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Note 13 - Stock-based Compensation

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Share-Based Payment Arrangement [Text Block]

Note 13 – 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.

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 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, and 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. The Company determines the fair value stock-based compensation related to its ESPP in accordance with ASC 718 using the component measurement approach and the Black-Scholes standard option pricing model.

Employees purchased 142,982 and 67,729 shares of common stock under the ESPP at an average exercise price of $27.09 and $61.96 during 2022 and 2021, respectively. As of December 31, 2022, 915,884 shares remained available for future issuance under the ESPP.

The Company determines its stock-based compensation in accordance with ASC 718, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors based on fair value.

Determining the appropriate fair value model and calculating the fair value of stock option grants requires the input of subjective assumptions. The Company uses the Black-Scholes option pricing model to value its stock option awards. Stock-based compensation expense is calculated using the Company’s best estimates, which involve inherent uncertainties and the application of management’s judgment. Significant estimates include its expected term and stock price volatility.

The expected term of stock options is estimated from the vesting period of the award and represents the weighted average period that the Company's stock options are expected to be outstanding. The Company estimates the volatility of its stock price based on the historic volatility of its common stock. The Company bases the risk-free interest rate that it uses in the Black-Scholes option pricing model on U.S. Treasury instruments with maturities similar to the expected term of the award being valued. The Company has never paid and does not anticipate paying, any cash dividends in the foreseeable future and, therefore, the Company uses an expected dividend yield of zero in the option pricing model. The Company accounts for forfeitures as they occur. The Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period.

The following table summarizes stock-based compensation expense for the years ended December 31, 2022, 2021 and 2020, respectively:

		*Year Ended December 31,*
(in thousands)		*2022*				*2021*				*2020*

Stock options and other		$	16,103			$	17,553			$	13,327
Employee stock purchase plan			1,442				1,542				1,346
Total stock-based compensation expense		$	17,545			$	19,095			$	14,673

Cost of revenue		$	2,172			$	2,595			$	2,451
Operating expenses:
Marketing and sales			3,295				3,736				3,121
Research and development			2,189				2,833				2,440
General and administrative			9,889				9,931				6,661
Total stock-based compensation expense		$	17,545			$	19,095			$	14,673

Stock Options

The following table provides the assumptions used in the Black-Scholes option pricing model for the years ended December 31, 2022, 2021 and 2020:

		*Year Ended December 31,*
		*2022*				*2021*				*2020*

Risk-free interest rate			1.94 - 3.40%				0.80 - 1.12%				0.50 - 1.47%
Expected life (years)			6.25				6.25				6.25
Expected volatility			45.95 - 46.03%				45.28 - 45.53%				42.40 - 43.83%
Expected dividend yield			0%				0%				0%
Weighted average grant date fair value			$23.11				$128.14				$45.32

The following table summarizes stock option activity and the weighted average exercise price for the years ended December 31, 2022, 2021 and 2020:

						*Weighted-*
						*Average*
		*Stock Options*				*Exercise Price*

Options outstanding at January 1, 2020			276,266			$	72.38
Granted			60,065				105.79
Exercised			(68,958	)			57.00
Cancelled			(37,842	)			67.92
Options outstanding at December 31, 2020			229,531				86.46
Granted			57,901				128.14
Exercised			(28,991	)			58.78
Cancelled			(25,057	)			109.31
Options outstanding at December 31, 2021			233,384				97.78
Granted			118,434				48.24
Exercised			(3,114	)			30.58
Cancelled			(84,712	)			89.32
Options outstanding at December 31, 2022			263,992			$	79.07

Exercisable at December 31, 2022			102,692			$	90.22

The outstanding options have a term of 10 years. For employees, options that have been granted become exercisable ratably over the vesting period, which is generally a four-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, 2022, 2021 and 2020, was $0.0 million, $3.8 million and $5.4 million, respectively. The aggregate intrinsic value represents the cumulative difference between the fair market value of the underlying common stock and the option exercise prices.

For options outstanding at December 31, 2022, the weighted-average remaining contractual term was 7.2 years and the aggregate intrinsic value was $0.0 million. For options exercisable at December 31, 2022, the weighted-average remaining contractual term was 4.7 years and the aggregate intrinsic value was $0.0 million. Refer to the table below for additional information.

The following table summarizes information about stock options outstanding at December 31, 2022:

		Options Outstanding, Vested and Expected to Vest										Options Exercisable
Range of Exercise Prices		Number Outstanding			Weighted Average Remaining Contractual Life			Weighted Average Exercise Price ($)				Number Exercisable			Weighted Average Exercise Price ($)

$39.11 to $66.87		137,829			7.63			49.84				32,808			56.53
$66.88 to $96.20		37,608			6.72			89.37				17,016			82.08
$96.21 to $180.46		88,555			6.81			120.17				52,868			113.74

The fair value of share-based payment transactions is recognized in the Consolidated Statements of Comprehensive Income. As of December 31, 2022, there was $3.9 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 2.6 years. The total fair value of options vested was $2.3 million, $2.1 million and $1.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Restricted Stock

The 2012 Plan provides for the award of restricted stock or restricted stock units. Restricted stock awards are share settled and restrictions lapse ratably over the vesting period, which is generally a four-year period, beginning on the first anniversary of the grant date, subject to the employee’s continuing service to the Company. For directors, restrictions generally lapse in full on the first anniversary of the grant date.

The following table summarizes restricted stock activity for the years ended December 31, 2022, 2021 and 2020:

						*Weighted-*
						*Average*
						*Grant Date*
		*Restricted*				*Fair Value*
		*Stock Awards*				*Per Share*

Restricted stock at January 1, 2020			314,973			$	89.55
Granted			108,179				111.76
Restrictions lapsed			(101,941	)			84.70
Forfeited			(14,012	)			94.24
Restricted stock at December 31, 2020			307,199				98.87
Granted			205,996				123.61
Restrictions lapsed			(115,908	)			91.26
Forfeited			(53,505	)			128.05
Restricted stock at December 31, 2021			343,782				111.79
Granted			315,432				42.03
Restrictions lapsed			(130,452	)			101.32
Forfeited			(50,166	)			96.48
Restricted stock at December 31, 2022			478,596			$	70.36

As of December 31, 2022, there was $21.1 million of unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 2.4 years.

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 outstanding PSUs at December 31, 2022 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 for the years ended December 31, 2022, 2021 and 2020:

						*Weighted-*
						*Average*
						*Grant Date*
		*Performance*				*Fair Value*
		*Stock Awards*				*Per Share*

Performance stock at January 1, 2020			9,383			$	58.35
Granted			19,956				118.66
Restrictions lapsed			(7,113	)			58.35
Performance change			-				-
Forfeited			(2,270	)			58.35
Performance stock at December 31, 2020			19,956				118.66
Granted			15,078				203.64
Restrictions lapsed			-				-
Performance change			(10,366	)			192.95
Forfeited			(7,829	)			113.91
Performance stock at December 31, 2021			16,839				115.56
Granted			35,697				96.71
Restrictions lapsed			-				-
Performance change			(13,156	)			99.59
Forfeited			(3,578	)			121.79
Performance stock at December 31, 2022			35,802			$	77.91

As of December 31, 2022, there was $2.5 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 years ended December 31, 2022, 2021 and 2020:

		*Year Ended December 31,*
		*2022*			*2021*			*2020*

Risk-free interest rate		0.17 - 4.60%			0.06 - 0.17%			0.12 - 0.17%
Expected life (months)		6.00			6.00			6.00
Expected volatility		47.05 - 67.84%			53.44 - 65.53%			50.85 - 59.99%
Expected dividend yield		0%			0%			0%