8.0 million, and$5.5 million, respectively, which expire at various times beginning in 2013 through 2019. The Company has established a valuation allowance against thesenet operating loss carry forwards as it does not believe they will be realizable before expiration. Of these net operating loss carry forwards, $5.7 million havebeen recognized as a benefit in the U.S. based on a qualified subsidiary election.The Company has liabilities related to unrecognized tax benefits totaling $0.4 million at December 31, 2012 and 2011, respectively, that if recognizedwould result in a reduction of the Company’s effective tax rate. The liabilities are classified as other long-term liabilities in the accompanying consolidatedbalance sheets. The Company does not anticipate that total unrecognized tax benefits will materially change in the next twelve months. The Companyrecognizes interest and penalties related to income tax matters in income tax expense, and reports the liability in current or long-term income taxes payable asappropriate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: December 31, 2012 2011 Balance at beginning of period $402 $392 Additions for tax positions of prior years 10 10 Balance at period end $412 $402 72 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements 13 – WarrantsAt December 31, 2010 the Company had issued and outstanding fully vested warrants for the purchase of up to 1,526,182 shares of common stock atan exercise price of $0.33 per share and for the purchase of up to 105,000 shares at an exercise price of $1.79 per share. These warrants were held by twoexecutive officers. During 2011, all of the warrants with an exercise price of $0.33 per share were exercised, resulting in the issuance of 1,526,182 shares ofcommon stock. During 2012, all of the warrants outstanding with an exercise price of $1.79 per share were exercised, resulting in the issuance of 105,000shares of common stock. No common stock warrants remained outstanding at December 31, 2012.14 – Redeemable Convertible Preferred Stock and Redeemable Common StockIn August 2008, the Company sold 427,985 shares of redeemable convertible preferred stock. Upon completion of its IPO in February 2012, theseshares were converted to common stock. Refer to Note 2 for additional information.During 2008, the Company executed an Investors’ Rights Agreement with certain investors that supplements the Stock Purchase Agreement executed in2005. The Investors’ Rights Agreement provides the investors certain rights, including the right to require the Company to redeem the 3,189,648 shares ofcommon stock owned by the investor at the then current fair market value. Upon completion of its IPO in February 2012, these redemption rights expired andthe shares of redeemable common stock were converted into common stock.15 – LitigationFrom time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business. Although theresults of litigation and claims cannot be predicted with certainty, the Company does not believe it is a party to any litigation the outcome of which, ifdetermined adversely, would individually or in the aggregate be reasonably expected to have a material adverse effect on its business.16 – Segment and Geographic InformationThe Company previously reported segments on a geographic basis. In 2012 as the Company’s operations have evolved, the CEO, who is theCompany’s chief operating decision maker, began reviewing operating results only at the consolidated level, which is how the CEO makes decisions to operatethe business and allocate resources. As a result, the Company has determined that it has only one operating segment, and has revised its historical segmentpresentation to align with the current year presentation.The Company’s revenue is derived from two product lines, Protomold injection molding and Firstcut CNC machining. Total revenue by product line isas follows: Year Ended December 31, (in thousands) 2012 2011 2010 Revenue: Protomold $90,371 $74,090 $50,690 First Cut 35,620 24,849 14,229 Total revenue $125,991 $98,939 $64,919 73 Table of ContentsProto Labs, Inc.Notes to Consolidated Financial Statements Revenue to external customers based on the billing location of the end user customer and long-lived assets by geography are as follows: Year Ended December 31, (in thousands) 2012 2011 2010 Revenue: United States $94,866 $73,010 $48,059 International 31,125 25,929 16,860 Total revenue $125,991 $98,939 $64,919 December 31, (in thousands) 2012 2011 Long-lived assets: United States $37,869 $28,831 International 7,447 5,418 Total long-lived assets $45,316 $34,249 74 Table of ContentsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNot applicable.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of the end ofthe period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of theperiod covered by this Annual Report on Form 10-K, our disclosure controls and procedures are effective and provided reasonable assurance that informationrequired to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately andwithin the time frames specified in the SEC’s rules and forms and accumulated and communicated to our management, including our Chief Executive Officerand Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.Management’s Annual Report on Internal Control Over Financial ReportingThis Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or anattestation report of the Company’s registered public accounting firm due to a transition period established by the rules of the Securities and ExchangeCommission for newly public companies.Changes in Internal Control over Financial ReportingThere have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during theperiod covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNone. 75 Table of ContentsPART IIIItem 10. Directors, Executive Officers and Corporate GovernanceThe information required by this item with respect to Item 401 relating to executive officers is contained in Item 1 of this Annual Report on Form 10-Kunder the heading “Executive Officers of the Registrant” and with respect to other information relating to our directors will be set forth in our 2013 ProxyStatement under the caption “Proposal 1 — Election of Directors,” which will be filed no later than 120 days after the end of the fiscal year covered by thisAnnual Report on Form 10-K, and is incorporated herein by reference.The information required by this item under Item 405 of Regulation S-K is incorporated herein by reference to the section titled “Corporate Governance— Section 16(a) Beneficial Ownership Reporting Compliance” of our 2013 Proxy Statement, which will be filed no later than 120 days after the end of thefiscal year covered by this Annual Report on Form 10-K. The information required by this item under Items 407 (c)(3), (d)(4) and (d)(5) of Regulation S-K isincorporated herein by reference to the section titled “Corporate Governance” of our 2013 Proxy Statement, which will be filed no later than 120 days after theend of the fiscal year covered by this Annual Report on Form 10-K.We have adopted a Code of Ethics and Business Conduct that applies to all of our directors, officers and employees, including our principal executiveofficer and principal financial officer. The Code of Ethics and Business Conduct is available on our website at www.protolabs.com under the InvestorsRelations section. We plan to post to our website at the address described above any future amendments or waivers of our Code of Ethics and BusinessConduct.Item 11. Executive CompensationInformation related to this item is incorporated herein by reference to the sections titled “Compensation Discussion and Analysis,” “CorporateGovernance — Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” of our 2013 Proxy Statement, whichwill be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersInformation related to security ownership required by this item is incorporated herein by reference to the section titled “Security Ownership of CertainBeneficial Owners and Management” of our 2013 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by thisAnnual Report on Form 10-K. Information related to our equity compensation plans required by this item is incorporated herein by reference to the section titled“Compensation Discussion and Analysis – Information Regarding Equity-Based Compensation Plans” of our 2013 Proxy Statement, which will be filed nolater than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.Item 13. Certain Relationships and Related Transactions, and Director IndependenceInformation required by this item is incorporated herein by reference to the sections titled “Corporate Governance — Certain Relationships and RelatedParty Transactions,” and “Corporate Governance — Director Independence” of our 2013 Proxy Statement, which will be filed no later than 120 days after theend of the fiscal year covered by this Annual Report on Form 10-K.Item 14. Principal Accountant Fees and ServicesInformation required by this item is incorporated herein by reference to the section titled “Fees Paid to Independent Registered Public Accounting Firm” ofour 2013 Proxy Statement, which will be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. 76 Table of ContentsPART IVItem 15. Exhibits and Financial Statement Schedules(a) The following documents are filed as part of this report:1. Consolidated Financial StatementsSee Index to Consolidated Financial Statement at Item 8 herein2. Financial Statement SchedulesSchedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financialstatement or notes herein.3. ExhibitsSee the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K. 77 Table of ContentsSIGNATUREPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized. Proto Labs, Inc.Date: March 22, 2013 /s/ Bradley A. Cleveland Bradley A. Cleveland President and Chief Executive Officer (Principal Executive Officer)Date: March 22, 2013 /s/ John R. Judd John R. Judd Chief Financial Officer (Principal Financial and Accounting Officer)Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theRegistrant in the capacities and on the dates indicated. Date: March 22, 2013 /s/ Bradley A. Cleveland Bradley A. Cleveland President and Chief Executive Officer and Director (Principal Executive Officer)Date: March 22, 2013 /s/ John R. Judd John R. Judd Chief Financial Officer (Principal Financial and Accounting Officer) Chairman of the Board of Directors and Chief Technology Officer: Lawrence J. Lukis* Directors: Matthew Blodgett* Rainer Gawlick* John Goodman* Douglas W. Kohrs* Margaret A. Loftus* Brian K. Smith* Sven A. Wehrwein**Bradley A. Cleveland, by signing his name hereto, does hereby sign this document on behalf of each of the above named officers and directors of theregistrant pursuant to powers of attorney duly executed by such persons and filed as an exhibit hereto. Date: March 22, 2013 /s/ Bradley A. Cleveland Bradley A. Cleveland President and Chief Executive Officer (Principal Executive Officer) 78 Table of ContentsEXHIBIT INDEX Exhibit Number Description of Exhibit3.1 Third Amended and Restated Articles of Incorporation of Proto Labs, Inc.3.2 Amended and Restated By-Laws of Proto Labs, Inc.4.1 Form of certificate representing common shares of Proto Labs, Inc.10.1 2012 Long-Term Incentive Plan10.2 Form of Incentive Stock Option Agreement under 2012 Long-Term Incentive Plan10.3 Form of Non-Statutory Stock Option Agreement (Directors) under 2012 Long-Term Incentive Plan10.4 Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2012 Long-Term Incentive Plan10.5 Form of Non-Statutory Stock Option Agreement (U.K. Employees) under 2012 Long-Term Incentive Plan10.6 Employee Stock Purchase Plan10.7 Stock Subscription Warrant issued to John B. Tumelty10.8 2000 Stock Option Plan, as amended10.9 Form of Incentive Stock Option Agreement under 2000 Stock Option Plan10.10 Form of Non-Statutory Stock Option Agreement (Directors) under 2000 Stock Option Plan10.11 Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2000 Stock Option Plan10.12 Form of Non-Statutory Stock Option Agreement (U.S. Employees) under 2000 Stock Option Plan10.13 Form of Non-Statutory Stock Option Agreement (U.K. Employees) under 2000 Stock Option Plan10.14 Executive Employment Agreement, dated as of June 1, 2011, between Proto Labs, Inc. and John R. Judd10.15 Amended and Restated Credit Agreement, dated as of September 30, 2011, between Proto Labs, Inc. and Wells Fargo Bank, N.A.10.16 Amendment, dated as of February 10, 2012, between Proto Labs, Inc., and Lawrence J. Lukis, Protomold Investment Company,LLC and North Bridge Growth Equity I, L.P.10.17 Letter Agreement, dated as of September 9, 2010, between Proto Labs, Inc., and Thomas Pang10.18 Voting Agreement, dated as of August 1, 2008, among Proto Labs, Inc., the Investors named on Schedule A thereto, and the KeyHolders named on Schedule B thereto10.19 Amendment No. 1 to Voting Agreement, dated as of May 31, 2011, among Proto Labs, Inc., North Bridge Growth Equity I, L.P.,Protomold Investment Company, LLC, and Lawrence Lukis10.20 Right of First Refusal and Co-Sale Agreement, dated as of August 1, 2008, among Proto Labs, Inc., the Investors named onSchedule A thereto, and the Key Holders named on Schedule B thereto10.21 Management Rights Agreement, dated as of August 1, 2008, by Proto Labs, Inc.10.22 Amended and Restated Investors’ Rights Agreement, dated as of July 19, 2011, among Proto Labs, Inc. and the Investors namedon Schedule A thereto21.1 Subsidiaries of Proto Labs, Inc.23.1 Consent of Ernst & Young LLP24.1 Powers of Attorney31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act32.1* Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act 79(1)(2)(3)(4)#(5)#(6)#(7)#(8)#(9)#(10)(11)#(12)#(13)#(14)#(15)#(16)#(17)#(18)(19)(20)#(21)(22)(23)(24)(25)(26) Table of ContentsExhibit Number Description of Exhibit101.INS** XBRL Instance Document101.SCH** XBRL Taxonomy Extension Schema Document101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document101.DEF** XBRL Taxonomy Extension Definition Linkbase Document101.LAB** XBRL Taxonomy Extension Label Linkbase Document101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission onFebruary 13, 2012. Incorporated by reference to Exhibit 3.4 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission onFebruary 13, 2012. Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commission onFebruary 13, 2012. Incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commissionon February 13, 2012. Incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commissionon February 13, 2012. Incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commissionon February 13, 2012. Incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commissionon February 13, 2012. Incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commissionon February 13, 2012. Incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commissionon February 13, 2012. Incorporated by reference to Exhibit 99.7 to the Company’s Registration Statement on Form S-8 (File No. 333-179651), filed with the Commission onFebruary 23, 2012. Incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission onJuly 25, 2011. Incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission onJuly 25, 2011. Incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission onJuly 25, 2011. Incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission onJuly 25, 2011. Incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission onJuly 25, 2011. Incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission onJuly 25, 2011. Incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission onJuly 25, 2011. Incorporated by reference to Exhibit 10.19 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commissionon October 26, 2011. Incorporated by reference to Exhibit 10.20 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commissionon February 13, 2012. Incorporated by reference to Exhibit 10.21 to the Company’s Registration Statement on Form S-1/A (File No. 333-175745), filed with the Commissionon February 13, 2012. Incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission onJuly 25, 2011. Incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission onJuly 25, 2011. 80(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14)(15)(16)(17)(18)(19)(20)(21)(22) Table of Contents Incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission onJuly 25, 2011. Incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission onJuly 25, 2011. Incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission onJuly 25, 2011. Incorporated by reference to Exhibit 21.1 to the Company’s Registration Statement on Form S-1 (File No. 333-175745), filed with the Commission onJuly 25, 2011. Indicates management contract or compensatory plan or arrangement.*The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed “filed” forpurposes of Section 18 of the Securities Exchange Act of 1934, as amended. Such certifications will not be deemed to be incorporated by reference intoany filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrantspecifically incorporates it by reference.**Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registrationstatement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 andotherwise are not subject to liability under these sections. 81(23)(24)(25)(26)# Exhibit 23.1Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-179651) pertaining to the 2012 Long-Term Incentive Plan,Employee Stock Purchase Plan, 2000 Stock Option Plan, and Stock Subscription Warrant of Proto Labs, Inc. of our report dated March 22, 2013, withrespect to the consolidated financial statements of Proto Labs, Inc. included in its Annual Report (Form 10-K) for the year ended December 31, 2012./s/ Ernst & Young LLPMinneapolis, MinnesotaMarch 22, 2013 Exhibit 24.1PROTO LABS, INC.POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICEREach of the undersigned directors and/or officers of Proto Labs, Inc., a Minnesota corporation (the “Company”), does hereby make, constitute andappoint Bradley A. Cleveland and John R. Judd, and each of them, either of whom may act without the joinder of the other, the undersigned’s true and lawfulattorney-in-fact and agent, with full power of substitution, for the undersigned and in the undersigned’s name, place and stead, to sign on his or her behalf,individually and in the capacities stated below, the Annual Report on Form 10-K for the year ended December 31, 2012 under the Securities Exchange Act of1934, as amended, with any amendment or amendments thereto, with all exhibits thereto and other supporting documents, with the U.S. Securities andExchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary orincidental to the performance and execution of the powers herein expressly granted.IN WITNESS WHEREOF, each of the undersigned directors and/or officers of Proto Labs, Inc. has hereunto set his or her hand this 27th day ofFebruary, 2013. /s/ Lawrence J. Lukis Chairman and Chief Technology OfficerLawrence J. Lukis /s/ Bradley A. Cleveland President, Chief Executive Officer and DirectorBradley A. Cleveland /s/ John R. Judd Chief Financial OfficerJohn R. Judd /s/ Matthew C. Blodgett DirectorMatthew C. Blodgett /s/ Rainer Gawlick DirectorRainer Gawlick /s/ John B. Goodman DirectorJohn B. Goodman /s/ Douglas W. Kohrs DirectorDouglas W. Kohrs /s/ Margaret A. Loftus DirectorMargaret A. Loftus /s/ Brian K. Smith DirectorBrian K. Smith /s/ Sven A. Wehrwein DirectorSven A. Wehrwein Exhibit 31.1CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OFTHE SECURITIES EXCHANGE ACT OF 1934,AS ADOPTED PURSUANT TO SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002I, Bradley A. Cleveland, certify that:1. I have reviewed this Annual Report on Form 10-K of Proto Labs, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 22, 2013 By: /s/ Bradley A. Cleveland Bradley A. Cleveland President and Chief Executive Officer (Principal Executive Officer) Exhibit 31.2CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OFTHE SECURITIES EXCHANGE ACT OF 1934,AS ADOPTED PURSUANT TO SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002I, John R. Judd, certify that:1. I have reviewed this Annual Report on Form 10-K of Proto Labs, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 22, 2013 By: /s/ John R. Judd John R. Judd Chief Financial Officer (Principal Financial Officer) Exhibit 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002I, Bradley A. Cleveland, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport of Proto Labs, Inc. on Form 10-K for the fiscal year ended December 31, 2012 fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financialcondition and results of operations of Proto Labs, Inc.Date: March 22, 2013 By: /s/ Bradley A. ClevelandName: Bradley A. ClevelandTitle: President and Chief Executive OfficerI, John R. Judd, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Reportof Proto Labs, Inc. on Form 10-K for the fiscal year ended December 31, 2012 fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition andresults of operations of Proto Labs, Inc.Date: March 22, 2013 By: /s/ John R. JuddName: John R. JuddTitle: Chief Financial Officer
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