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________________________________________________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________________________________________
FORM 10-Q
(Mark One)
|
| |
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
OR
|
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission file number: 000-26427
Stamps.com Inc.
(Exact Name of Registrant as Specified in Its Charter)
|
| | |
Delaware | | 77-0454966 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
1990 E. Grand Avenue
El Segundo, California 90245
(Address of Principal Executive Offices and Zip Code)
(310) 482-5800
(Registrant's Telephone Number, Including Area Code)
________________________________________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | STMP | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b‑2 of the Exchange Act. (Check one):
|
| | | |
Large accelerated filer | þ | Accelerated filer | ☐ |
| | | |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | | |
Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of October 31, 2019, there were 17,073,665 shares of the Registrant's Common Stock outstanding.
STAMPS.COM INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 2019
TABLE OF CONTENTS
|
| | | |
| Page |
| |
| |
| ITEM 1. | | |
| | | |
| ITEM 2. | | |
| | | |
| ITEM 3. | | |
| | | |
| ITEM 4. | | |
| | | |
| |
| |
| ITEM 1. | | |
| | | |
| ITEM1A. | | |
| | | |
| ITEM 2. | | |
| | | |
| ITEM 3. | | |
| | | |
| ITEM 4. | | |
| | | |
| ITEM 5. | | |
| | | |
| ITEM 6. | | |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Assets | (Unaudited) | | |
Current assets: | | | |
Cash and cash equivalents | $ | 143,487 |
| | $ | 113,757 |
|
Accounts receivable, net | 66,306 |
| | 83,595 |
|
Current income taxes | — |
| | 8,465 |
|
Prepaid expenses | 18,164 |
| | 13,072 |
|
Other current assets | 16,996 |
| | 10,722 |
|
Total current assets | 244,953 |
| | 229,611 |
|
Property and equipment, net | 33,684 |
| | 36,337 |
|
Goodwill | 374,090 |
| | 381,710 |
|
Intangible assets, net | 143,998 |
| | 163,859 |
|
Deferred income taxes, net | 29,874 |
| | 29,874 |
|
Lease right-of-use assets | 18,247 |
| | — |
|
Other assets | 18,954 |
| | 11,383 |
|
Total assets | $ | 863,800 |
| | $ | 852,774 |
|
Liabilities and Stockholders' Equity | |
| | |
|
Current liabilities: | |
| | |
|
Accounts payable and accrued expenses | $ | 125,465 |
| | $ | 133,626 |
|
Deferred revenue | 7,665 |
| | 7,159 |
|
Current portion of debt, net of debt issuance costs | 12,001 |
| | 10,454 |
|
Current portion of lease right-of-use liabilities | 4,313 |
| | — |
|
Total current liabilities | 149,444 |
| | 151,239 |
|
Long-term debt, net of debt issuance costs | 41,188 |
| | 50,189 |
|
Deferred income taxes, net | 14,781 |
| | 18,665 |
|
Long-term portion of lease right-of-use liabilities | 15,132 |
| | — |
|
Other liabilities | 21,009 |
| | 19,016 |
|
Total liabilities | 241,554 |
| | 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: 33,128 in 2019 and 33,042 in 2018; Outstanding shares: 17,103 in 2019 and 17,662 in 2018 | 56 |
| | 56 |
|
Additional paid-in capital | 1,085,829 |
| | 1,049,669 |
|
Treasury stock, at cost, 16,025 shares in 2019 and 15,380 in 2018 | (587,193 | ) | | (528,529 | ) |
Retained earnings | 130,607 |
| | 91,712 |
|
Accumulated other comprehensive income (loss) | (7,053 | ) | | 757 |
|
Total stockholders' equity | 622,246 |
| | 613,665 |
|
Total liabilities and stockholders' equity | $ | 863,800 |
| | $ | 852,774 |
|
The accompanying notes are an integral part of these consolidated financial statements.
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, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenues: | | | | | | | |
Service | $ | 124,643 |
| | $ | 127,810 |
| | $ | 375,979 |
| | $ | 373,932 |
|
Product | 5,116 |
| | 4,705 |
| | 15,306 |
| | 15,276 |
|
Insurance | 3,106 |
| | 4,023 |
| | 9,871 |
| | 12,684 |
|
Customized postage | 3,307 |
| | 6,957 |
| | 9,792 |
| | 14,755 |
|
Other | — |
| | 12 |
| | — |
| | 52 |
|
Total revenues | 136,172 |
| | 143,507 |
| | 410,948 |
| | 416,699 |
|
Cost of revenues (exclusive of amortization of intangible assets, which is included in general and administrative expense): | |
| | |
| | |
| | |
|
Service | 34,040 |
| | 25,102 |
| | 98,727 |
| | 68,361 |
|
Product | 1,602 |
| | 1,383 |
| | 4,824 |
| | 4,614 |
|
Insurance | — |
| | 933 |
| | — |
| | 2,945 |
|
Customized postage | 2,560 |
| | 5,706 |
| | 7,431 |
| | 12,173 |
|
Total cost of revenues | 38,202 |
| | 33,124 |
| | 110,982 |
| | 88,093 |
|
Gross profit | 97,970 |
| | 110,383 |
| | 299,966 |
| | 328,606 |
|
Operating expenses: | |
| | |
| | |
| | |
|
Sales and marketing | 33,058 |
| | 26,743 |
| | 99,181 |
| | 78,280 |
|
Research and development | 20,281 |
| | 14,432 |
| | 56,725 |
| | 38,845 |
|
General and administrative | 28,980 |
| | 24,916 |
| | 82,743 |
| | 71,119 |
|
Total operating expenses | 82,319 |
| | 66,091 |
| | 238,649 |
| | 188,244 |
|
Income from operations | 15,651 |
| | 44,292 |
| | 61,317 |
| | 140,362 |
|
Foreign currency exchange gain (loss), net | (38 | ) | | (957 | ) | | (285 | ) | | (957 | ) |
Interest expense | (589 | ) | | (668 | ) | | (1,948 | ) | | (1,908 | ) |
Interest income and other income, net | 53 |
| | 83 |
| | 170 |
| | 175 |
|
Income before income taxes | 15,077 |
| | 42,750 |
| | 59,254 |
| | 137,672 |
|
Income tax expense | 5,929 |
| | 9,337 |
| | 20,359 |
| | 11,691 |
|
Net income | $ | 9,148 |
| | $ | 33,413 |
| | $ | 38,895 |
| | $ | 125,981 |
|
Net income per share: | |
| | |
| | |
| | |
|
Basic | $ | 0.53 |
| | $ | 1.84 |
| | $ | 2.24 |
| | $ | 7.02 |
|
Diluted | $ | 0.52 |
| | $ | 1.75 |
| | $ | 2.19 |
| | $ | 6.69 |
|
Weighted average shares outstanding: | | | |
| | |
| | |
|
Basic | 17,144 |
| | 18,161 |
| | 17,326 |
| | 17,942 |
|
Diluted | 17,441 |
| | 19,046 |
| | 17,753 |
| | 18,822 |
|
The accompanying notes are an integral part of these consolidated financial statements.
STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net income | $ | 9,148 |
| | $ | 33,413 |
| | $ | 38,895 |
| | $ | 125,981 |
|
Other comprehensive income (loss), net of tax: | |
| | |
| | |
| | |
|
Foreign currency translation adjustments | (6,886 | ) | | 5,544 |
| | (7,806 | ) | | 5,544 |
|
Unrealized gain (loss) on investments | — |
| | (1 | ) | | (4 | ) | | (1 | ) |
Comprehensive income | $ | 2,262 |
| | $ | 38,956 |
| | $ | 31,085 |
| | $ | 131,524 |
|
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)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Common Stock | | Additional Paid-in Capital | | Treasury Stock at Cost | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
Shares | | Amount | |
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 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 13,992 |
| | — |
| | 13,992 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (4,886 | ) | | (4,886 | ) |
Stock-based compensation expense | — |
| | — |
| | 9,808 |
| | — |
| | — |
| | — |
| | 9,808 |
|
Exercise of stock options | 12 |
| | — |
| | 272 |
| | — |
| | — |
| | — |
| | 272 |
|
Stock repurchase | (295 | ) | | — |
| | — |
| | (20,187 | ) | | — |
| | — |
| | (20,187 | ) |
Balance at June 30, 2019 | 17,189 |
| | 56 |
| | 1,073,087 |
| | (580,807 | ) | | 121,459 |
| | (167 | ) | | 613,628 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 9,148 |
| | — |
| | 9,148 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (6,886 | ) | | (6,886 | ) |
Stock-based compensation expense | — |
| | — |
| | 11,753 |
| | — |
| | — |
| | — |
| | 11,753 |
|
Exercise of stock options | 9 |
| | — |
| | 272 |
| | — |
| | — |
| | — |
| | 272 |
|
Shares issued under the Employee Stock Purchase Plan | 18 |
| | — |
| | 717 |
| | — |
| | — |
| | — |
| | 717 |
|
Stock repurchase | (113 | ) | | — |
| | — |
| | (6,386 | ) | | — |
| | — |
| | (6,386 | ) |
Balance at September 30, 2019 | 17,103 |
| | $ | 56 |
| | $ | 1,085,829 |
| | $ | (587,193 | ) | | $ | 130,607 |
| | $ | (7,053 | ) | | $ | 622,246 |
|
The accompanying notes are an integral part of these consolidated financial statements.
STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| Common Stock | | Additional Paid-in Capital | | Treasury Stock at Cost | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total |
Shares | | Amount | |
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 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 45,524 |
| | — |
| | 45,524 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
Stock-based compensation expense | — |
| | — |
| | 9,891 |
| | — |
| | — |
| | — |
| | 9,891 |
|
Exercise of stock options | 322 |
| | — |
| | 21,329 |
| | — |
| | — |
| | — |
| | 21,329 |
|
Stock repurchase | (54 | ) | | — |
| | — |
| | (12,811 | ) | | — |
| | — |
| | (12,811 | ) |
Balance at June 30, 2018 | 18,151 |
| | 55 |
| | 1,022,608 |
| | (427,721 | ) | | 15,638 |
| | 6 |
| | 610,586 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 33,413 |
| | — |
| | 33,413 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 5,543 |
| | 5,543 |
|
Stock-based compensation expense | — |
| | — |
| | 8,911 |
| | — |
| | — |
| | — |
| | 8,911 |
|
Exercise of stock options | 56 |
| | 1 |
| | 4,662 |
| | — |
| | — |
| | — |
| | 4,663 |
|
Shares issued under the Employee Stock Purchase Plan | 10 |
| | — |
| | 1,774 |
| | — |
| | — |
| | — |
| | 1,774 |
|
Stock repurchase | (49 | ) | | — |
| | — |
| | (12,248 | ) | | — |
| | — |
| | (12,248 | ) |
Balance at September 30, 2018 | 18,168 |
| | $ | 56 |
| | $ | 1,037,955 |
| | $ | (439,969 | ) | | $ | 49,051 |
| | $ | 5,549 |
| | $ | 652,642 |
|
The accompanying notes are an integral part of these consolidated financial statements.
STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2019 | | 2018 |
Operating activities: | | | |
Net income | $ | 38,895 |
| | $ | 125,981 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Depreciation and amortization | 21,149 |
| | 16,861 |
|
Stock-based compensation expense | 30,418 |
| | 26,350 |
|
Deferred income tax expense | — |
| | 10,929 |
|
Accretion of debt issuance costs | 280 |
| | 279 |
|
Changes in operating assets and liabilities, net of assets and liabilities acquired: | |
| | |
|
Accounts receivable | 17,045 |
| | (5,054 | ) |
Prepaid expenses | (5,668 | ) | | (4,377 | ) |
Other current assets | (6,365 | ) | | (12,339 | ) |
Current income taxes | 8,465 |
| | (1,373 | ) |
Lease right-of-use assets | 2,282 |
| | — |
|
Other assets | (7,571 | ) | | (1,299 | ) |
Deferred revenue | 590 |
| | 560 |
|
Lease right-of-use liabilities | (2,416 | ) | | — |
|
Other liabilities | 1,320 |
| | 2,183 |
|
Accounts payable and accrued expenses | 2,200 |
| | 1,363 |
|
Net cash provided by operating activities | 100,624 |
| | 160,064 |
|
| | | |
Investing activities: | |
| | |
|
Acquisition of MetaPack, net of cash acquired | — |
| | (208,500 | ) |
Acquisition of property and equipment | (1,749 | ) | | (1,587 | ) |
Net cash used in investing activities | (1,749 | ) | | (210,087 | ) |
| | | |
Financing activities: | |
| | |
|
Proceeds from short term financing obligations, net of repayments | (8,463 | ) | | 678 |
|
Principal payments on term loan | (7,734 | ) | | (6,187 | ) |
Payment on revolving credit facility | — |
| | (12,716 | ) |
Proceeds from exercise of stock options | 2,925 |
| | 45,625 |
|
Issuance of common stock under Employee Stock Purchase Plan | 2,817 |
| | 3,755 |
|
Repurchase of common stock | (58,571 | ) | | (52,424 | ) |
Payments related to tax withholding for share-based compensation | (93 | ) | | (4,144 | ) |
Net cash used in financing activities | (69,119 | ) | | (25,413 | ) |
Effect of exchange rate changes | (26 | ) | | (203 | ) |
Net increase (decrease) in cash and cash equivalents | 29,730 |
| | (75,639 | ) |
Cash and cash equivalents at beginning of period | 113,757 |
| | 153,903 |
|
Cash and cash equivalents at end of period | $ | 143,487 |
| | $ | 78,264 |
|
| | | |
Supplemental information: | |
| | |
|
Capital expenditures accrued but not paid at period end | $ | 123 |
| | $ | 13 |
|
Tenant improvement allowance | $ | — |
| | $ | 600 |
|
Cash paid for amounts included in the measurement of lease liabilities included in cash provided by operating activities | $ | 3,530 |
| | $ | — |
|
Lease liabilities arising from obtaining right-of-use assets | $ | 8,649 |
| | $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
We prepared the consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). 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, 2018, filed with the SEC on March 1, 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, 2019, our results of operations for the three and nine months ended September 30, 2019, and our cash flows for the nine months ended September 30, 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, 2019.
Basis of Consolidation
The consolidated financial statements include all the 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). In August 2018, we completed our acquisition of 100% of the outstanding shares of 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.
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. There are significant estimates and judgments inherent in the preparation of the consolidated financial statements including the fair value of assets and liabilities for allocation of the purchase price of companies acquired.
Prior Period Reclassifications
Certain amounts in prior periods have been reclassified to 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.
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 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 $6.0 million of revenue recognized in the nine months ended September 30, 2019 was included in the deferred revenue balance at December 31, 2018. Approximately $2.6 million of revenue recognized in the nine months ended September 30, 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 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 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. 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.
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. When we perform the two-step process, the first step requires us to compare the fair value of 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 the 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, 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 September 30, 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.
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.
We account for property and equipment at cost less accumulated depreciation and amortization. We compute depreciation using the straight-line method over the estimated useful life of the asset, generally three to five years for furniture, fixtures, and equipment and ten to forty years for building and building improvements. Leasehold improvements are capitalized and amortized over the shorter of the useful life of the asset or the remaining term of the lease. We have a policy of capitalizing expenditures that materially increase assets' useful lives and charging ordinary maintenance and repairs to operations as incurred. When property or equipment is disposed of, the cost and related accumulated depreciation and amortization are removed, and any gain or loss is included in income from operations.
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 our leases do not provide an implicit rate, the interest rate used to determine the present value of future lease payments is an estimated incremental borrowing rate. Many of our leases include one or more options to renew. These options are factored into the determination of the lease term and lease payments when their exercise is considered to be reasonably certain.
Our lease agreements generally contain lease and 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 also elected to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term.
Operating leases are included in lease right-of-use assets, current portion of lease right-of-use liabilities, and long-term portion of lease right-of-use liabilities on our consolidated balance sheets. Operating lease expense is recognized on a straight-line basis over the lease term in income from operations on our consolidated statements of income.
Revenue Recognition
We recognize revenues when we transfer control of promised goods or services to our 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 rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is 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.
STAMPS.COM INC. AND SUBSIDIARIES
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 which may be waived or refunded for certain customers, for which we provide them access to our platform, in which case revenue is earned over the period of time that the customers have access to the platform which is typically month-to-month; (2) we have been, and in the future potentially could be, compensated directly by the USPS and/or other carriers for shipping labels printed that meet certain 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 revenue from customers that have access to our platform when they purchase postage or print shipping 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 revenue that may take the form of some or all of the spread between the rate a customer pays and the rate the carrier or integration partner receives, either charged directly or paid by our 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, in which case revenue is recognized at a point in 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. When funds are transferred directly from customers to the 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.
During the second quarter of 2019, 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.
Product revenue 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 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 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 customized postage sheets and rolls is recognized upon transfer of control of the product to the customer, which occurs upon our delivery to the 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 months ended September 30, 2019 or September 30, 2018, respectively.
Segment Information
We have organized our operations into two segments: Stamps.com and MetaPack. Please see Note 10 - “Segment and Geographical Information” in our Notes to Consolidated Financial Statements for 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, 2019, we had $15.3 million in short-term financing obligations and $52.7 million of unused credit. As of December 31, 2018, we had $23.8 million in short-term financing obligations and $96.7 million of unused credit.
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock-Based Compensation
We account for share-based employee compensation plans under the fair value recognition and measurement provisions in accordance with applicable accounting standards, which require all share-based payments to employees, including grants of stock options and restricted stock units (RSUs), to be measured based on the grant date fair value of the awards, with the resulting expense generally recognized on a straight-line basis over the period during which the employee is required to perform service in exchange for the award. We account for forfeitures as they 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 estimates and subjective assumptions, including stock price volatility, expected term, and risk-free interest 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 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
During the nine months ended September 30, 2019 and September 30, 2018, we repurchased approximately 644,000 shares and 223,000 shares for $58.6 million and $48.3 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 statements 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 any leases that existed prior to January 1, 2019.
STAMPS.COM INC. AND SUBSIDIARIES
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 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 receivable, 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.
STAMPS.COM INC. AND SUBSIDIARIES
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 allocation of the purchase price.
The final purchase price of MetaPack has been allocated as follows to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values 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 | 138,956 |
| | | | | | |
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 | (13,519 | ) | | |
| | | | |
Deferred revenue | (1,145 | ) | | |
| | | | |
Revolving credit facility | (12,716 | ) | | | | | | |
Deferred income tax liability | (15,963 | ) | | | | | | |
Other liabilities | (1,533 | ) | | |
| | | | |
Total purchase consideration | $ | 217,686 |
| | |
| | | | |
The fair value of the assets acquired and liabilities assumed were 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.
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.
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
During the quarter ended September 30, 2019, the Company identified additional information about facts and circumstances that existed as of the date of the acquisition. As a result, the Company adjusted the value of current and deferred income taxes and other income tax related liabilities. The net effect of these changes, in addition to other immaterial adjustments, resulted in a corresponding decrease to goodwill of $2.5 million based on the August 15, 2018 exchange rate. These adjustments are reflected in the table above.
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. On May 20, 2019, the court granted final approval of the settlement.
On February 28, 2019 and March 13, 2019, two putative class action complaints were filed against us in the United States District Court for the Central District of California, Western Division. Both cases alleged 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, and seek class certification, unspecified damages, attorneys' fees and costs. One of the two putative class actions was dismissed without prejudice, and in the other case, styled as Karinski v. Stamps.com, Inc. et al, Case 2:19-cv-01828 (the “Securities Class Action”), the Court appointed a lead plaintiff and approved lead plaintiff’s selection of lead counsel. Lead plaintiff filed a consolidated complaint in August 2019, and we filed a motion to dismiss in October 2019. We believe that the case is without merit and intend to defend it vigorously. Due to the early stage 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.
On May 16, 2019 and May 21, 2019, two purported shareholder derivative suits were filed in the United States District Court for the Central District of California, Western Division, alleging breaches of fiduciary duties by officers and/or directors, unjust enrichment, abuse of control, waste of corporate assets, and violations of the Securities Exchange Act of 1934, and seeking unspecified damages, attorneys' fees and costs. The two cases have been consolidated as In re Stamps.com Stockholder Derivative Litigation, Case 2:19-cv-04272 and co-lead plaintiffs and co-lead counsel have been appointed. The Court has entered a stipulation to stay the consolidated derivative case pending the outcome of our anticipated motion to dismiss the Securities Class Action. We believe that the case is without merit and intend to defend it vigorously. Due to the early stage 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.
On August 19, 2019, a purported shareholder derivative suit was filed against us in a case titled City of Cambridge Retirement System v. Kenneth T. McBride, et al, Case No. 2019-0658-AGB, in the Delaware Court of Chancery, alleging breaches of fiduciary duties by officers and/or directors, insider trading, waste of corporate assets, and unjust enrichment. We filed a motion to dismiss in October 2019. We believe that the case is without merit and intend to defend this case vigorously. Due to the 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.
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On October 3, 2019, a purported shareholder derivative suit was filed against us in a case titled Harvey v. Kenneth T. McBride, et al, Case No. 1:19-cv-01861-CFC, in the United States District Court for the District of Delaware, alleging breaches of fiduciary duties by officers and/or directors, unjust enrichment, waste of corporate assets, and violations of the Securities Exchange Act of 1934. The Court has entered a stipulation to stay the derivative case pending the outcome of the derivative lawsuit pending in the Delaware Court of Chancery. We believe that the case is without merit and intend to defend this case vigorously. Due to the 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 September 30, 2019 or December 31, 2018.
Although management at present believes that the ultimate outcome of the various 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 September 30, 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 September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net income | $ | 9,148 |
| | $ | 33,413 |
| | $ | 38,895 |
| | $ | 125,981 |
|
| | | | | | | |
Basic - weighted average common shares | 17,144 |
| | 18,161 |
| | 17,326 |
| | 17,942 |
|
Diluted effect of common stock equivalents | 297 |
| | 885 |
| | 427 |
| | 880 |
|
Diluted - weighted average common shares | 17,441 |
| | 19,046 |
| | 17,753 |
| | 18,822 |
|
| | | | | | | |
Earnings per share: | |
| | |
| | | | |
Basic | $ | 0.53 |
| | $ | 1.84 |
| | $ | 2.24 |
| | $ | 7.02 |
|
Diluted | $ | 0.52 |
| | $ | 1.75 |
| | $ | 2.19 |
| | $ | 6.69 |
|
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, |
| 2019 | | 2018 | | 2019 | | 2018 |
Anti-dilutive stock options | 2,254 |
| | 143 |
| | 1,905 |
| | 102 |
|
STAMPS.COM INC. AND SUBSIDIARIES
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 on a straight-line basis over the period during which the employee is required to 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 inducement equity awards relating to the MetaPack acquisition as described in Note 2 - "Acquisitions."
The following table sets forth the stock-based compensation expense that we recognized for the periods indicated (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Stock-based compensation expense relating to: | | | | | | | |
Stock options | $ | 11,184 |
| | $ | 8,500 |
| | $ | 29,128 |
| | $ | 25,198 |
|
Employee stock purchases | 569 |
| | 411 |
| | 1,339 |
| | 1,151 |
|
Total stock-based compensation expense | $ | 11,753 |
| | $ | 8,911 |
| | $ | 30,467 |
| | $ | 26,349 |
|
Stock-based compensation expense relating to: | |
| | |
| | |
| | |
|
Cost of revenues | $ | 856 |
| | $ | 785 |
| | $ | 2,057 |
| | $ | 1,998 |
|
Sales and marketing | 2,692 |
| | 1,816 |
| | 7,031 |
| | 4,818 |
|
Research and development | 2,874 |
| | 2,001 |
| | 7,668 |
| | 5,593 |
|
General and administrative | 5,331 |
| | 4,309 |
| | 13,711 |
| | 13,940 |
|
Total stock-based compensation expense | $ | 11,753 |
| | $ | 8,911 |
| | $ | 30,467 |
| | $ | 26,349 |
|
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, |
| 2019 | | 2018 | | 2019 | | 2018 |
Expected dividend yield | — | % | | — | % | | — | % | | — | % |
Risk-free interest rate | 1.6 | % | | 2.7 | % | | 2.0 | % | | 2.5 | % |
Expected volatility | 79.3 | % | | 49.8 | % | | 71.3 | % | | 50.3 | % |
Expected life (in years) | 3.3 |
| | 3.3 |
| | 3.3 |
| | 3.3 |
|
6. Goodwill and Intangible Assets
Goodwill represents the excess of the fair value of consideration given over the fair value of the tangible assets, identifiable intangible assets and liabilities assumed in business combinations.
STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes goodwill as of December 31, 2018 and September 30, 2019 (in thousands):
|
| | | | | | | | | | | |
| Stamps.com Segment | | MetaPack Segment | | Total |
Goodwill balance at December 31, 2018 | $ | 239,705 |
| | $ | 142,005 |
| | $ | 381,710 |
|
Measurement period adjustments (see Note 2 - "Acquisitions") | — |
| | (2,512 | ) | | (2,512 | ) |
Foreign currency translation | — |
| | (5,108 | ) | | (5,108 | ) |
Goodwill balance at September 30, 2019 | $ | 239,705 |
| | $ |
|