10-Q 1 prlb20220930_10q.htm FORM 10-Q prlb20220930_10q.htm
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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2022

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For 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 incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

5540 Pioneer Creek Drive

 

Maple Plain, Minnesota

55359

(Address of principal executive offices)

(Zip Code)

 

(763479-3680

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.001 Per Share

PRLB

New York Stock Exchange

 

Indicate 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 1934 during 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 filing requirements for the past 90 days.  ☑Yes ☐No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  ☑Yes ☐No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer     

Non-accelerated filer

☐    

 

Smaller reporting company

Emerging growth company

    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☑No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 27,116,891 shares of Common Stock, par value $0.001 per share, were outstanding at November 1, 2022.

 

 

 
 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

Proto Labs, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 


 

  

September 30,

  

December 31,

 
  2022  2021 
  

(Unaudited)

     

Assets

        

Current assets

        

Cash and cash equivalents

 $59,361  $65,929 

Short-term marketable securities

  25,253   11,580 

Accounts receivable, net of allowance for doubtful accounts of $1,821 and $1,948 as of September 30, 2022, and December 31, 2021, respectively

  80,611   80,051 

Inventory

  14,617   13,161 

Income taxes receivable

  763   1,321 

Prepaid expenses and other current assets

  11,752   11,450 

Total current assets

  192,357   183,492 

Property and equipment, net

  259,856   280,346 

Goodwill

  383,558   400,610 

Other intangible assets, net

  31,907   37,998 

Long-term marketable securities

  29,257   14,340 

Operating lease assets

  4,293   5,578 

Finance lease assets

  1,524   1,898 

Other long-term assets

  4,186   4,320 

Total assets

 $906,938  $928,582 
         

Liabilities and shareholders' equity

        

Current liabilities

        

Accounts payable

 $16,893  $25,364 

Accrued compensation

  15,087   13,704 

Accrued liabilities and other

  25,478   11,980 

Current operating lease liabilities

  1,773   3,298 

Current finance lease liabilities

  1,484   550 

Income taxes payable

  5   - 

Total current liabilities

  60,720   54,896 

Long-term operating lease liabilities

  2,477   2,245 

Long-term finance lease liabilities

  -   1,351 

Long-term deferred tax liabilities

  26,864   35,892 

Other long-term liabilities

  6,031   5,705 

Total liabilities

  96,092   100,089 
         

Shareholders' equity

        

Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of each of September 30, 2022, and December 31, 2021

  -   - 

Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 27,326,750 and 27,465,945 shares as of September 30, 2022, and December 31, 2021, respectively

  28   28 

Additional paid-in capital

  477,107   468,548 

Retained earnings

  380,735   376,734 

Accumulated other comprehensive loss

  (47,024)  (16,817)

Total shareholders' equity

  810,846   828,493 

Total liabilities and shareholders' equity

 $906,938  $928,582 

 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

Proto Labs, Inc.

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

 


 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Statements of Operations:

                

Revenue

 $121,721  $125,342  $372,791  $364,516 

Cost of revenue

  68,089   70,018   205,933   197,237 

Gross profit

  53,632   55,324   166,858   167,279 

Operating expenses

                

Marketing and sales

  20,594   21,422   62,235   61,946 

Research and development

  9,309   10,614   29,316   33,855 

General and administrative

  16,477   16,361   49,770   44,186 

Closure of Japan business

  1,194   -   6,388   - 

Total operating expenses

  47,574   48,397   147,709   139,987 

Income from operations

  6,058   6,927   19,149   27,292 

Other income (loss), net

  (24)  136   (323)  (40)

Income before income taxes

  6,034   7,063   18,826   27,252 

Provision for income taxes

  2,083   2,228   7,223   5,790 

Net income

 $3,951  $4,835  $11,603  $21,462 
                 

Net income per share:

                

Basic

 $0.14  $0.17  $0.42  $0.78 

Diluted

 $0.14  $0.17  $0.42  $0.77 
                 

Shares used to compute net income per share:

                

Basic

  27,505,097   27,713,229   27,512,057   27,638,611 

Diluted

  27,508,217   27,730,105   27,522,734   27,707,784 
                 

Comprehensive Income (Loss) (net of tax)

                

Comprehensive income (loss)

 $(6,924) $(508) $(18,604) $11,424 

 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

Proto Labs, Inc.

Consolidated Statements of Shareholders' Equity

(In thousands, except share amounts)

 


 

  

Common Stock

  

Additional

      

Accumulated Other

     
          

Paid-In

  

Retained

  

Comprehensive

     
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Total

 
                         

Balance at December 31, 2021

  27,465,945   28   468,548   376,734   (16,817)  828,493 

Common shares issued on exercise of options and other, net of shares withheld for tax obligations

  27,716   -   (462)  -   -   (462)

Stock-based compensation expense

  -   -   4,397   -   -   4,397 

Repurchases of common stock

  -   -   -   -   -   - 

Net income

  -   -   -   5,095   -   5,095 

Other comprehensive loss

                        

Foreign currency translation adjustment

  -   -   -   -   (4,972)  (4,972)

Net unrealized gains (losses) on investments in securities

  -   -   -   -   (516)  (516)

Comprehensive loss

                  (393)

Balance at March 31, 2022

  27,493,661  $28  $472,483  $381,829  $(22,305) $832,035 

Common shares issued on exercise of options and other, net of shares withheld for tax obligations

  122,705   -   1,158   -   -   1,158 

Stock-based compensation expense

  -   -   4,031   -   -   4,031 

Repurchases of common stock

  (113,266)  -   (1,932)  (3,307)  -   (5,239)

Net income

  -   -   -   2,557   -   2,557 

Other comprehensive loss

                        

Foreign currency translation adjustment

  -   -   -   -   (13,515)  (13,515)

Net unrealized gains (losses) on investments in securities

  -   -   -   -   (329)  (329)

Comprehensive loss

                  (11,287)

Balance at June 30, 2022

  27,503,100  $28  $475,740  $381,079  $(36,149) $820,698 

Common shares issued on exercise of options and other, net of shares withheld for tax obligations

  31,150   -   -   -   -   - 

Stock-based compensation expense

  -   -   4,907   -   -   4,907 

Repurchases of common stock

  (207,500)  -   (3,540)  (4,295)  -   (7,835)

Net income

  -   -      3,951   -   3,951 

Other comprehensive loss

                        

Foreign currency translation adjustment

  -   -   -   -   (10,287)  (10,287)

Net unrealized gains (losses) on investments in securities

  -   -   -   -   (588)  (588)

Comprehensive loss

                  (6,924)

Balance at September 30, 2022

  27,326,750  $28  $477,107  $380,735  $(47,024) $810,846 

 

  

Common Stock

  

Additional

      

Accumulated Other

     
          

Paid-In

  

Retained

  

Comprehensive

     
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Total

 
                         

Balance at December 31, 2020

  26,776,796   27   284,848   362,901   (3,420)  644,356 

Common shares issued on exercise of options and other, net of shares withheld for tax obligations

  48,955   -   (290)  -   -   (290)

Common shares issued for Hubs acquisition

  863,995   1   166,708   -      166,709 

Stock-based compensation expense

  -   -   5,620   -   -   5,620 

Repurchases of common stock

  -   -   -   -   -   - 

Net income

  -   -   -   3,712   -   3,712 

Other comprehensive loss

                        

Foreign currency translation adjustment

  -   -   -   -   (6,842)  (6,842)

Net unrealized gains (losses) on investments in securities

  -   -   -   -   166   166 

Comprehensive loss

                  (2,964)

Balance at March 31, 2021

  27,689,746  $28  $456,886  $366,613  $(10,096) $813,431 

Common shares issued on exercise of options and other, net of shares withheld for tax obligations

  85,317   -   (81)  -   -   (81)

Stock-based compensation expense

  -   -   4,941   -   -   4,941 

Repurchases of common stock

  (14,000)  -   (149)  (1,061)  -   (1,210)

Net income

  -   -   -   12,915   -   12,915 

Other comprehensive income

                        

Foreign currency translation adjustment

  -   -   -   -   2,030   2,030 

Net unrealized gains (losses) on investments in securities

  -   -   -   -   (49)  (49)

Comprehensive income

                  14,896 

Balance at June 30, 2021

  27,761,063  $28  $461,597  $378,467  $(8,115) $831,977 

Common shares issued on exercise of options and other, net of shares withheld for tax obligations

  -   -   -   -   -   - 

Stock-based compensation expense

  -   -   4,978   -   -   4,978 

Repurchases of common stock

  (157,414)  -   (1,675)  (10,151)  -   (11,826)

Net income

  -   -   -   4,835   -   4,835 

Other comprehensive loss

                        

Foreign currency translation adjustment

  -   -   -   -   (5,298)  (5,298)

Net unrealized gains (losses) on investments in securities

  -   -   -   -   (45)  (45)

Comprehensive loss

                  (508)

Balance at September 30, 2021

  27,603,649  $28  $464,900  $373,151  $(13,458) $824,621 

 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

Proto Labs, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 


 

  

Nine Months Ended

 
  

September 30,

 
  

2022

  

2021

 
         

Operating activities

        

Net income

 $11,603  $21,462 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

  29,981   30,231 

Stock-based compensation expense

  13,335   15,539 

Deferred taxes

  (8,920)  (139)

Fair value of contingent consideration

  -   (8,513)

Impairments related to closure of Japan business

  2,842   - 

Gain on disposal of property and equipment

  (1,174)  - 

Other

  11   442 

Changes in operating assets and liabilities:

        

Accounts receivable

  (3,909)  (25,615)

Inventories

  (1,613)  950 

Prepaid expenses and other

  (920)  1,009 

Income taxes

  670   (1,226)

Accounts payable

  1,292   1,978 

Accrued liabilities and other

  8,366   (3,893)

Net cash provided by operating activities

  51,564   32,225 
         

Investing activities

        

Purchases of property, equipment and other capital assets

  (16,414)  (27,956)

Proceeds from sales of property, equipment and other capital assets

  3,227   - 

Cash used for acquisitions, net of cash acquired

  -   (127,413)

Purchases of marketable securities

  (45,872)  (15,159)

Proceeds from sales of marketable securities

  1,998   57,089 

Proceeds from call redemptions and maturities of marketable securities

  13,696   15,114 

Net cash used in investing activities

  (43,365)  (98,325)
         

Financing activities

        

Proceeds from exercises of stock options

  2,311   3,838 

Purchases of shares withheld for tax obligations

  (1,615)  (4,209)

Repurchases of common stock

  (13,074)  (13,036)

Principal repayments of finance lease obligations

  (417)  (413)

Net cash used in financing activities

  (12,795)  (13,820)

Effect of exchange rate changes on cash and cash equivalents

  (1,972)  119 

Net decrease in cash and cash equivalents

  (6,568)  (79,801)

Cash and cash equivalents, beginning of period

  65,929   127,603 

Cash and cash equivalents, end of period

 $59,361  $47,802 

 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

Notes to Consolidated Financial Statements

 

Note 1 – Basis of Presentation

 

The unaudited interim Consolidated Financial Statements of Proto Labs, Inc. (Protolabs, the Company, we, us or our) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying financial statements reflect all adjustments necessary for a fair presentation of the Company’s statements of financial position, results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, these adjustments consist of normal, recurring items. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

 

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. For further information, refer to the audited Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended  December 31, 2021, as filed with the Securities and Exchange Commission (SEC) on February 18, 2022.

 

The accompanying Consolidated Balance Sheet as of December 31, 2021 was derived from the audited Consolidated Financial Statements but does not include all disclosures required by U.S. GAAP for a full set of financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Consolidated Financial Statements and Notes included in the Company's Annual Report on Form 10-K filed on February 18, 2022 as referenced above.

 

On May 27, 2022, the Company's board of directors approved a plan for the closure of the Company's manufacturing facility in Japan and announced an intention to cease operations in the region. Affected employees in Japan will receive severance and other transition assistance that meet or exceed local requirements. The Company expects to substantially complete the closure plan within the next year. The Company's decision to close the Japan business resulted in $1.2 million and $6.4 million in operating expenses during the three and nine months ended September 30, 2022, respectively. Operating expenses included $0.1 million of employee severance and $1.1 million related to the write-down of fixed assets for the three months ended September 30, 2022.  Operating expenses included $2.3 million of employee severance, $2.3 million related to the write-down of fixed assets, $0.9 million of facility-related charges, $0.6 million in goodwill impairment charges and $0.3 million in other closure related charges for the nine months ended September 30, 2022. 

  

 

Note 2 – Recent Accounting Pronouncements

 

The Company did not recently adopt any accounting pronouncements that had a material impact on the Company's Consolidated Financial Statements.  There are no pending accounting pronouncements that are expected to have a material impact on the Company's Consolidated Financial Statements.

 

 

Note 3 – Net Income per Common Share

 

Basic net income per share is computed based on the weighted-average number of common shares outstanding. Diluted net income per share is computed based on the weighted-average number of common shares outstanding, increased by the number of additional shares that would have been outstanding had potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock include stock options and other stock-based awards granted under stock-based compensation plans and shares committed to be purchased under the employee stock purchase plan. Performance stock units are excluded from the calculation of dilutive potential common shares until the performance conditions have been satisfied. For the three months ended September 30, 2022 and 2021, 210,443 and 184,920 anti-dilutive options were excluded from the calculation of diluted weighted average shares outstanding, respectively. For the nine months ended September 30, 2022 and 2021, 202,901 and 61,400 anti-dilutive options were excluded from the calculation of diluted weighted average shares outstanding, respectively.

 

The table below sets forth the computation of basic and diluted net income per share:

 


 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

(in thousands, except share and per share amounts)

 

2022

  

2021

  

2022

  

2021

 

Net income

 $3,951  $4,835  $11,603  $21,462 
                 

Basic - weighted-average shares outstanding:

  27,505,097   27,713,229   27,512,057   27,638,611 

Effect of dilutive securities:

                

Employee stock options and other

  3,120   16,876   10,677   69,173 

Diluted - weighted-average shares outstanding:

  27,508,217   27,730,105   27,522,734   27,707,784 

Net income per share:

                

Basic

 $0.14  $0.17  $0.42  $0.78 

Diluted

 $0.14  $0.17  $0.42  $0.77 

 


 

6

 
 

Note 4 – Business Combinations

 

On  January 22, 2021, the Company acquired all of the outstanding shares of 3D Hubs, Inc. (Hubs), for $294.1 million, consisting of $127.4 million in cash and 863,995 shares of the Company's common stock valued at $166.7 million on the closing date. The purchase agreement included additional contingent consideration of up to $52.8 million subject to the achievement of performance-based targets during fiscal 2021 and fiscal 2022. The contingent consideration consisted of up to $25.0 million in cash and up to 143,983 shares of the Company's common stock valued at $27.8 million on the closing date. 

 

Hubs is based in Amsterdam, Netherlands and is a leading online manufacturing platform that provides customers with on-demand access to a global network of premium manufacturing partners. The acquisition enhances the Company’s value proposition by expanding the customer offerings, enabling the Company to more holistically serve its customers.

 

The fair value of the consideration paid for this acquisition has been allocated to the assets purchased and liabilities assumed based on their fair values as of the acquisition date, with any excess recorded as goodwill.  The goodwill associated with the acquisition represents both the strategic and growth opportunities by significantly expanding the customer offering with a network of premium manufacturing partners. The goodwill related to the acquisition is not deductible for tax purposes. 

 

The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. The final purchase price allocation was as follows:


 

(in thousands)

 Acquisition 

Assets acquired:

    

Current assets

 $2,497 

Intangible assets

  30,770 

Goodwill

  280,925 

Other long-term assets

  1,139 

Total assets acquired

  315,331 
     

Liabilities assumed:

    

Current contingent consideration

  7,093 

Current liabilities

  5,666 

Long-term contingent consideration

  6,507 

Long-term deferred tax liabilities

  1,688 

Other long-term liabilities

  255 

Total liabilities assumed

  21,209 

Net assets acquired

  294,122 
     

Cash paid

  133,847 

Cash acquired

  (6,434)

Net cash consideration

  127,413 

Equity portion of purchase price

  166,709 

Total purchase consideration

 $294,122 

 


 

7

 
 

Note 5 – Goodwill and Other Intangible Assets

 

The changes in the carrying amount of goodwill during the nine months ended September 30, 2022 were as follows:

 


 

(in thousands)

 Nine Months Ended September 30, 2022 

Balance as of the beginning of the period

 $400,610 

Goodwill acquired during the period

  - 

Goodwill written off during the period

  (630)

Foreign currency translation adjustments

  (16,422)

Balance as of the end of the period

 $383,558 

 


 

Goodwill of $0.6 million was written off as of  September 30, 2022, as a result of the Company's decision to close the Japan manufacturing facility and exit the Japan market. The Japan business was in operations through the third quarter of 2022 and the assets are expected to be available for sale in the fourth quarter of 2022. The Euro denominated goodwill is translated at the end of each period using the current exchange rates resulting in a foreign currency translation adjustment that is recorded as a component of Other Comprehensive Income.

 

Intangible assets other than goodwill at  September 30, 2022 and December 31, 2021 were as follows:

 


 

  

September 30, 2022

  

December 31, 2021

  

Useful

  

Weighted Average

 

(in thousands)

 

Gross

  

Accumulated Amortization

  

Net

  

Gross

  

Accumulated Amortization

  

Net

  

Life (in years)

  

Useful Life Remaining (in years)

 

Intangible assets with finite lives:

                              

Marketing assets

  

$ 930

   

$ (783)

   

$ 147

   

$ 930

   

$ (713)

   

$ 217

  10.0  1.5 

Non-compete agreement

 807  (448) 359  842  (363) 479  2.0 - 5.0  2.3 

Software technology

 13,229  (6,041) 7,188  13,229  (5,014) 8,215  10.0  5.8 

Software platform

 25,071  (3,631) 21,440  26,725  (2,262) 24,463  12.0  10.3 

Tradenames

 337  (190) 147  359  (114) 245  3.0  1.3 

Customer relationships

 12,117  (9,491) 2,626  12,252  (7,873) 4,379  3.0 - 9.0  1.1 

Total intangible assets

 $52,491  $(20,584) $31,907  $54,337  $(16,339) $37,998       

 


 

Intangible assets have been allocated to the acquired Hubs entities consisting of intangible assets of €11.6 million in Europe and $16.6 million in the United States as of the date of the acquisition. The Euro denominated intangible assets are translated at the end of each period using the current exchange rates resulting in a foreign currency translation adjustment that is recorded as a component of Other Comprehensive Income. Foreign currency losses related to intangible assets were $2.8 million and $0.9 million as of September 30, 2022 and December 31, 2021, respectively. Amortization expense for intangible assets was $1.5 million and $1.6 million for the three months ended  September 30, 2022 and 2021, respectively, and $4.6 million in each of the nine months ended September 30, 2022 and 2021.

 

Estimated aggregated amortization expense based on the current carrying value of the amortizable intangible assets and current exchange rates is as follows:

 


 

(in thousands)

 

Estimated Amortization Expense

 

Remaining 2022

 $1,491 

2023

  5,774 

2024

  3,647 

2025

  3,551 

2026

  3,453 

Thereafter

  13,991 

Total estimated amortization expense

 $31,907 

 


 

8

 
 

 Note 6 Assets Held for Sale

 

Assets are classified as held for sale and presented separately on the Consolidated Balance Sheet when all of the following criteria for a plan of sale have been met: (1) management, having the authority to approve the action, commits to a plan to sell the assets; (2) the assets are available for immediate sale, in their present condition, subject only to terms that are usual and customary for sales of such assets; (3) an active program to locate a buyer and other actions required to complete the plan to sell the assets have been initiated; (4) the sale of the assets is probable and is expected to be completed within one year; (5) the assets are being actively marketed for a price that is reasonable in relation to their current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. The assets are then recorded at the lower of their current carrying value or the fair market value, less costs to sell.

 

During the first quarter of 2022, a facility the Company owns in Maple Plain, Minnesota, encompassing approximately 35,000 square feet of manufacturing and office space, met the criteria to be held for sale. The assets held for sale were $2.0 million as of June 30, 2022 and were presented on the Company's Consolidated Balance Sheet as Long-term assets held for sale. The Company closed on the sale of the facility in the third quarter of 2022 for a net purchase price of $3.2 million, which resulted in a gain of $1.2 million recorded in general and administrative expense on the Company's Consolidated Statements of Operations.

 

 

Note 7 – Fair Value Measurements

 

Accounting Standards Codification, Fair Value Measurement (ASC 820), defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires classification based on observable and unobservable inputs when measuring 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 not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

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 assets and liabilities that are required to be measured or disclosed at fair value on a recurring basis include cash and cash equivalents and marketable securities. The Company’s cash consists of bank deposits and cash equivalents consist primarily of money market mutual funds. The Company determines the fair value of these investments using Level 1 inputs. The Company's marketable securities consist of short-term and long-term agency, municipal, corporate and other debt securities. Fair value for the corporate debt securities is primarily determined based on quoted market prices (Level 1). Fair values for the U.S. municipal securities, U.S. government agency securities, certificates of deposit and U.S. treasury securities are primarily determined using dealer quotes or quoted market prices for similar securities (Level 2).

 

The following table summarizes financial assets as of  September 30, 2022 and December 31, 2021 measured at fair value on a recurring basis: 

 


 

  

September 30, 2022

  

December 31, 2021

 

(in thousands)

 

Level 1

  

Level 2

  

Level 3

  

Level 1

  

Level 2

  

Level 3

 

Financial Assets:

                        

Cash

 $36,813  $-  $-  $65,637  $-  $- 

Money market mutual fund

  22,548   -   -   292   -   - 

Marketable securities

  17,096   37,414   -   7,602   18,318   - 

Total

 $76,457  $37,414  $-  $73,531  $18,318  $- 

 

 

Note 8 – Marketable Securities

 

The Company invests in short-term and long-term agency, municipal, corporate and other debt securities. The securities are categorized as available-for-sale and are recorded at fair value. The following table summarizes information regarding the Company’s short-term and long-term marketable securities as of  September 30, 2022 and December 31, 2021:

 


 

  

September 30, 2022

 

(in thousands)

 

Cost

  

Unrealized Gains

  

Unrealized Losses

  

Fair Value

 

U.S. municipal securities

 $17,991  $-  $(494) $17,497 

Corporate debt securities

  9,602   -   (259)  9,343 

U.S. government agency securities

  25,780   -   (787)  24,993 

Certificates of deposit/time deposits

  1,189   -   (11)  1,178 

Commercial paper

  1,500   -   (1)  1,499 

Total marketable securities

 $56,062  $-  $(1,552) $54,510 

 


 

9

 

 

  

December 31, 2021

 

(in thousands)

 

Cost

  

Unrealized Gains

  

Unrealized Losses

  

Fair Value

 

U.S. municipal securities

 $12,549  $-  $(70) $12,479 

Corporate debt securities

  9,303   -   (44)  9,259 

U.S. government agency securities

  2,500   -   (12)  2,488 

Certificates of deposit/time deposits

  1,687   7   -   1,694 

Commercial paper

  -   -   -   - 

Total marketable securities

 $26,039  $7  $(126) $25,920 

 


 

Fair values for the corporate debt securities are primarily determined based on quoted market prices (Level 1). Fair values for the U.S. municipal securities, U.S. government agency securities, certificates of deposit and U.S. treasury securities are primarily determined using dealer quotes or quoted market prices for similar securities (Level 2).

 

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  September 30, 2022 balance of available-for-sale debt securities by contractual maturity is shown in the following table at fair value. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

 


 

  

September 30,

 

(in thousands)

 2022 

Due in one year or less

 $25,253 

Due after one year through five years

  29,257 

Total marketable securities

 $54,510 

 


 

 

Note 9 – Inventory

 

Inventory consists primarily of raw materials, which are recorded at the lower of cost and net realizable value using the standard cost method, which approximates first-in, first-out (FIFO) cost. The Company periodically reviews its inventory for slow-moving, damaged and discontinued items and provides allowances to reduce such items identified to their recoverable amounts.

 

The Company’s inventory consisted of the following as of the dates indicated:

 


 

  

September 30,

  

December 31,

 

(in thousands)

 2022  2021 

Total inventory

 $14,953  $13,474 

Allowance for obsolescence

  (336)  (313)

Inventory, net of allowance

 $14,617  $13,161 

 


 

10

 
 

Note 10 – Stock-Based Compensation

 

Under the Company’s 2012 Long-Term Incentive Plan, as amended (the 2012 Plan), the Company had the ability to grant stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, other stock-based awards and cash incentive awards through February 23, 2022. On July 8, 2022, the board of directors approved the Proto Labs, Inc. 2022 Long-Term Incentive Plan (the 2022 Plan), which was approved by the Company's shareholders at a Special Meeting of Shareholders on August 29, 2022. No awards were granted from February 23, 2022 to August 29, 2022. Awards outstanding under the 2012 Plan as of August 29, 2022 will continue to be subject to the terms of the 2012 Plan, but if those awards subsequently expire, are forfeited or cancelled or are settled in cash, the shares subject to those awards will become available for awards under the 2022 Plan. Under the 2022 Plan, the Company has the ability to grant stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, other stock-based awards and cash incentive awards. Awards under the 2022 Plan have a maximum term of ten years from the date of grant. The compensation committee may provide that the vesting or payment of any award will be subject to the attainment of specified performance measures in addition to the satisfaction of any continued service requirements and the compensation committee will determine whether such measures have been achieved. The per-share exercise price of stock options and SARs granted under the 2022 Plan generally may not be less than the fair market value of a share of our common stock on the date of the grant.

 

Employee Stock Purchase Plan

 

The Company’s 2012 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase a variable number of shares of the Company’s common stock each offering period at a discount through payroll deductions of up to 15 percent of their eligible compensation, subject to plan limitations. The ESPP provides for six-month offering periods with a single purchase period ending May 15 and November 15, respectively. At the end of each offering period, employees are able to purchase shares at 85 percent of the 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 offering period.

 

Stock-Based Compensation Expense

 

Stock-based compensation expense was $4.9 million and $5.0 million for the three months ended  September 30, 2022 and 2021, respectively, and $13.3 and $15.5 million for the nine months ended September 30, 2022 and 2021, respectively.

 

Stock Options

 

The following table summarizes stock option activity during the nine months ended September 30, 2022:

 


 

      

Weighted-

 
      

Average

 
  

Stock Options

  

Exercise Price

 

Options outstanding at December 31, 2021

  233,384  $97.78 

Granted

  118,434   48.24 

Exercised

  (3,114)  30.58 

Forfeited

  (38,618)  91.27 

Expired

  (34,201)  89.71 

Options outstanding at September 30, 2022

  275,885  $79.19 
         

Exercisable at September 30, 2022

  108,659  $91.50 

 


 

The outstanding options generally have a term of ten years. For employees, options granted become exercisable ratably over the vesting period, which is generally a period of four years, beginning on the first anniversary of the grant date, subject to the employee’s continuing service to the Company. For the board of directors, options generally become exercisable in full on the first anniversary of the grant date.

 

The weighted-average grant date fair value of options that were granted during the nine months ended September 30, 2022 was $23.11.

 

The following table provides the assumptions used in the Black-Scholes pricing model valuation of options during the nine months ended September 30, 2022 and 2021:

 


 

  

Nine Months Ended September 30,

 
  

2022

  

2021

 

Risk-free interest rate

  

1.94% - 3.40%

   

0.80% - 1.12%

 

Expected life (years)

  6.25   6.25 

Expected volatility

  

45.95% - 46.03%

   

45.28 - 45.35%

 

Expected dividend yield

  

0%

   

0%

 

 


 

As of September 30, 2022, there was $4.5 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.8 years.

 

11

 

Restricted Stock

 

Restricted stock awards are share-settled awards and restrictions lapse ratably over the vesting period, which is generally a period from three to four years, beginning on the first anniversary of the grant date, subject to the employee's continuing service to the Company. For the board of directors, restrictions generally lapse in full on the first anniversary of the grant date. 

 

The following table summarizes restricted stock activity during the nine months ended September 30, 2022:

 


 

      

Weighted-

 
      

Average

 
      

Grant Date

 
  

Restricted

  

Fair Value

 
  

Stock

  

Per Share

 

Restricted stock at December 31, 2021

  343,782  $111.79 

Granted

  312,270   42.05 

Restrictions lapsed

  (120,606)  104.99 

Forfeited

  (39,480)  106.64 

Restricted stock at September 30, 2022

  495,966  $69.95 

 


 

As of September 30, 2022, there was $24.7 million of unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 2.6 years. 

 

12

 

Performance Stock

 

Performance stock units (PSUs) are expressed in terms of a target number of PSUs, with anywhere between 0 percent and 200 percent of that target number capable of being earned and vesting at the end of a three-year performance period depending on the Company’s performance in the final year of the performance period and the award recipient’s continued employment. The Company’s PSUs granted from 2017 to 2019 and certain PSUs granted in 2021 are based on performance conditions and the related compensation cost is based on the probability that the performance conditions will be achieved. The Company’s PSUs granted in 2020 and 2022 and certain PSUs granted in 2021 are based on market conditions and the related compensation cost is based on the fair value at grant date calculated using a Monte Carlo pricing model.

 

The following table summarizes performance stock activity during the nine months ended September 30, 2022:

 


 

      

Weighted-

 
      

Average

 
      

Grant Date

 
  

Performance

  

Fair Value

 
  

Stock

  

Per Share

 

Performance stock at December 31, 2021

  16,839  $115.56 

Granted

  35,697   96.71 

Restrictions lapsed

  -   - 

Performance change

  -   - 

Forfeited

  (3,578)  121.79 

Performance stock at September 30, 2022

  48,958  $109.80 

 


 

The following table provides the assumptions used in the Monte Carlo pricing model valuation of PSUs during the nine months ended September 30, 2022 and 2021

 


 

  

Nine Months Ended September 30,

 
  

2022

  

2021

 

Risk-free interest rate

  

1.76% - 3.40%

   

0.22%

 

Expected life (years)

  2.34 - 2.87   2.87 

Expected volatility

  

53.5% - 53.6%

   

51.40%

 

Expected dividend yield

  

0%

   

0%

 

 


 

As of September 30, 2022, there was $2.8 million of unrecognized compensation expense related to non-vested performance stock, which is expected to be recognized over a weighted-average period of 2.2 years. 

 

Employee Stock Purchase Plan

 

The following table presents the assumptions used to estimate the fair value of the ESPP during the