0001437749-21-024923.txt : 20211102 0001437749-21-024923.hdr.sgml : 20211102 20211102161002 ACCESSION NUMBER: 0001437749-21-024923 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 69 CONFORMED PERIOD OF REPORT: 20210930 FILED AS OF DATE: 20211102 DATE AS OF CHANGE: 20211102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Proto Labs Inc CENTRAL INDEX KEY: 0001443669 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED STRUCTURAL METAL PRODUCTS [3440] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-35435 FILM NUMBER: 211371396 BUSINESS ADDRESS: STREET 1: 5540 Pioneer Creek CITY: Maple Plain STATE: MN ZIP: 55359 BUSINESS PHONE: 763-479-7474 MAIL ADDRESS: STREET 1: 5540 Pioneer Creek CITY: Maple Plain STATE: MN ZIP: 55359 10-Q 1 prlb20210930_10q.htm FORM 10-Q prlb20210930_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, 2021

 

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: 27,589,649 shares of Common Stock, par value $0.001 per share, were outstanding at October 28, 2021.

 

 

 

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,

 
  

2021

  

2020

 
  

(Unaudited)

     

Assets

        

Current assets

        

Cash and cash equivalents

 $47,802  $127,603 

Short-term marketable securities

  16,542   34,088 

Accounts receivable, net of allowance for doubtful accounts of $1,993 and $1,781 as of September 30, 2021 and December 31, 2020, respectively

  85,629   57,877 

Inventory

  9,813   10,862 

Income taxes receivable

  1,766   540 

Prepaid expenses and other current assets

  10,571   11,032 

Total current assets

  172,123   242,002 

Property and equipment, net

  283,019   282,666 

Goodwill

  404,240   128,752 

Other intangible assets, net

  39,816   14,350 

Long-term marketable securities

  19,557   59,357 

Operating lease assets

  5,197   9,855 

Finance lease assets

  2,022   2,396 

Other long-term assets

  4,337   4,826 

Total assets

 $930,311  $744,204 
         

Liabilities and shareholders' equity

        

Current liabilities

        

Accounts payable

 $22,735  $18,248 

Accrued compensation

  15,269   11,989 

Accrued liabilities and other

  12,636   16,193 

Current contingent consideration

  2,506   - 

Current operating lease liabilities

  2,362   3,272 

Current finance lease liabilities

  555   552 

Total current liabilities

  56,063   50,254 

Long-term contingent consideration

  2,294   - 

Long-term operating lease liabilities

  2,792   7,586 

Long-term finance lease liabilities

  1,498   1,919 

Long-term deferred tax liabilities

  36,331   33,854 

Other long-term liabilities

  6,712   6,235 

Total liabilities

  105,690   99,848 
         

Shareholders' equity

        

Preferred stock, $0.001 par value, authorized 10,000,000 shares; issued and outstanding 0 shares as of each of September 30, 2021 and December 31, 2020

  -   - 

Common stock, $0.001 par value, authorized 150,000,000 shares; issued and outstanding 27,603,649 and 26,776,796 shares as of September 30, 2021 and December 31, 2020, respectively

  28   27 

Additional paid-in capital

  464,900   284,848 

Retained earnings

  373,151   362,901 

Accumulated other comprehensive loss

  (13,458)  (3,420)

Total shareholders' equity

  824,621   644,356 

Total liabilities and shareholders' equity

 $930,311  $744,204 

 


 

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,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Statements of Operations:

                

Revenue

 $125,342  $107,504  $364,516  $329,187 

Cost of revenue

  70,018   52,861   197,237   163,988 

Gross profit

  55,324   54,643   167,279   165,199 

Operating expenses

                

Marketing and sales

  21,422   16,705   61,946   51,821 

Research and development

  10,614   7,915   33,855   25,550 

General and administrative

  16,361   12,354   44,186   38,983 

Total operating expenses

  48,397   36,974   139,987   116,354 

Income from operations

  6,927   17,669   27,292   48,845 

Other income (expense), net

  136   728   (40)  2,549 

Income before income taxes

  7,063   18,397   27,252   51,394 

Provision for income taxes

  2,228   3,700   5,790   10,106 

Net income

 $4,835  $14,697  $21,462  $41,288 
                 

Net income per share:

                

Basic

 $0.17  $0.55  $0.78  $1.54 

Diluted

 $0.17  $0.55  $0.77  $1.54 
                 

Shares used to compute net income per share:

                

Basic

  27,713,229   26,736,709   27,638,611   26,724,715 

Diluted

  27,730,105   26,886,433   27,707,784   26,861,647 
                 

Comprehensive Income (net of tax)

                

Comprehensive income

 $(508) $17,807  $11,424  $41,782 

 


 

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 January 1, 2021

  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 

 

  

Common Stock

  

Additional

      

Accumulated Other

     
          

Paid-In

  

Retained

  

Comprehensive

     
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Total

 
                         

Balance at January 1, 2020

  26,786,459   27   268,059   324,722   (7,018)  585,790 

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

  23,525   -   (902)  -   -   (902)

Stock-based compensation expense

  -   -   3,033   -   -   3,033 

Repurchases of common stock

  (161,460)  -   (1,616)  (9,569)  -   (11,185)

Net income

  -   -   -   13,984   -   13,984 

Other comprehensive income

                        

Foreign currency translation adjustment

  -   -   -   -   (2,980)  (2,980)

Comprehensive income

                      11,004 

Balance at March 31, 2020

  26,648,524  $27  $268,574  $329,137  $(9,998) $587,740 

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

  96,186   -   400   -   -   400 

Stock-based compensation expense

  -   -   3,639   -   -   3,639 

Repurchases of common stock

  (38,154)  -   (382)  (3,119)  -   (3,501)

Net income

  -   -   -   12,607   -   12,607 

Other comprehensive income

                        

Foreign currency translation adjustment

  -      -   -   364   364 

Comprehensive income

                      12,971 

Balance at June 30, 2020

  26,706,556  $27  $272,231  $338,625  $(9,634) $601,249 

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

  46,989   -   2,820   -   -   2,820 

Stock-based compensation expense

  -   -   3,945   -   -   3,945 

Repurchases of common stock

  -   -   -   -   -   - 

Net income

  -   -   -   14,697   -   14,697 

Other comprehensive income

                        

Foreign currency translation adjustment

  -      -   -   3,110   3,110 

Comprehensive income

                  17,807 

Balance at September 30, 2020

  26,753,545  $27  $278,996  $353,322  $(6,524) $625,821 

 


 

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,

 
  

2021

  

2020

 
         

Operating activities

        

Net income

 $21,462  $41,288 

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

        

Depreciation and amortization

  30,231   23,891 

Stock-based compensation expense

  15,539   10,617 

Deferred taxes

  (139)  6,578 

Amortization of marketable securities

  374   202 

Realized gain on available-sale-securities

  (72)  - 

Fair value of contingent consideration

  (8,513)  - 

Other

  140   (865)

Changes in operating assets and liabilities:

        

Accounts receivable

  (25,615)  (3,812)

Inventories

  950   (316)

Prepaid expenses and other

  1,009   (1,008)

Income taxes

  (1,226)  (1,325)

Accounts payable

  1,978   (1,257)

Accrued liabilities and other

  (3,893)  8,382 

Net cash provided by operating activities

  32,225   82,375 
         

Investing activities

        

Purchases of property, equipment and other capital assets

  (27,956)  (40,489)

Cash used for acquisitions, net of cash acquired

  (127,413)  - 

Purchases of other assets and investments

  -   (3,000)

Purchases of marketable securities

  (15,159)  (90,596)

Proceeds from sales of marketable securities

  57,089   - 

Proceeds from maturities of marketable securities

  15,114   56,428 

Net cash used in investing activities

  (98,325)  (77,657)
         

Financing activities

        

Proceeds from exercises of stock options

  3,838   5,674 

Purchases of shares withheld for tax obligations

  (4,209)  (3,367)

Repurchases of common stock

  (13,036)  (14,686)

Principal repayments of finance lease obligations

  (413)  - 

Net cash used in financing activities

  (13,820)  (12,379)

Effect of exchange rate changes on cash and cash equivalents

  119   690 

Net decrease in cash and cash equivalents

  (79,801)  (6,971)

Cash and cash equivalents, beginning of period

  127,603   125,225 

Cash and cash equivalents, end of period

 $47,802  $118,254 

 


 

The accompanying notes are an integral part of these 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, 2020 as filed with the Securities and Exchange Commission (SEC) on February 19, 2021.

 

The accompanying Consolidated Balance Sheet as of December 31, 2020 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 Form 10-Q should be read in conjunction with the Company’s Consolidated Financial Statements and Notes included in the Annual Report on Form 10-K filed on February 19, 2021 as referenced above.

  

 

Note 2 – Recent Accounting Pronouncements

 

Recently Adopted Accounting Pronouncements

 

In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12). ASU 2019-12 attempts to simplify aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year. The Company adopted ASU 2019-12 on January 1, 2021 and there was no 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, restricted stock units and restricted stock 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.

 

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)

 

2021

  

2020

  

2021

  

2020

 

Net income

 $4,835  $14,697  $21,462  $41,288 
                 

Basic - weighted-average shares outstanding:

  27,713,229   26,736,709   27,638,611   26,724,715 

Effect of dilutive securities:

                

Employee stock options and other

  16,876   149,724   69,173   136,932 

Diluted - weighted-average shares outstanding:

  27,730,105   26,886,433   27,707,784   26,861,647 

Net income per share:

                

Basic

 $0.17  $0.55  $0.78  $1.54 

Diluted

 $0.17  $0.55  $0.77  $1.54 

 


 

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 date of close. Up to an additional $52.8 million of contingent consideration is payable after closing, subject to the satisfaction of performance-based targets during fiscal year 2021 and fiscal year 2022, consisting 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 date of close.

 

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 on a preliminary basis to the assets purchased and liabilities assumed based on their estimated 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 Company recorded a contingent consideration liability of $13.6 million as of the acquisition date representing the estimated fair value of the amounts payable to former shareholders, as outlined under the terms of the merger agreement, payable subject to the satisfaction of performance-based targets during fiscal year 2021 and fiscal year 2022, consisting 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 date of close. The fair value of the contingent consideration (Level 3) is determined using a Monte Carlo pricing model. During the three and nine months ended September 30, 2021, the Company recorded a $0.8 million and $8.5 million decrease, respectively, to the estimated fair value of the contingent consideration liability, which was included as a decrease in general and administrative expense in the Consolidated Statements of Comprehensive Income. Fluctuations due to foreign currency translation have been recorded in the Consolidated Statements of Shareholders’ Equity.

 

The results of Hubs since the date of acquisition have been included with Protolabs' results. Pro forma disclosures of the consolidated results of the Company with the full year effects of Hubs, as if the acquisition had occurred on January 1, 2020, are not required and have not been separately presented since the impact to the Company's results of operations was not material.

 

The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. In the second quarter of 2021, the Company recorded adjustments to the preliminary allocation, including a $3.9 million decrease to intangible assets, a $6.4 million increase to goodwill, a $3.3 million increase to contingent consideration, a $0.5 million decrease to deferred tax liabilities, and a decrease to cash paid of $0.3 million. The adjustments were driven by changes to the preliminary valuation and finalization of the working capital calculation. No adjustments were made in the third quarter of 2021. As of September 30, 2021, the allocation of purchase price to assets and liabilities is preliminary. The purchase price allocation will be finalized in 2021. The preliminary allocation is as follows:


 

(in thousands)

 Acquisition 

Assets acquired:

    

Current assets

 $2,497 

Intangible assets

  30,770 

Goodwill

  281,845 

Other long-term assets

  1,139 

Total assets acquired

  316,251 
     

Liabilities assumed:

    

Current contingent consideration

  7,093 

Current liabilities

  5,666 

Long-term contingent consideration

  6,507 

Long-term deferred tax liabilities

  2,608 

Other long-term liabilities

  255 

Total liabilities assumed

  22,129 

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, 2021 were as follows:

 


 

(in thousands)

 Nine Months Ended September 30, 2021 

Balance as of the beginning of the period

 $128,752 

Goodwill acquired during the period

  281,845 

Foreign currency translation adjustments

  (6,357)

Balance as of the end of the period

 $404,240 

 


 

Goodwill increased $281.8 million during the nine months ended September 30, 2021 as a result of our acquisition of Hubs. Goodwill has been allocated to the acquired Hubs entities consisting of goodwill of €106.5 million in Europe and $152.2 million in the United States as of the date of the acquisition. 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, 2021 and December 31, 2020 were as follows:

 


 

  

September 30, 2021

  

December 31, 2020

  

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  $(690) $240  $930  $(620) $310  10.0 2.5

Non-compete agreement

 847  (330) 517  270  (238) 32  2.0 - 5.0 3.1

Software technology

 13,229  (4,672) 8,557  13,229  (3,645) 9,584  10.0 6.8

Software platform

 26,933  (1,672) 25,261  -  -  -  10.0 9.3

Tradenames

 362  (84) 278  -  -  -  3.0 2.3

Customer relationships

 12,269  (7,306) 4,963  10,070  (5,646) 4,424  3.0 - 9.0 2.1

Total intangible assets

 $54,570  $(14,754) $39,816  $24,499  $(10,149) $14,350     

 


 

Intangible assets increased $30.8 million during the nine months ended September 30, 2021 as a result of our acquisition of Hubs. 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 $0.7 million as of September 30, 2021. There was no foreign currency translation impact as of December 31, 2020. Amortization expense for intangible assets was $1.6 million and $0.8 million for the three months ended  September 30, 2021 and 2020, respectively, and $4.6 million and $2.3 million for the nine months ended September 30, 2021 and 2020, respectively.

 

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 2021

 $1,555 

2022

  6,225 

2023

  6,022 

2024

  3,806 

2025

  3,725 

Thereafter

  18,483 

Total estimated amortization expense

 $39,816 

 


 

8

 
 

Note 6 – 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, marketable securities and contingent consideration. The Company’s cash consists of bank deposits. The Company’s cash equivalents measured at fair value consist 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 Company's contingent consideration is the current fair value estimate of amounts owed to the former shareholders of Hubs and is determined using the Monte Carlo pricing model (Level 3).

 

The following table summarizes financial assets as of  September 30, 2021 and December 31, 2020 measured at fair value on a recurring basis: 

 


 

  

September 30, 2021

  

December 31, 2020

 

(in thousands)

 

Level 1

  

Level 2

  

Level 3

  

Level 1

  

Level 2

  

Level 3

 

Financial Assets:

                        

Cash and cash equivalents

 $47,337  $-  $-  $72,225  $-  $- 

Money market mutual fund

  465   -   -   55,378   -   - 

Marketable securities

  11,872   24,227   -   -   -   - 

Total

 $59,674  $24,227  $-  $127,603  $-  $- 

Financial Liabilities:

                        

Contingent consideration

 $-  $-  $4,800  $-  $-  $- 

Total

 $-  $-  $4,800  $-  $-  $- 

 


 

In the first quarter of 2021, the Company sold held-to-maturity securities in order to partially fund the acquisition of Hubs. As a result of the sale, all remaining marketable securities were reclassified to available-for-sale securities and reported at fair value.

 

The Company recorded a contingent consideration liability at the acquisition date of Hubs representing the amounts payable to former shareholders, as outlined under the terms of the merger agreement, payable subject to the satisfaction of performance-based targets during fiscal year 2021 and fiscal year 2022, consisting 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 date of close. The fair value of the contingent consideration (Level 3) is determined using a Monte Carlo pricing model. Subsequent changes in the fair value of the contingent consideration liabilities have been recorded in the Consolidated Statements of Comprehensive Income. Fluctuations due to foreign currency translation have been recorded in the Consolidated Statements of Shareholders’ Equity.

 

 

Note 7 – Marketable Securities

 

The Company invests in short-term and long-term agency, municipal, corporate and other debt securities. As of September 30, 2021, the securities are categorized as available-for-sale and are recorded at fair value. As of December 31, 2020, the securities were categorized as held-to-maturity and were recorded at amortized cost, net of an allowance for credit losses. The change in categorization was a result of the sale of securities in the first quarter of 2021 in order to partially fund the acquisition of Hubs and did not have a material impact on our financial statements. The following table summarizes information regarding the Company’s short-term and long-term marketable securities as of  September 30, 2021 and December 31, 2020:

 


 

  

September 30, 2021

 

(in thousands)

 

Cost

  

Unrealized Gains

  

Unrealized Losses

  

Fair Value

 

U.S. municipal securities

 $18,515  $28  $(13) $18,530 

Corporate debt securities

  11,852   34   (14)  11,872 

U.S. government agency securities

  1,500   -   (1)  1,499 

Certificates of deposit/time deposits

  4,160   38   -   4,198 

Total marketable securities

 $36,027  $100  $(28) $36,099 

 


 

9

 

 

  

December 31, 2020

 

(in thousands)

 

Cost

  

Unrealized Gains

  

Unrealized Losses

  

Fair Value

 

U.S. municipal securities

 $25,003  $83  $(2) $25,084 

Corporate debt securities

  42,048   211   (11)  42,248 

U.S. government agency securities

  18,500   6   (10)  18,496 

Certificates of deposit/time deposits

  5,395   93   -   5,488 

Commercial paper

  2,499   -   -   2,499 

Total marketable securities

 $93,445  $393  $(23) $93,815 

 


 

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).

 

During the first quarter of 2020, the Company adopted the FASB ASU 2016-13, Financial Instruments – Credit Losses. The Company calculated the expected credit loss for each security in its portfolio using the probability-of-default method. The Company concluded the adoption of the guidance had no material impact on its consolidated financial statements. 

 

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, 2021 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)

 

2021

 

Due in one year or less

 $16,542 

Due after one year through five years

  19,557 

Total marketable securities

 $36,099 

 


 

 

Note 8 – Inventory

 

Inventory consists primarily of raw materials, which are recorded at the lower of cost or market 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)

 

2021

  

2020

 

Total inventory

 $10,102  $11,122 

Allowance for obsolescence

  (289)  (260)

Inventory, net of allowance

 $9,813  $10,862 

 


 

10

 
 

Note 9 – Stock-Based Compensation

 

Under the Company’s 2012 Long-Term Incentive Plan, as amended (the 2012 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 2012 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 2012 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 $5.0 million and $3.9 million for the three months ended  September 30, 2021 and 2020, respectively, and $15.5 million and $10.6 million for the nine months ended September 30, 2021 and 2020, respectively.

 

Stock Options

 

The following table summarizes stock option activity during the nine months ended September 30, 2021:

 


 

      

Weighted-

 
      

Average

 
  

Stock Options

  

Exercise Price

 

Options outstanding at December 31, 2020

  229,531  $86.46 

Granted

  57,901   128.14 

Exercised

  (28,991)  58.78 

Forfeited

  (9,893)  100.58 

Options outstanding at September 30, 2021

  248,548  $98.84 
         

Exercisable at September 30, 2021

  116,088  $81.47 

 


 

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 to five 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, 2021 was $57.26.

 

The following table provides the assumptions used in the Black-Scholes pricing model valuation of options during the nine months ended September 30, 2021 and 2020:

 


 

  

Nine Months Ended September 30,

 
  

2021

  

2020

 

Risk-free interest rate

  

0.80 - 1.12%

   

0.50 - 1.47%

 

Expected life (years)

  6.25   6.25 

Expected volatility

  

45.28 - 45.53%

   

42.40 - 43.83%

 

Expected dividend yield

  

0%

   

0%

 

 


 

As of September 30, 2021, there was $5.4 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 five 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, 2021:

 


 

      

Weighted-

 
      

Average

 
      

Grant Date

 
  

Restricted

  

Fair Value

 
  

Stock

  

Per Share

 

Restricted stock at December 31, 2020

  307,199  $98.87 

Granted

  180,798   132.84 

Restrictions lapsed

  (113,315)  91.10 

Forfeited

  (22,908)  120.01 

Restricted stock at September 30, 2021

  351,774  $117.51 

 


 

As of September 30, 2021, there was $31.7 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 150 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 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, 2021:

 


 

      

Weighted-

 
      

Average

 
      

Grant Date

 
  

Performance

  

Fair Value

 
  

Stock

  

Per Share

 

Performance stock at December 31, 2020

  19,956  $118.66 

Granted

  15,078   203.64 

Restrictions lapsed

  -   - 

Performance change

  (8,226)  192.95 

Forfeited

  (4,184)  99.59 

Performance stock at September 30, 2021

  22,624  $148.28 

 


 

The following table provides the assumptions used in the Monte Carlo pricing model valuation of PSUs during the nine months ended September 30, 2021 and 2020

 


 

  

Nine Months Ended September 30,

 
  

2021

  

2020

 

Risk-free interest rate

  

0.22%

   

1.41%

 

Expected life (years)

  2.87   2.88 

Expected volatility

  

51.40%

   

38.70%

 

Expected dividend yield

  

0%

   

0%

 

 


 

As of September 30, 2021, there was $2.0 million of unrecognized compensation expense related to non-vested performance stock, which is expected to be recognized over a weighted-average period of 2.0 years. 

 

Employee Stock Purchase Plan

 

The following table presents the assumptions used to estimate the fair value of the ESPP during the nine months ended September 30, 2021 and 2020

 


 

  

Nine Months Ended September 30,

 
  

2021

  

2020

 

Risk-free interest rate

  

0.06 - 0.12%

   

0.17 - 1.59%

 

Expected life (months)

  6.00   6.00 

Expected volatility

  

50.85 - 65.53%

   

42.63 - 59.99%

 

Expected dividend yield

  

0%

   

0%

 

 


 

13

 
 

 Note 10 – Accumulated Other Comprehensive Income (Loss)

 

Other comprehensive income (loss) is comprised of foreign currency translation adjustments and net unrealized gains (losses) on investments in securities. The following table presents the changes in accumulated other comprehensive income (loss) balances during the three and nine months ended September 30, 2021 and 2020:

 


 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

(in thousands)

 

2021

  

2020

  

2021

  

2020

 
                 

Balance at beginning of period

 $(8,115) $(9,634) $(3,420) $(7,018)

Foreign currency translation adjustments

                

Other comprehensive income (loss) before reclassifications

  (5,298)  3,110   (10,110)  494 

Amounts reclassified from accumulated other comprehensive loss

  -   -   -   - 

Net current-period other comprehensive income (loss)

  (5,298)  3,110   (10,110)  494 

Net unrealized gains (losses) on investments in securities

                

Other comprehensive income (loss) before reclassifications

  (45)  -   72   - 

Amounts reclassified from accumulated other comprehensive loss

  -   -   -   - 

Net current-period other comprehensive income (loss)

  (45)  -   72   - 

Balance at end of period

 $(13,458) $(6,524) $(13,458) $(6,524)

 


 

 

Note 11 – Income Taxes