

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

1990 E. Grand Avenue

El Segundo, California 90245

(Address of ~~principal executive offices, including zip code)~~Principal Executive Offices and Zip Code)

(310) 482-5800

(~~Registrant’s telephone number, including area code)~~

Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the ~~registrant:~~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~~Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑þ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate 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 ☑þ No ☐

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



	Large accelerated filer ☑þ	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~~Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑þ

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes ☐ No ☐

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


·	As
Title of ~~October 31, 2017, there were 17,478,768 shares~~each class	Trading Symbol(s)	Name of ~~the Registrant’s~~ each exchange on which registered
Common Stock, ~~issued and outstanding.~~par value $0.001 per share	STMP	The NASDAQ Stock Market

As of April 30, 2019, there were 17,316,796 shares of the Registrant's Common Stock outstanding.

STAMPS.COM INC. AND SUBSIDIARIES

FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED ~~SEPTEMBER 30, 2017~~MARCH 31, 2019

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	19 22

	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	34 36

	ITEM 4.	CONTROLS AND PROCEDURES	34 36

PART II –- OTHER INFORMATION			34 37

	ITEM 1.	LEGAL PROCEEDINGS	34 37

	ITEM1A.	RISK FACTORS	34 37

	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	35 38

	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	35 38

	ITEM 4.	MINE SAFETY DISCLOSURES	35 38

	ITEM 5.	OTHER INFORMATION	35 39

	ITEM 6.	EXHIBITS	36 40

~~Table of Contents~~

PART I - FINANCIAL INFORMATION

~~ITEM 1.~~

ITEM 1. FINANCIAL STATEMENTS

~~FINANCIAL STATEMENTS~~

STAMPS.COM INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

September 30,
2017

December 31,
2016

(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 183,538 $ 106,932
Short-term investments — 1,511
Accounts receivable, net 52,555 62,756
Other current assets 44,616 13,081
Total current assets 280,709 184,280
Property and equipment, net 38,138 36,829
Goodwill 239,705 239,705
Intangible assets, net 85,000 97,027
Deferred income taxes, net. 42,231 48,782
Other assets 5,579 3,506
Total assets $ 691,362 $ 610,129

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 88,830 $ 86,205
Deferred revenue 3,598 3,858
Current portion of debt, net of debt issuance costs 7,876 6,329
Total current liabilities 100,304 96,392
Long-term debt, net of debt issuance costs 125,117 141,025
Total liabilities 225,421 237,417
Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock, $.001 par value per share
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 940,001 855,344
Treasury stock, at cost, 14,435 shares in 2017 and 13,610 in 2016 (356,908 ) (252,981 )
Accumulated deficit (117,213 ) (229,715 )
Accumulated other comprehensive income 7 11
Total stockholders' equity 465,941 372,712
Total liabilities and stockholders' equity $ 691,362 $ 610,129



	March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	110,925		$	113,757
Accounts receivable, net	76,079			83,595
Current income taxes	1,723			8,465
Prepaid expenses	15,355			13,072
Other current assets	13,491			10,722
Total current assets	217,573			229,611
Property and equipment, net	35,101			36,337
Goodwill	384,506			381,710
Intangible assets, net	159,460			163,859
Deferred income taxes, net	29,874			29,874
Lease right-of-use assets	17,159			—
Other assets	12,736			11,383
Total assets	$	856,409		$	852,774
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses	$	119,237		$	133,626
Deferred revenue	7,301			7,159
Current portion of debt, net of debt issuance costs	10,970			10,454
Current portion of lease right-of-use liabilities	3,884			—
Total current liabilities	141,392			151,239
Long-term debt, net of debt issuance costs	47,188			50,189
Deferred income taxes, net	18,749			18,665
Long-term portion of lease right-of-use liabilities	14,533			—
Other liabilities	19,918			19,016
Total liabilities	241,780			239,109
Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock, $.001 par value per share
Authorized shares: 47,500 in 2019 and 2018
Issued shares: 33,089 in 2019 and 33,042 in 2018
Outstanding shares: 17,472 in 2019 and 17,662 in 2018	56			56
Additional paid-in capital	1,063,007			1,049,669
Treasury stock, at cost, 15,617 shares in 2019 and 15,380 in 2018	(560,620		)	(528,529		)
Retained earnings	107,467			91,712
Accumulated other comprehensive income	4,719			757
Total stockholders' equity	614,629			613,665
Total liabilities and stockholders' equity	$	856,409		$	852,774

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

~~Table of Contents~~

STAMPS.COM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017 2016 2017 2016
Revenues:
Service $ 97,529 $ 78,871 $ 292,634 $ 220,567
Product 4,824 4,703 15,301 15,109
Insurance 4,099 4,050 12,932 12,643
Customized postage 8,588 4,912 15,306 10,016
Other 22 23 69 74
Total revenues 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 11,882 9,903 37,284 28,054
Product 1,535 1,579 4,930 5,019
Insurance 966 1,291 3,547 3,920
Customized postage 7,151 3,954 12,600 8,076
Total cost of revenues 21,534 16,727 58,361 45,069
Gross profit 93,528 75,832 277,881 213,340
Operating expenses:
Sales and marketing 20,588 18,229 66,018 59,708
Research and development 12,037 9,111 34,187 25,579
General and administrative 25,243 16,901 65,676 49,276
Total operating expenses 57,868 44,241 165,881 134,563
Income from operations 35,660 31,591 112,000 78,777
Interest expense (967 ) (828 ) (2,779 ) (2,648 )
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
$ 2.71 $ 1.08 $ 6.51 $ 2.67
Diluted $ 2.49 $ 1.03 $ 6.04 $ 2.52
Weighted average shares outstanding
Basic 17,073 17,218 16,969 17,319
Diluted 18,548 18,120 18,282 18,325



	Three Months Ended March 31,
	2019			2018
Revenues:
Service	$	123,907		$	120,916
Product	5,405			5,679
Insurance	3,334			4,368
Customized postage	3,357			2,580
Other	—			22
Total revenues	136,003			133,565
Cost of revenues (exclusive of amortization of intangible assets, which is included in general and administrative expense):
Service	32,235			20,649
Product	1,673			1,751
Insurance	—			998
Customized postage	2,431			2,129
Total cost of revenues	36,339			25,527
Gross profit	99,664			108,038
Operating expenses:
Sales and marketing	32,881			25,748
Research and development	17,314			12,073
General and administrative	26,228			21,016
Total operating expenses	76,423			58,837
Income from operations	23,241			49,201
Foreign currency exchange gain (loss), net	(95		)	—
Interest expense	(714		)	(590		)
Interest income and other income, net	65			49
Income before income taxes	22,497			48,660
Income tax expense	6,742			1,616
Net income	$	15,755		$	47,044
Net income per share:
Basic	$	0.90		$	2.67
Diluted	$	0.87		$	2.54
Weighted average shares outstanding:
Basic	17,547			17,644
Diluted	18,015			18,511

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

~~Table of Contents~~

STAMPS.COM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

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



	Three Months Ended March 31,
	2019			2018
Net income	$	15,755		$	47,044
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	3,966			—
Unrealized gain (loss) on investments	(4		)	1
Comprehensive income	$	19,717		$	47,045

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

STAMPS.COM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)

(Unaudited)



	Three Months Ended March 31, 2019
	Common Stock				Additional Paid-in Capital		Treasury Stock at Cost			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
	Shares		Amount		Additional Paid-in Capital		Treasury Stock at Cost			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balance at December 31, 2018	17,662		$	56	$	1,049,669	$	(528,529	)	$	91,712	$	757	$	613,665
Net income	—		—		—		—			15,755		—		15,755
Other comprehensive income (loss)	—		—		—		—			—		3,962		3,962
Issuance of shares for performance-based awards	4		—		—		—			—		—		—
Stock-based compensation expense	—		—		8,857		—			—		—		8,857
Exercise of stock options	29		—		2,381		—			—		—		2,381
Shares issued under the Employee Stock Purchase Plan	13		—		2,100		—			—		—		2,100
Stock repurchase, excluding tax withholding stock repurchase	(235	)	—		—		(31,998		)	—		—		(31,998		)
Tax withholding stock repurchase	(1	)	—		—		(93		)	—		—		(93		)
Balance at March 31, 2019	17,472		$	56	$	1,063,007	$	(560,620	)	$	107,467	$	4,719	$	614,629



	Three Months Ended March 31, 2018
	Common Stock				Additional Paid-in Capital		Treasury Stock at Cost			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)		Total
	Shares		Amount		Additional Paid-in Capital		Treasury Stock at Cost			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)		Total
Balance at December 31, 2017	17,573		$	55	$	962,227	$	(387,545	)	$	(76,930	)	$	6	$	497,813
Net income	—		—		—		—			47,044			—		47,044
Other comprehensive income (loss)	—		—		—		—			—			1		1
Issuance of shares for performance-based awards	56		—		—		—			—			—		—
Stock-based compensation expense	—		—		7,548		—			—			—		7,548
Exercise of stock options	380		—		19,632		—			—			—		19,632
Shares issued under the Employee Stock Purchase Plan	15		—		1,981		—			—			—		1,981
Stock repurchase, excluding tax withholding stock repurchase	(120	)	—		—		(23,221		)	—			—		(23,221		)
Tax withholding stock repurchase	(21	)	—		—		(4,144		)	—			—		(4,144		)
Balance at March 31, 2018	17,883		$	55	$	991,388	$	(414,910	)	$	(29,886	)	$	7	$	546,654

~~Table of Contents~~

STAMPS.COM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Nine Months Ended
September 30,

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

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

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

Supplemental information:
Capital expenditures accrued but not paid at period end $ 123 $ 122
Issuance of 2015 and 2014 earn-out shares $ — $ 63,209
Noncash adjustment of purchase price for Endicia acquisition $ — $ 372
Tenant improvement allowance $ 848 $ 676



	Three Months Ended March 31,
	2019			2018
Operating activities:
Net income	$	15,755		$	47,044
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,036			5,335
Stock-based compensation expense	8,857			7,548
Deferred income tax expense	—			872
Accretion of debt issuance costs	93			93
Changes in operating assets and liabilities, net of assets and liabilities acquired:
Accounts receivable	7,639			(11,267		)
Prepaid expenses	(2,750		)	(1,190		)
Other current assets	(2,765		)	(413		)
Current income taxes	6,742			696
Lease right-of-use assets	715			—
Other assets	(1,353		)	37
Deferred revenue	115			(29		)
Lease right-of-use liabilities	(781		)	—
Other liabilities	899			872
Accounts payable and accrued expenses	(6,758		)	5,690
Net cash provided by operating activities	33,444			55,288

Investing activities:
Acquisition of property and equipment	(262		)	(447		)
Net cash used in investing activities	(262		)	(447		)

Financing activities:
Proceeds from short term financing obligations, net of repayments	(5,850		)	(938		)
Principal payments on term loan	(2,578		)	(2,062		)
Proceeds from exercise of stock options	2,381			19,632
Issuance of common stock under Employee Stock Purchase Plan	2,100			1,981
Repurchase of common stock	(31,998		)	(27,365		)
Payments related to tax withholding for share-based compensation	(93		)	(4,144		)
Net cash used in financing activities	(36,038		)	(12,896		)
Effect of exchange rate changes	24			—
Net (decrease) increase in cash and cash equivalents	(2,832		)	41,945
Cash and cash equivalents at beginning of period	113,757			153,903
Cash and cash equivalents at end of period	$	110,925		$	195,848

Supplemental information:
Cash paid for amounts included in the measurement of lease liabilities included in cash provided by operating activities	$	1,132		$	—
Lease liabilities arising from obtaining right-of-use assets	$	5,482		$	—

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

~~Table of Contents~~

STAMPS.COM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.	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). Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States (U.S.) generally accepted accounting principles (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, ~~2016,~~2018, filed with the SEC on March 1, ~~2017.~~2019.

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, 2017,~~March 31, 2019, our results of operations for the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2019, and our cash flows for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2019. 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, ~~2017.~~2019.

~~Principles~~Basis of Consolidation

The consolidated financial statements include all the ~~accounts~~assets, liabilities, revenues, expenses and cash flows of Stamps.com Inc., and the entities in which we have 100% voting and/or economic control, which includes Auctane LLC (ShipStation), Interapptive, Inc. (ShipWorks), MetaPack Limited (MetaPack), PhotoStamps Inc., PSI Systems, Inc. (Endicia), and ShippingEasy Group, Inc. (ShippingEasy) ~~and PhotoStamps Inc.~~. In ~~July 2016,~~August 2018, we completed our acquisition of 100% of the outstanding shares of ~~ShippingEasy.~~MetaPack. Please see Note 2 - “Acquisitions” in our Notes to Consolidated Financial Statements for further description. References in this Report to "we" "us" "our" or "Company" are references to Stamps.com Inc. and its subsidiaries.

Because 100% of the voting control of ShipStation, ShipWorks, Endicia and ShippingEasy 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. Intercompany accounts and transactions between consolidated entities have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates, judgments 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, realizability of deferred income taxes, the~~There are significant estimates and ~~assumptions used to calculate stock-based compensation,~~judgments inherent in the ~~estimates~~preparation of the consolidated financial statements including the fair value of assets and ~~assumptions used to calculate the~~liabilities for allocation of the purchase price ~~related~~of companies acquired.

Prior Period Reclassifications

Certain amounts in prior periods have been reclassified to ~~our acquisitions, and estimates regarding the useful lives of our building, amortizable intangible assets, and goodwill.~~

conform with current period presentation.

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.

Table of Contents

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. Approximately $4.2 million of revenue recognized in the three months ended March 31, 2019 was included in the deferred revenue balance at December 31, 2018. Approximately $2.1 million of revenue recognized in the three months ended March 31, 2018 was included in the deferred revenue balance at December 31, 2017.

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 fair value inputs as defined in ~~footnote 8.~~Note 8 in our Consolidated Financial Statements.

Foreign Currency Translation

The functional currency of the Company’s major foreign subsidiaries is generally the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded in accumulated other comprehensive income as a component of stockholders’ equity. Foreign currency transaction gains and losses are included in foreign currency exchange gain (loss), net. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange rate during the period.

Goodwill and Indefinite-Lived 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. 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. ~~We aggregated our reporting units into a single reporting unit because we determined they have similar economic characteristics.~~

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STAMPS.COM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Goodwill is reviewed for impairment annually on October 1 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~~When we perform the two-step process, the first step requires us to compare the fair value of ~~each~~the 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 athe 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,~~March 31, 2019, we are not aware of any indicators of impairment that would require an impairment analysis other than our annual goodwill impairment analysis.

Indefinite-lived intangible assets are reviewed for impairment annually on October 1 and whenever events or circumstances indicate that the fair value of an indefinite-lived intangible asset may be below its carrying value. In assessing other intangible assets not subject to amortization for impairment, the Company also has the option to perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of such an intangible asset is less than its carrying amount. If the Company determines that it is not more likely than not that the fair value of such an intangible asset is less than its carrying amount, then the Company is not required to perform any additional tests for assessing those intangible assets for impairment. However, if the Company concludes otherwise or elects not to perform the qualitative assessment, then it is required to perform a quantitative impairment test that involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. As of March 31, 2019, we are not aware of any indicators of impairment that would require an impairment analysis other than our annual indefinite-lived intangible assets impairment analysis.

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~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

~~Impairment of~~ Long-Lived Assets and Finite-Lived 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~~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 ~~have indefinite~~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 ~~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.~~removed, and any gain or loss is included in income from operations.

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STAMPS.COM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Income Taxes

We are subject to income taxes in the US and Foreign jurisdictions. We provide for income taxes at the current and future enacted tax rate and consistent with the laws applicable in each jurisdiction. 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.

Leases

On January 1, 2019, we adopted a new lease accounting standard (ASC Topic No. 842, Leases) (Leases) that sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. For information regarding the impact of adoption, see “Summary of Significant Accounting Policies - Accounting Guidance Adopted in 2019.”

Under Leases, we determine if an arrangement is a lease at inception. Right-of-use (ROU) assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. For this purpose, we consider only payments that are fixed and determinable at the time of commencement. As most of ~~September 30, 2017 and December 31, 2016, we~~our leases do not ~~have any valuation allowance recorded~~provide an implicit rate, the interest rate used to ~~reduce~~determine the present value of future lease payments is an estimated incremental borrowing rate. Many of our ~~gross deferred tax assets as we believe we have met~~leases include one or more options to renew. These options are factored into the ~~more likely than not threshold~~determination of the lease term and ~~we will realize our tax loss carry-forwards in the foreseeable future.~~lease payments when their exercise is considered to be reasonably certain.

~~Property~~Our lease agreements generally contain lease and ~~Equipment~~non-lease components. Non-lease components primarily include payments for maintenance and utilities. We elected the practical expedient to combine fixed payments for non-lease components with our lease payments and account for them together as a single lease component which increases the amount of the ROU assets and liabilities.

We ~~account for property~~also elected to keep leases with an initial term of 12 months or less off the balance sheet and ~~equipment at cost less accumulated depreciation and amortization. We compute depreciation using~~recognize the associated lease payments in the consolidated statements of income on a straight-line ~~method~~basis over the ~~estimated useful life~~lease term.

Operating leases are included in lease right-of-use assets, current portion of ~~the asset, generally three to five years for furniture, fixtures~~lease right-of-use liabilities, and ~~equipment and ten to forty years for building and building improvements. Leasehold improvements are capitalized and amortized~~long-term portion of lease right-of-use liabilities on our condensed consolidated balance sheets. Operating lease expense is recognized on a straight-line basis over the ~~shorter of the useful life of the asset or the remaining~~lease 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.~~operations on our consolidated statements of income.

Revenue Recognition

We recognize ~~revenue from product sales~~revenues when we transfer control of promised goods or services ~~rendered, as well as commissions from advertising or sale of products by third party vendors~~ to our ~~customer base~~customers in an amount that reflects the consideration to which we expect to be entitled to in exchange for those goods or services. We account for a contract when it has approval and commitment from both parties, the ~~following four revenue recognition criteria~~rights of the parties are ~~met: persuasive evidence of an arrangement exists; delivery~~identified, payment terms are identified, the contract has ~~occurred or services have been rendered; the selling price is fixed or determinable;~~commercial substance, and collectability of consideration is ~~reasonably assured.~~probable. Our payment terms vary by the products and services offered. The term between billings and when payment is due is not significant.

Revenues are presented on a disaggregated basis on the consolidated statements of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Service revenue is recognized over time for each month that customers have access to our platform or at a point in time when assets are transferred to the customer. We earn service revenue from our mailing and shipping operations in several different ways: (1) customers may pay us a monthly fee, based on a subscription ~~plan;~~plan which may be waived or refunded for certain customers, for which we provide them access to our platform. Revenue is earned over the period of time that the customers have access to the platform which is typically month-to-month; (2) we ~~may~~have been, and in the future potentially could be, compensated directly by the ~~United States Postal Service (USPS)~~USPS and/or other carriers for shipping labels printed that meet certain ~~qualifying customers under our USPS partnership;~~requirements, in which case revenue is earned over time, which is typically in the same month that the relevant labels are printed; (3) we may earn ~~transaction related~~ revenue ~~based on~~from customers ~~purchasing~~that have access to our platform when they purchase postage or ~~printing~~print shipping ~~labels;~~labels, in which case revenue is earned at the point in time we transfer an asset to the customer and have a present right of payment for the asset transferred; (4) we may earn ~~compensation by offering customers~~revenue that may take the form of some or all of the spread between the rate a ~~discounted postage~~customer pays and the rate ~~that is provided to~~ the ~~customers~~carrier or integration partner receives, either charged directly or paid by our ~~integration partners;~~partners, in which case revenue is earned at a point in time, which is typically when the customer purchases postage or prints a shipping label; and (5) we may earn other types of revenue shares or other compensation from specific customers that have access to our platform or through integration ~~partners. Revenue~~partners, in which case revenue is recognized at a point in ~~the period that services are provided.~~

time, which is when we have fulfilled our performance obligations.

Customers may purchase postage and other delivery services from the USPS and other carriers through our mailing and shipping solutions. ~~Postage purchase~~When funds ~~that~~ are transferred directly from ~~the~~ customers to the ~~USPS~~carrier, these funds are not recognized as revenue. We also provide mailing and shipping services for which the cost of postage or delivery is included in the cost of the service and, therefore, is recognized as service revenue.

Product revenue ~~for this postage, as it is purchased by~~consists of products sold through the mailing and shipping supplies stores which are available to our customers from within some of our mailing and shipping solutions. Products sold include shipping labels, mailing labels, dedicated postage printers, scales, and other mailing and shipping-focused office supplies. We recognize product revenue on product purchases upon delivery of the order to the customer.

We provide our customers with the opportunity to purchase parcel insurance directly through our solutions. Beginning on October 1, 2018, insurance revenue represents the amount we receive from customers net of the ~~USPS.~~

~~Table~~costs paid to our insurance providers. For the periods presented prior to October 1, 2018, insurance revenue represented the gross amount charged to the customer for purchasing insurance and the insurance cost of ~~Contents~~

~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

revenues represented the amount paid to our insurance providers. We recognize insurance revenue on insurance purchases upon the ship date of the insured package, which is the point in time when we have fulfilled our performance obligations.

Customized postage revenue, which includes the face value of postage, from the sale of ~~PhotoStamps and PictureItPostage~~customized postage sheets and rolls is ~~made pursuant to a sales contract that provides for~~recognized upon transfer of ~~both title and risk~~control of ~~loss~~the product to the customer, which occurs upon our delivery to the ~~carrier and revenue is recognized at that time.~~

carrier.

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~~three months ended ~~September 30, 2017~~March 31, 2019 or ~~2016.~~March 31, 2018, respectively.

Segment Information

We ~~provide~~have organized our ~~customers with the opportunity~~operations into two segments: Stamps.com and MetaPack. Please see Note 10 - “Segment and Geographical Information” in our Notes to ~~purchase parcel insurance directly through our solutions. Insurance revenue represents the gross amount charged to the customer~~Consolidated Financial Statements 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.~~further description.

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,~~March 31, 2019, we had ~~$15.2~~$18.0 million in short-term financing obligations and ~~$90.4~~$50.1 million of unused ~~short-term financing obligations~~ credit. As of December 31, ~~2016,~~2018, we had ~~$15.6~~$23.8 million in short-term financing obligations and ~~$90.0~~$96.7 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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STAMPS.COM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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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~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

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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~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

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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~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(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.

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.

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~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

~~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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~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

5.	Stock-Based Compensation

~~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~~ We 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.

occur.

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, and risk-free interest ~~rates and projected employee stock option exercise behaviors.~~rates. 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~~weighted average period the stock options are expected to remain outstanding, determined based on an analysis of historical exercise behavior.

Trademarks, Trade Names, and Other Intangible Assets (excluding Goodwill)

Acquired trademarks, trade names, and other intangibles (excluding goodwill) 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

~~Compensation~~During the three months ended March 31, 2019 and March 31, 2018, we repurchased approximately 235,461 shares and 120,000 shares for $32.0 million and $23.2 million, respectively. Also, in the first quarter of 2019 and the first quarter of 2018, we withheld 1,039 and 21,076 of shares, respectively, to satisfy income tax obligations related to performance-based inducement equity awards issued to the General Manager and the then Chief Technology Officer of ShippingEasy.

Accounting Guidance Adopted in 2019

Disclosure Update and Simplification

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The Company adopted the new presentation for its consolidated statement of stockholders' equity in the first quarter of 2019.

Leases

In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases, a new accounting standard for leases. The new standard generally requires the recognition of financing and operating lease liabilities and corresponding ROU assets on the balance sheet. For financing leases, a lessee recognizes amortization of the ROU 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.

We adopted the new guidance on January 1, 2019 using the modified retrospective transition approach. We elected the practical expedient to apply the new standard to all leases existing at the date of initial application and not restating comparative periods. We also elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification of finance or operating lease, our assessment on whether a contract was or contains a lease, and our initial direct costs for ~~employee~~any leases that existed prior to January 1, 2019.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The adoption of the new standard on January 1, 2019 resulted in recording operating lease ROU assets and operating lease liabilities of approximately $11.8 million and $13.6 million, respectively. The adoption did not impact our beginning retained earnings, or our prior year condensed consolidated statements of income and statements of cash flows.

For information regarding the accounting policy and required disclosures under the new standard, see “Summary of Significant Accounting Policies - Leases” and Note 11 - “Leases,” respectively.

Accounting Guidance Not Yet Adopted

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.

Financial Instruments - Credit Losses

In June 2016, the FASB issued ASU 2016-13, a standard that replaces the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The guidance will become effective for the Company on January 1, 2020 using a modified retrospective approach with early adoption permitted. We are evaluating the impact of adopting this guidance on the Company's consolidated 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.

MetaPack Acquisition

On August 15, 2018, we, through our wholly owned subsidiary Pacific Shelf 1855 Limited (Pacific Shelf), completed the acquisition of MetaPack Limited, a private limited company incorporated in England and Wales, pursuant to a share purchase agreement dated July 24, 2018, as amended (the “Agreement”), by and among certain key sellers named in the Agreement (the “Key Sellers”), MetaPack, Pacific Shelf, and Stamps.com Inc. as Pacific Shelf’s guarantor. MetaPack provides multi-carrier enterprise-level solutions to many of the world’s preeminent e-commerce retailers and brands.

Pursuant to the Agreement and a related agreement to purchase Minority Shares (as defined below), Pacific Shelf acquired 100% of MetaPack’s issued and to be issued share capital by purchasing (i) all of the Key Sellers’ shares of MetaPack, representing approximately 80% of the total outstanding shares and (ii) all other issued and to be issued shares of MetaPack (Minority Shares), for a final adjusted purchase price, for all such shares, of approximately £171 million, or $217.7 million using the August 15, 2018 GBP to USD exchange rate. Total cash paid for the acquisition was funded from cash and investment balances.

Stamps.com granted inducement stock options for an aggregate of 320,250 shares of Stamps.com common stock to 72 new employees after completion of its acquisition of MetaPack. The stock options were granted as inducements material to the new employees entering into employment with Stamps.com, pursuant to the Stamps.com 2018 MetaPack Equity Inducement Plan, which was approved by Stamps.com’s Compensation Committee. The awards were granted without stockholder approval in accordance with Nasdaq Listing Rule 5635(c)(4). Each option vests 25% on the one year anniversary of the grant date with the remaining 75% vesting in approximately equal monthly increments over the succeeding thirty-six months, provided that the option holder is still employed by Stamps.com or one of its subsidiaries on the vesting dates. The stock options have a ten year term and an exercise price equal to closing price of Stamps.com common stock on the grant date of August 15, 2018.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Under the acquisition method of accounting under ASC 805, the total 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 preliminary allocation of the purchase price. The Company has made a preliminary allocation of the purchase price of MetaPack to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value. The preliminary allocation of the purchase price is based upon management's estimates and is subject to revision, as a more detailed analysis of intangible assets and tax and other liabilities is completed and additional information on the fair value of assets and liabilities becomes available. A change in the fair value of the net assets may change the amount of the purchase price allocable to goodwill, and could impact the amounts of amortization expense.

The purchase price of MetaPack has been allocated on a preliminary basis as follows to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value based on the August 15, 2018 GBP to USD exchange rate (in thousands, except years):



	Fair Value			Fair Value		Useful Life (In Years)	Weighted Average Estimated Useful Life (In Years)
Cash and cash equivalents	$	9,186
Trade accounts receivable	9,767
Other current assets	2,776
Property and equipment	1,039
Goodwill	141,468
Identifiable intangible assets:
Trade names				$	10,936	12
Developed technology				40,691		16
Customer relationships				49,211		16
Total identifiable intangible assets	100,838						16
Accounts payable and accrued expenses	(13,415		)
Deferred revenue	(1,145		)
Revolving credit facility	(12,716		)
Deferred income tax liability	(19,288		)
Other liabilities	(824		)
Total purchase consideration	$	217,686

The fair value of the assets acquired and liabilities assumed were preliminarily determined using income, cost and market participant approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in ASC 820. The identified intangible assets consist of trade names, developed technology, and customer relationships. The estimated fair values of the trade names and developed technology were determined using the “relief from royalty” 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 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. Intangible assets are being amortized on a straight-line basis over their estimated useful lives. Based on the August 15, 2018 exchange rate, we expect the amortization of acquired intangibles will be approximately $1.6 million per quarter for the remaining estimated useful lives.

Deferred taxes were adjusted to record the deferred tax impact of acquisition accounting adjustments primarily related to intangible assets. The incremental deferred tax liabilities were calculated based on the tax effect of the step-up in book basis of the net assets of MetaPack, excluding the amount attributable to goodwill, using the estimated statutory tax rates.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Goodwill represents the excess of the consideration given over the sum of the fair values assigned to identifiable assets acquired less liabilities assumed in a business combination. The goodwill balance is primarily attributable to the expanded market opportunities for the Company internationally and MetaPack in the United States and the Company's ability to generate future technology. None of the goodwill recognized is expected to be deductible for income tax purposes. The goodwill recorded as part of this acquisition is included in the MetaPack segment (see Note 6 - “Goodwill and Intangible Assets” in our Notes to Consolidated Financial Statements).

Immediately following the acquisition, we repaid in full MetaPack's existing revolving credit facility balance of approximately $12.7 million.

We incurred approximately $2.5 million in transaction costs included in general and administrative expense and $1.0 million of nonrecurring foreign currency exchange loss directly related to the acquisition during the year ended December 31, 2018.

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.

On February 8, 2018, a putative class action complaint was filed against us in a case entitled Juan Lopez and Nicholas Dixon v. Stamps.com, Inc., Case No. 2:18-cv-01101, in the United States District Court for the Central District of California, Western Division, alleging wage and hour claims on behalf of our current and former “non-exempt” hourly call center employees. The complaint sought class certification, unspecified damages, unpaid wages, penalties, restitution, interest, and attorneys’ fees and costs. On July 24, 2018, we entered into a preliminary settlement that would resolve this matter for a non-material payment to be distributed to the participating class members. The court granted preliminary approval of the settlement and, at a hearing held on April 29, 2019, requested additional documentation. Therefore the timing of final approval of the settlement is now pending court approval at a time convenient to the court.

On February 28, 2019, a putative class action complaint was filed against us in a case entitled Grabisch v. Stamps.com, Inc. et al, Case No. 2:19-cv-01497, in the United States District Court for the Central District of California, Western Division, alleging violations of the Securities Exchange Act of 1934 purportedly on behalf of all those who purchased, or otherwise acquired, Stamps.com common stock between May 3, 2017 and February 21, 2019. On March 13, 2019, a second putative class action complaint, with the same allegations, was filed against us in a case entitled Karinski v. Stamps.com, Inc. et al, Case 2:19-cv-01828, in the United States District Court for the Central District of California, Western Division. On April 22, 2019, the Grabisch action was dismissed in its entirety without prejudice. The remaining Karinski complaint seeks class certification, unspecified damages, attorneys’ fees and costs. Lead plaintiff motions were filed on April 29, 2019, but a lead plaintiff has not yet been appointed and a consolidated complaint has not yet been filed. We believe that the case is without merit and intend to defend this case vigorously. Due to the very recent filing date of the case, neither the likelihood that a loss, if any, will be realized, nor an estimate of the possible loss or range of loss, if any, can be determined.

The Company had not accrued any material amounts related to any of the Company’s legal proceedings as of March 31, 2019 or December 31, 2018.

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

Our significant contractual obligations and commercial commitments (other than debt commitments) consist of operating lease obligations as of March 31, 2019. Please see Note 11 - “Leases” for additional information.

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 March 31,
	2019		2018
Net income	$	15,755	$	47,044

Basic - weighted average common shares	17,547		17,644
Diluted effect of common stock equivalents	468		867
Diluted - weighted average common shares	18,015		18,511

Earnings per share:
Basic	0.90		2.67
Diluted	0.87		2.54

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



	Three Months Ended March 31,
	2019	2018
Anti-dilutive stock options	1,153	95

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 RSUs, to be measured based on the grant date fair value of the awards, with the resulting expense generally recognized ~~using~~on a straight-line basis over the ~~straight-line method over their respective vesting periods of up~~period during which the employee is required to ~~five years.~~perform service in exchange for the award. Starting in the third quarter of fiscal 2016 through the fourth quarter of fiscal 2018, our stock-based compensation expense included performance-based inducement equity awards relating to the ShippingEasy acquisition. Starting in the third quarter of fiscal 2018, our stock-based compensation expense included performance-based inducement equity awards relating to the MetaPack acquisition as described in Note 2 - ~~“Acquisitions.”~~"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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~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~



	Three Months Ended March 31,
	2019		2018
Stock-based compensation expense relating to:
Stock options	$	8,497	$	7,191
Employee stock purchases	393		357
Total stock-based compensation expense	$	8,890	$	7,548
Stock-based compensation expense relating to:
Cost of revenues	$	646	$	483
Sales and marketing	2,054		1,518
Research and development	2,304		1,927
General and administrative	3,886		3,620
Total stock-based compensation expense	$	8,890	$	7,548

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 %



	Three Months Ended March 31,
	2019		2018
Expected dividend yield	—	%	—	%
Risk-free interest rate	2.5	%	2.3	%
Expected volatility	54.7	%	50.5	%
Expected life (in years)	3.3		3.4

6.	6. Goodwill and Intangible Assets

Goodwill ~~was approximately $239.7 million~~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 business combinations.

The following table summarizes goodwill as of ~~September 30, 2017 and~~ December 31, ~~2016, respectively.~~2018 and March 31, 2019 (in thousands):



	Stamps.com Segment		MetaPack Segment		Total
Goodwill balance at December 31, 2018	$	239,705	$	142,005	$	381,710
Foreign currency translation	—		2,796		2,796
Goodwill balance at March 31, 2019	$	239,705	$	144,801	$	384,506

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

We have amortizable and non-amortizable intangible assets consisting of trademarks, trade names, developed technology, non-compete agreements, customer relationships, and ~~other totaling approximately $125.4 million in~~other. The gross carrying amount as of ~~both September 30, 2017~~amortizable and non-amortizable intangible assets was $227.7 million at March 31, 2019 and $226.5 million at December 31, ~~2016.~~2018. Non-amortizable assets of $11.4 million as of both ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 consist primarily of the trade name relating to the Endicia acquisition.

The following table summarizes our amortizable intangible assets as of ~~September 30, 2017~~March 31, 2019 (in ~~thousands)~~thousands, except years):

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



	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Remaining weighted average amortization period (years)
Patents and Others	$	8,889	$	8,877	$	12	0.2
Customer Relationships	110,778		36,586		74,192		8.4
Technology	81,360		19,407		61,953		10.1
Non-Compete	2,211		1,725		486		2.2
Trademarks and Trade Names	13,107		1,679		11,428		10.6
Total amortizable intangible assets at March 31, 2019	$	216,345	$	68,274	$	148,071	9.1

The following table summarizes our amortizable intangible assets as of December 31, ~~2016~~2018 (in ~~thousands)~~thousands, except years):

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		Remaining weighted average amortization period (years)
Patents and Others	$	8,889	$	8,866	$	23	0.5
Customer Relationships	110,194		33,299		76,895		8.6
Technology	80,878		17,451		63,427		10.3
Non-Compete	2,211		1,668		543		2.4
Trademarks and Trade Names	12,977		1,395		11,582		10.8
Total amortizable intangible assets at December 31, 2018	$	215,149	$	62,679	$	152,470	9.4

~~Table~~We recorded amortization of ~~Contents~~

~~STAMPS.COM INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

intangible assets totaling approximately $5.6 million for the three months ended March 31, 2019. We recorded amortization of intangible assets totaling approximately $4.0 million ~~and $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, respectively.March 31, 2018. Amortization of intangible assets is included in general and administrative expense in the accompanying consolidated statements of income.

~~As of September 30, 2017, the remaining weighted average amortization period for our amortizable intangible assets is approximately 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

2018 $ 15,954
2019 15,623
2020 15,545
2021 14,421
2022 5,498
Thereafter 6,569
Total $ 73,610



Twelve Month Period Ending March 31,	Estimated Amortization Expense
2020	$	22,206
2021	21,948
2022	17,070
2023	10,022
2024	9,675
Thereafter	67,150
Total	$	148,071

7.	7. Income Taxes

Our income tax ~~benefit~~expense was ~~$11.4~~$6.7 million ~~and $873,000~~ for the three ~~and nine~~ months ended ~~September 30, 2017, respectively, which is~~March 31, 2019. The income tax expense for the three months ended March 31, 2019 was primarily ~~attributable~~due to (a) our pre-tax ~~book~~ income multiplied by an estimated annual effective tax rate and (b) discrete tax benefits ~~relating~~related to the exercises of ~~options in the three and nine months ended September 30, 2017.~~stock awards of approximately $0.4 million. Our income tax expense was ~~$12.1 million and $30.0~~$1.6 million for the three ~~and nine~~ months ended September 30, 2016, respectively, which is primarily attributable to our pre-tax income including our current tax expense consisting of federal alternative minimum tax and various state taxes and our deferredMarch 31, 2018. The income tax expense for the ~~utilization of net operating losses~~three months ended March 31, 2018 was primarily due to (a) our pre-tax income multiplied by an estimated annual effective tax rate and ~~other temporary differences. 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 effects of share-based awards be recognized in the income tax provision in the consolidated statements of income when the awards vest or are settled. Under the previous guidance, excess(b) discrete tax benefits ~~and deficiencies were recognized in additional paid-in capital in~~related to the ~~consolidated balance sheets when the~~exercises of stock awards ~~vested or were settled. For the three and nine months ended September 30, 2017, the amount~~ of ~~excess tax benefits recognized in the income tax provision was~~ approximately $23.5 million and $41.8 million, respectively. For the three and nine months ended September 30, 2016, respectively, the amount of excess tax benefits recognized in additional paid-in capital was not material.$10.7 million.

Our effective income tax rate differs from the statutory income tax rate primarily as a result of permanent tax adjustments for non-deductible expenses, state taxes, and tax benefits from ~~stock options exercised and~~ research and development tax credits ~~as well as permanent tax adjustments~~and exercises of stock awards. As of March 31, 2019 and December 31, 2018, we have recorded a valuation allowance of $1.3 million and $1.2 million against certain state research and development credits for ~~nondeductible items, such as stock-based compensation and state taxes. We evaluated the appropriateness of our~~which we believe it is more likely than not that these 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~~will not be realized. We also have ~~any~~recorded a valuation allowance against ~~our deferred tax assets.~~the activity of certain foreign jurisdictions.

8.	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 tables summarize our financial assets measured at fair value on a recurring basis as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016, respectively~~2018 (in thousands):

Fair Value Measurement at Reporting Date Using

Description

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 and cash equivalents $ 183,538 $ 183,538 $ — $ —
Available-for-sale debt securities — — — ��
Total $ 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 $ —

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.



			Fair Value Measurement at Reporting Date Using
Description	March 31, 2019		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	$	110,925	$	110,925	—	—
Total	$	110,925	$	110,925	—	—



			Fair Value Measurement at Reporting Date Using
Description	December 31, 2018		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	$	113,757	$	113,757	—		—
Total	$	113,757	$	113,757	$	—	—

9. Cash and Cash Equivalents ~~and Investments~~

Our cash equivalents ~~and investments consist~~consisted of money market ~~asset-backed securities and public corporate debt securities~~funds at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016.~~2018. 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~~At March 31, 2019 and ~~are recorded at fair value using the specific identification method. Realized gains and losses are reflected in other income, net using the specific identification method. There was~~December 31, 2018, we had no material unrealized or realized gain or loss with respect to our short-term investments during the nine months ended September 30, 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.investments.

1718

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following tables summarize our cash and cash equivalents ~~and investments~~ as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 (in thousands):

September 30, 2017

Cost or
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value

Cash and cash equivalents:
Cash $ 177,039 — — $ 177,039
Money market 6,492 9 (2 ) 6,499
Total cash and cash equivalents 183,531 9 (2 ) 183,538
Short-term investments:
Corporate bonds and asset backed securities — — — —
Total short-term investments — — — —
Cash and cash equivalents and short-term investments $ 183,531 9 (2 ) $ 183,538

December 31, 2016

Cost or
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value

Cash and cash equivalents:
Cash $ 101,987 — — $ 101,987
Money market 4,945 — — 4,945
Total cash and cash equivalents 106,932 — — 106,932
Short-term investments:
Corporate bonds and asset backed securities 1,500 13 (2 ) 1,511
Total short-term investments 1,500 13 (2 ) 1,511
Cash and cash equivalents and short-term investments $ 108,432 13 (2 ) $ 108,443

~~As of September 30, 2017, the amortized cost and estimated fair value of our marketable fixed-income securities due within one year and due after one year was immaterial.~~



	March 31, 2019
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value


Cash and cash equivalents:
Cash	$	104,234	—	—	$	104,234
Money market	6,691		—	—	6,691
Cash and cash equivalents	$	110,925	—	—	$	110,925



	December 31, 2018
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
Cash and cash equivalents:
Cash	$	107,118	—	—	$	107,118
Money market	6,639		—	—	6,639
Cash and cash equivalents	$	113,757	—	—	$	113,757

10. Segment Information and Geographic Data

Segment Information

Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker (CODM) for purposes of allocating resources and evaluating financial performance. The Company's Chairman and Chief Executive Officer has been identified as the CODM as defined by guidance regarding segment disclosures.

The Company’s reportable segments have been determined based on the distinct nature of their operations and customer bases, and the financial information that is evaluated regularly by the CODM. Following the MetaPack acquisition (see Note 2) in 2018, the Company added a new segment for the MetaPack business. Previously, the Company had a single reportable segment.

The Stamps.com segment derives revenue from external customers from offering postage online and shipping software solutions offered to consumers, small businesses, e-commerce shippers, enterprise mailers, and high volume shippers. The Stamps.com reportable segment includes the results of brand names Stamps.com, Endicia, ShippingEasy, ShipStation, and ShipWorks. Stamps.com's customers are primarily located in the US.

The MetaPack segment consists of the operations of MetaPack which derives revenues from external customers from offering multi-carrier enterprise-level shipping software solutions to large e-commerce retailers and brands. MetaPack's customers are primarily located outside the US.

Revenues, cost of revenues, and operating expenses are generally directly attributed to our segments. Inter-segment revenues are not presented separately, as these amounts are immaterial. Our CODM does not evaluate operating segments using asset information.

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STAMPS.COM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Information about segments during the periods presented were as follows (in thousands):



	Three Months Ended March 31,
	2019			2018
Segment revenues
Stamps.com	$	122,904		$	133,565
MetaPack	13,099			—
Total revenues	$	136,003		$	133,565

Segment income (loss) from operations
Stamps.com	$	25,311		$	49,201
MetaPack	(2,070		)	—
Total income from operations	$	23,241		$	49,201

Company's total segment income from operations	$	23,241		$	49,201
Foreign currency exchange gain (loss), net	(95		)	—
Interest expense	(714		)	(590		)
Interest income and other income, net	65			49
Income before income taxes	$	22,497		$	48,660

Geographic Data

No sales to an individual customer or country other than the US accounted for more than 10% of revenue for the three months ended March 31, 2019 or March 31, 2018. The following table presents our revenues by geography, based on the billing addresses of our customers (in thousands, unaudited):



	Three Months Ended March 31,
	2019		2018
Revenues
United States	$	122,700	$	132,955
International	13,303		610
Total revenues	$	136,003	$	133,565

11. Leases

The Company's material lease contracts are generally for corporate office space. The Company leases facilities pursuant to noncancelable operating lease agreements expiring through 2029.

Operating lease cost for the three months ended March 31, 2019 was approximately $1.1 million. Operating lease cost for the three months ended March 31, 2018 was approximately $933,000.

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STAMPS.COM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table is a schedule of maturities of operating lease liabilities as of March 31, 2019 (in thousands):



Twelve Month Period Ending March 31,	Operating Lease Obligations
2020	$	4,774
2021	4,834
2022	3,763
2023	3,089
2024	2,317
Thereafter	2,435
Total undiscounted cash flows	21,212
Less amount representing interest	(2,795		)
Present value of lease liabilities	$	18,417

The table above reflects payments for noncancelable operating leases with initial or remaining terms of one year or more as of March 31, 2019. The table above does not include obligations for leases that have not yet commenced and does not include lease payments that were not fixed at commencement or modification.

As of March 31, 2019, the weighted-average remaining lease term (in years) and discount rate related to the operating leases were as follows:

~~ITEM 2.~~

	March 31, 2019
Weighted-average remaining lease term	5.1
Weighted-average discount rate	5.3	%

12. 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, except as described below and in Note 3 - “Commitments and Contingencies” in our Notes to Consolidated Financial Statements.

Prior to issuance, we became aware of potential adverse amendments, renegotiations, changes, or termination of certain contracts between the USPS and certain of our strategic partners who are part of the USPS’s reseller program, and through which we derive material revenues and profits (such potential events, collectively the "Reseller Restructuring"); however there is significant uncertainty as to whether, how and when any Reseller Restructuring may be implemented. As such, an estimate of any future financial impact for accounting purposes cannot be made at this time.

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

Customized postage revenue increased ~~75%~~30% to ~~$8.6~~$3.4 million in the three months ended ~~September 30, 2017~~March 31, 2019 from ~~$4.9~~$2.6 million in the three months ended ~~September 30, 2016 and increased 53% to $15.3 million in the nine months ended September 30, 2017 from $10.0 million in the nine months ended September 30, 2016.~~March 31, 2018. The increase was primarily attributable to increases in partner sales and website orders, partially offset by decreases in high volume customer orders. ~~High volume order sales are unpredictable and vary from quarter to quarter.~~

Cost of Revenue

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

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017 2016 2017 2016
Cost of revenues
Service $ 11,882 $ 9,903 $ 37,284 $ 28,054
Product 1,535 1,579 4,930 5,019
Insurance 966 1,291 3,547 3,920
Customized postage 7,151 3,954 12,600 8,076
Total cost of revenues $ 21,534 $ 16,727 $ 58,361 $ 45,069
Cost as percentage of associated revenue
Service 12.2 % 12.6 % 12.7 % 12.7 %
Product 31.8 % 33.6 % 32.2 % 33.2 %
Insurance 23.6 % 31.9 % 27.4 % 31.0 %
Customized postage 83.3 % 80.5 % 82.3 % 80.6 %
Total cost as a percentage of total revenues 18.7 % 18.1 % 17.4 % 17.4 %



	Three Months Ended March 31,
	2019			2018
Cost of revenues
Service	32,235			20,649
Product	1,673			1,751
Insurance	—			998
Customized postage	2,431			2,129
Total cost of revenues	$	36,339		$	25,527
Cost as percentage of associated revenue
Service	26.0		%	17.1		%
Product	31.0		%	30.8		%
Insurance	—		%	22.8		%
Customized postage	72.4		%	82.5		%
Total cost as a percentage of total revenues	26.7		%	19.1		%

Cost of service revenue principally consists of the cost of customer service, certain promotional expenses, system operating costs, credit card processing fees, vendor costs and expenses, 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~~For the periods presented prior to October 1, 2018, the cost of insurance revenue principally consists of parcel insurance offering costs through our third party insurance ~~providers.~~providers as described in the previous section. Cost of customized postage revenue principally consists of the face value of postage, customer service, image review costs, and printing and fulfillment costs.

~~Table of Contents~~

Cost of service revenue increased ~~20%~~56% to ~~$11.9~~$32.2 million in the three months ended ~~September 30, 2017~~March 31, 2019 from ~~$9.9~~$20.6 million in the three months ended ~~September 30, 2016 and increased 33% to $37.3~~March 31, 2018. Our acquisition of MetaPack resulted in cost of service revenue increasing by $4.6 million in ~~the nine months ended September 30, 2017 from $28.1 million in the nine months ended September 30, 2016. The increase during~~ the three months ended ~~September 30, 2017~~March 31, 2019 compared to the 2018 period. The remaining increase for the three months ended March 31, 2019 was primarily attributable to ~~higher credit card processing fees, which increased by $2.0 million, directly related to~~the growth of 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.consolidation services. Promotional expenses were not material in the three ~~or nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016.~~March 31, 2018.

Cost of service revenue as a percent of service revenue ~~was 12%~~increased to 26% in the three months ended ~~September 30, 2017 and 13%~~March 31, 2019 from 17% in the three months ended ~~September 30, 2016. Cost~~March 31, 2018. The increase is primarily attributable to: (i) the relative increase in service revenue from service offerings, such as consolidation services, for which the vendor costs and expenses are included both in revenue and in cost of service revenue; (ii) the decrease in service revenue attributable to the termination of our agreement with the USPS that provided for Package Incentive Payments; and (iii) the acquisition of MetaPack, which has higher cost of service revenue as a percent of service ~~revenue was 13% in the nine months ended September 30, 2017, which was consistent with the nine months ended September 30, 2016.~~revenue.

Cost of product revenue decreased 4% to $1.7 million in the three ~~and nine~~ months ended ~~September 30, 2017 was consistent with~~March 31, 2019 from $1.8 million in the ~~cost of product revenue in~~ three ~~and nine~~ months ended ~~September 30, 2016, respectively.~~ March 31, 2018. The decrease during the three months ended March 31, 2019 is primarily due to the decrease in our product revenue.

Cost of product revenue as a percent of product revenue was ~~32%~~31% in the three months ended ~~September 30, 2017~~March 31, 2019 and ~~34%~~31% in the three months ended ~~September 30, 2016. Cost of product revenue as a percent of product revenue was 32% in the nine months ended September 30, 2017 and 33% in the nine months ended September 30, 2016.~~March 31, 2018.

~~Cost~~The decrease in cost of insurance revenue ~~decreased 25%~~ to zero in the three months ended March 31, 2019 from $1.0 million in the three months ended ~~September 30, 2017 from $1.3 million~~March 31, 2018 was due to the change to recognizing revenue on a net basis of accounting beginning October 1, 2018 as described in the three months ended September 30, 2016 and decreased 10% to $3.5 million in the nine months ended September 30, 2017 from $3.9 million in the nine months ended September 30, 2016. The decrease was primarily attributable to lower cost as a result of a renegotiated contract.

previous section. Cost of insurance revenue as a percent of insurance revenue was ~~24%~~23% 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, 2017 and 31% in the nine months ended September 30, 2016. The decrease is the combination of decreased costs of insurance revenue and increased insurance revenue.March 31, 2018.

Cost of customized postage revenue increased ~~81%~~14% to ~~$7.2~~$2.4 million in the three months ended ~~September 30, 2017~~March 31, 2019 from ~~$4.0~~$2.1 million in the three months ended ~~September 30, 2016 and increased 56% to $12.6 million in the nine months ended September 30, 2017 from $8.1 million in the nine months ended September 30, 2016.~~March 31, 2018. The increase in cost of customized postage revenue during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 is primarily due to the increase in our customized postage ~~revenue.~~ volume.

Cost of customized postage revenue as a percent of customized postage revenue was 72% in the three months ended March 31, 2019 and 83% in the three months ended ~~September 30, 2017 and 81%~~March 31, 2018. The decrease in ~~the three months ended September 30, 2016. Cost~~cost of customized postage revenue as a percent of customized postage revenue ~~was 82% in~~is primarily due to 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~~relative increase in ~~high volume~~our customized postage revenue related to partner sales and website orders which have a ~~lower profit~~higher margin compared to ~~website sales.~~high volume orders.

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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)~~percentages):

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017 2016 2017 2016
Operating expenses:
Sales and marketing $ 20,588 $ 18,229 $ 66,018 $ 59,708
Research and development 12,037 9,111 34,187 25,579
General and administrative 25,243 16,901 65,676 49,276
Total operating expenses $ 57,868 $ 44,241 $ 165,881 $ 134,563
Operating expenses as a percent of total revenues:
Sales and marketing 17.9 % 19.7 % 19.6 % 23.1 %
Research and development 10.5 % 9.8 % 10.2 % 9.9 %
General and administrative 21.9 % 18.3 % 19.5 % 19.1 %
Total operating expenses as a percentage of Total revenues 50.3 % 47.8 % 49.3 % 52.1 %



	Three Months Ended March 31,
	2019			2018
Operating expenses:
Sales and marketing	$	32,881		$	25,748
Research and development	17,314			12,073
General and administrative	26,228			21,016
Total operating expenses	$	76,423		$	58,837
Operating expenses as a percent of total revenues:
Sales and marketing	24.2		%	19.3		%
Research and development	12.7		%	9.0		%
General and administrative	19.3		%	15.7		%
Total operating expenses as a percentage of total revenues	56.2		%	44.1		%

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. 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%~~28% to ~~$20.6~~$32.9 million in the three months ended ~~September 30, 2017~~March 31, 2019 from ~~$18.2~~$25.7 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.~~March 31, 2018. 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, 2017March 31, 2019 was primarily attributable to an increase in discretionary and sales volume-based partner marketing ~~spending~~spend of ~~$3.9~~$3.1 million and an increase in headcount-related expenses including stock-based compensation of ~~$2.2~~$3.0 million. The ~~increase~~increases in headcount-related expenses ~~was due~~were primarily attributable to the ~~issuance~~inclusion 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~~ ~~Note 2 – “Acquisitions”~~ ~~in our Notes to Consolidated Financial Statements~~headcount-related expenses for ~~further description of the ShippingEasy acquisition.~~MetaPack employees.

Sales and marketing expense as a percent of total revenue was ~~18%~~24% in the three months ended ~~September 30, 2017~~March 31, 2019 which was ~~down~~up compared to ~~20%~~19% in the three months ended ~~September 30, 2016.~~March 31, 2018. Sales and marketing expense as a ~~percent~~percentage of total revenue ~~was 20%~~increased primarily due to the decrease 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 primarilyrevenue attributable to the termination of our ~~ability to leverage our sales and marketing spend,~~agreement with the USPS which ~~is expensed as incurred relative to the year-over-year growth in our average monthly revenue per paid customer.~~provided for Package Incentive Payments.

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 ~~32%~~43% to ~~$12.0~~$17.3 million in the three months ended ~~September 30, 2017~~March 31, 2019 from ~~$9.1~~$12.1 million in the three months ended ~~September 30, 2016 and increased 34% to $34.2 million in the nine months ended September 30, 2017 from $25.6 million in the nine months ended September 30, 2016.~~March 31, 2018. The increase during the three months ended ~~September 30, 2017~~March 31, 2019 was primarily attributable to an increase in headcount-related expense including stock-based compensation of ~~$2.0~~$3.4 million and ana $1.0 million increase in facilities expense of $0.2 million. The increase during the nine months ended September 30, 2017 was primarily due to an increase in headcount-related expenses including stock-based compensation of $6.6 million and an increase in facilities expense of $0.8 million.allocated information technology expenses. 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~~incurred to support our expanded product offerings and technology infrastructure ~~investments. The increase in facilities expense was associated with the increase in headcount.~~investments and include headcount-related expenses for MetaPack employees.

~~Table of Contents~~

Research and development expense as a percent of total revenue ~~during~~was 13% in the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 which was up compared to 9% in the three months ended March 31, 2018. Research and ~~2016 was 10%.~~development expense as a percentage of total revenue increased primarily due to the decrease in revenue attributable to the termination of our agreement with the USPS which provided for Package Incentive Payments and the acquisition of MetaPack which had higher research and development expense as a percent of total revenue.

General and Administrative

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

General and administrative expense increased ~~49%~~25% to ~~$25.2~~$26.2 million in the three months ended ~~September 30, 2017~~March 31, 2019 from ~~$16.9~~$21.0 million in the three months ended ~~September 30, 2016 and increased 33% to $65.7 million in~~March 31, 2018. In the ~~nine~~three months ended ~~September 30, 2017 from $49.3 million in the nine months ended September 30, 2016.~~March 31, 2019, MetaPack general and administrative expense was $4.5 million. The remaining increase during the three months ended ~~September 30, 2017~~March 31, 2019 was primarily ~~attributable to: (1) $6.0~~due to other general increases in operating expenses, partially offset by a $0.8 million ~~of executive consulting expense; and (2) an increase~~decrease 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 compared to the same periods in 2017 due to acquisition related costs. We did not have any acquisition related costs in 2017.compensation.

General and administrative expense as a percent of total revenue was ~~22%~~19% in the three months ended ~~September 30, 2017~~March 31, 2019 and ~~was 18%~~16% in the three months ended ~~September 30, 2016.~~March 31, 2018. General and administrative expense as a ~~percent~~percentage of total revenue ~~was 20%~~increased primarily due to the decrease in revenue attributable to the ~~nine months ended September 30, 2017~~termination of our agreement with the USPS which provided for Package Incentive Payments and ~~was 19% in~~ the ~~nine months ended September 30, 2016. The increases in~~acquisition of MetaPack which had higher general and administrative ~~expense~~expenses as a percent of total ~~revenue~~revenue.

Foreign Currency Exchange Gain (Loss), Net

Foreign currency transaction gains and losses are included in foreign currency exchange gain (loss), net. The foreign currency exchange loss, net of $95,000 in the three ~~and nine~~ months ended ~~September 30, 2017 were attributable~~March 31, 2019 was not material to the ~~factors described in the previous paragraph.~~

consolidated financial statements.

Interest Income and Other Income

Interest income and other income primarily consists of interest income from cash, cash equivalents, and ~~short-term and long-term~~ investments. Interest and other income ~~was $120,000 and $24,000~~increased to $65,000 in the three months ended ~~September 30, 2017 and 2016, respectively.~~March 31, 2019 from $49,000 in the three months ended March 31, 2018. Interest and other income ~~was $309,000 and $98,000 in~~is not material to the ~~nine months ended September 30, 2017 and 2016, respectively.~~consolidated financial statements.

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~~increased to $714,000 in the three months ended ~~September 30, 2017 compared to $828,000~~March 31, 2019 from $590,000 in the three months ended ~~September 30, 2016. Interest expense was $2.8 million in the nine months ended September 30, 2017 compared to $2.6 million in the nine months ended September 30, 2016.~~March 31, 2018. The increase in interest expense iswas primarily attributable to higher ~~average~~ interest rates, ~~in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016,~~ partially offset by lower outstanding debt balances under our credit facility.

~~Table of Contents~~

Provision for Income Taxes

~~For~~Our income tax expense was $6.7 million for the three ~~and nine~~ months ended ~~September 30, 2017, our~~March 31, 2019. Our income tax ~~benefit~~expense was ~~$11.4~~$1.6 million ~~and $873,000, respectively.~~ for the three months ended March 31, 2018.

Our effective income tax ~~benefit was~~rate differs from the statutory income tax rate 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~~as a result of ~~our adoption of ASU 2016-09 in 2017, we recognize the full impact of the excess~~permanent tax adjustments for non-deductible expenses, state taxes, and tax benefits ~~associated with~~from research and development tax credits and exercises of 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~~ awards.

See Note ~~1 – “Summary of Significant Accounting Policies”~~7 — “Income Taxes” ~~and~~ ~~Note 5 – “Stock Based Compensation”~~ in our Notes to Consolidated Financial Statements for further ~~description of the impact of this accounting standard.~~discussion.

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 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 research and 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, 2017 and December 31, 2016, we do not have any valuation allowance against our gross deferred tax assets.

Liquidity and Capital Resources

Changes in cash and cash equivalents for the three months ended March 31, 2019 and March 31, 2018 were as follows:



	Three Months Ended March 31,
	2019			2018			Change
Net cash provided by operating activities	$	33,444		$	55,288		$	(21,844	)
Net cash used in investing activities	(262		)	(447		)	185
Net cash used in financing activities	(36,038		)	(12,896		)	(23,142		)
Effect of exchange rate changes	24			—			24
Net (decrease) increase in cash and cash equivalents	$	(2,832	)	$	41,945		$	(44,777	)

As of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, we had ~~$183.5~~$110.9 million and ~~$108.4~~$113.8 million, respectively, primarily in cash and 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 securities, and US government and agency bonds, and do not engage in hedging or speculative activities.equivalents.

Net cash provided by operating activities was approximately ~~$149.0~~$33.4 million and ~~$104.0~~$55.3 million during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~March 31, 2018, respectively. The ~~increase~~decrease in net cash provided by operating activities was primarily attributable to the following changes in the consolidated statement of cash flows line items: (1) ~~increase~~a decrease in net income of ~~$64.2 million;~~$31.3 million and (2) a $12.4 million decrease in cash flows due to a decrease in accounts payable and accrued expenses, partially offset by (a) an $18.9 million increase in cash flows due to a decrease in accounts receivable ~~of $14.1 million; (3)~~and (b) a $6.0 million increase in stock-based compensation expense of $8.9 million; and 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 other current assets of $30.3 million primarilycash flows due to ~~prepaid income taxes; (6)~~a decrease in ~~the deferred~~current income ~~tax balance of $18.1 million; and the (7) decrease in deferred revenue balance of $2.4 million.~~taxes.

Net cash used in investing activities was approximately ~~$4.5 million~~$262,000 and ~~$51.9 million~~$447,000 during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~March 31, 2018, respectively. The 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 the Stamps.com headquarters.

not material.

Net cash used in financing activities was approximately ~~$68.0~~$36.0 million and ~~$36.1~~$12.9 million during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~March 31, 2018, respectively. The increase in net cash used in financing activities was primarily due to (1) the ~~(1) $55.7~~decrease in proceeds received from exercise of stock options of $17.3 million, (2) the $4.9 million decrease in proceeds from short term financing obligations, net of repayments, and (3) the $4.6 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;repurchases, partially offset by ~~(5)~~ the ~~$38.3~~$4.1 million ~~increase~~decrease in ~~proceeds from stock option exercises.~~payments of statutory income tax withholding obligations that were funded by shares withheld.

~~Table of Contents~~

The following table is a schedule of our significant contractual obligations and commercial commitments (other than debt commitments), which consist of minimum operating lease payments as of ~~September 30, 2017~~March 31, 2019 (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



Twelve Month Period Ending March 31,	Operating Lease Obligations
2020	$	4,774
2021	4,834
2022	3,763
2023	3,089
2024	2,317
Thereafter	2,435
Total undiscounted cash flows	21,212
Less amount representing interest	(2,795		)
Present value of lease liabilities	$	18,417

On November 18, 2015, we entered into a ~~credit agreement~~Credit Agreement with a group of banks, which ~~provides~~provided for a term loan of $82.5 million and a revolving credit facility with a maximum borrowing of $82.5 ~~million (the “Credit Agreement”).~~million. 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. Interest expense associated with the debt issuance costs for each of the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and March 31, 2018 was approximately ~~$93,000 and $279,000, respectively.~~$93,000. In December 2017, we repaid all of our revolving credit facility outstanding debt of $62.0 million.

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% and 2.00%, based upon certain financial measures. As of ~~September 30, 2017,~~March 31, 2019, our applicable margin was our applicable margin was 1.25% and the interest rate on our outstanding loan was approximately ~~2.49%~~3.75%. 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. As of ~~September 30, 2017,~~March 31, 2019, 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 to among other things, incur additional ~~indebtedness,~~indebtedness; grant ~~liens,~~liens; repurchase ~~stock,~~stock; pay ~~dividends~~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, 2017,~~March 31, 2019, such requirements were: (1) our Consolidated Total Leverage Ratio, as defined in the Credit Agreement, must be less than ~~2.75~~2.50 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,~~March 31, 2019, our Consolidated Total Leverage Ratio was ~~0.62~~0.25 to 1.00, our Fixed Charge Coverage Ratio was ~~21.70~~16.92 to 1.00 and our Liquidity was approximately ~~$204~~$193 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 do not believe that the provisions of the Credit Agreement currently represent a restriction to our ability to pay dividends in permissible amounts.

The contractual maturities of our debt obligations due subsequent to ~~September 30, 2017~~March 31, 2019 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 March 31,	Amount
2020	$	11,344
2021	47,437
Thereafter	—
Total debt	58,781

Less: debt issuance costs	623
Total debt, net of debt issuance costs	$	58,158

~~Table of Contents~~

The estimated interest payments related to our debt due subsequent to ~~September 30, 2017~~March 31, 2019 are as follows (in thousands):

Year ending September 30, Amount
2018 $ 3,320
2019 3,097
2020 2,829
2021 570
Thereafter —
Total $ 9,816



Year Ending March 31,	Amount
2020	$	2,088
2021	1,085
Thereafter	—
Total	$	3,173

The above estimated interest payments assume an interest rate of ~~2.49%~~3.75%, which is our interest rate as of ~~September 30, 2017, and assume~~March 31, 2019.

Immediately following the ~~entire remaining amount~~acquisition of ~~our~~MetaPack, we repaid in full MetaPack's existing revolving credit facility ~~is paid on the maturity date~~balance of ~~November 18, 2020.~~approximately $12.7 million.

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.

Segment Analysis

~~Table~~

We acquired MetaPack on August 15, 2018, and, accordingly, there is no inclusion of ~~Contents~~MetaPack’s results prior to our ownership within this Report. Given the absence of MetaPack data in our results prior to our ownership of MetaPack, and the inclusion of segment financial information contained in Note 10 to the Notes to Consolidated Financial Statements contained in this Report, we believe that, as of the filing of this Report, a segment presentation in this Management's Discussion and Analysis of Results of Operations section is not necessary to form an understanding of our overall business. We intend to provide a segment analysis in our future Management's Discussion and Analysis of Results of Operations sections when appropriate to facilitate an understanding of our business.

Business Outlook and 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 1A ~~“Risk Factors”~~"Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018, filed with the SEC on March 1, ~~2017.~~2019.

As previously disclosed, our agreement with the USPS that provided for Package Incentive Payments to be paid directly to us by the USPS for certain classes of shipping labels terminated on December 31, 2018. In addition, we have recently become aware of potential adverse amendments, renegotiations, changes, or termination of certain contracts between the USPS and certain of our strategic partners who are part of the USPS’s reseller program, and through which we derive material revenues and profits (such potential events, collectively the "Reseller Restructuring"); however there is significant uncertainty as to whether, how and when any Reseller Restructuring may be implemented.

We expect our mailing and shipping revenue to ~~increase~~decrease in ~~2017~~2019 compared to ~~2016. We expect our mailing and shipping revenue growth in 2017~~2018 primarily due to ~~be less than~~ the ~~growth we achieved in 2016 now that we have passed the one year anniversary~~termination on December 31, 2018 of our ~~Endicia acquisition.~~agreement with the USPS which provided for Package Incentive Payments and the potential Reseller Restructuring, partially offset by an increase due to MetaPack results being included for the full fiscal year in 2019, compared to the period from August 15 through year end in 2018. Our ~~ability to grow our~~ mailing and shipping revenue is ~~partly~~also 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 or retain customers, this would further negatively impact our ~~2017~~2019 mailing and shipping revenue growth expectations.

Our expectations of mailing and shipping revenue reflect the discontinuation of Package Incentive Payments as well as the uncertainty regarding any potential Reseller Restructuring. As a result, our revenue and operating results will be adversely affected unless we are successful in timely replacing the lost revenue with similar compensation from the USPS or other potential partners. While we have strategies to replace some portion of these revenues with new carrier relationships, these plans are in various stages, and we do not expect any material replacement of such revenues to occur during the 2019 fiscal year. Further, there is no assurance as to when, if or to what extent we may ultimately succeed in implementing such strategies, all of which carry negotiation and execution risks. Unless and until we replace these lost revenues and associated profit margins, our operating results in 2019 and beyond may be materially less than in 2018. See "Risk Factors--Risks Related to our Industry--The discontinuation of certain financial compensation arrangements with the USPS will have an adverse effect on our revenues and operating results, unless we are successful in replacing the lost revenue and profit with similar compensation from the USPS or other potential partners, of which there is no assurance," "Risk Factors--Risks Related to our Industry--The USPS could modify, discontinue or terminate agreements and other financial compensation arrangements, which would have an adverse effect on our revenue and operating results," "Risk Factors--Risks Related to our Industry--The USPS or our integration partners could cause discounts our customers receive to be diminished or terminated, which would have an adverse effect on our results of operations, reputation and competitiveness," and "Risk Factors--Risks Related to our Industry--Strategic business Partners or carriers could modify or terminate agreements and other financial compensation arrangements, which could materially adversely affect our results of operations and prospects," in our Annual Report on Form 10-K for the fiscal year ended December 1, 2018, filed with the SEC on March 1, 2019.

~~Customized postage revenue increased in 2017 compared to 2016, as~~We expect customized postage revenue ~~for the nine months ended September 30, 2017 exceeded customized postage revenue for the twelve months ended December 30, 2016.~~to decline in 2019 compared to 2018, due to certain high volume business purchases occurring in 2018, which may not be repeated in 2019. 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 ~~expense~~expenses to ~~increase~~be higher in ~~2017~~2019 as compared to ~~2016. We~~2018 and we expect the percent increase in sales and marketing expense in ~~2017~~2019 to be less than the percent increase in ~~2016,~~2018. The increases are as ~~2016 reflected~~ a ~~full year~~result of ~~Endicia results, as opposed~~the inclusion of MetaPack, the annualized effect of our headcount investments in 2018, and our plan to ~~approximately one and a half months~~increase our investments in ~~2015.~~headcount resources in 2019 to drive growth. 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 research and development expenses to be higher in ~~2017~~2019 as compared to ~~2016. We~~2018 and we expect the percent increase in research and development expense in ~~2017~~2019 to be ~~less~~greater than the percent increase in ~~2016, as 2016 reflected~~2018. The increases are a ~~full year~~result of ~~Endicia results, as opposed~~the inclusion of MetaPack, the annualized effect of our headcount investments in 2018, and our plan to ~~approximately one and a half months~~increase our investments in ~~2015. We expect~~headcount resources in 2019 to ~~hire additional research and development personnel in 2017.~~

drive growth.

We expect general and administrative expenses to be higher in ~~2017~~2019 as compared to ~~2016.~~2018. The increase is a result of the inclusion of MetaPack, the annualized effect of our headcount investments in 2018, and our plan to increase our investments in headcount resources in 2019. We expect the percent increase in general and administrative expense in ~~2017~~2019 to be less than the percent increase in ~~2016, as 2016 reflected a full year of Endicia results, as opposed~~2018.

We expect our stock-based compensation expense to be higher in 2019 compared to 2018.

We expect our interest and other income (expense), net in 2019 to be approximately ~~one and a half months in 2015.~~

similar to 2018 due to higher expected interest rates, partially offset by lower outstanding balances.

We expect our effective tax rate for ~~2017~~2019 to be ~~lower~~higher than ~~2016 as we benefitted from excess~~2018. The increase in our estimated effective tax ~~benefits~~rate for 2019 was primarily driven by an increase in projected non-deductible expenses related to ~~the exercise of stock options~~executive compensation coupled with a reduction in ~~2017. However, there are other factors that impact taxable income compared to~~projected pre-tax book ~~income which can be difficult to predict and can change from quarter-to-quarter.~~

income.

As discussed 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 qualifications and limitations on forward-looking statements discussion in the beginning of Item 2 of this Report and the risks and other factors set forth in Item 1A of Part II of this Report and Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 1, 2019. Our business has grown through acquisitions during 2014 through ~~2016;~~2018; however the expectations above do not assume any future acquisitions or dispositions, 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~~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~~For more information regarding our critical accounting estimates and policies, see Part II, Item 7, ~~“Management’s~~"Management's Discussion and Analysis of Financial Condition and Results of ~~Operations—Critical~~Operations-Critical Accounting Policies and ~~Judgments”~~Judgments" of our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, filed with the SEC on March 1, ~~2017.~~2019.

~~Table of Contents~~

~~ITEM 3.~~

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~~provided for a term loan of $82.5 million and a revolving credit facility with a maximum borrowing of $82.5 million. Our Credit Agreement matures on November 18, 2020. As of ~~September 30, 2017,~~March 31, 2019, the debt outstanding under our Credit Agreement, gross of debt issuance costs, was ~~$134.2~~$58.8 million. Borrowings under the term loan are payable in quarterly installments which began on December 31, 2015. We pay interest on our Credit Agreement at a rate equal to the London Interbank Offered Rate plus an applicable margin, which is between 1.25% and 2.00%, based upon certain financial measures. As of ~~September 30, 2017,~~March 31, 2019, our applicable margin was our applicable margin was 1.25% and the interest rate on our outstanding loan was approximately ~~2.49%~~3.75%. Interest expense would not be significantly affected by either a 10% increase or decrease in the rates of interest on our debt.

We do not hold or issue financial instruments for trading purposes. We do not have material exposure to market risk with respect to investments. We do not ~~used~~use derivative financial instruments ~~in our investment portfolio. None of the instruments in our investment portfolio are held~~ for speculative or trading purposes. However, we may adopt specific hedging strategies in the future.

Our cash equivalents ~~and investments~~ consist primarily of money market ~~U.S. government obligations, asset-backed~~ securities and ~~public corporate debt securities with~~had a weighted average ~~maturities~~maturity of 3116 days ~~at September 30, 2017. Our cash equivalents~~ and ~~investments approximated $183.5 million at September 30, 2017 and had~~ a weighted average interest rate of ~~0.9%.~~2.4% at March 31, 2019. The aggregate value of our cash and cash equivalents was $110.9 million at March 31, 2019. 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.~~

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~~As discussed in Note 2 in our Notes to Consolidated Financial Statements, we acquired MetaPack on August 15, 2018. We are in the process of integrating certain processes, systems and controls relating to MetaPack into our existing system of internal control over financial reporting in accordance with our integration plans. Except for the foregoing, during the quarter ended ~~September 30, 2017,~~March 31, 2019, 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.

PART II –- OTHER INFORMATION

~~ITEM 1.~~

~~LEGAL PROCEEDINGS~~

ITEM 1. LEGAL PROCEEDINGS

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

~~ITEM 1A.~~

ITEM 1A. RISK FACTORS

We are not aware of any material changes to the risk factors included in Item 1A ~~“Risk Factors”~~"Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, filed with the SEC on March 1, ~~2017.~~2019.

~~Table of Contents~~

~~ITEM 2.~~

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, 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



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)
January 1, 2019 - January 31, 2019	151,604	$	164.45	151,604	$	—
February 1, 2019 - February 28, 2019	—	n/a		—	$	—
March 1, 2019 - March 31, 2019	83,857	$	84.18	83,857	$	52,941

On October ~~25, 2016, our~~24, 2018, the Board of Directors approved a ~~new~~ stock repurchase plan which became effective November 7, 2016, that replaced our prior stock repurchase plan and authorized us to repurchase up to $90 million of stock over the 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~~November 11, 2018 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 authorizesauthorized the Company to repurchase up to $90 million of stock over the six months following its effective date. On March 8, 2019, our Board of Directors approved a $60 million share repurchase plan which is scheduled to expire in September 2019. As of May 8, 2019, we had repurchased approximately $24 million under this plan. On May 1, 2019, our Board of Directors adjusted the repurchase parameters of the plan which is now expected to repurchase a further $9 million, between May 9, 2019 and the plan's expiration in September 2019, in addition to the $24 million purchased under the plan prior to such period.

From time to time we withhold shares of our stock to satisfy income tax obligations related to performance-based or restricted equity awards. See Note 1 - "Summary of Significant Accounting Policies-Treasury Stock" in our Notes to Consolidated Financial Statements included elsewhere in this filing.

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~~

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

~~ITEM 4.~~

~~MINE SAFETY DISCLOSURES~~

ITEM 6. EXHIBITS

~~Not applicable.~~

~~ITEM 5.~~

~~OTHER INFORMATION~~

~~None.~~

~~Table of Contents~~

~~ITEM 6.~~

~~EXHIBITS~~

~~10.1~~	~~Consulting Agreement, dated as of July 31, 2017, between James Bortnak and Stamps.com Inc. (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



*	Furnished, not filed.

~~(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).~~

~~Table of Contents~~

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~~Date: May 9, ~~2017~~2019	By:	/s/ KEN MCBRIDE
		Ken McBride
		Chairman and Chief Executive Officer

~~November~~

Date: May 9, ~~2017~~2019	By:	/s/ JEFF CARBERRY
		Jeff Carberry
		Chief Financial Officer

	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 March 31,
	2019		2018		% Change
Paid customers for the quarter	736		740		(0.6	)%
Average monthly revenue per paid customer	$	60.05	$	58.96	1.9	%
Mailing and shipping revenue	$	132,646	$	130,963	1.3	%

☑

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



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

	September 30, 2017			December 31, 2016
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	183,538		$	106,932
Short-term investments		—			1,511
Accounts receivable, net		52,555			62,756
Other current assets		44,616			13,081
Total current assets		280,709			184,280
Property and equipment, net		38,138			36,829
Goodwill		239,705			239,705
Intangible assets, net		85,000			97,027
Deferred income taxes, net.		42,231			48,782
Other assets		5,579			3,506
Total assets	$	691,362		$	610,129

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses	$	88,830		$	86,205
Deferred revenue		3,598			3,858
Current portion of debt, net of debt issuance costs		7,876			6,329
Total current liabilities		100,304			96,392
Long-term debt, net of debt issuance costs		125,117			141,025
Total liabilities		225,421			237,417
Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock, $.001 par value per share
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		940,001			855,344
Treasury stock, at cost, 14,435 shares in 2017 and 13,610 in 2016		(356,908	)		(252,981	)
Accumulated deficit		(117,213	)		(229,715	)
Accumulated other comprehensive income		7			11
Total stockholders' equity		465,941			372,712
Total liabilities and stockholders' equity	$	691,362		$	610,129

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Revenues:
Service	$	97,529		$	78,871		$	292,634		$	220,567
Product		4,824			4,703			15,301			15,109
Insurance		4,099			4,050			12,932			12,643
Customized postage		8,588			4,912			15,306			10,016
Other		22			23			69			74
Total revenues		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		11,882			9,903			37,284			28,054
Product		1,535			1,579			4,930			5,019
Insurance		966			1,291			3,547			3,920
Customized postage		7,151			3,954			12,600			8,076
Total cost of revenues		21,534			16,727			58,361			45,069
Gross profit		93,528			75,832			277,881			213,340
Operating expenses:
Sales and marketing		20,588			18,229			66,018			59,708
Research and development		12,037			9,111			34,187			25,579
General and administrative		25,243			16,901			65,676			49,276
Total operating expenses		57,868			44,241			165,881			134,563
Income from operations		35,660			31,591			112,000			78,777
Interest expense		(967	)		(828	)		(2,779	)		(2,648	)
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	$	2.71		$	1.08		$	6.51		$	2.67
Diluted	$	2.49		$	1.03		$	6.04		$	2.52
Weighted average shares outstanding
Basic		17,073			17,218			16,969			17,319
Diluted		18,548			18,120			18,282			18,325

	September 30, 2017
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value


Cash and cash equivalents:
Cash	$	177,039		—		—		$	177,039
Money market		6,492		9		(2	)		6,499
Total cash and cash equivalents		183,531		9		(2	)		183,538
Short-term investments:
Corporate bonds and asset backed securities		—		—		—			—
Total short-term investments		—		—		—			—
Cash and cash equivalents and short-term investments	$	183,531		9		(2	)	$	183,538

	December 31, 2016
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Cash and cash equivalents:
Cash	$	101,987		—		—		$	101,987
Money market		4,945		—		—			4,945
Total cash and cash equivalents		106,932		—		—			106,932
Short-term investments:
Corporate bonds and asset backed securities		1,500		13		(2	)		1,511
Total short-term investments		1,500		13		(2	)		1,511
Cash and cash equivalents and short-term investments	$	108,432		13		(2	)	$	108,443

	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	%

Year	First Quarter		Second Quarter		Third Quarter

2017		722		738		736
2016		649		646		648

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