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, ~~2016~~2017

☐	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: 000-26427

Stamps.com Inc.

(Exact name of registrant as specified in its charter)

Delaware		77-0454966
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1990 E. Grand Avenue

El Segundo, California 90245

(Address of principal executive offices, including zip code)

(310) 482-5800

(Registrant’s telephone number, including area code)

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 and posted on its corporate ~~Web site,~~website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

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

	Large accelerated filer ☑	Accelerated filer ☐

	Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☐

	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 ☑

As of October 31, ~~2016,~~2017, there were ~~17,052,401~~17,478,768 shares of the Registrant’s Common Stock issued and outstanding.

STAMPS.COM INC. AND SUBSIDIARIES

FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED SEPTEMBER 30, ~~2016~~2017

TABLE OF CONTENTS

			Page
PART I - FINANCIAL INFORMATION			1

	ITEM 1.	FINANCIAL STATEMENTS	1

	ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2419

	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	3734

	ITEM 4.	CONTROLS AND PROCEDURES	3734

PART II – OTHER INFORMATION			3834

	ITEM 1.	LEGAL PROCEEDINGS	3834

	~~ITEM 1A.~~ITEM1A.	RISK FACTORS	3834

	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	3835

	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	3835

	ITEM 4.	MINE SAFETY DISCLOSURES	3835

	ITEM 5.	OTHER INFORMATION	3935

	ITEM 6.	EXHIBITS	3936

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

STAMPS.COM INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	September 30, 2016			December 31, 2015			September 30, 2017			December 31, 2016
	(unaudited)						(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	81,144		$	65,126		$	183,538		$	106,932
Short-term investments		3,029			8,553			—			1,511
Accounts receivable, net		60,089			55,052			52,555			62,756
Other current assets		9,595			8,345			44,616			13,081
Total current assets		153,857			137,076			280,709			184,280
Property and equipment, net		32,032			31,707			38,138			36,829
Goodwill		239,532			197,807			239,705			239,705
Intangible assets, net		101,046			95,950			85,000			97,027
Long-term investments		—			1,529
Deferred income taxes, net.		38,841			57,224			42,231			48,782
Other assets		7,829			7,321			5,579			3,506
Total assets	$	573,137		$	528,614		$	691,362		$	610,129

Liabilities and Stockholders’ Equity
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses	$	70,710		$	60,816		$	88,830		$	86,205
Deferred revenue		6,175			4,000			3,598			3,858
Current portion of debt, net of debt issuance costs		5,814			4,267			7,876			6,329
Contingent consideration		—			63,209
Total current liabilities		82,699			132,292			100,304			96,392
Long-term debt, net of debt issuance costs		142,993			157,353			125,117			141,025
Total liabilities		225,692			289,645			225,421			237,417
Commitments and contingencies
Stockholders’ equity:
Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock, $.001 par value per share
Authorized shares: 47,500 in 2016 and 2015
Issued shares: 30,425 in 2016 and 29,463 in 2015
Outstanding shares: 17,131 in 2016 and 16,697 in 2015		53			52
Authorized shares: 47,500 in 2017 and 2016
Issued shares: 31,772 in 2017 and 30,507 in 2016
Outstanding shares: 17,337 in 2017 and 16,897 in 2016								54			53
Additional paid-in capital		825,941			716,253			940,001			855,344
Treasury stock, at cost, 13,294 shares in 2016 and 12,766 in 2015		(219,821	)		(172,410	)
Treasury stock, at cost, 14,435 shares in 2017 and 13,610 in 2016								(356,908	)		(252,981	)
Accumulated deficit		(258,743	)		(304,944	)		(117,213	)		(229,715	)
Accumulated other comprehensive income		15			18			7			11
Total stockholders’ equity		347,445			238,969
Total liabilities and stockholders’ equity	$	573,137		$	528,614
Total stockholders' equity								465,941			372,712
Total liabilities and stockholders' equity							$	691,362		$	610,129

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

Table of Contents

STAMPS.COM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~INCOME

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015		2016			2015			2017			2016			2017			2016
Revenues:
Service	$	78,871		$	42,470	$	220,567		$	118,497		$	97,529		$	78,871		$	292,634		$	220,567
Product		4,703			4,193		15,109			13,206			4,824			4,703			15,301			15,109
Insurance		4,050			2,513		12,643			7,806			4,099			4,050			12,932			12,643
Customized postage		4,912			2,484		10,016			4,545			8,588			4,912			15,306			10,016
Other		23			9		74			27			22			23			69			74
Total revenues		92,559			51,669		258,409			144,081			115,062			92,559			336,242			258,409
Cost of revenues (exclusive of amortization of intangible assets, which is included in general and administrative expense):
Service		9,903			6,809		28,054			19,775			11,882			9,903			37,284			28,054
Product		1,579			1,364		5,019			4,400			1,535			1,579			4,930			5,019
Insurance		1,291			896		3,920			2,746			966			1,291			3,547			3,920
Customized postage		3,954			2,120		8,076			3,831			7,151			3,954			12,600			8,076
Total cost of revenues		16,727			11,189		45,069			30,752			21,534			16,727			58,361			45,069
Gross profit		75,832			40,480		213,340			113,329			93,528			75,832			277,881			213,340
Operating expenses:
Sales and marketing		18,229			11,341		59,708			37,898			20,588			18,229			66,018			59,708
Research and development		9,111			4,758		25,579			13,720			12,037			9,111			34,187			25,579
General and administrative		16,901			9,470		49,276			30,004			25,243			16,901			65,676			49,276
Contingent consideration charges		—			1,920		—			26,027
Litigation settlement		—			—		—			10,000
Total operating expenses		44,241			27,489		134,563			117,649			57,868			44,241			165,881			134,563
Income (loss) from operations		31,591			12,991		78,777			(4,320	)

Income from operations													35,660			31,591			112,000			78,777
Interest expense		(828	)		—		(2,648	)		—			(967	)		(828	)		(2,779	)		(2,648	)
Interest and other income (loss), net		24			48		98			103
Income (loss) before income taxes		30,787			13,039		76,227			(4,217	)
Income tax expense (benefit)		12,115			5,765		30,026			(90	)
Net income (loss)	$	18,672		$	7,274	$	46,201		$	(4,127	)
Net income (loss) per share
Interest and other income													120			24			309			98
Income before income taxes													34,813			30,787			109,530			76,227
Income tax (benefit) expense													(11,412	)		12,115			(873	)		30,026
Net income												$	46,225		$	18,672		$	110,403		$	46,201
Net income per share
Basic	$	1.08		$	0.44	$	2.67		$	(0.25	)	$	2.71		$	1.08		$	6.51		$	2.67
Diluted	$	1.03		$	0.42	$	2.52		$	(0.25	)	$	2.49		$	1.03		$	6.04		$	2.52
Weighted average shares outstanding
Basic		17,218			16,538		17,319			16,367			17,073			17,218			16,969			17,319
Diluted		18,120			17,517		18,325			16,367	⁽¹⁾		18,548			18,120			18,282			18,325

⁽¹⁾	~~Common equivalent shares are excluded from the diluted loss per share calculation as their effect is anti-dilutive.~~

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

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STAMPS.COM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

(In thousands)

(Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2016 2015 2016 2015

Net income (loss) $ 18,672 $ 7,274 $ 46,201 $ (4,127 )
Other comprehensive loss, net of tax:
Unrealized loss on investments (7 ) (1 ) (3 ) (15 )
Comprehensive income (loss) $ 18,665 $ 7, 273 $ 46,198 $ (4,142 )

	Three Months Ended September 30,					Nine Months Ended September 30,
	2017		2016			2017			2016

Net income	$	46,225	$	18,672		$	110,403		$	46,201
Other comprehensive income, net of tax:
Unrealized loss on investments		—		(7	)		(4	)		(3	)
Comprehensive income	$	46,225	$	18,665		$	110,399		$	46,198

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

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STAMPS.COM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2017			2016
Operating activities:
Net income (loss)	$	46,201		$	(4,127	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net income							$	110,403		$	46,201
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		13,922			5,169			16,055			13,922
Stock-based compensation expense		24,755			9,104			33,669			24,755
Deferred income tax expense (benefit)		26,724			(872	)
Deferred income tax expense								8,650			26,724
Stock option windfall tax benefit		(9,771	)		—			—			(9,771	)
Accretion of debt issuance costs		279			—			279			279
Contingent consideration		—			26,027
Changes in operating assets and liabilities, net of assets and liabilities acquired:
Accounts receivable		(3,843	)		(2,970	)		10,201			(3,843	)
Other current assets		(1,275	)		(1,934	)
Other current assets, net of excess tax benefit from stock-based award activity								(31,535	)		(1,275	)
Other assets		(508	)		(767	)		(2,073	)		(508	)
Deferred revenue		2,122			162			(261	)		2,122
Accounts payable and accrued expenses		5,350			5,171			3,647			5,350
Net cash provided by operating activities		103,956			34,963			149,035			103,956

Investing activities:
Sale of short-term investments		6,988			3,918			1,502			6,988
Purchase of short-term investments		—			(977	)
Sale of long-term investments		77			1,064			10			77
Purchase of long-term investments		(15	)		—			(4	)		(15	)
Acquisition of Endicia		(573	)		—			—			(573	)
Acquisition of ShippingEasy, net of cash acquired		(55,447	)		—			—			(55,447	)
Acquisition of property and equipment		(2,903	)		(1,652	)		(5,972	)		(2,903	)
Net cash (used in) provided by investing activities		(51,873	)		2,353
Net cash used in investing activities								(4,464	)		(51,873	)

Financing activities:
Proceeds from short term financing obligation, net of repayments		2,713			1,815			(389	)		2,713
Principal payments on term loan		(3,092	)		—			(4,641	)		(3,092	)
Payment on revolving credit facility		(10,000	)		—			(10,000	)		(10,000	)
Proceeds from exercise of stock options		9,773			7,940			48,054			9,773
Issuance of common stock under Employee Stock Purchase Plan		2,181			1,555			2,937			2,181
Repurchase of common stock		(47,411	)		—			(103,127	)		(47,411	)
Shares withheld to satisfy statutory income tax withholding obligations								(799	)		—
Stock option windfall tax benefit		9,771			—			—			9,771
Net cash (used in) provided by financing activities		(36,065	)		11,310
Net cash used in financing activities								(67,965	)		(36,065	)
Net increase in cash and cash equivalents		16,018			48,626			76,606			16,018
Cash and cash equivalents at beginning of period		65,126			40,933			106,932			65,126
Cash and cash equivalents at end of period	$	81,144		$	89,559		$	183,538		$	81,144

Supplemental Information:
Supplemental information:
Capital expenditures accrued but not paid at period end	$	122		$	6		$	123		$	122
Issuance of 2015 and 2014 earn-out shares							$	—		$	63,209
Noncash adjustment of purchase price for Endicia acquisition							$	—		$	372
Tenant improvement allowance	$	676		$	—		$	848		$	676
Income taxes paid	$	2,723		$	835
Issuance of 2015 and 2014 earn-out shares (see Note -2 “Acquisitions”)	$	63,209		$	9,225
Non cash adjustment of purchase price for Endicia acquisition	$	372		$	—

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

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STAMPS.COM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	Summary of Significant Accounting Policies

Basis of Presentation

We prepared the consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission ~~(“SEC”)~~(SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States ~~(“U.S.”~~(U.S.) generally accepted accounting principles ~~(“GAAP”)~~(GAAP) have been condensed or omitted pursuant to such rules and regulations. We believe that the disclosures are adequate to make the information presented not misleading. We recommend that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in our latest annual report on Form 10-K for the fiscal year ended December 31, ~~2015,~~2016, filed with the SEC on ~~February 29, 2016.~~March 1, 2017.

In our opinion, these unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly our financial position as of September 30, ~~2016,~~2017, our results of operations for the three and nine months ended September 30, ~~2016~~2017, and our cash flows for the nine months ended September 30, ~~2016.~~2017. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2016.~~2017.

Principles of Consolidation

The consolidated financial statements include the accounts of Stamps.com Inc., Auctane LLC (ShipStation), Interapptive, Inc. (ShipWorks), PSI Systems Inc. (Endicia), ShippingEasy Group, Inc., (ShippingEasy) and PhotoStamps Inc. In June 2014, we completed our acquisition of 100% of the outstanding equity of Auctane LLC, the Texas limited liability company that operates ShipStation (“Auctane LLC” or “ShipStation”) in a cash and contingent stock transaction. ShipStation, based in Austin, Texas, offers monthly subscription based e-commerce shipping software primarily under the brands ShipStation and Auctane. In August 2014, we completed our acquisition of 100% of the outstanding equity of Interapptive, Inc., a Missouri corporation, that operates ShipWorks (“Interapptive, Inc.” or “ShipWorks”) in a cash transaction. ShipWorks, based in St. Louis, Missouri, offers monthly subscription based e-commerce shipping software. In November 2015, we completed our acquisition of 100% of the outstanding shares of PSI Systems, Inc. (“Endicia”). Endicia, based in Palo Alto, California, is a leading provider of high volume shipping technologies and solutions for shipping with the United States Postal Service (“USPS”). In July 2016, we completed our acquisition of 100% of the outstanding shares of ShippingEasy Group, Inc. (“ShippingEasy”). ShippingEasy, based in Austin, Texas, offers web-based multi-carrier shipping software that allows online retailers and e-commerce merchants to organize, process, fulfill and ship their orders quickly and easily. See ~~Note 2– “Acquisitions”~~ ~~for further discussion of our acquisitions.~~ShippingEasy.

Because 100% of the voting control of ~~Auctane LLC, Interapptive, Inc. PSI Systems, Inc.,~~ShipStation, ShipWorks, Endicia and ShippingEasy ~~Group, Inc.~~ is held by us, we have consolidated the results of operations of ShipStation, ShipWorks, Endicia and ShippingEasy from the date we obtained control in the accompanying consolidated financial statements. Similarly, due to our 100% control of PhotoStamps, Inc., PhotoStamps, Inc. is also consolidated in the accompanying consolidated financial statements from the date of its inception. ~~All significant intercompany~~Intercompany accounts and transactions between consolidated entities have been ~~eliminated.~~eliminated in consolidation.

Use of Estimates ~~and Risk Management~~

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements. Examples include estimates of loss contingencies, ~~promotional coupon redemptions, the number of PhotoStamps retail boxes that will not be redeemed,~~ realizability of deferred income taxes, the estimates and assumptions used to calculate stock-based compensation, the estimates and assumptions used to calculate the allocation of the purchase price related to our acquisitions, ~~including related contingent consideration,~~ and estimates regarding the useful lives of our building, ~~patents and other~~ amortizable intangible assets, and goodwill.

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~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

~~Contingencies and Litigation~~

We are subject to various routine litigation matters as a claimant and a defendant. We record any amounts recovered in these matters when received. We establish loss provisions for claims against us when the loss is both probable and can be reasonably estimated. If either or both of the criteria are not met, we assess whether there is at least a reasonable possibility that a loss, or additional losses, may have been incurred. If there is a reasonable possibility that a loss or additional loss may have been incurred for such proceedings, we disclose the estimate of the amount of loss or possible range of loss, or disclose that an estimate of loss cannot be made, as applicable.

~~Fair Value of Financial Instruments~~

Carrying amounts of certain of our financial instruments, including cash, cash equivalents, accounts receivable and accounts payable, approximate fair value due to their short maturities. The fair values of investments are determined using quoted market prices for those securities or similar financial instruments. The fair value of our debt approximates book value.

In 2015 the fair value of the contingent consideration related to our acquisition of ShipStation was determined based on a probability weighted method, which incorporated management’s forecasts of financial measures related to ShipStation and the likelihood of the financial measure targets related to such acquisition being achieved using a series of options that replicated the pay-off structure of the earn-out, and the value of each of these options was determined using the Black-Scholes-Merton option pricing framework. Changes in the fair value of the contingent consideration obligations resulted from changes in the assumed timing and amount of revenue and expense estimates, changes in the probability of payment scenarios, changes in stock values, as well as changes in capital market conditions, which impacted the discount rate used in the fair valuation. Significant judgment was employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent reporting period during 2015. See ~~Note 2 – “Acquisitions”~~ ~~for a further description of the contingent consideration relating to ShipStation.~~

~~Property and Equipment~~

We account for property and equipment at cost less accumulated depreciation and amortization. We compute depreciation using the straight-line method over the estimated useful life of the asset, generally three to five years for furniture, fixtures and equipment and ten to forty years for building and building improvements. We have a policy of capitalizing expenditures that materially increase assets’ useful lives and charging ordinary maintenance and repairs to operations as incurred. When property or equipment is disposed of, the cost and related accumulated depreciation and amortization are removed, and any gain or loss is included in operations.

Business Combinations

The acquisition method of accounting is used for business combinations. The results of operations of acquired businesses are included in our consolidated financial statements prospectively from the date of acquisition. The fair value of purchase consideration is allocated to the assets acquired and liabilities assumed from the acquired entity and is generally based on their fair value at the acquisition date. The excess of the fair value of purchase consideration over the fair value of the assets acquired and liabilities assumed is recorded as goodwill. Historically, the primary items that have generated goodwill include anticipated synergies between the acquired business and the Company and the acquired assembled workforce, neither of which qualifies for recognition as an intangible asset. Acquisition-related expenses are recognized in our consolidated financial statements as incurred.

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STAMPS.COM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Contingencies and Litigation

In the ordinary course of business, we are subject to various routine litigation matters as a claimant and a defendant. We record any amounts recovered in these matters when received. We establish loss provisions for claims against us when the loss is both probable and can be reasonably estimated. If either or both of the criteria are not met, we assess whether there is at least a reasonable possibility that a loss, or additional losses, may have been incurred. If there is a reasonable possibility that a loss or additional loss may have been incurred for such proceedings, we disclose the estimate of the amount of loss or possible range of loss, or disclose that an estimate of loss cannot be made, as applicable.

Deferred Revenue

Our deferred revenue relates mainly to service revenue, which generally arises due to the timing of payment versus the provision of services for certain customers billed in advance.

Fair Value of Financial Instruments

Carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate fair value due to their short maturities. The fair values of investments are determined using quoted market prices for those securities or similar financial instruments. The Company’s outstanding debt held by third-party financial institutions is carried at cost, adjusted for debt issuance costs. The Company’s debt is not publicly traded and the carrying amount typically approximates fair value for debt that accrues interest at a variable rate for companies with similar financial characteristics as the Company, which are considered Level 2 inputs as defined in footnote 8.

Goodwill

Goodwill represents the excess of the fair value of consideration given over the fair value of the tangible assets, identifiable intangible assets and liabilities assumed in a business combination. We are required to test goodwill for impairment annually and whenever events or circumstances indicate the fair value of a reporting unit may be below its carrying value. Goodwill is reviewed for impairment annually on October 1. A reporting unit is the operating segment or a business that is one level below that operating segment. Reporting units are aggregated as a single reporting unit if they have similar economic characteristics. ~~As of September 30, 2016, we are not aware of any indicators of impairment that would require an impairment analysis other than~~We aggregated our ~~annual impairment analysis.~~

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~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

~~Trademarks, Patents and Intangible Assets~~

Acquired trademarks, patents and other intangibles include both amortizable and non-amortizable assets and are included in intangible assets, net in the accompanying consolidated balance sheets. Intangible assets are carried at cost less accumulated amortization. Cost associated with internally developed intangible assets is typically expensed as incurred as research and development costs. Amortization of amortizable intangible assets is calculated on a straight-line basis, which is consistent with expected future cash flows.

~~Impairment of Long-Lived Assets and Intangible Assets~~

Long-lived assets including intangible assets with finite useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Intangible assets that have indefinite useful lives are not amortized but, instead, tested at least annually for impairment while intangible assets that have finite useful lives continue to be amortized over their respective useful lives.

~~Deferred Revenue~~

Our deferred revenue relates mainly to service revenue and PhotoStamps retail boxes. Deferred revenue related to our service revenue generally arises due to the timing of payment versus the provision of services for certain customers billed in advance. We previously sold PhotoStamps retail boxes to our customers through our website and selected third parties. Proceeds from the sale of our PhotoStamps retail boxes were initially recorded as a liability when received. We recorded the liability for outstanding PhotoStamps retail boxes in deferred revenue. We no longer sell PhotoStamps retail boxes.

~~Revenue Recognition~~

We recognize revenue from product sales or services rendered, as well as commissions from advertising or sale of products by third party vendors to our customer base when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured.

Service revenue is primarily derived from monthly service fees and transaction related revenues from our USPS mailing and shipping services, our multi-carrier shipping services and our mailing and shipping integrations, and is recognized in the period that services are provided. Product sales, net of return allowances, are recorded when the products are shipped and title passes to customers. Sales of items, including customized postage, sold to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier. Return allowances for expected product returns, which reduce product revenue, are estimated using historical experience. Commissions from the advertising or sale of products by a third party vendor to our customer base are recognized when the revenue is earned and collection is deemed probable.

Customers purchase postage through our mailing and shipping solutions. If the postage purchase funds are transferred directly from the customers to the USPS, we do not recognize revenue for this postage, as it is purchased by our customers directly from the USPS.

Customized postage revenue, which includes the face value of postage, from the sale of PhotoStamps and PictureItPostage sheets and rolls is made pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier and revenue is recognized at that time. Sale of PhotoStamps retail boxes are initially recorded as deferred revenue. PhotoStamps revenue related to the sale of these PhotoStamps retail boxes is subsequently recognized when either: 1) the PhotoStamps retail box is redeemed; or 2) the likelihood of the PhotoStamps retail box being redeemed is deemed remote (“breakage”) and there is no legal obligation to remit the value of the unredeemed PhotoStamps retail boxes.

~~Table of Contents~~

~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

On a limited basis, we allow third parties to offer products and promotions to our customer base. These arrangements generally provide payment in the form of a flat fee or revenue sharing arrangements where we receive payment upon customers accessing third party products and services. During the three and nine months ended September 30, 2016 and 2015 revenue from such advertising arrangements was not significant.

We provide our customers with the opportunity to purchase parcel insurance directly through our solutions. Insurance revenue represents the gross amount charged to the customer for purchasing insurance and the related cost represents the amount paid to our insurance brokers. We recognize revenue on insurance purchases upon the ship date of the insured package.

~~PhotoStamps Retail Boxes~~

We previously sold PhotoStamps retail boxes that are redeemable for PhotoStamps on our website. The PhotoStamps retail boxes were sold through various third party retail partners. We no longer sell PhotoStamps retail boxes. Our PhotoStamps retail boxes are not subject to administrative fees on unredeemed boxes and have no expiration date. PhotoStamps retail box sales were recorded as deferred revenue. We concluded that sufficient company-specific historical evidence existed to determine the period of time after which the likelihood of the PhotoStamps retail boxes being redeemed was remote. Based on our analysis of the redemption data, we estimate that period of time to be 60 months after the sale of our PhotoStamps retail boxes.

We recognize breakage revenue related to our PhotoStamps retail boxes utilizing the redemption recognition method. Under the redemption recognition method, we recognize breakage revenue from unredeemed retail boxes in proportion to the revenue recognized from the retail boxes that have been redeemed. Revenue from our PhotoStamps retail boxes is included in Customized postage revenue. PhotoStamps retail box breakage revenue was not significant during the three and nine months ended September 30, 2016 and 2015.

~~Income Taxes~~

We account for income taxes in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic No. 740, Income Taxes (“ASC 740”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the net deferred tax assets will not be realized. We record a valuation allowance to reduce our gross deferred tax assets, which are primarily comprised of U.S. Federal and State tax loss carry-forwards, to the amount that is more likely than not (a likelihood of more than 50 percent) to be realized. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income. We evaluate the appropriateness of our deferred tax assets and related valuation allowance in accordance with ASC 740 based on all available positive and negative evidence. As of September 30, 2016 and December 31, 2015 we do not have any valuation allowance recorded to reduce our gross deferred tax assets as we believe we have met the more likely than not threshold and we will realize our tax loss carry-forwards in the foreseeable future.

~~Short-Term Financing Obligation~~

We utilize short-term financing, which is separate from our debt, to fund certain company operations. Short-term financing is included in accrued expenses. As of September 30, 2016 we had $16 million in short-term financing obligations and $120 million of unused credit. As of December 31, 2015 we had $13.3 million in short-term financing obligations and $34.2 million of unused credit.

~~Table of Contents~~

~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

~~Recent Accounting Pronouncements~~

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") an updated standard on revenue recognition. This ASU will supersede the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, and most industry-specific guidance. ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using US GAAP and International Financial Reporting Standards. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so the companies may be required to use more judgment and make more estimates than under current authoritative guidance. ASU 2014-09 will be effective for the Company in the first quarter of fiscal 2018 and may be applied on a full retrospective or modified retrospective approach. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

In April 2015, the FASB issued guidance to help entities evaluate whether fees paid in a cloud computing arrangement include a software license. Pursuant to this guidance, when a cloud computing arrangement includes a software license, the customer accounts for the software license element of the arrangement consistent with the acquisition of other software licenses. When a cloud computing arrangement does not include a software license element, the customer accounts for the arrangement as a service contract. The prospective adoption of this guidance on January 1, 2016 did not have a material effect on the Consolidated Financial Statements.

In November 2015, the FASB issued guidance that requires deferred tax assets and liabilities to be presented as noncurrent in a classified statement of financial position. The guidance is effective beginning January 1, 2017, with early adoption permitted. The guidance can be applied prospectively or retrospectively. The Company elected to early adopt the requirements and apply them retrospectively as of December 31, 2015.

In February 2016, the FASB issued a new accounting standard for leases. The new standard generally requires the recognition of financing and operating lease liabilities and corresponding right-of-use assets on the balance sheet. For financing leases, a lessee recognizes amortization of the right-of-use asset as an operating expense over the lease term separately from interest on the lease liability. For operating leases, a lessee recognizes its total lease expense as an operating expense over the lease term. The amendments are effective for the Company in the first quarter of 2019 using a modified retrospective approach with early adoption permitted. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

In March 2016, the FASB simplified certain areas of accounting for stock-based compensation, including accounting for the income tax consequences of stock-based compensation, determining the classification of awards as either equity or liabilities, classifying certain items within the statement of cash flows and introducing an accounting policy election to account for forfeitures of non-vested awards as they occur. The simplified guidance is effective for the Company in the first quarter of 2017. Depending on the area simplified, the guidance is effective either prospectively, retrospectively or using a modified retrospective approach. Early adoption is permitted. The Company is evaluating the effect of adoption on its Consolidated Financial Statements.

~~Subsequent Events~~

~~We are not aware of any material subsequent events or transactions that have occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements.~~

~~Table of Contents~~

~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

2.	~~Acquisitions~~

~~We have accounted for all of our acquisitions under the acquisition method of accounting in accordance with the provisions of FASB ASC Topic No. 805 Business Combinations (“ASC 805”).~~

~~ShippingEasy Acquisition~~

On July 1, 2016, we completed our acquisition of ShippingEasy Group, Inc. (“ShippingEasy”) when our wholly owned subsidiary was merged with and into ShippingEasy, resulting in our 100% ownership of ShippingEasy. The merger agreement provided for us to pay $55.0 million in aggregate merger consideration to the former owners of ShippingEasy, payable in cash. The purchase price was subject to adjustments for changes in ShippingEasy’s net working capital. The net purchase price including adjustments for net working capital totaled approximately $55.4 million and was funded from current cash and investment balances.

In connection with the acquisition, we issued performance based inducement equity awards to each of the General Manager and Chief Technology Officer of ShippingEasy. These inducement awards cover an aggregate of up to 43,567 common shares each if earnings targets for ShippingEasy are achieved over a two and one-half year period beginning July 1, 2016. The two and one-half year period is divided into three phases consisting of the six months ended December 31, 2016 and each of the twelve months ended December 31, 2017 and 2018. The awards are subject to proration if at least 75% of the applicable target is achieved and are subject to forfeiture or acceleration based on changes in employment circumstances over the performance period. The stock-based compensation expense associated with the performance based inducement equity award will be recognized ratably over each phase based on the estimated probable achievement of each financial target. The awards are a material inducement to the General Manager and Chief Technology Officer entering into employment agreements with Stamps.com in connection with the acquisition of ShippingEasy. We determined the achievement of 100% of the earnings target for the six months ended December 31, 2016 is probable, therefore, we recognized approximately $946,000 of stock-based compensation expense for these inducement equity awards during the three months ended September 30, 2016. The $946,000 stock-based compensation expense recognized represents 50% of the total performance based inducement equity award for the first phase.

We also issued inducement stock option grants for an aggregate of approximately 62,000 shares of Stamps.com common stock to 48 new employees in connection with our acquisition of ShippingEasy. Each option vests 25% on the one year anniversary of the July 1, 2016 grant date with the remaining 75% vesting in approximately equal monthly increments over the immediately succeeding thirty-nine months provided that the option holder is still employed by the Company on the vesting dates. The stock options have a ten year term and an exercise price equal to the closing price of Stamps.com common stock on the grant date of July 1, 2016. The stock options were granted as inducements material to the new employees entering into employment with Stamps.com in connection with the acquisition of ShippingEasy. The related stock-based compensation expense we recognized during the three months ended September 30, 2016 was not material.

The total net purchase price for the ShippingEasy acquisition is allocated to the assets acquired and the liabilities assumed based on their fair values. We have made significant estimates and assumptions in determining the allocation of the purchase price. The preliminary allocation of purchase consideration is subject to change based on finalizing the deferred tax liability and the valuation of the intangible assets as of the date of acquisition. The following table is the allocation of the preliminary purchase price (in thousands, except years):

~~Table of Contents~~

~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Fair Value Fair Value
Useful Life
(In Years)

Weighted
Average
Estimated
Useful Life
(In Years)

Trade accounts receivable $ 1,194
Other assets 76
Property and equipment 40
Goodwill 40,780
Identifiable intangible assets:
Trade name $ 1,304 8
Developed technology 6,948 5
Customer relationship 6,316 5
Non-compete agreements 1,111 3 to 5
Total identifiable intangible assets 15,679 5
Accrued expenses and other liabilities (707 )
Deferred revenue (185 )
Deferred tax liability (1,430 )
Total purchase price $ 55,447

Goodwill represents the excess of the fair value of consideration given over the fair value of the tangible assets, identifiable intangible assets and liabilities assumed in a business combination and the potential synergy of combining the operations of Stamps.com and ShippingEasy. Such synergies include estimated cost reductions and enhanced sales which are expected to drive increased volume. The identified intangible assets consist of trade names, developed technology, non-compete agreements and customer relationships. The estimated fair values of the trademark and developed technology were determined using the “relief from royalty” method. The estimated fair value of the non-compete agreements was determined using the “with and without” method. The estimated fair value of customer relationship was determined using the “excess earnings” method. The rate utilized to discount net cash flows to their present values was approximately 23% and was determined after consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows. Trademark, developed technology, non-compete and customer relationship is amortized on a straight-line basis over their estimated useful lives. The amortization of acquired intangibles will be approximately $761,000 per quarter for the remaining estimated useful lives. The intangible assets and goodwill recorded in this acquisition are not deductible for tax purposes.

For the three and nine months ended September 30, 2016, the Company incurred approximately $111,000 and $604,000, respectively in acquisition expenses. These costs are included in general and administrative expense on our Consolidated Statements of Operations.

~~Pro-Forma Financial Information (unaudited)~~

The pro-forma information presented is for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the acquisition had been completed on the date indicated, nor is it indicative of future operating results. The pro-forma financial information does not include any ~~adjustments for anticipated operating efficiencies or cost savings.~~

~~Table of Contents~~

~~The following table presents the pro-forma financial information (in thousands, except per share amounts) and assumes the acquisition of ShippingEasy occurred on January 1, 2015:~~

~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Three Months Ended
September 30,

Nine Months Ended
September 30,

2016 2015 2016 2015

Revenues $ 92,559 $ 53,133 $ 264,664 $ 147,517
Income from operations 31,702 12,143 80,137 (7,580 )
Net income 18,744 6,705 46,846 (6,192 )
Basic earnings per share $ 1.09 $ 0.41 $ 2.70 $ (0.38 )
Diluted earnings per share $ 1.03 $ 0.38 $ 2.56 $ (0.38 )

~~Endicia Acquisition~~

~~On March 22, 2015 we entered~~units into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Endicia, and Newell Rubbermaid Inc., a Delaware corporation (“Newell”). The Stock Purchase Agreement provided for our purchase of all of the issued and outstanding shares of common stock of Endicia from a wholly owned indirect subsidiary of Newell for an aggregate purchase price of $215 million in cash (the “Transaction”). The purchase price was subject to adjustment for changes in Endicia’s net working capital as of the date of the closing of the Transaction and certain transaction expenses and closing cash adjustments. After receiving regulatory clearance,single reporting unit because we ~~closed the Transaction on November 18, 2015.~~

As part of the funding of our acquisition of Endicia, we entered into a credit agreement with a group of banks on November 18, 2015, which provided for a term loan of $82.5 million and a revolving credit facility with a maximum borrowing of $82.5 million (collectively, the “Credit Agreement”) to fund our acquisition of Endicia. The Credit Agreement is secured by substantially all of our assets. We funded our acquisition with cash of $56.5 million and debt from our Credit Agreement of $164.5 million, totaling $221.0 million. The $221.0 million consists of the following: 1) purchase price of $214.2 million; 2) $1.5 million of debt issuance costs; and 3) the transfer of Endicia’s ending cash balance on November 17, 2015 of $5.3 million. Total debt issuance costs of $1.8 million, which includes $300,000 of costs incurred prior to closing, were recorded as debt discount and are being accreted as interest expense over the life of the Credit Agreement. Our Credit Agreement matures on November 18, 2020.

As of September 30, 2016 our outstanding debt under the Credit Agreement, gross of debt issuance costs, was approximately $78.4 million under the term loan and approximately $72.0 million under the revolving credit facility. Because wedetermined they have a letter of credit of approximately $510,000 relating to a facility lease, we have approximately $10.0 million of available and unused borrowings under the revolving credit facility as of September 30, 2016.

~~Table of Contents~~

During the first quarter of 2016, we adjusted the purchase price of Endicia and related goodwill by approximately $945,000 due to certain acquisition date balance sheet adjustments and the settlement of net working capital with Newell. The total estimated purchase price of the acquired company is allocated to the assets acquired and the liabilities assumed based on their fair values. We have made significant estimates and assumptions in determining the allocation of the purchase price. The following table sets forth the final allocation of the purchase price (in thousands, except years):

~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Fair Value Fair Value
Useful Life
(In Years)

Weighted
Average
Estimated
Useful Life
(In Years)

Trade accounts receivable $ 10,247
Other assets 771
Property and equipment 2,798
Goodwill 131,860
Identifiable intangible assets:
Trade name $ 10,900 Indefinite
Developed technology 26,100 9
Customer relationship 43,200 6
Total identifiable intangible assets 80,200 7
Accrued expenses and other liabilities (10,212 )
Deferred revenue (926 )
Total purchase price $ 214,738

Goodwill represents the excess of the fair value of consideration given over the fair value of the tangible assets, identifiable intangible assets and liabilities assumed in a business combination and the potential synergy of combining the operations of Stamps.com and Endicia. Such synergies include estimated cost reductions and enhanced sales and customer support which are expected to drive increased volume. The entire amount of goodwill recorded in this acquisition is being deducted for tax purposes ratably over a 15 year period. The identified intangible assets consist of trade name, developed technology and customer relationships. The estimated fair values of the trade name and developed technology were determined using the “relief from royalty” method. The estimated fair value of customer relationship was determined using the “excess earnings” method. The rate utilized to discount net cash flows to their present values was approximately 20% and was determined after consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows. Developed technology and customer relationship is being amortized on a straight-line basis over their estimated useful lives. The amortization of acquired intangibles is being approximately $2.5 million per quarter for the remaining estimated useful lives.

~~Table of Contents~~

~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

~~ShipWorks Acquisition~~

On August 29, 2014, we acquired 100% of the outstanding equity of Interapptive Inc., which operates ShipWorks, in a cash transaction. ShipWorks, based in St. Louis, Missouri, offers monthly subscription based e-commerce shipping software that provides simple, powerful and easy to use solutions for online sellers. ShipWorks solutions integrate with over 50 popular online sales and marketplace systems including eBay, PayPal, Amazon, Yahoo! and others. ShipWorks offers multi-carrier shipping options and features including sending email notifications to buyers, updating online order status, generating reports and many more. During the fourth quarter of 2014, we adjusted the purchase price of ShipWorks by approximately $69,000.

~~The total purchase price for ShipWorks was approximately $22.1 million and was comprised of the following (in thousands):~~

Fair Value
Cash consideration $ 21,952
Deferred consideration 181
Total purchase price $ 22,133

The total purchase price of the acquired company was allocated to the assets acquired and the liabilities assumed based on their fair values. We have made significant estimates and assumptions in determining the allocation of the purchase price. The following table sets forth the final allocation of the purchase price (in thousands, except years):

Fair Value Fair Value
Useful Life
(In Years)

Weighted
Average
Estimated
Useful Life
(In Years)

Cash and cash equivalents $ 803
Trade accounts receivable 353
Other assets 21
Property and equipment 1,091
Goodwill 16,349
Identifiable intangible assets:
Trademark $ 200 6
Developed technology 1,700 7
Non-compete agreement 700 4
Customer relationship 2,300 6
Total identifiable intangible assets 4,900 6
Accrued expenses and other liabilities (1,119 )
Deferred revenue (265 )
Total purchase price $ 22,133

Goodwill represents the excess of the fair value of consideration given over the fair value of the tangible assets, identifiable intangible assets and liabilities assumed in a business combination and the potential synergy of combining the operations of Stamps.com and ShipWorks. The entire amount of goodwill recorded in this acquisition is being deducted for tax purposes ratably over a 15 year period. The identified intangible assets consist of trademarks, developed technology, non-compete agreements and customer relationships. The estimated fair values of the trademark and developed technology were determined using the “relief from royalty” method. The estimated fair value of the non-compete was determined using the “with and without” method. The estimated fair value of customer relationship was determined using the “excess earnings” method. The rate utilized to discount net cash flows to their present values was approximately 13% and was determined after consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows. Trademark, developed technology, non-compete and customer relationship is amortized on a straight-line basis over their estimated useful lives. The amortization of acquired intangibles is approximately $200,000 per quarter for the remaining estimated useful lives.

~~Table of Contents~~

~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

~~ShipStation Acquisition and Contingent Consideration~~

On June 10, 2014, we acquired 100% of the outstanding equity of Auctane LLC, which operates ShipStation, in a cash and contingent stock transaction. ShipStation, based in Austin, Texas, offers monthly subscription based e-commerce shipping software primarily under the brands ShipStation and Auctane. ShipStation is a leading web-based shipping software solution that allows online retailers and e-commerce merchants to organize, process, fulfill and ship their orders quickly and easily. ShipStation supports automatic order importing from over 50 shopping carts and marketplaces, including eBay, Amazon, Shopify, BigCommerce, Volusion, Squarespace and others. ShipStation offers multi-carrier shipping options, and automation features like custom hierarchical rules and product profiles that allow customers to easily and automatically optimize their shipping. Using ShipStation, an online retailer or e-commerce merchant can ship their orders from wherever they sell and however they ship.

~~The total purchase price for ShipStation was approximately $66.2 million and was comprised of the following (in thousands, except shares):~~

Fair Value
Cash consideration $ 50,000
Fair value of performance linked earn-out of up to 768,900 shares of Stamps.com common stock (contingent consideration) 16,242
Total purchase price $ 66,242

The performance linked earn-out payment of Stamps.com shares (or contingent consideration) to former equity members of Auctane LLC was based on the achievement of certain financial measures within a future time period. There were two periods in which the earn-out payment was calculated. The first earn-out period was based on the achievement of certain financial measures during the nine months ended December 31, 2014. The second earn-out period was based on the achievement of certain financial measures during the twelve months ended December 31, 2015. The range of Stamps.com shares available for the performance linked earn-out for both periods was between 576,675 to 768,900 shares provided that a minimum threshold for the financial measures was achieved. The first earn-out payment totaled 192,225 shares and was made in the first quarter of 2015. The second earn-out payment totaled 576,675 shares and was made in the first quarter of 2016. The fair value of the contingent consideration was determined at the acquisition date based on a probability weighted method, which incorporated management’s forecasts of financial measures and the likelihood of the financial measure targets being achieved using a series of options that replicate the pay-off structure of the earn-out, and the value of each of these options was determined using the Black-Scholes-Merton option pricing framework.

~~Table of Contents~~

~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Fair Value Fair Value
Useful Life
(In Years)

Weighted
Average
Estimated
Useful Life
(In Years)

Cash and cash equivalents $ 1,117
Trade accounts receivable 254
Other assets 39
Property and equipment 187
Goodwill 50,544
Identifiable intangible assets:
Trademark $ 500 4
Developed technology 5,300 8
Non-compete agreement 400 4
Customer relationship 9,000 8
Total identifiable intangible assets 15,200 8
Accrued expenses and other liabilities (835 )
Deferred revenue (264 )
Total purchase price $ 66,242

Goodwill represents the excess of the fair value of consideration given over the fair value of the tangible assets, identifiable intangible assets and liabilities assumed in a business combination and the potential synergy of combining the operations of Stamps.com and ShipStation. The entire amount of goodwill recorded in this acquisition is being deducted for tax purposes ratably over a 15 year period. The identified intangible assets consist of trademarks, developed technology, non-compete agreements and customer relationships. The estimated fair values of the trademark and developed technology were determined using the “relief from royalty” method. The estimated fair value of the non-compete was determined using the “with and without” method. The estimated fair value of customer relationship was determined using the “excess earnings” method. The rate utilized to discount net cash flows to their present values was approximately 15% and was determined after consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows. Trademark, developed technology, non-compete and customer relationship is amortized on a straight-line basis over their estimated useful lives. The amortization of acquired intangibles is approximately $500,000 per quarter for the remaining estimated useful lives.

Under ASC 805, we are required to re-measure the fair value of the contingent consideration at each reporting period. During the 2015 periods, the fair value of the contingent consideration was determined based on a probability weighted method, which incorporated management’s forecasts of financial measures and the likelihood of the financial measure targets being achieved using a series of options that replicate the pay-off structure of the earn-out, and the value of each of these options was determined using the Black-Scholes-Merton option pricing framework. Increases or decreases in the fair value of the contingent consideration can result from changes in the assumed timing and amount of revenue and expense estimates, changes in the probability of payment scenarios, changes in stock values, as well as changes in capital market conditions, which impact the discount rate used in the fair valuation. Significant judgment was employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent reporting period. We recognized $13.6 million and $24.1 million of contingent consideration charges during the three and nine months ended September 30, 2015, respectively. As of December 31, 2015, the fair value of the contingent consideration was calculated by multiplying the expected earn-out shares to be distributed by our stock price at December 31, 2015. The fair value of the contingent consideration for the ShipStation acquisition was $63.2 million as of December 31, 2015, the final measurement date. No increases or decreases to the fair value of the contingent consideration were made following December 31, 2015 and prior to the second and final earn-out payment in the first quarter of 2016.

~~Table of Contents~~

~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

3.	~~Commitments and Contingencies~~

~~Legal Proceedings~~

We are subject to various routine legal proceedings and claims incidental to our business, and we do not believe that these proceedings and claims would reasonably be expected to have a material adverse effect on our financial position, results of operations or cash flows.

Although management at present believes that the ultimate outcome of the various routine proceedings, individually and in the aggregate, will not materially harm our financial position, results of operations, cash flows, or overall trends, legal proceedings are subject to inherent uncertainties, and unfavorable rulings or other events could occur. An unfavorable outcome for an amount in excess of management’s present expectations may result in a material adverse impact on our business, results of operations, financial position, and overall trends.

~~Commitments~~

The following table is a schedule of our significant contractual obligations and commercial commitments (other than debt commitments), which consist only of future minimum lease payments under operating leases as of September 30, 2016 (in thousands):

Twelve Month Period Ending September 30,
Operating
Lease
Obligation

2017 $ 3,845
2018 3,985
2019 1,626
2020 1,389
2021 1,204
Thereafter 198
Total $ 12,247

4.	~~Net Income (loss) per Share~~

Net income (loss) per share represents net income (loss) attributable to common stockholders divided by the weighted average number of common shares outstanding during a reporting period. The diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options (commonly and hereafter referred to as “common stock equivalents”), were exercised or converted into common stock. Diluted net income per share is calculated by dividing net income during a reporting period by the sum of the weighted average number of common shares outstanding plus common stock equivalents for the period.

~~The following table reconciles share amounts utilized to calculate basic and diluted net income (loss) per share (in thousands, except per share data):~~

~~Table of Contents~~

~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Three Months Ended
September 30,

Nine Months Ended
September 30,

2016 2015 2016 2015
Net income (loss) $ 18,672 $ 7,274 $ 46,201 $ (4,127 )

Basic - weighted average common shares 17,218 16,538 17,319 16,367
Diluted effect of common stock equivalents 902 979 1,006 —
⁽¹⁾
Diluted - weighted average common shares 18,120 17,517 18,325 16,367

Earnings (loss) per share:
Basic $ 1.08 $ 0.44 $ 2.67 $ (0.25 )
Diluted $ 1.03 $ 0.42 $ 2.52 $ (0.25 )

~~(1) Common equivalent shares are excluded from the diluted net loss per share calculation as their effect is anti-dilutive.~~

~~The calculation of dilutive shares excludes the effect of the following options that are considered anti-dilutive (in thousands):~~

Three Months Ended
September 30,

Nine Months Ended
September 30,

2016 2015 2016 2015
Anti-dilutive stock options 514 64 269 2,990

5.	~~Stock-Based Employee Compensation~~

We estimate the fair value of share-based payment awards on the date of grant using an option-pricing model and recognize stock-based compensation expense during each period based on the value of that portion of share-based payment awards that is ultimately expected to vest during the period, reduced for estimated forfeitures. We estimate forfeitures at the time of grant based on historical data and revise, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Compensation expense recognized for all employee stock options granted is recognized using the straight-line method over their respective vesting periods of up to five years. Starting in the third quarter of 2016, our stock-based compensation expense included performance based inducement equity awards relating to the ShippingEasy acquisition as described in Note 2 - ~~Acquisitions~~.

~~The following table sets forth the stock-based compensation expense that we recognized for the periods indicated (in thousands):~~

Three Months Ended
September 30,

Nine Months Ended
September 30,

2016 2015 2016 2015
Stock-based compensation expense relating to:
Employee and director stock options $ 8,525 $ 2,899 $ 23,960 $ 8,701
Employee stock purchases 297 162 795 403
Total stock-based compensation expense $ 8,822 $ 3,061 $ 24,755 $ 9,104

Stock-based compensation expense relating to:
Cost of revenues $ 476 $ 221 $ 1,351 $ 589
Sales and marketing 1,734 766 5,322 2,341
Research and development 1,916 641 4,696 1,806
General and administrative 4,696 1,433 13,386 4,368
Total stock-based compensation expense $ 8,822 $ 3,061 $ 24,755 $ 9,104

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~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

We use the Black-Scholes-Merton option valuation model to estimate the fair value of share-based payment awards on the date of grant, which requires us to make a number of highly complex and subjective assumptions, including stock price volatility, expected term, risk-free interest rates and projected employee stock option exercise behaviors. In the case of options we grant, our assumption of expected volatility is based on the historical volatility of our stock price over the term equal to the expected life of the options. We base the risk-free interest rate on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the options assumed at the date of grant. The estimated expected life represents the weighted-average period the stock options are expected to remain outstanding, determined based on an analysis of historical exercise behavior.

~~The following are the weighted average assumptions used in the Black-Scholes valuation model for the periods indicated:~~

Three Months Ended
September 30,

Nine Months Ended
September 30,

2016 2015 2016 2015
Expected dividend yield — — — —
Risk-free interest rate 1.0 % 1.0 % 1.0 % 1.0 %
Expected volatility 47 % 46 % 48 % 46 %
Expected life (in years) 3.4 3.4 3.4 3.4
Expected forfeiture rate 6 % 6 % 6 % 6 %

6.	~~Goodwill and Intangible Assets~~

~~Goodwill represents the excess of the fair value of consideration given over the fair value of the tangible assets, identifiable intangible assets and liabilities assumed in a business combination.~~

~~The following table summarizes goodwill as of December 31, 2015 and September 30, 2016 (in thousands):~~

2016
Goodwill balance at December 31, 2015 $ 197,807
Purchase price adjustment (see Note 2– “Acquisitions”)
945
Acquisition of ShippingEasy (see Note 2– “Acquisitions”)
40,780
Goodwill balance at September 30, 2016 $ 239,532
similar economic characteristics.

Goodwill is reviewed for impairment annually on October 1^st utilizing either a qualitative assessment or a two-step process. We have an option to make a qualitative assessment of a reporting unit's goodwill for impairment. If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. For reporting units where we perform the two-step process, the first step requires us to compare the fair value of each reporting unit, which we primarily determine using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, there is an indication that impairment may exist and the second step is required. In step two, the implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit's goodwill, the difference is recognized as an impairment loss. As of September 30, 2017, we are not aware of any indicators of impairment that would require an impairment analysis other than our annual impairment analysis.

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Impairment of Long-Lived Assets and Intangible Assets

Intangible assets that have indefinite useful lives are not amortized but, instead, are tested at least annually for impairment while intangible assets that have finite useful lives are amortized over their respective useful lives.

Income Taxes

We account for income taxes in accordance with Financial Accounting Standards Board (FASB) ASC Topic No. 740, Income Taxes (Income Taxes), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. Income Taxes also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the net deferred tax assets will not be realized. We record a valuation allowance to reduce our gross deferred tax assets to the amount that is more likely than not (a likelihood of more than 50 percent) to be realized. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income. We evaluate the appropriateness of our deferred tax assets and related valuation allowance in accordance with Income Taxes based on all available positive and negative evidence. As of September 30, 2017 and December 31, 2016, we do not have any valuation allowance recorded to reduce our gross deferred tax assets as we believe we have met the more likely than not threshold and we will realize our tax loss carry-forwards in the foreseeable future.

Property and Equipment

We account for property and equipment at cost less accumulated depreciation and amortization. We compute depreciation using the straight-line method over the estimated useful life of the asset, generally three to five years for furniture, fixtures and equipment and ten to forty years for building and building improvements. Leasehold improvements are capitalized and amortized over the shorter of the useful life of the asset or the remaining term of the lease. We have a policy of capitalizing expenditures that materially increase assets’ useful lives and charging ordinary maintenance and repairs to operations as incurred. When property or equipment is disposed of, the cost and related accumulated depreciation and amortization are removed, and any gain or loss is included in income from operations.

Revenue Recognition

We recognize revenue from product sales or services rendered, as well as commissions from advertising or sale of products by third party vendors to our customer base when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the selling price is fixed or determinable; and collectability is reasonably assured.

We earn service revenue in several different ways: (1) customers may pay us a monthly fee based on a subscription plan; (2) we may be compensated directly by the United States Postal Service (USPS) for certain qualifying customers under our USPS partnership; (3) we may earn transaction related revenue based on customers purchasing postage or printing shipping labels; (4) we may earn compensation by offering customers a discounted postage rate that is provided to the customers by our integration partners; and (5) we may earn other types of revenue shares or other compensation from specific customers or integration partners. Revenue is recognized in the period that services are provided.

Customers purchase postage from the USPS through our mailing and shipping solutions. Postage purchase funds that are transferred directly from the customers to the USPS are not recognized as revenue for this postage, as it is purchased by our customers directly from the USPS.

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On a limited basis, we allow third parties to offer products and promotions to our customer base. These arrangements generally provide payment in the form of a flat fee or revenue sharing arrangements where we receive payment upon customers accessing third party products and services. Total revenue from such advertising arrangements was not significant during the nine months ended September 30, 2017 or 2016.

We provide our customers with the opportunity to purchase parcel insurance directly through our solutions. Insurance revenue represents the gross amount charged to the customer for purchasing insurance and the related cost represents the amount paid to our insurance providers. We recognize insurance revenue on insurance purchases upon the ship date of the insured package.

Short-Term Financing Obligations

We utilize short-term financing, which is separate from our debt, to fund certain Company operations. Short-term financing obligations are included in accounts payable and accrued expenses in the accompanying consolidated balance sheets. As of September 30, 2017, we had $15.2 million in short-term financing obligations and $90.4 million of unused short-term financing obligations credit. As of December 31, 2016, we had $15.6 million in short-term financing obligations and $90.0 million of unused credit.

Trademarks and Intangible Assets

Acquired trademarks and intangibles include both amortizable and non-amortizable assets and are included in intangible assets, net in the accompanying consolidated balance sheets. Intangible assets are carried at cost less accumulated amortization. Cost associated with internally developed intangible assets is typically expensed as incurred as research and development costs. Amortization of amortizable intangible assets is calculated on a straight-line basis, which is consistent with the expected future cash flows.

Treasury Stock

During the nine-months ended September 30, 2017 and September 30, 2016, we repurchased approximately 818,000 shares and 528,000 shares for $103.1 million and $47.4 million, respectively. Also, 6,670 shares were withheld to satisfy income tax obligations related to performance-based inducement equity awards issued to the General Manager and Chief Technology Officer of ShippingEasy on March 31, 2017.

Accounting Guidance Adopted in 2017

Share-based Payment Transactions to Employees

On January 1, 2017, the Company adopted Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09) issued by the FASB on a prospective basis that changes the reporting for certain aspects of share-based payments. One aspect of the guidance requires that the income tax effects of share-based awards be recognized in the income tax provision in the consolidated statement of operations when the awards vest or are settled. Under the previous guidance, excess tax benefits and deficiencies were recognized in additional paid-in capital in the consolidated balance sheets when the awards vested or were settled. For the nine months ended September 30, 2017, the amount of excess tax benefits recognized in the income tax provision was approximately $41.8 million. For the nine months ended September 30, 2016, the amount of excess tax benefits recognized in additional paid-in capital was not material. In addition, because excess tax benefits are no longer recognized in additional paid-in capital under the new guidance, such amounts are no longer included in the determination of assumed proceeds in applying the treasury stock method when computing earnings per share.

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A net cumulative-effect adjustment of $2.1 million, which was an increase to retained earnings and the deferred tax asset balance as of January 1, 2017, was recorded to reflect the recognition of the previously unrecognized excess tax benefits using the modified retrospective method.

Another aspect of the new guidance requires that excess tax benefits be classified as a cash flow from operating activities, rather than a cash flow from financing activities, in the consolidated statement of cash flows. For the nine months ended September 30, 2017, the amount of excess tax benefits presented as a cash flow from operating activities was $41.8 million; this amount is included within the change of other current assets, net of excess tax benefit from stock-based award activity line item in the consolidated statement of cash flows. For the nine months ended September 30, 2016, the amount of excess tax benefits presented as a cash flow from financing was not material. The presentation requirements for cash flows related to excess tax benefits were adopted prospectively. Accordingly, the operating activity cash flows were not adjusted for the year ended December 31, 2016.

The new standard also provides an accounting policy election to account for forfeitures as they occur. We elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The impact of this was not material.

Another aspect of the new guidance clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on our consolidated statements of cash flows. The presentation requirements for cash flows related to employee taxes paid for withheld shares were adopted retrospectively. The Company did not withhold shares for employee taxes in fiscal 2016; as such, there was no change to the December 31, 2016 consolidated statement of cash flows related to employee taxes. The Company accrued $0.8 million of employee taxes in the first quarter of 2017 for withheld shares, which were classified as a financing activity on our consolidated statements of cash flows when paid in the second quarter of 2017.

The other aspects of the new guidance did not have any material effect on the Company’s consolidated financial statements.

Inventory Measurement Principle

In July 2015, the FASB issued ASU 2015-11, a new accounting standard which changed the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value for entities that do not use the last-in, first-out (LIFO) or retail inventory method. The changes also eliminate the requirement to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory for entities that do not use the LIFO or retail inventory method. The changes were effective for the Company in the first quarter of 2017 using a prospective transition approach. The adoption of the new guidance did not have a material effect on the Company’s consolidated financial statements.

Accounting Guidance Not Yet Adopted

Revenue Recognition

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09) an updated standard on revenue recognition. This ASU will supersede the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, and most industry-specific guidance. ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using U.S. GAAP and International Financial Reporting Standards. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, the companies may be required to use more judgment and make more estimates than under current authoritative guidance.

During fiscal 2017, the FASB issued additional clarification guidance on the new revenue recognition standard which also included certain scope improvements and practical expedients. ASU 2014-09 will be effective for the Company beginning January 1, 2018 and may be applied retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective approach).

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The Company has completed the review of its material contracts and performed a preliminary assessment of the impact of the new standard. While the Company has not finalized its evaluation of the impact of the adoption of this standard on its consolidated financial statements and related disclosures, it does not anticipate a material impact on the financial statements when the standard is adopted in 2018. The Company currently plans to adopt under the modified retrospective method. However, a final decision regarding the adoption method has not been made at this time.

Leases

In February 2016, the FASB issued ASU 2016-02, a new accounting standard for leases. The new standard generally requires the recognition of financing and operating lease liabilities and corresponding right-of-use assets on the balance sheet. For financing leases, a lessee recognizes amortization of the right-of-use asset as an operating expense over the lease term separately from interest on the lease liability. For operating leases, a lessee recognizes its total lease expense as an operating expense over the lease term. The amendments are effective for the Company in the first quarter of 2019 using a modified retrospective approach with early adoption permitted. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, a standard which simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance will become effective on a prospective basis for the Company on January 1, 2020 and is not expected to have a material impact on the Company’s consolidated financial statements.

Definition of a Business

In January 2017, the FASB issued ASU 2013-12, guidance that changes the definition of a business for accounting purposes. Under the new guidance, an entity first determines whether substantially all of the fair value of a set of assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of assets is not deemed to be a business. If this threshold is not met, the entity then evaluates whether the set of assets meets the requirement to be deemed a business, which at minimum, requires there to be an input and a substantive process that together significantly contribute to the ability to create outputs. The guidance will become effective on a prospective basis for the Company on January 1, 2020 and is not expected to have a material impact on the Company’s consolidated financial statements.

Subsequent Events

We are not aware of any material subsequent events or transactions that have occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements.

2.	Acquisitions

We have accounted for all of our acquisitions under the acquisition method of accounting in accordance with the provisions of FASB ASC Topic No. 805 Business Combinations.

ShippingEasy Acquisition

On July 1, 2016, we completed our acquisition of ShippingEasy Group, Inc. (ShippingEasy) when our wholly owned subsidiary was merged with and into ShippingEasy, resulting in our 100% ownership of ShippingEasy. The merger agreement provided for us to pay $55.0 million in aggregate merger consideration to the former owners of ShippingEasy, payable in cash. The purchase price was subject to adjustments for changes in ShippingEasy’s net working capital. The net purchase price including adjustments for net working capital totaled approximately $55.4 million and was funded from current cash and investment balances.

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In connection with the acquisition, we issued performance-based inducement equity awards to each of the General Manager and Chief Technology Officer of ShippingEasy. These inducement awards cover an aggregate of up to 43,567 common shares each if earnings targets for ShippingEasy are achieved over a two and one-half year period that began July 1, 2016. The two and one-half year period is divided into three phases consisting of the six months ended December 31, 2016 and each of the twelve months ending December 31, 2017 and 2018. The awards are subject to proration if at least 75% of the applicable target is achieved and are subject to forfeiture or acceleration based on changes in employment circumstances over the performance period. We recognize stock-based compensation expense associated with the performance-based inducement equity award ratably over each phase based on the estimated probable achievement of each financial target. The awards were a material inducement to the General Manager and Chief Technology Officer entering into employment agreements with Stamps.com in connection with the acquisition of ShippingEasy. In fiscal 2016, we determined the achievement of 100% of the earnings target for the six months ended December 31, 2016 was probable, therefore, we recognized approximately $1.9 million of stock-based compensation expense, representing 21,783 shares, for these inducement equity awards during the six months ended December 31, 2016. The $1.9 million of stock-based compensation expense recognized represents 100% of the total performance-based inducement equity award for the first phase. The equity award for the first phase was issued in the first quarter of 2017 with 15,113 shares distributed and 6,670 shares withheld to satisfy income tax obligations. In the first, second and third quarters of 2017, we determined the achievement of 100% of the earnings target for the twelve months ended December 31, 2017 is probable, therefore, we recognized approximately $1.2 million and $3.7 million of stock-based compensation expense for these inducement equity awards during the three and nine months ended September 30, 2017, respectively. The $3.7 million of stock-based compensation expense recognized in the nine months ended September 30, 2017 represents 75% of the total performance-based inducement equity award for the second phase.

We also issued inducement stock option grants for an aggregate of approximately 62,000 shares of Stamps.com common stock to 48 new employees in connection with our acquisition of ShippingEasy. Each option vests 25% on the one year anniversary of the July 1, 2016 grant date with the remaining 75% vesting in approximately equal monthly increments over the immediately succeeding thirty-six months provided that the option holder is still employed by the Company on the vesting dates. The stock options have a ten year term and an exercise price equal to the closing price of Stamps.com common stock on the grant date of July 1, 2016. The stock options were granted as inducements material to the new employees entering into employment with Stamps.com in connection with the acquisition of ShippingEasy. The related stock-based compensation expense we recognized in fiscal 2016 and for the three and nine months ended September 30, 2017 was not material.

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(UNAUDITED)

The total net purchase price for the ShippingEasy acquisition was allocated to the assets acquired and the liabilities assumed based on their fair values. The following table is the final allocation of the purchase price (in thousands, except years):

	Fair Value			Fair Value		Useful Life (In Years)		Weighted Average Estimated Useful Life (In Years)
Trade accounts receivable	$	1,194
Other assets		76
Property and equipment		40
Goodwill		40,953
Identifiable intangible assets:
Trade name				$	1,304		8
Developed technology					6,948		5
Customer relationships					6,316		5
Non-compete agreements					1,111	3 to 5
Total identifiable intangible assets		15,679							5
Accrued expenses and other liabilities		(707	)
Deferred revenue		(185	)
Deferred tax liability		(1,603	)
Total purchase price		55,447
Less: settlement of preexisting relationship (accounts receivable)		1,194
Purchase price, net of settlement	$	54, 253

Goodwill represented the excess of the fair value of consideration given over the fair value of the tangible assets, identifiable intangible assets and liabilities assumed in the business combination and the potential acquisition related synergies. Such synergies include leveraging Stamps.com’s resources, personnel, expertise and capital to grow ShippingEasy’s revenue faster than it otherwise would have as a standalone company. The identified intangible assets consisted of trade names, developed technology, non-compete agreements and customer relationships. The estimated fair values of the trademark and developed technology were determined using the “relief from royalty” method. The estimated fair value of the non-compete agreements was determined using the “with and without” method. The estimated fair value of customer relationships was determined using the “excess earnings” method. The rate utilized to discount net cash flows to their present values was approximately 23% and was determined after consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows. Trademark, developed technology, non-compete and customer relationships are each amortized on a straight-line basis over their estimated useful lives. The amortization of acquired intangibles is approximately $761,000 per quarter for the remaining estimated useful lives. The goodwill recorded in this acquisition was not deductible for tax purposes.

3.	Commitments and Contingencies

Legal Proceedings

In the ordinary course of business, we are subject to various routine legal proceedings and claims incidental to our business, and we do not believe that these proceedings and claims would reasonably be expected to have a material adverse effect on our financial position, results of operations or cash flows.

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Commitments

The Company leases facilities pursuant to noncancelable operating lease agreements expiring through fiscal 2021. Rent expense is recognized on a straight-line basis over the lease term. Lease incentives are amortized over the lease term on a straight-line basis. Leasehold improvements are capitalized and amortized over the shorter of the useful life of the asset or the remaining term of the lease. Rent expense for the three and nine months ended September 30, 2017 was approximately $1.0 million and $2.8 million, respectively. Rent expense for the three and nine months ended September 30, 2016 was approximately $900,000 and $2.2 million, respectively.

The following table is a schedule of our significant future contractual obligations and commercial commitments (other than debt commitments), which consist of future minimum lease payment under operating leases as of September 30, 2017 (in thousands):

Twelve Month Period Ending September 30,	Operating Lease Obligations
2018	$	3,909
2019		1,625
2020		1,393
2021		1,097
2022		116
Thereafter		—
Total	$	8,140

4.	Net Income per Share

The following table reconciles share amounts utilized to calculate basic and diluted net income per share (in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Net income	$	46,225	$	18,672	$	110,403	$	46,201

Basic - weighted average common shares		17,073		17,218		16,969		17,319
Diluted effect of common stock equivalents		1,475		902		1,313		1,006
Diluted - weighted average common shares		18,548		18,120		18,282		18,325

Earnings per share:
Basic	$	2.71	$	1.08	$	6.51	$	2.67
Diluted	$	2.49	$	1.03	$	6.04	$	2.52

The calculation of dilutive shares excludes the effect of the following options that are considered anti-dilutive (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Anti-dilutive stock option shares		30		514		24		269

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5.	Stock-Based Compensation

We account for share-based employee compensation plans under the fair value recognition and measurement provisions in accordance with applicable accounting standards, which require all share-based payments to employees, including grants of stock options and restricted stock units (RSUs), to be measured based on the grant date fair value of the awards, with the resulting expense generally recognized on a straight-line basis over the period during which the employee is required to perform service in exchange for the award.

As described in Note 1 – “Summary of Significant Accounting Policies,” we adopted ASU 2016-09, which among other items, provides an accounting policy election to account for forfeitures as they occur, rather than to account for them based on an estimate of expected forfeitures. We elected to account for forfeitures as they occur and therefore, share-based compensation expense for the three and nine months ended September 30, 2017 has been calculated based on actual forfeitures in our consolidated statements of income, rather than our previous approach which was net of estimated forfeitures. The net cumulative effect of this change did not have a material impact on the consolidated financial statements. Share-based compensation expense for the year ended December 31, 2016 was recorded net of estimated forfeitures, which were based on historical forfeitures and adjusted to reflect changes in facts and circumstances, if any.

We use the Black-Scholes-Merton option valuation model to estimate the fair value of share-based payment awards on the date of grant, which requires us to use a number of complex estimates and subjective assumptions, including stock price volatility, expected term, risk-free interest rates and projected employee stock option exercise behaviors. In the case of options we grant, our assumption of expected volatility is based on the historical volatility of our stock price over the term equal to the expected life of the options. We base the risk-free interest rate on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the options assumed at the date of grant. The estimated expected life represents the weighted-average period the stock options are expected to remain outstanding, determined based on an analysis of historical exercise behavior.

Compensation expense for employee stock options granted is generally recognized using the straight-line method over their respective vesting periods of up to five years. Starting in the third quarter of fiscal 2016, our stock-based compensation expense included performance-based inducement equity awards relating to the ShippingEasy acquisition as described in Note 2 - “Acquisitions.” Stock-based compensation expense related to the ShippingEasy performance-based inducement equity awards is equal to the grant date fair value of the common stock and is recognized over the required performance period. Total compensation expense related to ShippingEasy’s performance-based equity awards during the three and nine months ended September 30, 2017 was approximately $1.2 million and $3.7 million, respectively.

The following table sets forth the stock-based compensation expense that we recognized for the periods indicated (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Stock-based compensation expense relating to:
Stock options	$	11,065	$	8,525	$	32,923	$	23,960
Employee stock purchases		269		297		746		795
Total stock-based compensation expense	$	11,334	$	8,822	$	33,669	$	24,755

Stock-based compensation expense relating to:
Cost of revenues	$	444	$	476	$	1,437	$	1,351
Sales and marketing		1,915		1,734		6,197		5,322
Research and development		2,337		1,916		7,054		4,696
General and administrative		6,638		4,696		18,981		13,386
Total stock-based compensation expense	$	11,334	$	8,822	$	33,669	$	24,755

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The following are the weighted average assumptions used in the Black-Scholes-Merton option valuation model for the periods indicated:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Expected dividend yield		—			—			—			—
Risk-free interest rate		1.5	%		1.0	%		1.5	%		1.0	%
Expected volatility		47.9	%		47.0	%		46.9	%		47.9	%
Expected life (in years)		3.3			3.4			3.4			3.4
Forfeiture rate		—			6.0	%		—			6.0	%

6.	Goodwill and Intangible Assets

Goodwill was approximately $239.7 million as of September 30, 2017 and December 31, 2016, respectively.

We have amortizable and non-amortizable intangible assets consisting of ~~patents,~~ trademarks, trade names, ~~lease-in-place intangible assets,~~ developed technology, non-compete agreements, ~~and~~ customer relationships and other totaling approximately $125.4 ~~million and $109.7~~ million in gross carrying amount as of both September 30, ~~2016~~2017 and December 31, ~~2015, respectively.~~2016. Non-amortizable assets of $11.4 million as of both September 30, 2017 and December 31, 2016 consist primarily of the trade name relating to the Endicia acquisition.

The following table summarizes our amortizable intangible assets as of September 30, 2017 (in thousands):

	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Patents and Others	$	8,889	$	8,809	$	80
Customer Relationships		60,816		19,677		41,139
Technology		40,048		9,998		30,050
Non-Compete		2,211		1,154		1,057
Trademark		2,004		720		1,284
Total amortizable intangible assets at September 30, 2017	$	113,968	$	40,358	$	73,610

The following table summarizes our amortizable intangible assets as of December 31, 2016 (in thousands):

	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Patents and Others	$	8,889	$	8,774	$	115
Customer Relationships		60,816		12,199		48,617
Technology		40,048		6,100		33,948
Non-Compete		2,211		777		1,434
Trademark		2,004		479		1,525
Total amortizable intangible assets at December 31, 2016	$	113,968	$	28,329	$	85,639

Gross
Carrying
Amount

Accumulated
Amortization

Net Carrying
Amount

Patents and Others $ 8,889 $ 8,763 $ 126
Customer Relationships 60,816 9,696 51,120
Technology 40,048 4,801 35,247
Non-Compete 2,211 652 1,559
Trademark 2,004 398 1,606
Total amortizable intangible assets at September 30, 2016 $ 113,968 $ 24,310 $ 89,658

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

We recorded amortization of intangible assets totaling approximately ~~$10.5~~$4.0 million and ~~$2.3~~$12.0 million for the three and nine months ended September 30, 2017, respectively. We recorded amortization of intangible assets totaling approximately $4.0 million and $10.5 million for the three and nine months ended September 30, 2016, ~~and 2015, respectively, which~~respectively. Amortization of intangible assets is included in general and administrative expense in ~~our~~the accompanying consolidated statements of ~~operations.~~income.

As of September 30, ~~2016,~~2017, the remaining weighted average amortization period for our amortizable intangible assets is approximately ~~5.8~~4.9 years. Our estimated amortization expense for the next five years and thereafter is as follows (in thousands):

Twelve Month Period Ending September 30,	Estimated Amortization Expense		Estimated Amortization Expense
2017	$	16,038
2018		15,964	$	15,954
2019		15,623		15,623
2020		15,545		15,545
2021		14,422		14,421
2022				5,498
Thereafter		12,066		6,569
Total	$	89,658	$	73,610

7.	Income Taxes

Our income tax benefit was $11.4 million and $873,000 for the three and nine months ended September 30, 2017, respectively, which is primarily attributable to our pre-tax book income multiplied by an estimated annual effective tax rate and discrete tax benefits relating to exercises of options in the three and nine months ended September 30, 2017. Our income tax expense was $12.1 million and ~~$30~~$30.0 million for the three and nine months ended September 30, 2016, ~~respectively. Our tax expense was~~respectively, which is primarily attributable to our pre-tax income ~~resulting in~~including our current tax expense consisting of federal alternative minimum tax and various state taxes and our deferred income tax expense for the utilization of net operating losses and other temporary differences. ~~We had~~As described in Note 1- “Summary of Significant Accounting Policies” we adopted the new accounting guidance that changes the reporting for certain aspects of share-based payments. One aspect of the guidance requires that the income tax ~~expense~~effects of ~~$5.8 million and~~share-based awards be recognized in the income tax ~~benefit~~provision in the consolidated statements of ~~$90,000 during~~income when the awards vest or are settled. Under the previous guidance, excess tax benefits and deficiencies were recognized in additional paid-in capital in the consolidated balance sheets when the awards vested or were settled. For the three and nine months ended September 30, ~~2015, respectively. Our~~2017, the amount of excess tax benefits recognized in the income tax ~~expense~~provision was approximately $23.5 million and ~~tax benefit during~~$41.8 million, respectively. For the three and nine months ended September 30, ~~2015,~~2016, respectively, ~~were primarily attributable to our pre-tax income and pre-tax losses during those periods including deferred income taxes.~~ the amount of excess tax benefits recognized in additional paid-in capital was not material.

Our effective income tax rate differs from the statutory ~~federal~~income tax rate primarily as a result of ~~several factors including non-temporary differences~~permanent tax adjustments for tax benefits from stock options exercised and ~~state~~research and ~~local income~~development tax credits, as well as permanent tax adjustments for nondeductible items, such as stock-based compensation and state taxes. We evaluated the appropriateness of our deferred tax assets and related valuation allowance in accordance with ~~ASC 740~~Income Taxes based on all available positive and negative evidence. As of September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, we do not have any valuation allowance against our deferred tax assets.

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~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

8.	Fair Value Measurements

Financial assets measured at fair value on a recurring basis are classified in one of the three following categories, which are described below:

Level 1 - Valuations based on unadjusted quoted prices for identical assets in an active market

Level 2 - Valuations based on quoted prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets

Level 3 - Valuations based on inputs that are unobservable and involve management judgment and our own assumptions about market participants and pricing

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STAMPS.COM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following ~~table summarizes~~tables summarize our financial assets measured at fair value on a recurring basis as of September 30, ~~2016~~2017 and December 31, ~~2015~~2016, respectively (in thousands):

			Fair Value Measurement at Reporting Date Using								Fair Value Measurement at Reporting Date Using
Description	September 30, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		September 30, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Cash equivalents	$	81,144	$	81,144	$	—	$	—
Cash and cash equivalents									$	183,538	$	183,538	$	—	$	—
Available-for-sale debt securities		3,029		—		3,029		—		—		—		—		��
Total	$	84,173	$	81,144	$	3,029	$	—	$	183,538	$	183,538	$	—	$	—

			Fair Value Measurement at Reporting Date Using
Description	December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Cash and cash equivalents	$	106,932	$	106,932	$	—	$	—
Available-for-sale debt securities		1,511		—		1,511		—
Total	$	108,443	$	106,932	$	1,511	$	—

Fair Value Measurement at Reporting Date Using

Description

December 31,
2015

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Cash equivalents $ 65,126 $ 65,126 $ — $ —
Available-for-sale debt securities 10,082 — 10,082 —
Total $ 75,208 $ 65,126 $ 10,082 $ —

The fair value of our available-for-sale debt securities included in the Level 2 category is based on the market values obtained from an independent pricing service that were evaluated using pricing models that vary by asset class and may incorporate available trade, bid and other market information and price quotes from well-established independent pricing vendors and broker-dealers.

As of December 31, 2015 we had $63.2 million of contingent consideration relating to our acquisition of ShipStation that was required to be measured at fair value using quoted prices in active markets (level 1) because the contingencies had been resolved as of that date. As of September 30, 2016, we had no contingent consideration.

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~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

~~The following table summarizes our contingent consideration measured at fair value on a recurring basis (in thousands):~~

Fair Value Measurement at Reporting Date Using

Description

December 31,
2015

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Contingent consideration – current $ 63,209 $ 63,209 $ — $ —

9.	Cash, Cash Equivalents and Investments

Our cash equivalents and investments consist of money market, ~~U.S. government obligations,~~ asset-backed securities and public corporate debt securities at September 30, ~~2016~~2017 and December 31, ~~2015.~~2016. We consider all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. All of our short-term investments are classified as available for sale and are recorded at ~~market~~fair value using the specific identification method. Realized gains and losses are reflected in other income, net using the specific identification method. There was no material unrealized or realized gain or loss with respect to our short-term investments during the ~~three and~~ nine months ended September 30, ~~2016.~~2017. Unrealized gains and losses are included as a separate component of stockholders' equity. We do not intend to sell investments with an amortized cost basis exceeding fair value and it is not likely that we will be required to sell the investments before recovery of their amortized cost bases. ~~We have 3 securities with a total fair value of $27,000 that have unrealized losses of approximately $2,000 as of September 30, 2016.~~

On at least a quarterly basis, we evaluate our available for sale securities, and record an “other-than-temporary impairment” (“OTTI”) if we believe their fair value is less than historical cost and it is probable that we will not collect all contractual cash flows. We did not record any OTTI during the three and nine months ended September 30, 2016, after evaluating a number of factors including, but not limited to:

~~How much fair value has declined below amortized cost~~

~~The financial condition of the issuers~~

~~Significant rating agency changes on the issuer~~

~~Our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value~~

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STAMPS.COM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following tables summarize our cash and cash equivalents and investments as of September 30, ~~2016~~2017 and December 31, ~~2015~~2016 (in thousands):

										September 30, 2017
										Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	September 30, 2016
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Cash and cash equivalents:
Cash	$	77,726		—		—		$	77,726	$	177,039		—		—		$	177,039
Money market		3,418		—		—			3,418		6,492		9		(2	)		6,499
Total cash and cash equivalents		81,144		—		—			81,144		183,531		9		(2	)		183,538
Short-term investments:
Corporate bonds and asset backed securities		3,014		18		(3	)		3,029		—		—		—			—
Total short-term investments		3,014		18		(3	)		3,029		—		—		—			—
Long-term investments:
Corporate bonds and asset backed securities		—		—		—			—
Total long-term investments		—		—		—			—
Cash, cash equivalents and investments	$	84,158		18		(3	)	$	84,173
Cash and cash equivalents and short-term investments										$	183,531		9		(2	)	$	183,538

	December 31, 2015									December 31, 2016
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Cash and cash equivalents:
Cash	$	63,593		—		—		$	63,593	$	101,987		—		—		$	101,987
Money market		1,533		—		—			1,533		4,945		—		—			4,945
Total cash and cash equivalents		65,126		—		—			65,126		106,932		—		—			106,932
Short-term investments:
Corporate bonds and asset backed securities		8,549		7		(3	)		8,553		1,500		13		(2	)		1,511
Total short-term investments		8,549		7		(3	)		8,553		1,500		13		(2	)		1,511
Long-term investments:
Corporate bonds and asset backed securities		1,515		17		(3	)		1,529
Total long-term investments		1,515		17		(3	)		1,529
Cash, cash equivalents and investments	$	75,190		24		(6	)	$	75,208
Cash and cash equivalents and short-term investments										$	108,432		13		(2	)	$	108,443

~~The following table summarizes contractual maturities~~As of September 30, 2017, the amortized cost and estimated fair value of our marketable fixed-income securities ~~as of September 30, 2016 (in thousands):~~

Amortized
Cost

Estimated
Fair Value

Due within one year $ 3,014 $ 3,029
Due after one year — —
Total $ 3,014 $ 3,029
due within one year and due after one year was immaterial.

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ITEM 2.

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

This Quarterly Report on Form 10-Q (this “Report”) contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements relate to expectations concerning matters that are not historical facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “seeks,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “could,” ”should,” “will,” “may” or other similar expressions in this Report. We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995 with respect to forward-looking statements. We caution investors that any forward-looking statements presented in this Report, or that we may make orally or in writing from time to time, are based on beliefs and assumptions made by, and information currently available to, us at the respective times they are made. Such statements are based on assumptions, and the actual outcome will be affected by known and unknown risks, trends and uncertainties and other factors that may be beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will inevitably prove to be incorrect. As a result, our actual future results may differ from our expectations, and those differences may be material. We are not undertaking any obligation to update any forward-looking ~~statements.~~statements after the date of this Report. Accordingly, investors should use caution in relying on forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.

Please refer to the risk factors under “Item 1A. Risk Factors” of our Form 10-K for the year ended December 31, ~~2015~~2016 as well as those described elsewhere in this Report and in our other public filings. The risks included are not exhaustive, and additional factors could adversely affect our business and financial performance. We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

Our ~~pending and~~ registered trademarks include Stamps.com, Endicia, ShipStation, ShipWorks, ShippingEasy, NetStamps, ~~Stamps.com Internet Postage,~~ PhotoStamps, PictureItPostage, ~~Photo NetStamps~~ and the Stamps.com logo. This Report also references trademarks of other entities. References in this Report to “we” “us” “our” or “Company” are references to Stamps.com Inc. and its subsidiaries.

Overview

Stamps.com® is a leading provider of Internet-based mailing and shipping ~~solutions.~~solutions in the United States. Under the Stamps.com and Endicia® ~~branded solutions, our~~brands, customers use our ~~service~~USPS only solutions to mail and ship a variety of mail pieces ~~including postcards, envelopes, flats~~ and packages ~~using a wide range of United States Postal Service (“USPS”) mail classes, including First Class Mail®, Priority Mail®, Priority Mail Express®, Media Mail®, Parcel Select®, and others.~~through the USPS. Customers using our ~~service~~solutions receive discounted postage rates compared to USPS.com and USPS retail locations on certain mail pieces such as First Class letters and domestic and international Priority ~~Mail~~Mail® and Priority Mail ~~Express~~Express® packages. Stamps.com was the first ever USPS-approved PC Postage vendor to offer a software only mailing and shipping solution in 1999. Endicia became a USPS-approved PC Postage vendor in 2000. Under the ShipStation®, ShipWorks® and ShippingEasy® brands, customers use our multi-carrier solutions to ship packages through multiple carriers such as the USPS, UPS, FedEx and others. Our customers include individuals, small businesses, home offices, medium-size businesses, large enterprises, e-commerce merchants and large enterprises. We were the first ever USPS-licensed vendor to offer mailing and shipping in a software-only business model in 1999. We also offer multi-carrier shipping solutions under the brand names ShipStation®, ShipWorks® and ShippingEasy^TM.warehouse shippers.

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Mailing and Shipping Business References

When we refer to our “mailing and shipping business,” we are referring to our mailing and shipping products and services including our USPS and multi-carrier mailing and shipping ~~services~~solutions, mailing and shipping integrations, ~~Mailing & Shipping Supplies Stores,~~mailing and shipping supplies stores and branded insurance ~~offerings and multi-carrier services.~~offerings. We do not include our customized postage business when we refer to our mailing and shipping business.

~~We have historically broken out our mailing and shipping business between Core mailing and shipping and Non-Core mailing and shipping.~~

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We previously referred to our "Core mailing and shipping business" as the portion of our mailing and shipping business targeting our small business, enterprise and high volume shipping customers acquired through our Core mailing and shipping marketing channels which include partnerships, online advertising, direct mail, direct sales, traditional media advertising and others.

We previously referred to our "Non-Core mailing and shipping business" as the portion of our mailing and shipping business that targeted a more consumer oriented customer through the online enhanced promotion marketing channel.

In light of our acquisitions, including the Endicia acquisition, we have concluded that the Non-Core mailing and shipping business is not material enough to break out separately in 2015 or subsequently, as it no longer provides investors with material additional insights into our business.

When we refer to our “mailing and shipping revenue,” we are referring to our service, product and insurance revenue generated by ~~all of~~ our mailing and shipping customers. We do not include our customized postage revenue generated by our customized postage business in our “mailing and shipping revenue.

Services and Products

Mailing and Shipping Business

We offer the following mailing and shipping products and services to our customers under the Stamps.com, Endicia, ShipStation, ShipWorks and ShippingEasy brands:

~~USPS Mailing and Shipping Services.~~ ~~After completing the registration process, customers can purchase and print postage 24 hours a day, seven days a week, through~~USPS Mailing and Shipping Solutions

Under the Stamps.com and Endicia brands, customers use our software or web interface. Typically, customers fund an account balance prior to using our service. The customer then draws down their prepaid account balance as they print postage and repurchase postage as necessary. Our USPS-approved mailing and shipping services enables users to print “electronic stamps” directly onto envelopes, plain paper, or labels using only a standard personal computer, printer and Internet connection. Our services currently support a variety of USPS mail classes. Customers can also add to their mail pieces USPS Special Services such as USPS Tracking^TM~~, Signature Confirmation~~^TM, Registered Mail, Certified Mail, Insured Mail, Return Receipt, Collect on Delivery and Restricted Delivery. Our customers can print postage (1) on NetStamps® labels or DYMO Stamps® labels, which can be used just like regular stamps, (2) directly on envelopes, postcards or on other types of mail or labels, in a single step process that saves time and provides a professional look, (3) on plain 8.5” x 11” paper or on special labels for packages, and (4) on integrated customs forms for international mail and packages.

~~For added convenience, our~~ mailing and shipping ~~services~~solutions to mail and ship a variety of mail pieces and packages through the USPS. Customers can purchase and print postage 24 hours a day, seven days a week, through our software or web interfaces. Typically, customers fund an account balance prior to using our service. The customers then draw down their prepaid account balance as they print postage and repurchase postage as necessary.

Our USPS mailing and shipping solutions enable users to print “electronic postage” directly onto envelopes, plain paper, or labels using only a standard personal computer, printer and Internet connection. Our solutions support a variety of USPS mail classes including First Class Mail®, Priority Mail, Priority Mail Express, Media Mail®, Parcel Select®, and others. Customers can also add to their mail pieces USPS Special Services such as USPS Tracking®, Signature Confirmation^TM, Registered Mail^TM, Certified Mail^TM, Insured Mail, Return Receipt, Collect on Delivery and Restricted Delivery. Our customers can print postage (1) on NetStamps® or DYMO Stamps® labels, which can be used just like regular stamps, (2) directly on envelopes and postcards or on labels in a single step process that saves time and provides a professional look, (3) on plain 8.5” x 11” paper or on special labels for packages, and (4) on integrated customs forms for international mail and packages.

Our mailing and shipping solutions incorporate address verification technology that verifies each destination address for mail or packages sent using our ~~service~~solutions against a database of all known addresses in the United States. Our mailing and shipping ~~services~~solutions are also integrated with common small business and productivity software applications such as word processing, contact and address management, and accounting and financial applications. ~~We also offer several different versions~~Our shipping solutions feature integrations with hundreds of ~~NetStamps labels, such as Themed NetStamps labels~~partners and ~~Photo NetStamps® labels, which allow customers to add stock or custom designs to their postage label.~~carriers including popular shipping management products, shopping carts, online marketplaces and other e-commerce solutions.

We target different customer categories with ~~multiple~~ service plans that provide various features and capabilities. We target smaller offices, home offices, and smaller online sellers that need a more basic set of mailing and shipping ~~features with the Stamps.com Pro, Endicia Standard, Endicia for Mac and Endicia Premium plans.~~features. We target larger ~~businesses~~enterprises that need a richer set of mailing capabilities ~~with our Stamps.com Premier plan which adds~~such as multiple-user functionality, automated Certified Mail forms, additional reference codes and higher allowable postage balances. We target ~~higher volume~~ shippers such as e-commerce merchants, online retailers, fulfillment houses, warehouses, and large retailers ~~and e-commerce merchants with the Stamps.com Professional Shipper, Endicia Professional and Endicia Platinum Shipper plans which add~~that need shipping specific features such as direct integration into athe customer’s order databases, faster label printing speed and the ability to customize and save shipping ~~profiles, and integrations with over 300 of the industry’s leading shipping management products, shopping carts, online marketplaces and other eCommerce solutions.~~

~~Table of Contents~~

profiles. We target large corporations with multiple geographic locations ~~with the Stamps.com Enterprise plan which features~~that need enhanced reporting ~~that allows~~and the ability for a central location, such as a corporate headquarters, to have greater visibility and control over postage expenditures across their distributed network of locations. We target large volume mailers ~~with Endicia Dazzle Express, Envelope Manager LE, and Move Update which have~~that need features designed for presort mail, Certified Mail, and bulk address updating.

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Customers typically pay us a monthly ~~service~~subscription fee ~~ranging from $9.95 to $34.99~~which varies depending on ~~the~~their service plan. ~~Under certain plans, customers pay a fee per transaction for shipping labels printed.~~ In certain circumstances, customers may be on a plan where they do not owe us any monthly service fees. Under certain plans or arrangements, customers or integration partners pay a fee per transaction for shipping labels printed. We have ~~an arrangement~~arrangements with the USPS under which if a customer or integration partner prints a certain amount of domestic or international First Class, Priority Mail or Priority Mail Express ~~postage,~~shipping labels, the USPS compensates us ~~directly and the customer can qualify to have their~~directly. We may waive or refund our service fees ~~waived~~for these or ~~refunded.~~other customers. In addition, we also have service plans with ~~service~~lower monthly subscription fees ~~less than $9.95~~ which offer more limited functionality and are targeted at retaining customers who print a lower volume of postage. We ~~also~~ offer ~~the Endicia DYMO Stamps plan~~service plans where customers are not charged a monthly fee but instead purchase labels for use as needed. We also offer ~~the Endicia Dazzle Express, Envelope Manager LE, and Move Update~~high volume mailing products for a one time upfront ~~fee~~fee. We also earn compensation by offering customers a discounted postage rate that is provided to the customers by our integration partners, and we may earn other types of ~~$295~~revenue share or other compensation from specific customers or partners.

Multi-Carrier Shipping Solutions

As a result of our acquisitions, we offer multi-carrier shipping solutions through our ShipStation, ShipWorks and ShippingEasy brands. ShipStation, ShipWorks and ShippingEasy offer leading multi-carrier solutions for shippers including e-commerce merchants, online retailers, warehouses, fulfillment houses, large retailers and other types of shippers that use multiple carriers such as the USPS, UPS, FedEx and others.

ShippingEasy, which we acquired on July 1, 2016, offers web-based multi-carrier shipping solutions that allow online retailers and e-commerce merchants to ~~$895.~~organize, process, fulfill and ship their orders quickly and easily. ShippingEasy's solutions feature over 50 integrations with partners and carriers, including marketplaces, shopping carts and e-commerce platforms, allowing its customers to import and export fulfillment and tracking data in real time across all of their selling channels. ShippingEasy's solutions download orders from all selling channels and automatically map custom shipping preferences, rates and delivery options across all of its supported carriers. ShippingEasy's easy-to-use solutions also include complimentary access to ShippingEasy customer service shipping specialists helping merchants to streamline workflow and save on shipping costs.

ShipWorks, which we acquired on August 29, 2014, offers software-based multi-carrier shipping solutions that target e-commerce merchants, online retailers, fulfillment houses and warehouses. ShipWorks offers simple, powerful and easy to use solutions for shippers. ShipWorks’ solutions feature over 100 integrations with partners and carriers, including marketplaces, shopping carts and e-commerce platforms. ShipWorks offers multi-carrier shipping options and features including importing orders from any marketplace or shopping cart, easily comparing shipping rates and services, sending email notifications to buyers, updating online order status, generating reports and many more.

ShipStation, which we acquired on June 10, 2014, offers web-based multi-carrier shipping solutions under the brand names ShipStation and Auctane that target e-commerce merchants, online retailers, fulfillment houses and warehouses. ShipStation’s solutions feature over 150 integrations with partners and carriers, including marketplaces, shopping carts and e-commerce platforms. ShipStation offers multi-carrier shipping options and automation features like custom hierarchical rules and product profiles that allow customers to easily and automatically optimize their shipping. Using ShipStation, an online retailer or e-commerce merchant can ship their orders from wherever they sell and however they ship.

Mailing and Shipping Integrations

As part of our mailing and shipping services, we offer back-end integration solutions where we provide the electronic postage for transactions to partners who manage the front-end users. Our solutions integrate directly into the most popular e-commerce platforms, allowing web store managers to completely automate their order fulfillment process by processing, managing, and shipping orders from virtually any e-commerce source through a single interface without manual data entry. Managers can retrieve order data and print complete shipping labels for all types of packages.

~~Multi-Carrier Shipping Services~~

21. We offer multi-carrier shipping solutions through our ShipStation, ShipWorks and ShippingEasy brands as a result of our acquisitions. The ShipStation, ShipWorks and ShippingEasy platforms offer leading solutions for medium and high volume shippers such as warehouses, fulfillment houses, e-commerce shippers, large retailers, and other types of high volume shippers that may need more than just the USPS for their business.

~~Mailing and Shipping Integrations.~~ As part of our mailing and shipping services, we offer back-end integration solutions where we provide the electronic postage for transactions to partners who manage the front-end users. Our solutions integrate directly into the most popular e-commerce platforms, allowing web store managers to completely automate their order fulfillment process by processing, managing, and shipping orders from virtually any e-commerce source through a single interface without manual data entry. Managers can retrieve order data and print complete shipping labels for all types of USPS packages.Table of Contents

~~We have~~Stamps.com had an integration partnership with Amazon.com that ~~makes our~~made Stamps.com domestic and international shipping labels for certain USPS package classes available to Amazon.com Marketplace ~~users.~~users, which ended in the third quarter of 2017. The ~~service allows customers~~integration had allowed Marketplace users to automatically pay for postage using their Marketplace Payments account, to set a default ship-from address so they dowould not have to type or write it for each shipment, and to automatically populate the ship-to address on the label. Domestic and international mail classes ~~are~~were supported and Marketplace users ~~may~~could request carrier pickup from the USPS. A transaction fee per shipping label printed iswas charged to ~~merchants~~Marketplace users who ~~are~~were not Stamps.com subscription customers. ~~In October 2012, Amazon.com launched their own internally developed Marketplace USPS shipping solution system utilizing~~We do not believe the ~~USPS’s ePostage branded solution that resulted in a reduction in postage printed through~~termination of Stamps.com’s integration partnership with Amazon will have any material effect on our solution. Amazon's shipping solution is utilized by merchants for certain mail classes while our shipping solution is utilized by merchants for the other mail classes. In addition, we continue to provide the integrated Amazon.com Marketplace solution to Stamps.com subscription customers.results.

We have an integration partnership with the USPS where we provide electronic postage for shipping transactions generated by Click-N-Ship Business Pro^TM and Click-N-Ship®, a web-based service available at USPS.com that allows USPS customers to purchase and print shipping labels for domestic and international Priority Mail and Priority Mail Express packages at no additional mark-up over the cost of postage.

Endicia had an integration partnership with Etsy.com where Endicia provided electronic postage for shipping transactions generated by their users. Etsy informed us that they would be switching their postage solution from Endicia to the USPS’s ePostage branded solution in February 2016, and as a result Endicia experienced a loss of postage volume and revenue from this partnership as compared to the same periods of 2015.

In addition, ShipStation, ShipWorks and ~~ShipWorks~~ShippingEasy have hundreds of integrations with partners and carriers, including marketplaces, shopping carts and ~~online marketplaces~~e-commerce platforms as part of their multi-carrier shipping solutions. Integrations with partners include Amazon, eBay, PayPal, Shopify, Bigcommerce, Magento, Volusion, ChannelAdvisor, Yahoo! Stores and many others. Carrier integrations include USPS, FedEx, UPS, DHL, Canada Post, UPS Canada, FedEx Canada and many others.

~~Mailing & Shipping Supplies Stores.~~ ~~Stamps.com and Endicia~~ Mailing & Shipping Supplies Stores (our “Supplies Stores”) are available to our customers from within our mailing and shipping solutions and sell NetStamps labels, DYMO Stamp labels, shipping labels, other mailing labels, dedicated postage printers, scales, and other mailing and shipping-focused office supplies. Our Supplies Stores feature store catalogs, messaging regarding free or discounted shipping promotions, cross-selling product recommendations during the checkout process, product search capabilities, and same-day shipping of orders with expedited shipping options.

26Stamps.com and Endicia’s mailing & shipping supplies stores (our “Supplies Stores”) are available to our customers from within our mailing and shipping solutions and sell NetStamps labels, DYMO Stamp labels, shipping labels, other mailing labels, dedicated postage printers, scales, and other mailing and shipping-focused office supplies. Our Supplies Stores feature store catalogs, messaging regarding free or discounted shipping promotions, cross-selling product recommendations during the checkout process, product search capabilities and same-day shipping of orders with expedited shipping options. Our multi-carrier solutions do not have mailing and shipping supplies stores as part of their solutions.

Branded Insurance

~~Table~~

We offer branded insurance for USPS packages to our customers so that they may insure their mail or packages in a fully integrated, online process that eliminates any trips to the post office or the need to complete any special forms. Our branded insurance is offered by all our brands including Stamps.com, Endicia, ShipStation, ShipWorks and ShippingEasy as part of ~~Contents~~

their USPS and multi-carrier solutions. Our branded insurance is provided by our insurance providers.

~~Branded Insurance~~. We offer Stamps.com branded insurance to our customers so that they may insure their mail or packages in a fully integrated, online process that eliminates any trips to the post office or the need to complete any special forms. Our branded insurance is provided in partnership with Parcel Insurance Plan and is underwritten by Fireman's Fund. In addition, ShipStation, ShipWorks, ShippingEasy and Endicia also offer branded package insurance as part of their offerings.

International

·	~~International.~~ ~~We offer International postage solutions through our subsidiaries to certain international posts including the French Post and Canadian Post.~~

We offer International postage solutions through our subsidiaries to certain international posts including the French Post and Canadian Post.

Customized Postage

We offer customized postage under the ~~PhotoStamps~~®PhotoStamps® and ~~PictureItPostage~~®PictureItPostage® brand names. Customized postage is a patented form of postage that allows consumers to turn digital photos, designs or images into valid USPS-approved postage. With these products, individuals or businesses can create customized ~~USPS approved~~USPS-approved postage using pictures of their children, pets, vacations, celebrations, business logos and more. Customized postage can be used as regular postage to send letters, postcards or packages. PhotoStamps and PictureItPostage are available from our separately marketed websites at www.photostamps.com and www.pictureitpostage.com,, respectively. Customers upload a digital photograph or image file, customize the look and feel by choosing a border color to complement the photo, select the value of postage, and place the order online. Each sheet includes 10 or 20 individual PhotoStamps or PictureItPostage stamps, and orders arrive via U.S. Mail in a few business days. Customized postage is also available in roll labels for high-volume orders.

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Acquisitions

ShippingEasy

On June 16, 2016, we entered into a definitive agreement to acquire ShippingEasy for approximately $55.0 million. ShippingEasy, an Austin, Texas based company, offers web-based multi-carrier shipping software that allows online retailers and e-commerce merchants to organize, process, fulfill and ship their orders quickly and easily. ShippingEasy's solution features integrations with more than 40 leading marketplaces, shopping carts, and e-commerce platforms, allowing its customers to import and export fulfillment and tracking data in real time across all of their selling channels. ShippingEasy currently has integrations with eBay, PayPal, Amazon, Shopify, BigCommerce, Magento, Volusion, Jane.com and many others. ShippingEasy's solution downloads orders from all selling channels and automatically maps custom shipping preferences, rates and delivery options across all of its supported carriers. ShippingEasy's easy-to-use solution also includes complimentary access to shipping specialists, helping merchants to streamline workflow and save on shipping costs.

solutions. On July 1, 2016, we completed our acquisition of ~~ShippingEasy for approximately $55 million.~~ShippingEasy. The purchase price was subject to adjustments for changes in ShippingEasy’s net working capital. The net purchase price including adjustments for net working capital totaled approximately $55.4 million and was funded from current cash and investment balances.

In connection with the acquisition, we issued ~~performance based~~performance-based inducement equity awards to ~~Katie May, who would serve as~~the General Manager ~~of ShippingEasy,~~ and ~~Barry Cox, who would serve as~~ Chief Technology Officer of ShippingEasy. These inducement awards cover an aggregate of up to 43,567 common shares each to ~~Ms. May~~the General Manager and ~~Mr. Cox~~Chief Technology Officer if earnings targets for ShippingEasy are achieved over a two and one-half year period ~~beginning~~which began July 1, 2016. The awards are subject to proration if at least 75% of the applicable target is achieved and are subject to forfeiture or acceleration based on changes in employment circumstances over the performance period. The awards ~~are~~were a material inducement to ~~Ms. May~~the General Manager and ~~Mr. Cox~~Chief Technology Officer entering into employment agreements with Stamps.com in connection with the acquisition.

In fiscal 2016, we determined the achievement of 100% of the earnings target for the six months ended December 31, 2016 was probable, therefore, we recognized approximately $1.9 million of stock-based compensation expense, representing 21,783 shares, for these inducement equity awards during the six months ended December 31, 2016. The $1.9 million of stock-based compensation expense recognized represents 100% of the total performance-based inducement equity award for the first phase. The equity award for the first phase was issued in the first quarter of 2017 with 15,113 shares distributed and 6,670 shares withheld to satisfy income tax obligations. In the first, second and third quarters of 2017, we determined the achievement of 100% of the earnings target for the twelve months ended December 31, 2017 is probable, therefore, we recognized approximately $1.2 million and $3.7 million of stock-based compensation expense for these inducement equity awards during the three and nine months ended September 30, 2017, respectively. The $3.7 million of stock-based compensation expense recognized in the nine months ended September 30, 2017 represents 75% of the total performance-based inducement equity award for the second phase.

We also issued inducement stock option grants for an aggregate of 62,000 shares of Stamps.com common stock to 48 new employees in connection with our acquisition of ShippingEasy. Each option vests 25% on the one year anniversary of the July 1, 2016 grant date with the remaining 75% vesting in approximately equal monthly increments over the immediately succeeding thirty-nine months provided that the option holder is still employed by the Company on the vesting dates. The stock options have a ten year term and an exercise price equal to the closing price of Stamps.com common stock on the grant date of July 1, 2016. The stock options were granted as inducements material to the new employees entering into employment with Stamps.com. ~~See~~ ~~Note 2 – “Acquisitions”~~ ~~in our Notes to Consolidated Financial Statements for further description.~~

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~~Endicia~~

On March 22, 2015 we entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with PSI Systems, Inc., a California corporation d/b/a Endicia (“Endicia”), and Newell Rubbermaid Inc., a Delaware corporation (“Newell”). Endicia, based in Palo Alto, California, is a leading provider of high volume shipping technologies and solutions for shipping with the USPS. The Stock Purchase Agreement provided for our purchase of all of the issued and outstanding shares of common stock of Endicia from a wholly owned indirect subsidiary of Newell for an aggregate purchase price of approximately $215 million in cash (the “Transaction”). The purchase price was subject to adjustment for changes in Endicia’s net working capital as of the date of the closing of the Transaction and certain transaction expenses and closing cash adjustments. After receiving regulatory clearance, we closed the Transaction on November 18, 2015.

As part of the funding for our acquisition of Endicia, we entered into a credit agreement with a group of banks on November 18, 2015, which provides for a term loan of $82.5 million and a revolving credit facility with a maximum borrowing of $82.5 million (collectively, the “Credit Agreement”). The Credit Agreement is secured by substantially all our assets. We funded our acquisition with cash of $56.5 million and debt from our Credit Agreement of $164.5 million, totaling $221.0 million. The $221.0 million consists of the following: 1) purchase price of $214.2 million, 2) $1.5 million of debt issuance costs and 3) the transfer of Endicia’s ending cash balance on November 17, 2015 of $5.3 million. Total debt issuance costs of $1.8 million, which includes $300 thousand of costs incurred prior to closing, were recorded as debt discount and are being accreted as interest expense over the life of the Credit Agreement. Our Credit Agreement matures on November 18, 2020. During the first quarter of 2016, we adjusted the purchase price of Endicia and related goodwill by approximately $945,000.

Please see Note 2 – “Acquisitions” in our Notes to Consolidated Financial Statements for further description.

Results of Operations

The results of our operations during the three and nine months ended September 30, ~~2016~~2017 include the operations of ~~Endicia, ShipStation and ShipWorks. The results of our operations also include ShippingEasy’s operation beginning on the July 1, 2016 acquisition date.~~ShippingEasy. The results of our operations during the three ~~and nine~~ months ended September 30, ~~2015~~2016 include the operations of ShippingEasy. The results of our operations during the six months ended June 30, 2016 do not include the operations of ~~Endicia or~~ ShippingEasy. Please see Note 2 – “Acquisitions” in our Notes to Consolidated Financial Statements for further description. Accordingly, care should be used in comparing periods that include the operations of ~~Endicia and~~ ShippingEasy with those that do not include such operations.

Three and Nine Months Ended September 30, ~~2016~~2017 and ~~2015~~2016

Total revenue increased ~~79%~~24% to $115.1 million in the three months ended September 30, 2017 from $92.6 million in the three months ended September 30, ~~2016 from $51.7~~2016. Total revenue increased 30% to $336.2 million in the ~~three~~nine months ended September 30, ~~2015. Total revenue increased 79% to~~2017 from $258.4 million in the nine months ended September 30, ~~2016 from $144.1 million in the nine months ended September 30, 2015.~~2016. Mailing and shipping revenue, which includes service revenue, product revenue and insurance revenue, was $106.5 million in the three months ended September 30, 2017, an increase of 21% from $87.6 million in the three months ended September 30, 2016 ~~an increase of 78% from $49.2~~and was $320.9 million in the ~~three~~nine months ended September 30, ~~2015 and was~~2017, an increase of 29% from $248.3 million in the nine months ended September 30, ~~2016, an increase of 78% from $139.5~~2016. Customized Postage revenue increased 75% to $8.6 million in the ~~nine~~three months ended September 30, ~~2015. Customized postage revenue increased 98% to~~2017 from $4.9 million in the three months ended September 30, 2016 ~~from $2.5~~and was $15.3 million in the ~~three~~nine months ended September 30, ~~2015 and was~~2017, an increase of 53% from $10.0 million in the nine months ended September 30, ~~2016, an increase of 120% from $4.5 million in the nine months ended September 30, 2015.~~2016.

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The following table sets forth the breakdown of revenue for the three and nine months ended September 30, ~~2016~~2017 and ~~2015~~2016 and the resulting percentage change (revenue in thousands):

	Three months ended September 30,							Nine months ended September 30,
	2017		2016		% Change			2017		2016		% Change
Revenues
Service	$	97,529	$	78,871		23.7	%	$	292,634	$	220,567		32.7	%
Product		4,824		4,703		2.6	%		15,301		15,109		1.3	%
Insurance		4,099		4,050		1.2	%		12,932		12,643		2.3	%
Mailing and shipping revenue	$	106,452	$	87,624		21.5	%	$	320,867	$	248,319		29.2	%
Customized postage	$	8,588	$	4,912		74.8	%	$	15,306	$	10,016		52.8	%
Other		22		23		(4.3	)%		69		74		(6.8	)%
Total revenues	$	115,062	$	92,559		24.3	%	$	336,242	$	258,409		30.1	%

Three months ended
September 30,

Nine months ended
September 30,

2016 2015 % Change 2016 2015 % Change
Revenues
Service $ 78,871 $ 42,470 86 % $ 220,567 $ 118,497 86 %
Product 4,703 4,193 12 % 15,109 13,206 14 %
Insurance 4,050 2,513 61 % 12,643 7,806 62 %
Mailing and shipping revenue 87,624 49,176 78 % 248,319 139,509 78 %
Customized postage 4,912 2,484 98 % 10,016 4,545 120 %
Other 23 9 156 % 74 27 174 %
Total revenues $ 92,559 $ 51,669 79 % $ 258,409 $ 144,081 79 %

We define “paid customers” for the quarter as ones from whom we successfully collected service fees or otherwise earned revenue at least once during that quarter, and we define average revenue per paid customer as mailing and shipping revenue divided by paid customers. We define lost paid customers ~~for~~(Lost Paid Customers) as customers from whom we successfully collected service fees or otherwise earned revenue at least once during the ~~year~~previous quarter but not during the current quarter, less recaptured paid customers. We define monthly paid customer cancellation rate as a fraction, the ~~average~~numerator of which is the quotient of Lost Paid Customers in a quarter divided by the sum of paid customers in the prior quarter and new paid customers in the current quarter, and the denominator of which is 3 months.

The following table sets forth the number of paid customers in the period for ~~each of the four quarters during the year.~~our mailing and shipping business (in thousands):

Year	First Quarter		Second Quarter		Third Quarter

2017		722		738		736
2016		649		646		648

The following table sets forth the growth in paid customers and average ~~quarterly~~monthly revenue per paid customer for our mailing and shipping business (in thousands except average quarterly revenue per paid customer and percentage):

	Three months ended September 30,
	2017		2016		% Change
Paid customers for the quarter		736		648		13.6	%
Average monthly revenue per paid customer	$	48.23	$	45.05		7.1	%
Mailing and shipping revenue	$	106,452	$	87,624		21.5	%

Three months ended September 30,
2016 2015 % Change
Paid customers for the quarter 648 569 14 %
Average quarterly revenue per paid customer $ 45.05 $ 28.81 56 %
Mailing and shipping revenue $ 87,624 $ 49,176 78 %

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The increase in paid customers is primarily the result of ~~(1) our~~ increased ~~spending in our mailing and shipping~~ sales and marketing ~~channels, (2) a reduction~~spend and better performance in our ~~paid customer churn rates and (3) the addition of paid customers from Endicia and ShippingEasy as a result of our acquisitions in the fourth quarter of 2015 and third quarter of 2016, respectively.~~marketing programs.

The increase in our average quarterly revenue per paid customer ~~(“ARPU”)~~ was primarily the result of (1) the addition of paid customers from our acquisition of Endicia and ShippingEasy where the ARPU for those paid customers is higher as compared to the ARPU from the existing Stamps.com customers, and (2) the growth in our ~~high volume~~ shipping business where we have the ability to better monetize postage volume as compared to monthly flat rate subscription fees.

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Revenue by Product

The following table shows our components of revenue and their respective percentages of total revenue for the periods indicated (in thousands except percentage):

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Revenues
Service	$	78,871		$	42,470		$	220,567		$	118,497		$	97,529		$	78,871		$	292,634		$	220,567
Product		4,703			4,193			15,109			13,206			4,824			4,703			15,301			15,109
Insurance		4,050			2,513			12,643			7,806			4,099			4,050			12,932			12,643
Customized postage		4,912			2,484			10,016			4,545			8,588			4,912			15,306			10,016
Other		23			9			74			27			22			23			69			74
Total revenues	$	92,559		$	51,669		$	258,409		$	144,081		$	115,062		$	92,559		$	336,242		$	258,409
Revenue as a percentage of total revenues
Service		85.2	%		82.2	%		85.4	%		82.2	%		84.8	%		85.2	%		87.0	%		85.4	%
Product		5.1	%		8.1	%		5.8	%		9.2	%		4.2	%		5.1	%		4.6	%		5.8	%
Insurance		4.4	%		4.9	%		4.9	%		5.4	%		3.5	%		4.4	%		3.8	%		4.9	%
Customized postage		5.3	%		4.8	%		3.9	%		3.2	%		7.5	%		5.3	%		4.6	%		3.9	%
Other		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%
Total revenue		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Our revenue is derived primarily from five sources: (1) service and transaction related revenues from our USPS mailing and shipping services, our multi-carrier shipping services and our mailing and shipping integrations; (2) product revenue from the direct sale of consumables and supplies through our Supplies Stores; (3) package insurance revenue from our branded insurance offerings; (4) customized postage revenue from the sale of PhotoStamps and PictureItPostage postage labels; and (5) other revenue, consisting of advertising revenue derived from advertising programs with our existing customers.

~~For~~We earn service ~~revenue, we earn~~ revenue in several different ways: (1) customers may pay us a monthly fee based on a subscription ~~plan; (2) customers~~plan which may ~~qualify under our USPS partnership to have their service fees~~be waived or refunded ~~and then~~for certain customers; (2) we ~~are~~may be compensated directly by the ~~USPS;~~USPS for certain qualifying customers under our USPS partnership; (3) we may earn transaction related revenue based on customers ~~may pay us a fee per~~purchasing postage or printing shipping ~~label printed;~~labels; (4) we may earn compensation by offering customers a discounted postage rate that is provided to the customers by our integration partners; and (5) we may earn other types of revenue shares or other compensation from specific customers or integration partners.

Service revenue increased ~~86%~~24% to $97.5 million in the three months ended September 30, 2017 from $78.9 million in the three months ended September 30, 2016 ~~from $42.5~~and increased 33% to $292.6 million in the ~~three~~nine months ended September 30, ~~2015 and increased 86% to~~2017 from $220.6 million in the nine months ended September 30, ~~2016 from $118.5 million in the nine months ended September 30, 2015.~~2016. The ~~86%~~ increase in service revenue during the ~~quarter~~three months ended September 30, 2017 consisted of a 14% increase in the number of our ~~quarterly~~ average paid customers and ~~63%~~a 9% increase in our average service revenue per paid customer.

The increase in the number of our paid customers ~~is primarily~~was attributable to the result of (1) our increased spending in our mailing and shipping sales and marketing channels, (2) a reduction in our paid customer churn rates and (3) the addition of paid customers from Endicia and ShippingEasy as a result of our acquisitionsfactors described in the ~~fourth quarter of 2015 and third quarter of 2016, respectively.~~

previous section. The increase in our average service revenue per paid customer was ~~primarily~~attributable to (1) the ~~result of (1) our acquisition of Endicia and ShippingEasy, where~~factors that resulted in an increase in the average ~~service~~total mailing and shipping revenue per paid customer ~~are higher as compared to~~described in the ~~average service revenue per paid customer for existing Stamps.com customers~~previous section and (2) the ~~growth in~~renewal of two of our high volume shipping business where our average service revenue per paid customer reflects our ability to better monetize postage volume for shippers as compared to monthly flat rate subscription fees for traditional small business customers.agreements with the USPS with improved economics.

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Product revenue increased ~~12%~~3% to $4.8 million in the three months ended September 30, 2017 from $4.7 million in the three months ended September 30, 2016 ~~from $4.2~~and increased 1% to $15.3 million in ~~three~~the nine months ended September 30, ~~2015 and increased 14% to~~2017 from $15.1 million in the nine months ended September 30, ~~2016 from $13.2 million in the nine months ended September 30, 2015.~~ ~~The increase~~2016. Product revenue is primarily ~~attributable to an increase~~driven by labels, such as NetStamps and DYMO Stamps, which are used for mailing. As our growth in ~~(1)~~postage has been driven more by shipping than mailing over the ~~addition of~~recent years, our year-to-date growth in product revenue ~~from~~has been lower than our Endicia acquisition, and (2) sales of mailing and shipping labels and supplies as we continue to grow our customer base. Postage printed typically helps drive sales of consumable supplies such as labels. ~~Total postage printed by customers using our mailing and shipping solutions~~growth in the third quarter of 2016 was approximately $1.2 billion, a 113% increase from the $547 million printed during the third quarter of 2015. Postage printed by customers was approximately $3.6 billion and $1.7 billion during the nine months ended September 30, 2016 and 2015, respectively, an increase of 116%.total revenue.

Insurance revenue ~~increased 61% to~~was $4.1 million in the three months ended September 30, ~~2016 from $2.5 million in~~2017, which was consistent with the three months ended September 30, ~~2015 and~~2016. Insurance revenue increased ~~62%~~2% to $12.9 million in the nine months ended September 30, 2017 from $12.6 million in the nine months ended September 30, ~~2016 from $7.8~~2016. The growth in insurance revenue is less than the growth in service revenue primarily due to the increase in high volume shipper customers. High volume shipper customers often self-insure, so while the high volume shipping business results in higher service fee revenue, it may not result in higher insurance revenue.

Customized postage revenue increased 75% to $8.6 million in ~~nine~~the three months ended September 30, ~~2015. The increase in insurance revenue was primarily attributable to our acquisitions whose solutions target shipping customers who are more likely than mailing customers to purchase insurance.~~

~~Customized postage revenue increased 98% to~~2017 from $4.9 million in the three months ended September 30, 2016 ~~from $2.5~~and increased 53% to $15.3 million in the ~~three~~nine months ended September 30, ~~2015 and increased 120% to~~2017 from $10.0 million in the nine months ended September 30, ~~2016 from $4.5 million in the nine months ended September 30, 2015.~~2016. The increase was primarily attributable to ~~(1) an increase~~increases in ~~PhotoStamps~~ high volume ~~business orders~~customer orders. High volume order sales are unpredictable and ~~(2) the addition of PictureItPostage as a result of our Endicia acquisition. The increase in customized postage revenue was partially offset by a decrease in PhotoStamps revenue~~vary from ~~orders placed through the PhotoStamps website. The decrease in revenue from website orders is primarily attributable~~quarter to ~~a reduction in our PhotoStamps sales and marketing spending.~~quarter.

Cost of Revenue

The following table shows cost of revenues and cost of revenues as a percentage of associated ~~revenues~~revenue for the periods indicated (in thousands except percentage):

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Cost of revenues
Service	$	9,903		$	6,809		$	28,054		$	19,775		$	11,882		$	9,903		$	37,284		$	28,054
Product		1,579			1,364			5,019			4,400			1,535			1,579			4,930			5,019
Insurance		1,291			896			3,920			2,746			966			1,291			3,547			3,920
Customized postage		3,954			2,120			8,076			3,831			7,151			3,954			12,600			8,076
Total cost of revenues	$	16,727		$	11,189		$	45,069		$	30,752		$	21,534		$	16,727		$	58,361		$	45,069
Cost as percentage of associated revenues
Cost as percentage of associated revenue
Service		12.6	%		16.0	%		12.7	%		16.7	%		12.2	%		12.6	%		12.7	%		12.7	%
Product		33.6	%		32.5	%		33.2	%		33.3	%		31.8	%		33.6	%		32.2	%		33.2	%
Insurance		31.9	%		35.7	%		31.0	%		35.2	%		23.6	%		31.9	%		27.4	%		31.0	%
Customized postage		80.5	%		85.3	%		80.6	%		84.3	%		83.3	%		80.5	%		82.3	%		80.6	%
Total cost as a percentage of total revenues		18.1	%		21.7	%		17.4	%		21.3	%		18.7	%		18.1	%		17.4	%		17.4	%

Cost of service revenue principally consists of the cost of customer service, certain promotional expenses, system operating costs, credit card processing fees and customer misprints that do not qualify for reimbursement from the USPS. Cost of product revenue principally consists of the cost of products sold through our Supplies Stores and the related costs of shipping and handling. The cost of insurance revenue principally consists of parcel insurance offering costs through our third party insurance ~~partners.~~providers. Cost of customized postage revenue principally consists of the face value of postage, customer service, image review costs, and printing and fulfillment costs.

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Cost of service revenue increased ~~45%~~20% to $11.9 million in the three months ended September 30, 2017 from $9.9 million in the three months ended September 30, 2016 ~~from $6.8~~and increased 33% to $37.3 million in the ~~three~~nine months ended September 30, ~~2015 and increased 42% to~~2017 from $28.1 million in the nine months ended September 30, ~~2016 from $19.8~~2016. The increase during the three months ended September 30, 2017 was primarily attributable to higher credit card processing fees, which increased by $2.0 million, directly related to our higher revenue. The increase during the nine months ended September 30, 2017 was primarily attributable to (1) higher credit card processing fees, which increased by $5.8 million, directly related to our higher revenue; (2) higher customer service costs, which increased by $1.9 million, to support our growing customer base; and (3) higher system operating costs, which increased by $1.4 million, to support our growing business. Promotional expenses were not material in the three or nine months ended September 30, 2017 and 2016.

Cost of service revenue as a percent of service revenue was 12% in the three months ended September 30, 2017 and 13% in the three months ended September 30, 2016. Cost of service revenue as a percent of service revenue was 13% in the nine months ended September 30, ~~2015. The increase~~2017, which was ~~primarily attributable to higher customer service costs to support our growing customer base~~consistent with the nine months ended September 30, 2016.

Cost of product revenue in the three and ~~higher credit card processing fees associated~~nine months ended September 30, 2017 was consistent with ~~our higher revenue offset by~~ the ~~decrease in our promotional expense. Promotional expenses, which represents a material portion of total~~ cost of ~~service~~product revenue ~~is expensed~~ in ~~the period in which~~three and nine months ended September 30, 2016, respectively. Cost of product revenue as a ~~customer qualifies for the promotion while the~~percent of product revenue associated with the acquired customer is earned over the customer's lifetime. As a result, promotional expense for newly acquired customers may exceed the revenue earned from those customers in that period. Promotional expense decreased 28% to $583,000was 32% in the three months ended September 30, ~~2016 from $814,000~~2017 and 34% in the three months ended September 30, ~~2015 and decreased 34% to $1.8 million~~2016. Cost of product revenue as a percent of product revenue was 32% in the nine months ended September 30, ~~2016 from $2.8 million~~2017 and 33% in the nine months ended September 30, ~~2015.~~2016.

Cost of ~~product~~insurance revenue ~~increased 16%~~decreased 25% to ~~$1.6~~$1.0 million in the three months ended September 30, ~~2016~~2017 from $1.4 million in the three months ended September 30, 2015 and increased 14% to $5.0 million in the nine months ended September 30, 2016 from $4.4 million in the nine months ended September 30, 2015. The increase in cost of product revenue was primarily attributable to the increase in product revenue over the same time period. The increase in cost of product revenue was in-line with the increase in product revenue over the same time period.

~~Cost of insurance revenue increased 44% to~~ $1.3 million in the three months ended September 30, 2016 ~~from $896 thousand~~and decreased 10% to $3.5 million in the ~~three~~nine months ended September 30, ~~2015 and increased 43% to~~2017 from $3.9 million in the nine months ended September 30, ~~2016 from $2.7 million~~2016. The decrease was primarily attributable to lower cost as a result of a renegotiated contract.

Cost of insurance revenue as a percent of insurance revenue was 24% in the three months ended September 30, 2017 and 32% in the three months ended September 30, 2016. Cost of insurance revenue as a percent of insurance revenue was 27% in the nine months ended September 30, ~~2015.~~2017 and 31% in the nine months ended September 30, 2016. The ~~increase in cost~~decrease is the combination of decreased costs of insurance revenue ~~resulted from growth in the number of~~and increased insurance ~~transactions, which was primarily attributable to our acquisitions.~~revenue.

Cost of customized postage revenue increased ~~87%~~81% to $7.2 million in the three months ended September 30, 2017 from $4.0 million in the three months ended September 30, 2016 ~~from $2.1~~and increased 56% to $12.6 million in the ~~three~~nine months ended September 30, ~~2015 and increased 111% to~~2017 from $8.1 million in the nine months ended September 30, ~~2016 from $3.8 million in the nine months ended September 30, 2015.~~2016. The increase in cost of customized postage revenue during the three and nine months ended September 30, 2017 is primarily due to the increase in our customized postage revenue. Cost of customized postage revenue as a percent of customized postage revenue was 83% in the three months ended September 30, 2017 and 81% in the three months ended September 30, 2016. Cost of customized postage revenue as a percent of customized postage revenue was 82% in the nine months ended September 30, 2017 and 81% in the nine months ended September 30, 2016. The increase, both on an absolute and as a percentage of customized revenue, was primarily the result of the increase in high volume orders which have a lower profit margin compared to website sales.

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Operating Expenses

The following table outlines the components of our operating expense and their respective percentages of total revenues for the periods indicated (in thousands except percentage):

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Operating expenses:
Sales and marketing	$	18,229		$	11,341		$	59,708		$	37,898		$	20,588		$	18,229		$	66,018		$	59,708
Research and development		9,111			4,758			25,579			13,720			12,037			9,111			34,187			25,579
General and administrative		16,901			9,470			49,276			30,004			25,243			16,901			65,676			49,276
Contingent consideration charges		—			1,920			—			26,027
Legal settlements and reserves		—			—			—			10,000
Total operating expenses	$	44,241		$	27,489		$	134,563		$	117,649		$	57,868		$	44,241		$	165,881		$	134,563
Operating expenses as a percent of total revenue:
Operating expenses as a percent of total revenues:
Sales and marketing		19.7	%		21.9	%		23.1	%		26.3	%		17.9	%		19.7	%		19.6	%		23.1	%
Research and development		9.8	%		9.2	%		9.9	%		9.5	%		10.5	%		9.8	%		10.2	%		9.9	%
General and administrative		18.3	%		18.3	%		19.1	%		20.8	%		21.9	%		18.3	%		19.5	%		19.1	%
Contingent consideration charges		0.0	%		3.7	%		0.0	%		18.1	%
Legal settlements and reserves		0.0	%		0.0	%		0.0	%		6.9	%
Total operating expenses as a percentage of total revenues		47.8	%		53.2	%		52.1	%		81.7	%
Total operating expenses as a percentage of Total revenues														50.3	%		47.8	%		49.3	%		52.1	%

Sales and Marketing

Sales and marketing expense principally consists of spending to acquire new customers and compensation and related expenses for personnel engaged in sales, marketing and business development activities. Sales and marketing expense increased 61% to $18.2 million in the three months ended September 30, 2016 from $11.3 million in the three months ended September 30, 2015 and increased 58% to $59.7 million in the nine months ended September 30, 2016 from $37.9 million in the nine months ended September 30, 2015. The increase is primarily due to (1) the addition of sales and marketing expense from our Endicia and ShippingEasy acquisitions, (2) an increase in stock-based compensation expense and (3) an increase in sales and marketing spending and activity in our mailing and shipping business as we continued to focus on acquiring customers. Our sales and marketing programs include direct sales, customer referral programs, customer re-marketing efforts, direct mail, online advertising, partnerships, telemarketing and traditional advertising.

Sales and marketing expense increased 13% to $20.6 million in the three months ended September 30, 2017 from $18.2 million in the three months ended September 30, 2016 and increased 11% to $66.0 million in the nine months ended September 30, 2017 from $59.7 million in the nine months ended September 30, 2016. The increase during the three months ended September 30, 2017 was primarily attributable to an increase in headcount-related expenses including stock-based compensation of $1.2 million and an increase in discretionary marketing spending of $0.8 million. The increase during the nine months ended September 30, 2017 was primarily attributable to an increase in discretionary marketing spending of $3.9 million and an increase in headcount-related expenses including stock-based compensation of $2.2 million. The increase in headcount-related expenses was due to the issuance of stock options to additional employees as part of the ShippingEasy acquisition, as well as the increased number of employees in the rest of the Company. Please see 32Note 2 – “Acquisitions” in our Notes to Consolidated Financial Statements for further description of the ShippingEasy acquisition.

~~Table~~Sales and marketing expense as a percent of ~~Contents~~total revenue was 18% in the three months ended September 30, 2017 which was down compared to 20% in the three months ended September 30, 2016. Sales and marketing expense as a percent of total revenue was 20% in the nine months ended September 30, 2017, which was down compared to 23% in the nine months ended September 30, 2016. The decline during both the three and nine months ended September 30, 2017 was primarily attributable to our ability to leverage our sales and marketing spend, which is expensed as incurred relative to the year-over-year growth in our average monthly revenue per paid customer.

Research and Development

Research and development expense principally consists of compensation for personnel involved in the development of our services, depreciation of equipment and software and expenditures for consulting services and third party software.

Research and development expense increased ~~91%~~32% to $12.0 million in the three months ended September 30, 2017 from $9.1 million in the three months ended September 30, 2016 ~~from $4.8~~and increased 34% to $34.2 million in the ~~three~~nine months ended September 30, ~~2015 and increased 86% to~~2017 from $25.6 million in the nine months ended September 30, ~~2016 from $13.7~~2016. The increase during the three months ended September 30, 2017 was primarily attributable to an increase in headcount-related expense including stock-based compensation of $2.0 million and an increase in facilities expense of $0.2 million. The increase during the nine months ended September 30, ~~2015. The increase is~~2017 was primarily due to ~~(1) the addition of research and development expense from our Endicia and ShippingEasy acquisitions and (2)~~ an increase in headcount-related expenses including stock-based compensation of $6.6 million and an increase in facilities expense of $0.8 million. The increases in headcount-related expenses were due to increased headcount resulting from the ShippingEasy acquisition as well as increased headcount in the rest of the Company to support our expanded product offerings and technology infrastructure investments. The increase in facilities expense was associated with the increase in headcount.

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Research and development expense as a percent of total revenue during the three and nine months ended September 30, 2017 and 2016 was 10%.

General and Administrative

General and administrative expense principally consists of compensation and related costs for executive and administrative personnel, fees for legal and other professional services, depreciation of equipment, software and building used for general corporate purposes and amortization of intangible assets.

General and administrative expense increased ~~78%~~49% to $25.2 million in the three months ended September 30, 2017 from $16.9 million in the three months ended September 30, 2016 ~~from $9.5~~and increased 33% to $65.7 million in the ~~three~~nine months ended September 30, ~~2015 and increased 64% to~~2017 from $49.3 million in the nine months ended September 30, 2016. The increase during the three months ended September 30, 2017 was primarily attributable to: (1) $6.0 million of executive consulting expense; and (2) an increase in headcount-related expense including stock-based compensation expense of $3.4 million; partially offset by (3) $1.9 million of one-time insurance proceeds relating to a prior legal settlement. The increase during the nine months ended September 30, 2017 was primarily attributable to: (1) an increase in headcount-related expense including stock-based compensation of $10.5 million; (2) $6.0 million of executive consulting expense; and (3) a $1.4 million increase in intangible amortization expense; partially offset by (4) $1.9 million of one-time insurance proceeds relating to a prior legal settlement; and (5) a $1.1 million decrease in professional expenses. The increases in headcount-related and stock-based compensation expenses were due to both the addition of headcount resulting from our ShippingEasy acquisition as well as increased headcount at the rest of the Company to support our growth in the business and corporate infrastructure investments. The increase in intangible amortization expense was due to our ShippingEasy acquisition. Professional fee expense was higher during the three and nine months ended September 30, 2016 ~~from $30.0 million~~compared to the same periods in 2017 due to acquisition related costs. We did not have any acquisition related costs in 2017.

General and administrative expense as a percent of total revenue was 22% in the three months ended September 30, 2017 and was 18% in the three months ended September 30, 2016. General and administrative expense as a percent of total revenue was 20% in the nine months ended September 30, ~~2015. The increase during the three months~~2017 and nine months ended September 30, 2016 is primarily attributable to (1) the addition of general and administrative expense from our Endicia and ShippingEasy acquisitions, (2) an increase in headcount and headcount related expenses including stock-based compensation expense and infrastructure investments to support the growth in our business, and (3) an increase in the amortization of acquired intangibles related to our acquisitions.

~~Contingent consideration charges~~

Contingent consideration charges are attributable to the change in the fair value of our contingent consideration liability related to the acquisition of ShipStation. We did not incur any contingent consideration charges in 2016. Contingent consideration charge was ~~$13.6 million~~19% in the nine months ended September 30, ~~2015.~~2016. The ~~decrease was due to ShipStation fully achieving all~~increases in general and administrative expense as a percent of ~~their financial measures for~~total revenue in the ~~second earn-out in accordance with the purchase agreement~~three and ~~the distribution of the final earn-out in first quarter 2016. See~~ ~~Note 2 – “Acquisition”~~ ~~in our Notes to Consolidated Financial Statements for further description of our contingent consideration liability related~~nine months ended September 30, 2017 were attributable to the ~~acquisition of ShipStation.~~factors described in the previous paragraph.

Interest and Other Income ~~Net~~

Interest and other income primarily ~~consist~~consists of interest income from cash, cash equivalents and short-term and long-term investments. Interest and other income ~~net decreased 50% to~~was $120,000 and $24,000 in the three months ended September 30, 2017 and 2016, ~~from $48,000 in the three months ended September 30, 2015~~respectively. Interest and ~~decreased 5% to~~other income was $309,000 and $98,000 in the nine months ended September 30, 2017 and 2016, ~~from $103,000 in the nine months ended September 30, 2015. The decrease is primarily due lower income from our investments.~~respectively.

Interest Expense

Interest expense consists of interest expense from the debt under our credit facility and the associated accretion of debt issuance costs. Interest expense was $967,000 in the three months ended September 30, 2017 compared to $828,000 in the three months ended September 30, ~~2016 compared to $0~~2016. Interest expense was $2.8 million in the ~~three~~nine months ended September 30, ~~2015. Interest expense was~~2017 compared to $2.6 million in the nine months ended September 30, ~~2016 compared~~2016. The increase in interest expense is primarily attributable to $0higher average interest rates in the nine months ended September 30, ~~2015. The interest expense resulted from~~2017 compared to the nine months ended September 30, 2016, partially offset by lower outstanding debt ~~incurred in connection with acquisition of Endicia in the fourth quarter of 2015.~~balances under our credit facility.

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Provision for Income Taxes

For the three and nine months ended September 30, 2017, our income tax benefit was $11.4 million and $873,000, respectively. Our tax benefit was primarily attributable to discrete tax benefits relating to exercises of options, net of our pre-tax book income multiplied by an estimated annual effective tax rate. As a result of our adoption of ASU 2016-09 in 2017, we recognize the full impact of the excess tax benefits associated with stock option exercises during the period, which decreases our effective tax rate for the three and nine months ended September 30, 2017, resulting in lower tax expense compared to prior year. Please see Note 1 – “Summary of Significant Accounting Policies” and Note 5 – “Stock Based Compensation” in our Notes to Consolidated Financial Statements for further description of the impact of this accounting standard.

Our income tax expense was $12.1 million and $30.0 million for the three and nine months ended September 30, 2016, respectively. Our tax expense was primarily attributable to our pre-tax income including our current tax expense consisting of federal alternative minimum tax and various state taxes and our deferred income tax expense consisting of temporary tax items including stock compensation and differences in the book and tax lives of amortizable intangibles. Our income tax expense was $5.8 million for the three months ended September 30, 2015, and our income tax benefit was $90,000 for the nine months ended September 30, 2015. Our income tax expense and tax benefit during the three and nine months ended September 30, 2015, respectively, were primarily attributable to our pre-tax income and pre-tax losses during those periods including deferred income taxes.

Our effective tax rate differs from the statutory federal rate as a result of several factors including non-temporary differences from excess tax benefits from the exercise of stock options, as well as state income taxes and ~~state~~research and ~~local income taxes.~~ development tax credits.

We evaluated the appropriateness of our deferred tax assets and related valuation allowance in accordance with ASC 740 based on all available positive and negative evidence. As of September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, we do not have any valuation allowance against our gross deferred tax assets.

Liquidity and Capital Resources

As of September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, we had ~~$84.2~~$183.5 million and ~~$75.2~~$108.4 million, respectively, in cash, cash equivalents and short-term and long-term investments. We invest available funds in short-term and long-term securities, including money market funds, corporate bonds, ~~asset-backed~~asset backed securities, and US government and agency bonds, and do not engage in hedging or speculative activities.

Net cash provided by operating activities was approximately ~~$104.0~~$149.0 million and ~~$35.0~~$104.0 million during the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively. The increase in net cash provided by operating activities was primarily attributable to ~~growth~~the (1) increase in ~~our revenue and~~ net income of $64.2 million; (2) decrease in accounts receivable of $14.1 million; (3) increase in stock-based compensation expense of $8.9 million; and ~~net changes~~the (4) lack of a stock option windfall tax benefit, which was $9.8 million during the nine months ended September 30, 2016; partially offset by the (5) increase in ~~our operating~~other current assets of $30.3 million primarily due to prepaid income taxes; (6) decrease in the deferred income tax balance of $18.1 million; and ~~liabilities.~~the (7) decrease in deferred revenue balance of $2.4 million.

Net cash used in investing activities was approximately $4.5 million and $51.9 million during the nine months ended September 30, ~~2016. Net cash provided by investing activities was approximately $2.4 million during the nine months ended September 30, 2015.~~2017 and 2016, respectively. The ~~increase~~decrease in net cash used in investing activities was primarily due to (1) the prior period acquisition of ShippingEasy on July 1, 2016 for $55.4 million; partially offset by (2) a $5.5 million decrease in cash from short-term investment sales; and (3) a $3.1 million increase in capital expenditures related to the build out of ~~cash used to acquire ShippingEasy during~~ the ~~third quarter of 2016.~~Stamps.com headquarters.

Net cash used in financing activities was approximately $68.0 million and $36.1 million during the nine months ended September 30, ~~2016. Net cash provided by financing activities was approximately $11.3 million during the nine months ended September 30, 2015.~~2017 and 2016, respectively. The increase in net cash used in financing activities was primarily due to the ~~treasury re-purchase~~(1) $55.7 million increase in stock repurchases; (2) recharacterization, pursuant to ASU 2016-09 of a stock option windfall tax benefit, which was $9.8 million in the prior period, to an operating activity in the current period; (3) $3.1 million increase in short-term financing payments; (4) $1.5 million increase in term-loan principal payments; partially offset by (5) the $38.3 million increase in proceeds from stock option exercises.

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The following table is a schedule of our ~~common stock~~significant contractual obligations and ~~payment on our term loan and revolving credit facility, including an optional prepayment~~commercial commitments as of ~~$10 million made during the second quarter of 2016. Net cash provided by financing activities during the nine months ended~~ September 30, ~~2015 was primarily proceeds from the exercise of stock options.~~2017 (in thousands):

Twelve Month Period Ending September 30,	Operating Lease Obligations
2018	$	3,909
2019		1,625
2020		1,393
2021		1,097
2022		116
Thereafter		—
Total	$	8,140

On November 18, 2015, we entered into a ~~Credit Agreement~~credit agreement with a group of banks, which provides for a term loan of $82.5 million and a revolving credit facility with a maximum borrowing of $82.5 ~~million.~~million (the “Credit Agreement”). Our Credit Agreement matures on November 18, 2020. In connection with entering into the Credit Agreement, we incurred approximately $1.8 million in debt issuance costs which were recorded as debt discount and are being accreted as interest expense over the life of the Credit Agreement. ~~Amortization~~Interest expense associated with the debt issuance costs for the three and nine months ended September 30, ~~2016~~2017 was approximately $93,000 and $279,000, respectively.

Borrowings under the term loan are payable in quarterly installments which began on December 31, 2015. We pay interest on our Credit Agreement equal to the London Interbank Offered Rate plus an applicable margin, between 1.25% toand 2.00%, based upon certain financial measures. As of September 30, ~~2016,~~2017, our applicable margin was 1.25% and the interest rate on our outstanding loan was approximately ~~1.88%~~2.49%. We are subject to certain customary quarterly financial covenants under our Credit Agreement such as a maximum total leverage ratio and a minimum fixed charge coverage ratio. ~~Further,~~As of September 30, 2017, we were in compliance with the covenants of the Credit Agreement.

The Credit Agreement includes negative covenants, subject to exceptions, restricting or limiting our ability ~~and the ability of our subsidiaries~~ to among other things, incur additional indebtedness, grant liens, repurchase stock, pay dividends and engage in certain investment, acquisition and disposition transactions. The Credit Agreement imposes certain requirements in order for us to make dividend payments. As of September 30, ~~2016,~~2017, such requirements were: (1) our Consolidated Total Leverage Ratio, as defined in the Credit Agreement, must be less than 2.75 to 1.00; (2) our Fixed Charge Coverage Ratio, as defined in the Credit Agreement, must be greater than 1.25 to 1.00; and (3) our Liquidity as defined in the Credit Agreement must be greater than $20 million. As of September 30, 2017, our Consolidated Total Leverage Ratio was 0.62 to 1.00, our Fixed Charge Coverage Ratio was 21.70 to 1.00 and our Liquidity was approximately $204 million, which includes cash and cash equivalent and investment balances, as well as the available balance under the revolving credit facility. Based on our actual financial condition and results of operations, we ~~were in compliance with~~do not believe that the ~~covenants~~provisions of the Credit ~~Agreement.~~Agreement currently represent a restriction to our ability to pay dividends in permissible amounts.

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The contractual maturities of our debt obligations due subsequent to September 30, ~~2016~~2017 are as follows (in thousands):

Year ending September 30,	Amount
2018	$	8,250
2019		10,312
2020		12,375
2021		103,240
Thereafter		—
Total debt		134,177

Less: debt issuance costs		1,184
Total debt, net of debt issuance costs	$	132,993

Year ending September 30, Amount
2017 $ 6,188
2018 8,250
2019 10,313
2020 12,375
2021 113,239
Total debt 150,365

Less: deferred financing costs 1,558
Total debt, net of deferred financing costs $ 148,807

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The estimated interest payments related to our debt due subsequent to September 30, ~~2016~~2017 are as follows (in thousands):

Year ending June 30,	Amount
2017	$	2,833
Year ending September 30,			Amount
2018		2,704	$	3,320
2019		2,535		3,097
2020		2,333		2,829
2021		472		570
Thereafter				—
Total	$	10,877	$	9,816

The above estimated interest payments assume an interest rate of ~~1.88%~~2.49%, which is our interest rate as of September 30, ~~2016,~~2017, and assume the entire remaining amount of our revolving credit facility is paid on the maturity date of November 18, 2020.

We believe our available cash and marketable securities, together with the cash flow from operations, will be sufficient to fund our business for at least the next twelve months.

~~There have been no material changes to our contractual obligations~~

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Business Outlook and ~~commercial commitments included~~Forward-Looking Statements

The following forward-looking statements are accompanied by, and should only be read in conjunction with, the qualifications and limitations described in the forward-looking statements discussion at the beginning of this Item 2 and the risks and other factors set forth in Item ~~7 “Management’s Discussion and Analysis~~1A “Risk Factors” of ~~Financial Condition and Results of Operations” in~~ our Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016 filed with SEC on March 1, 2017.

~~Trend Analysis~~

~~As of the date of the filing of this Report, we expect the following trends for 2016:~~

We expect our mailing and shipping revenue to increase in ~~2016~~2017 compared to ~~2015.~~2016. We expect our mailing and shipping revenue growth in 2017 to be less than the growth we achieved in 2016 now that we have passed the one year anniversary of our Endicia acquisition. Our ability to grow our mailing and shipping revenue is partly dependent on our ability to increase our sales and marketing spend to acquire new customers and to retain our existing customers. To the extent we are not able to achieve our target increase in spending and acquire ~~and~~or retain customers, this ~~could~~would negatively impact our ~~2016~~2017 mailing and shipping revenue growth expectations. ~~We expect~~

Customized postage revenue increased in 2017 compared to 2016, as customized postage revenue ~~to increase in 2016 compared to 2015.~~for the nine months ended September 30, 2017 exceeded customized postage revenue for the twelve months ended December 30, 2016. High volume business orders for customized postage can fluctuate significantly from quarter to quarter and therefore historical trends may not be indicative of future results for customized postage revenue.

We expect our sales and marketing ~~spend~~expense to increase in ~~2016~~2017 compared to 2016. We expect the percent increase in sales and marketing expense in 2017 to be less than the percent increase in 2016, as 2016 reflected a full year of Endicia results, as opposed to approximately one and a half months in 2015. We will continue to monitor our customer metrics and the state of the economy and adjust our level of spending accordingly. Sales and marketing spend is expensed in the period incurred, while the revenue and profits associated with the acquired customers are earned over the customers’ lifetimes. As a result, increased sales and marketing spend in future periods could result in a reduction in operating profit and cash flow compared to past periods.

We expect ~~our~~ research and development expenses to be higher in ~~2016~~2017 as compared to ~~2015 taking into account~~2016. We expect the ~~trends experienced year-to-date~~percent increase in research and development expense in 2017 to be less than the percent increase in 2016, as 2016 reflected a full year of Endicia results, as opposed to approximately one and a half months in 2015. We expect to hire additional ~~expenses expected to result from the ShippingEasy acquisition.~~research and development personnel in 2017.

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We expect ~~our~~ general and administrative expenses to be higher in ~~2016~~2017 as compared to ~~2015 taking into account~~2016. We expect the ~~trends experienced year-to-date~~percent increase in general and administrative expense in 2017 to be less than the ~~additional expenses expected~~percent increase in 2016, as 2016 reflected a full year of Endicia results, as opposed to ~~result from the ShippingEasy acquisition.~~approximately one and a half months in 2015.

We expect our ~~stock-based compensation expense~~effective tax rate for 2017 to be higher in 2016 compared to 2015 taking into account the trends experienced year-to-date and the additional expenses expected to result from the ShippingEasy acquisition and the associated inducement grants.

~~We do not expect to incur contingent consideration charges in~~lower than 2016 as we benefitted from excess tax benefits related to the ~~ShipStation earn-out period was completed as~~exercise of ~~December 31, 2015.~~

~~Tax expense (benefit)~~stock options in ~~2015 may not be indicative of 2016 tax expense (benefit) due to~~2017. However, there are other factors that impact taxable income compared to book income which can be difficult to predict and can change from quarter-to-quarter. As of September 30, 2016, the Company had a $39 million deferred tax asset resulting from past net operating losses and other tax credits. The Company expects to be able to continue to utilize its deferred tax assets to reduce cash taxes for the remainder of 2016.

As discussed ~~above,~~earlier in this Report, our expectations are subject to substantial uncertainty and our results are subject to macro-economic factors and other factors which could cause these trends to be worse than our current expectation or which could cause actual results to be materially different than our current expectations. These expectations are “forward looking statements,” are made only as of the date of this Report and are subject to the qualification and limitations described in the forward-looking statements discussion at the beginning of this Item 2 and the risks and other factors set forth in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with SEC on February 29, 2016. Our business has grown through ~~acquisition~~acquisitions during 2014 ~~2015 and~~through 2016; however the expectations above do not assume any future acquisitions or dispositions, ~~or any related financings,~~ any of which could have a significant impact on our current expectations. As described in our forward-looking statements discussion, we do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report.

Critical Accounting Policies and Judgments

Management’s discussion and analysis of our financial condition and results of operations is based on our unaudited financial statements. The preparation of these financial statements is based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and notes. Except as noted below, for more information regarding our critical accounting estimates and policies, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Judgments” of our Annual Report on Form 10-K for the year ended December 31, ~~2015,~~2016, filed with the SEC on ~~February 29, 2016.~~

~~Section 382 Update~~

We currently have federal and state net operating loss (“NOL”) carry-forwards. Under Internal Revenue Code Section 382 rules, if a “change of ownership” is triggered, our NOL asset may be impaired. A change in ownership can occur whenever there is a shift in ownership by more than 50 percentage points by one or more “5% shareholders” within a three-year period.

Under our certificate of incorporation, any person, company or investment firm that wishes to become a “5% shareholder” (as defined in our certificate of incorporation) must first obtain a waiver from our board of directors. In addition, any person, company or investment firm that is already a “5% shareholder” of ours cannot make any additional purchases of our stock without a waiver from our board of directors. The NOL protective provisions contained in our certificate of incorporation (the “NOL Protective Measures”) are more specifically described in our Definitive Proxy filed with the SEC on April 2, 2008.

On July 22, 2010, our board of directors suspended the NOL Protective Measures by approving a waiver from the NOL Protective Measures to all persons and entities, including companies and investment firms. As a result, our stockholders are now allowed to become “5% shareholders” and existing “5% shareholders” are allowed to make additional purchases of our stock each without having to comply with the restrictions contained in the NOL Protective Measures. This waiver may be revoked by our board of directors at any time if the board deems the revocation necessary to protect against a Section 382 “change of ownership” that would limit our ability to utilize future NOLs. For complete details about this waiver from the NOL Protective Measures, please see our Current Report on Form 8-K filed with the SEC on July 28, 2010.March 1, 2017.

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~~As of October 31, 2016, we had 17,052,401shares outstanding, and therefore ownership of approximately 852,000 shares or more would currently constitute a “5% shareholder.”~~ ~~We strongly urge that any shareholder contemplating becoming a 5% or more shareholder contact us before doing so.~~

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

On November 18, 2015, we entered into a Credit Agreement with a group of banks, which provides for a term loan of $82.5 million and a revolving credit facility with a maximum borrowing of $82.5 million. Our ~~exposure to market rate risk for changes in interest rates relates primarily to our~~Credit Agreement matures on November 18, 2020. As of September 30, 2017, the debt outstanding ~~borrowings~~ under our Credit Agreement, ~~as well as our investment portfolio. Interest rate fluctuations impact the interest expense incurred on borrowings~~gross of debt issuance costs, was $134.2 million. Borrowings under the term loan are payable in quarterly installments which began on December 31, 2015. We pay interest on our Credit Agreement ~~as the interest~~at a rate ~~is based on~~equal to the London Interbank Offered ~~Rate. A~~Rate plus an applicable margin, which is between 1.25% and 2.00%, based upon certain financial measures. As of September 30, 2017, our applicable margin was 1.25% and the interest rate on our outstanding loan was approximately 2.49%. Interest expense would not be significantly affected by either a 10% increase or decrease in the ~~London Interbank Offered Rate will not significantly affect~~rates of interest ~~expense.~~ on our debt.

We have not used derivative financial instruments in our investment portfolio. None of the instruments in our investment portfolio are held for trading purposes. Our cash equivalents and investments consist of money market, U.S. government obligations, asset-backed securities and public corporate debt securities with weighted average maturities of 8131 days at September 30, ~~2016.~~2017. Our cash equivalents and investments approximated ~~$84.2~~$183.5 million at September 30, ~~2016~~2017 and had a weighted average interest rate of ~~0.3%~~0.9%. Interest rate fluctuations impact the carrying value of the portfolio. The fair value of our portfolio of marketable securities would not be significantly affected by either a 10% increase or decrease in the rates of interest due primarily to the short-term nature of the portfolio. We do not believe that the future market risks related to the above securities will have a material adverse impact on our financial position, results of operations or liquidity.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).

As of the end of the period covered by this Report, our management evaluated, with the participation of our Principal Executive Officer and Principal Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded, as of that time, that our disclosure controls and procedures were effective.

Changes in internal controls

During the quarter ended September 30, ~~2016,~~2017, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

See Note 3 – ~~“Commitments~~“Commitments and Contingencies – Legal Proceedings” of our Notes to Consolidated Financial Statements, which is incorporated herein by reference.

ITEM 1A.

RISK FACTORS

We are not aware of any material changes to the risk factors included in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2015,~~2016, filed with the SEC on ~~February 29, 2016.~~March 1, 2017.

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ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Period
Total Number of
Shares Purchased
Average Price Paid
per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value of Shares That
May Yet be
Purchased Under the
Plans or Programs
(in 000’s)
July 1, 2016 –
July 31, 2016
— — — $40,000
August 1, 2016 –
August 31, 2016
103,427 $87.23 103,427 $30,978
September 1, 2016 –
September 30, 2016
89,903 $93.14 89,903 $22,604

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs (in 000’s)
July 1, 2017 – July 31, 2017		46,300	$	147.35		46,300	$	61,659
August 1, 2017 – August 31, 2017		23,400	$	196.06		23,400	$	57,071
September 1, 2017 – September 30, 2017		19,000	$	199.77		19,000	$	53,276

~~On July 27, 2016, our Board of Directors approved a new stock repurchase plan authorizing us to repurchase up to $40 million of our common stock during the next nine months.~~ On October 25, 2016, our Board of Directors approved a new stock repurchase plan, which became effective November 7, 2016, that ~~replaces~~replaced our prior stock repurchase plan ~~authorizing~~and authorized us to repurchase up to $90 million of stock over the ~~next 6 months.~~six months following the effective date of the plan. On April 24, 2017, our Board of Directors approved a new stock repurchase program that took effect upon expiration of the prior plan on May 8, 2017 and authorizes the Company to repurchase up to another $90 million of stock over the six months following its effective date. On October 24, 2017, the Board of Directors approved a new stock repurchase program that will take effect upon expiration of the current plan on November 10, 2017 and authorizes the Company to repurchase up to $90 million of stock over the six months following its effective date.

We will consider repurchasing stock in the future by evaluating such factors as the price of the stock, the daily trading volume and the availability of large blocks of stock and any additional constraints related to material inside information we may possess. Our repurchase of any of our shares will be subject to limitations that may be imposed on such repurchases by applicable securities laws and regulations and the rules of The NASDAQ Stock Market, as well as restrictions under our Credit Agreement. Repurchases may be made in the open market, or in privately negotiated transactions from time to time at our discretion. We have no commitment to make any repurchases.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

~~Table of Contents~~

ITEM 5.

OTHER INFORMATION

None.

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ITEM 6.

EXHIBITS

10.1	~~Management Incentive Plan,~~Consulting Agreement, dated as of July ~~1, 2016, by~~31, 2017, between James Bortnak and ~~among ShippingEasy, Inc.,~~ Stamps.com Inc. ~~and the Participant Representative (as defined therein), and acknowledged and agreed to by Katie May and Barry Cox~~ (1) †

31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. *

32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. *

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

†	~~Confidential treatment has been requested and received with respect to certain portions of this exhibit, which portions have been filed separately with the Securities and Exchange Commission.~~

*	Furnished, not filed.

~~(1)Incorporated herein by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on August 9,~~ ~~2016 (File No.~~ ~~000-26427)~~

(1)	Incorporated herein by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on August 2, 2017 (File No. 000-26427).

3936

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	STAMPS.COM INC.
	(Registrant)

November 9, ~~2016~~2017	By:	/s/ KEN MCBRIDE
		Ken McBride
		Chairman and Chief Executive Officer

November 9, ~~2016~~2017	By:	/s/ ~~KYLE HUEBNER~~JEFF CARBERRY
		~~Kyle Huebner~~Jeff Carberry
		~~Co-President and~~ Chief Financial Officer

4037

	Fair Value
Cash consideration	$	21,952
Deferred consideration		181
Total purchase price	$	22,133

	Fair Value
Cash consideration	$	50,000
Fair value of performance linked earn-out of up to 768,900 shares of Stamps.com common stock (contingent consideration)		16,242
Total purchase price	$	66,242

Twelve Month Period Ending September 30,	Operating Lease Obligation
2017	$	3,845
2018		3,985
2019		1,626
2020		1,389
2021		1,204
Thereafter		198
Total	$	12,247

	2016
Goodwill balance at December 31, 2015	$	197,807
Purchase price adjustment (see Note 2– “Acquisitions”)		945
Acquisition of ShippingEasy (see Note 2– “Acquisitions”)		40,780
Goodwill balance at September 30, 2016	$	239,532

	Amortized Cost		Estimated Fair Value
Due within one year	$	3,014	$	3,029
Due after one year		—		—
Total	$	3,014	$	3,029