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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 June 30, 2020

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 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  o    
Non-accelerated filer  o                         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 July 31, 2020, there were 17,575,686 shares of the Registrant's Common Stock outstanding.





STAMPS.COM INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED JUNE 30, 2020

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.


Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

  
June 30, 2020
 
December 31, 2019
Assets
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
275,053

 
$
156,307

Accounts receivable, net
56,416

 
74,898

Prepaid expenses
16,411

 
20,447

Other current assets
35,674

 
23,031

Total current assets
383,554

 
274,683

Property and equipment, net
33,141

 
32,983

Goodwill
375,096

 
384,540

Intangible assets, net
128,144

 
145,063

Deferred income taxes, net
27,056

 
27,056

Lease right-of-use assets
15,967

 
17,697

Other assets
29,456

 
20,474

Total assets
$
992,414

 
$
902,496

Liabilities and Stockholders' Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and other current liabilities
$
160,256

 
$
121,853

Deferred revenue
10,681

 
8,015

Current portion of debt, net of debt issuance costs

 
50,188

Current portion of lease right-of-use liabilities
4,841

 
4,612

Total current liabilities
175,778

 
184,668

Deferred income taxes, net
10,725

 
11,455

Long-term portion of lease right-of-use liabilities
12,319

 
14,191

Other liabilities
28,322

 
26,557

Total liabilities
227,144

 
236,871

Commitments and contingencies (Note 3)


 


Stockholders' equity:
 

 
 

Common stock, $.001 par value per share; Authorized shares: 47,500 in 2020 and 2019; Issued shares: 33,652 in 2020 and 33,130 in 2019; Outstanding shares: 17,414 in 2020 and 17,029 in 2019
56

 
56

Additional paid-in capital
1,162,890

 
1,098,426

Treasury stock, at cost, 16,238 shares in 2020 and 16,101 in 2019
(611,485
)
 
(593,511
)
Retained earnings
219,161

 
150,941

Accumulated other comprehensive income (loss)
(5,352
)
 
9,713

Total stockholders' equity
765,270

 
665,625

Total liabilities and stockholders' equity
$
992,414

 
$
902,496

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

1

Table of Contents

STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Revenues:
 
 
 
 
 
 
 
Service
$
186,990

 
$
127,429

 
$
326,126

 
$
251,336

Product
6,827

 
4,785

 
12,783

 
10,190

Insurance
4,096

 
3,431

 
7,276

 
6,765

Customized postage
8,817

 
3,128

 
11,891

 
6,485

Total revenues
206,730

 
138,773

 
358,076

 
274,776

Cost of revenues (exclusive of amortization of intangible assets, which is included in general and administrative expense):
 

 
 

 
 

 
 

Service
37,465

 
32,452

 
73,992

 
64,687

Product
2,411

 
1,549

 
4,149

 
3,222

Customized postage
7,885

 
2,440

 
10,000

 
4,871

Total cost of revenues
47,761

 
36,441

 
88,141

 
72,780

Gross profit
158,969

 
102,332

 
269,935

 
201,996

Operating expenses:
 

 
 

 
 

 
 

Sales and marketing
41,884

 
33,242

 
78,888

 
66,123

Research and development
22,884

 
19,130

 
44,207

 
36,444

General and administrative
33,015

 
27,535

 
61,483

 
53,763

Total operating expenses
97,783

 
79,907

 
184,578

 
156,330

Income from operations
61,186

 
22,425

 
85,357

 
45,666

Foreign currency exchange gain (loss), net
(33
)
 
(152
)
 
(171
)
 
(247
)
Interest expense
(456
)
 
(645
)
 
(923
)
 
(1,359
)
Interest income and other income (loss), net
6

 
52

 
32

 
117

Income before income taxes  
60,703

 
21,680

 
84,295

 
44,177

Income tax expense
8,977

 
7,688

 
16,075

 
14,430

Net income
$
51,726

 
$
13,992

 
$
68,220

 
$
29,747

Net income per share:
 

 
 

 
 

 
 

Basic  
$
3.00

 
$
0.81

 
$
3.98

 
$
1.71

Diluted
$
2.73

 
$
0.79

 
$
3.68

 
$
1.66

Weighted average shares outstanding:
 
 
 
 
 

 
 

Basic
17,231

 
17,291

 
17,148

 
17,418

Diluted
18,927

 
17,809

 
18,558

 
17,911


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

2

Table of Contents

STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Net income
$
51,726

 
$
13,992

 
$
68,220

 
$
29,747

Other comprehensive income (loss), net of tax:
 

 
 

 
 

 
 

Foreign currency translation adjustments
(338
)
 
(4,886
)
 
(15,065
)
 
(920
)
Unrealized gain (loss) on investments

 

 

 
(4
)
Comprehensive income
$
51,388

 
$
9,106

 
$
53,155

 
$
28,823

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

3

Table of Contents

STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)

 
Six Months Ended June 30, 2020
 
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock at Cost
 
Retained Earnings
 
Accumulated
Other Comprehensive Income (Loss)
 
Total
Shares
 
Amount
 
Balance at December 31, 2019
17,029

 
$
56

 
$
1,098,426

 
$
(593,511
)
 
$
150,941

 
$
9,713

 
$
665,625

Net income

 

 

 

 
16,494

 

 
16,494

Other comprehensive income (loss)

 

 

 

 

 
(14,727
)
 
(14,727
)
Stock-based compensation expense

 

 
10,725

 

 

 

 
10,725

Exercise of stock options
103

 

 
8,818

 

 

 

 
8,818

Shares issued under the Employee Stock Purchase Plan
50

 

 
1,950

 

 

 

 
1,950

Stock repurchase
(80
)
 

 

 
(8,577
)
 

 

 
(8,577
)
Balance at March 31, 2020
17,102

 
$
56

 
$
1,119,919

 
$
(602,088
)
 
$
167,435

 
$
(5,014
)
 
$
680,308

Net income

 

 

 

 
51,726

 

 
51,726

Other comprehensive income (loss)

 

 

 

 

 
(338
)
 
(338
)
Stock-based compensation expense

 

 
13,221

 

 

 

 
13,221

Exercise of stock options
368

 

 
29,750

 

 

 

 
29,750

Stock repurchase
(56
)
 

 

 
(9,397
)
 

 

 
(9,397
)
Balance at June 30, 2020
17,414

 
$
56

 
$
1,162,890

 
$
(611,485
)
 
$
219,161

 
$
(5,352
)
 
$
765,270


 
Six Months Ended June 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


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


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STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended
June 30,
 
2020
 
2019
Operating activities:
 
 
 
Net income
$
68,220

 
$
29,747

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

 
 

Depreciation and amortization
13,140

 
14,069

Stock-based compensation expense
23,946

 
18,665

Accretion of debt issuance costs
342

 
186

Changes in operating assets and liabilities, net of assets and liabilities acquired:
 

 
 

Accounts receivable
17,837

 
12,733

Prepaid expenses
3,900

 
(4,773
)
Other current assets
(12,791
)
 
(5,439
)
Current income taxes
69

 
8,338

Lease right-of-use assets
2,026

 
1,519

Other assets
(8,218
)
 
(2,312
)
Deferred revenue
2,804

 
1,192

Lease right-of-use liabilities
(1,953
)
 
(1,553
)
Other liabilities
1,787

 
1,490

Accounts payable and other current liabilities
12,895

 
(19,538
)
Net cash provided by operating activities
124,004

 
54,324

 
 
 
 
Investing activities:
 

 
 

Acquisition of property and equipment
(2,347
)
 
(610
)
Net cash used in investing activities
(2,347
)
 
(610
)
 
 
 
 
Financing activities:
 

 
 

Net proceeds from (repayments of) short-term financing obligations
26,001

 
(5,190
)
Debt issuance costs
(762
)
 

Principal payments on term loan
(50,530
)
 
(5,156
)
Proceeds from exercise of stock options
38,568

 
2,653

Issuance of common stock under Employee Stock Purchase Plan
1,950

 
2,100

Repurchase of common stock
(17,974
)
 
(52,185
)
Payments related to tax withholding for share-based compensation

 
(93
)
Net cash provided by (used in) financing activities
(2,747
)
 
(57,871
)
Effect of exchange rate changes
(164
)
 
113

Net increase (decrease) in cash and cash equivalents
118,746

 
(4,044
)
Cash and cash equivalents at beginning of period
156,307

 
113,757

Cash and cash equivalents at end of period
$
275,053

 
$
109,713

 
 
 
 
Supplemental information:
 

 
 

Capital expenditures accrued but not paid at period end
$

 
$
42

Cash paid for amounts included in the measurement of lease liabilities included in cash provided by operating activities
$
2,671

 
$
2,239

Lease liabilities arising from obtaining right-of-use assets
$
852

 
$
6,785

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

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STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.    Summary of Significant Accounting Policies

Basis of Presentation

We prepared the consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States (US) 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, 2019, filed with the SEC on March 2, 2020.

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 June 30, 2020, our results of operations for the three and six months ended June 30, 2020, and our cash flows for the six months ended June 30, 2020. 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, 2020.

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. 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 US 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 those related to the fair value of intangible assets and goodwill and the allowance for credit losses.
The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that there were no material adverse impacts on the consolidated financial statements for the period ended June 30, 2020. As events continue to evolve and additional information becomes available, our assumptions and estimates may change materially in future periods.

Prior Period Reclassifications
Certain amounts in prior periods have been reclassified to conform with current period presentation.
Accounts Receivable

Our accounts receivable relate to mailing and shipping services, postage purchasing and invoicing, customized postage sales, branded insurance provided to customers prior to billing, and other receivables.
We maintain an allowance for credit losses for expected uncollectible accounts which is recorded as an offset to accounts receivable and changes in such are classified as general and administrative expense in the consolidated statements of operations.

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STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


We evaluate collectability by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when we identify specific customers with known collectability issues. The evaluation is based on a combination of factors. If we become aware of a customer’s inability to meet its financial obligations, an allowance is recorded to reduce the net receivable to the amount reasonably believed to be collectible from the customer. Accounts receivable are written off against the allowance for uncollectible accounts when we determine amounts are no longer collectible. Beginning January 1, 2020, as part of the adoption of ASU 2016-13 as described below in Accounting Guidance Adopted in 2020, we recognize allowances for credit losses for all other customers based on either the age of the receivable or applying a loss rate method which incorporates historical experience and an evaluation of macroeconomic factors. As a result of the adoption, we recorded an immaterial increase to our allowance for credit losses which included the estimated impact of COVID-19 on the collectability of our accounts receivable.
As additional information becomes available to us, our future assessment of our allowance for credit losses could materially and adversely impact our consolidated financial statements in future reporting periods.
The allowance for credit losses on accounts receivable was approximately $8.8 million and $6.9 million as of June 30, 2020 and December 31, 2019, respectively.
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. Acquisition-related expenses are recognized in our consolidated financial statements as incurred.
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 $7.5 million of revenue recognized in the six months ended June 30, 2020 was included in the deferred revenue balance at December 31, 2019. Approximately $5.5 million of revenue recognized in the six months ended June 30, 2019 was included in the deferred revenue balance at December 31, 2018.

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. Prior to June 30, 2020, the Company had outstanding debt held by third party financial institutions and this was carried at cost, adjusted for debt issuance costs. The Company’s debt was not publicly traded and the carrying amount typically approximated fair value for debt that accrued interest at a variable rate for companies with similar financial characteristics as the Company, which were considered Level 2 fair value inputs as defined in Note 8 in our Consolidated Financial Statements.

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STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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 US 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 US 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 business combinations. 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.
Goodwill is reviewed for impairment annually on October 1 utilizing either a qualitative or quantitative assessment. 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 quantitative assessment, we 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, the difference is recognized as an impairment loss. As of June 30, 2020, 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 June 30, 2020, 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.


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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) Accounting Standards Codification (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

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 recognize the associated lease payments for leases with an initial term of 12 months or less in the consolidated statements of operations on a straight-line basis without recognizing a ROU asset or liability.

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 operations.

Other Current Assets
Other current assets principally consist of prepayments for postage and shipping labels and inventory. Prepayments for postage and shipping labels totaled $31.9 million at June 30, 2020 and $17.4 million at December 31, 2019.
Other Liabilities
Other liabilities principally consist of long-term unrecognized income tax benefits, as well as indirect tax liabilities and other liabilities.
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.

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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 may be compensated directly by our 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 when they purchase postage, print shipping labels or perform other transactions using our solutions, 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.
In the case of monthly fees based on subscription plans, the Company recognizes a reduction of revenue in the period for which a waiver is granted or when a refund is processed, which is typically the same period in which the associated subscription revenue is recognized or, in the case of refunds, could be a later period. Waivers and refunds were not material to the consolidated financial statements during the six months ended June 30, 2020 or June 30, 2019.
Customers may purchase delivery services from 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.
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 mailing labels, shipping labels, thermal printers, scales, and other mailing and shipping-focused office supplies. We recognize product revenue on product purchases upon shipment of orders to customers.
We provide our customers with the opportunity to purchase parcel insurance directly through our solutions. Insurance revenue represents the amount we receive from customers net of the costs 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. In the second quarter of 2020, we received notification from the US Postal Service (USPS) that it was eliminating its customized postage program and also revoking our authorization to offer products pursuant to that program effective June 16, 2020. As a result, we do not expect material customized postage revenue or cost of revenue after June 2020.
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 six months ended June 30, 2020 or June 30, 2019, respectively.

Segment Information

Our operations consist of 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 and revolving credit facility, 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 June 30, 2020, we had $27.0 million in short-term financing obligations and $41.1 million of unused credit. As of December 31, 2019, we had $1.0 million in short-term financing obligations and $69.5 million of unused credit.

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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 US 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 six months ended June 30, 2020 and June 30, 2019, we repurchased approximately 136,000 shares and 531,000 shares for $18.0 million and $52.2 million, respectively. Also, in the first quarter of 2019, we withheld 1,039 shares, to satisfy income tax obligations related to performance-based inducement equity awards issued to the General Manager of ShippingEasy.

Accounting Guidance Adopted in 2020

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

In August 2018, the FASB issued ASU 2018-15, a standard which aligns the capitalization requirements for implementation costs incurred in a hosting arrangement that is a service contract with the existing capitalization requirements for implementation costs incurred to develop or obtain internal-use software. The service element of a hosting arrangement that is a service contract is not affected by this update, meaning service costs will continue to be expensed as incurred. The guidance became effective on a prospective basis for the Company on January 1, 2020. The adoption of the guidance did not have a material impact on the Company's 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 became effective on a prospective basis for the Company on January 1, 2020. The adoption of the guidance did not have a material impact on the Company's consolidated financial statements.

Fair Value Measurements

In August 2018, the FASB issued ASU 2018-13, a standard which modifies the disclosure requirements on fair value measurements. The guidance became effective for the Company on January 1, 2020. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

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STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



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 are required to use a forward-looking expected credit loss model for accounts receivable, loans, and other financial instruments. The guidance became effective for the Company on January 1, 2020 using a modified retrospective approach. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

Accounting Guidance Not Yet Adopted

Income Taxes

In December 2019, the FASB issued ASU 2019-12, a standard which eliminates certain exceptions to the general principles of ASC Topic 740 Income Taxes. The guidance is effective for reporting periods after December 15, 2020; however, early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.

Reference Rate Reform

In March 2020, the FASB issued 2020-04, optional accounting guidance for a limited period of time to ease the potential burden in accounting for reference rate reform. The new standard provides expedients and exceptions to existing accounting requirements for contract modifications and hedge accounting related to transitioning from discontinued reference rates, such as the London Interbank Offered Rate (LIBOR), to alternative reference rates, if certain criteria are met. The new standard was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. We are currently evaluating the impact of the transition from LIBOR to alternative reference interest rates on our Amended Credit Agreement, as described in Note 13 - "Debt", but do not expect a significant impact to our operating results, financial position or cash flows.




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.


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STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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.

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 other current liabilities
(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.


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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.

MetaPack revenues and net income included in the Consolidated Statements of Operations for the year ended December 31, 2018 were $20.3 million and $1.5 million, respectively, reflecting activity since the acquisition date.

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 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. 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, purportedly on behalf of all those who purchased, or otherwise acquired, Stamps.com common stock between May 3, 2017 and May 8, 2019, alleging violations of the Securities Exchange Act of 1934 based on public disclosures that were purportedly rendered misleading based on certain uses of reseller rates. We filed a motion to dismiss in October 2019, and our motion to dismiss was granted in part and denied in part in January 2020. 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. On July 8, 2020, the court granted our motion to transfer the consolidated suits to the United States District Court for the District of Delaware. 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.


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STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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 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 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 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.

The Company had not accrued any material amounts related to any of the Company’s legal proceedings as of June 30, 2020 or December 31, 2019.

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 June 30, 2020. 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
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Net income
$
51,726

 
$
13,992

 
$
68,220

 
$
29,747

 
 
 
 
 
 
 
 
Basic - weighted average common shares
17,231

 
17,291

 
17,148

 
17,418

Diluted effect of common stock equivalents
1,696

 
518

 
1,410

 
493

Diluted - weighted average common shares
18,927

 
17,809

 
18,558

 
17,911

 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 
 
 
Basic
$
3.00

 
$
0.81

 
$
3.98

 
$
1.71

Diluted
$
2.73

 
$
0.79

 
$
3.68

 
$
1.66


 

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STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The calculation of dilutive shares excludes the effect of the following options that are considered anti-dilutive (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Anti-dilutive stock options
678

 
2,307

 
1,103

 
1,730



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


5.    Stock-Based Compensation

In 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
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Stock-based compensation expense relating to:
 
 
 
 
 
 
 
Stock options
$
12,830

 
$
9,447

 
$
23,072

 
$
17,944

Employee stock purchases
391

 
377

 
874

 
770

Total stock-based compensation expense
$
13,221

 
$
9,824

 
$
23,946

 
$
18,714

Stock-based compensation expense relating to:
 

 
 

 
 

 
 

Cost of revenues
$
925

 
$
555

 
$
1,844

 
$
1,201

Sales and marketing
2,362

 
2,285

 
4,669

 
4,339

Research and development
2,947

 
2,490

 
5,825

 
4,794

General and administrative
6,987

 
4,494

 
11,608

 
8,380

Total stock-based compensation expense
$
13,221

 
$
9,824

 
$
23,946

 
$
18,714



The following are the weighted average assumptions used in the Black-Scholes-Merton option valuation model for stock options granted in the periods indicated:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Expected dividend yield
%
 
%
 
%
 
%
Risk-free interest rate
0.2
%
 
1.8
%
 
0.7
%
 
2.1
%
Expected volatility
87.5
%
 
79.8
%
 
85.0
%
 
67.2
%
Expected life (in years)
3.3

 
3.3

 
3.3

 
3.3




6.    Goodwill and Intangible Assets

The following table summarizes goodwill as of December 31, 2019 and June 30, 2020 (in thousands):

 
Stamps.com Segment
 
MetaPack Segment
 
Total
Goodwill balance at December 31, 2019
$
239,705

 
$
144,835

 
$
384,540

Foreign currency translation

 
(9,444
)
 
(9,444
)
Goodwill balance at June 30, 2020
$
239,705

 
$
135,391

 
$
375,096



We have amortizable and non-amortizable intangible assets consisting of trademarks, trade names, developed technology, non-compete agreements, customer relationships, and other. The gross carrying amount of amortizable and non-amortizable intangible assets was $222.9 million at June 30, 2020 and $229.4 million at December 31, 2019.  Non-amortizable assets of $11.4 million as of both June 30, 2020 and December 31, 2019 consist primarily of the trade name relating to the Endicia acquisition.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table summarizes our amortizable intangible assets as of June 30, 2020 (in thousands, except years):

 
Gross
Carrying
 Amount
 
Accumulated
 Amortization
 
Net Carrying
Amount
 
Remaining weighted average amortization period (years)
Patents and Others
$
8,195

 
$
8,195

 
$

 
0.0
Customer Relationships
108,826

 
52,731

 
56,095

 
7.0
Technology
79,646

 
28,859

 
50,787

 
8.7
Non-Compete
2,211

 
1,996

 
215

 
1.0
Trademarks and Trade Names
12,673

 
3,016

 
9,657

 
9.3
Total amortizable intangible assets at June 30, 2020
$
211,551

 
$
94,797

 
$
116,754

 
7.8

The following table summarizes our amortizable intangible assets as of December 31, 2019 (in thousands, except years):

 
Gross
Carrying
 Amount
 
Accumulated
 Amortization
 
Net Carrying
Amount
 
Remaining weighted average amortization period (years)
Patents and Others
$
8,195

 
$
8,195

 
$

 
0.0
Customer Relationships
111,997

 
46,503

 
65,494

 
7.7
Technology
82,269

 
25,240

 
57,029

 
9.4
Non-Compete
2,211

 
1,889

 
322

 
1.5
Trademarks and Trade Names
13,378

 
2,549

 
10,829

 
9.9
Total amortizable intangible assets at December 31, 2019
$
218,050

 
$
84,376

 
$
133,674

 
8.5

 
We recorded amortization of intangible assets totaling approximately $5.5 million and $11.0 million for the three and six months ended June 30, 2020, respectively. We recorded amortization of intangible assets totaling approximately $5.6 million and $11.1 million for the three and six months ended June 30, 2019, respectively. Amortization of intangible assets is included in general and administrative expense in the accompanying consolidated statements of operations.

Our estimated amortization expense for the next five years and thereafter is as follows (in thousands):
Twelve Month Period Ending June 30,
Estimated
Amortization
Expense
2021
$
21,562

2022
14,222

2023
9,407

2024
9,407

2025
7,552

Thereafter
54,604

Total
$
116,754





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STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


7.    Income Taxes

Our income tax expense was $9.0 million and $16.1 million for the three and six months ended June 30, 2020, respectively. Our income tax expense was $7.7 million and $14.4 million for the three and six months ended June 30, 2019, respectively. Income taxes expected at the US federal statutory income tax rate of 21 percent differ from the reported income tax expense primarily as a result of permanent tax adjustments for non-deductible expenses, state taxes, and tax benefits from research and development tax credits and exercises of stock awards.

As of June 30, 2020 and December 31, 2019, we have recorded a valuation allowance of $1.8 million and $1.7 million, respectively, against certain state research and development credits for which we believe it is more likely than not that these deferred tax assets will not be realized. We also have recorded a valuation allowance against the activity of certain foreign jurisdictions.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law in the US to provide certain relief as a result of the COVID-19 pandemic.  The CARES Act is not expected to have a material impact on our consolidated financial statements.


8.    Fair Value Measurements

Financial assets measured at fair value on a recurring basis are classified in one of the three categories 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

The following tables summarize our financial assets measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 (in thousands):
 
 
 
 
Fair Value Measurement at Reporting Date Using
 
 
 
 
Description
June 30, 2020
 
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
$
275,053

 
$
275,053

 

 

Total
$
275,053

 
$
275,053

 

 


 
 
 
Fair Value Measurement at Reporting Date Using
 
 
 
 
Description
December 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
$
156,307

 
$
156,307

 

 

Total
$
156,307

 
$
156,307

 

 


 


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


9.    Cash and Cash Equivalents

Our cash equivalents consisted of money market funds at June 30, 2020 and December 31, 2019. 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. At June 30, 2020 and December 31, 2019, we had no material investments.

The following tables summarize our cash and cash equivalents as of June 30, 2020 and December 31, 2019 (in thousands):
 
 
June 30, 2020
   
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 
Estimated
Fair Value
Cash and cash equivalents: