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

 

 

 

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

 

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

 

 

 

 

 

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PART I - FINANCIAL INFORMATION		2
ITEM 1.	FINANCIAL STATEMENTS	2
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	2
ITEM 4.	CONTROLS AND PROCEDURES	2
PART II - OTHER INFORMATION		2
ITEM 1.	LEGAL PROCEEDINGS	2
ITEM 1A.	RISK FACTORS	2
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	2
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	2
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	2
ITEM 5.	OTHER INFORMATION	2
ITEM 6.	EXHIBITS	2

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

STAMPS.COM INC.

BALANCE SHEETS

(In thousands, except per share data)

 

		March 31,			December 31,
		2007			2006
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	15,260		$	11,740
Restricted cash			554			554
Short-term investments			46,965			45,635
Trade accounts receivable, net			2,392			2,365
Other accounts receivable			991			671
Other current assets			2,160			2,095
Total current assets			68,322			63,060
Property and equipment, net			4,716			5,084
Intangible assets, net			1,682			1,956
Long-term investments			40,971			48,145
Other assets			3,204			3,305
Total assets		$	118,895		$	121,550
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses		$	9,554		$	11,015
Total current liabilities			9,554			11,015
Commitments and contingencies
Stockholders’ equity:
Common stock, $.001 par value
Authorized shares 47,500 in 2007 and 2006
Issued shares of 24,138 in 2007 and 24,082 in 2006
Outstanding shares of 21,873 in 2007 and 22,185 in 2006			47			47
Additional paid-in capital			619,635			618,664
Accumulated deficit			(474,167	)		(477,221	)
Treasury stock, at cost, 2,265 shares in 2007 and 1,897 shares in 2006			(35,738	)		(30,429	)
Accumulated other comprehensive loss			(436	)		(526	)
Total stockholders’ equity			109,341			110,535
Total liabilities and stockholders’ equity		$	118,895		$	121,550

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

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STAMPS.COM INC.

STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited) 

 

		Three Months ended March 31,
		2007			2006
Revenues:
Service		$	13,661		$	13,457
PhotoStamps			3,176			3,860
Product			2,358			2,393
Other			827			832
Total revenues			20,022			20,542
Cost of revenues:
Service			2,343			2,614
PhotoStamps			2,083			2,421
Product			799			753
Other			141			143
Total cost of revenues			5,366			5,931
Gross profit			14,656			14,611
Operating expenses:
Sales and marketing			7,831			6,824
Research and development			2,145			2,339
General and administrative			2,747			3,157
Total operating expenses			12,723			12,320
Income from operations			1,933			2,291
Other income:
Interest income			1,213			1,078
Total other income			1,213			1,078
Income before income taxes			3,146			3,369
Provision for income taxes Basic			92			12
Net income		$	3,054		$	3,357
Net income per share (see Note 3):
Basic Basic		$	0.14		$	0.14
Diluted		$	0.14		$	0.14
Weighted average shares outstanding:
Basic Basic			21,892			23,268
Diluted			22,326			24,386

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

 

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STAMPS.COM INC.

STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Three Months ended March 31,
		2007			2006
Operating activities:
Net income		$	3,054		$	3,357
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			788			688
Stock-based compensation expense			461			795
Changes in operating assets and liabilities:
Trade accounts receivable			(27	)		(172	)
Other accounts receivable			(320	)		481
Other current assets			(65	)		(639	)
Other assets			101			(718	)
Accounts payable and accrued expenses			(1,461	)		1,171
Net cash provided by operating activities			2,531			4,963
Investing activities:
Sale of short-term investments			8,567			6,196
Purchase of short-term investments			(9,911	)		(9,760	)
Sale of long-term investments			9,351			4,476
Purchase of long-term investments			(2,073	)		(8,610	)
Acquisition of property and equipment			(146	)		(468	)
Net cash provided by (used in) investing activities			5,788			(8,166	)
Financing activities:
Proceeds from exercise of stock options			242			5,099
Issuance of common stock under ESPP			268			238
Repurchase of common stock			(5,309	)		—
Net cash (used in) provided by financing activities			(4,799	)		5,337
Net increase in cash and cash equivalents			3,520			2,134
Cash and cash equivalents at beginning of period			11,740			20,768
Cash and cash equivalents at end of period		$	15,260		$	22,902

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

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STAMPS.COM

NOTES TO FINANCIAL STATEMENTS

(ALL INFORMATION WITH RESPECT TO MARCH 31, 2007 AND 2006 IS UNAUDITED)

 

1. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The financial statements included herein have been prepared by Stamps.com Inc. (Stamps.com or Company) without audit 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 US generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K.

 

In the opinion of the Company, these unaudited financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of the Company as of March 31, 2007, the results of its operations for the three months ended March 31, 2007 and its cash flows for the three months ended March 31, 2007.

 

Use of Estimates and Risk Management

 

The preparation of financial statements in conformity with US generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates and such differences may be material to the financial statements. Examples include estimates of loss contingencies, promotional coupon redemptions and estimates regarding the useful lives of patents and other amortizable intangibles.

 

The Company is involved in various litigation matters as a claimant and a defendant. The Company records any amounts recovered in these matters when received. The Company records liabilities for claims against it when the loss is probable and estimable. Amounts recorded are based on reviews by outside counsel, in-house counsel and management. Actual results could differ from estimates.

 

2. Legal Proceedings

 

Please refer to "Part II - Other Information - Item 1 - Legal Proceedings" of this report for a discussion of legal proceedings.

 

3. Net Income per Share

 

Net income per share represents net income attributable to common stockholders divided by the weighted average number of common shares outstanding during a reported period. The diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, including convertible preferred stock and stock options and warrants (commonly and hereafter referred to as “common stock equivalents”), were exercised or converted into common stock. Diluted net income per share is calculated by dividing net income during a reported period by the sum of the weighted average number of common shares outstanding plus common stock equivalents for the period. The following table reconciles share amounts utilized to calculate basic and diluted net income per share (in thousands, except per share data):

 

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STAMPS.COM

NOTES TO FINANCIAL STATEMENTS

(ALL INFORMATION WITH RESPECT TO MARCH 31, 2007 AND 2006 IS UNAUDITED)

		Three Months Ended March 31,
		2007			2006
Net income		$	3,054		$	3,357
Basic - weighted average common shares			21,892			23,268
Diluted effect of common stock equivalents			434			1,118
Diluted - weighted average common shares			22,326			24,386
Earnings per share:
Basic		$	0.14		$	0.14
Diluted		$	0.14		$	0.14

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

 

		Three Months Ended March 31,
		2007			2006
Anti-dilutive stock options shares			1,270			183

4. Stock-Based Employee Compensation

 

Effective January 1, 2006, the Company adopted the Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), and related SEC rules included in Staff Accounting Bulletin No. 107 (SAB 107), which require the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan (employee stock purchases) based on estimated fair values.

 

The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. The Company’s Financial Statements as of and for the three months ended March 31, 2007 and 2006 reflect the impact of SFAS 123R. The following table illustrates the stock-based compensation expense the Company recognized under SFAS 123R for the periods indicated:

 

		Three Months Ended March 31,
		2007			2006
Stock-based compensation expense relating to:
Employee and director stock options		$	414,000		$	296,000
Employee stock purchases			47,000			499,000
Total stock-based compensation expense		$	461,000		$	795,000

SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Statement of Income. Prior to the adoption of SFAS 123R, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). Under the intrinsic value method, no stock-based compensation expense had been recognized in the Company’s Statement of Income prior to January 1, 2006 because the exercise price of the Company’s stock options granted to employees and directors was equal to or greater than the fair market value of the underlying stock at the date of grant.

 

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STAMPS.COM

NOTES TO FINANCIAL STATEMENTS

(ALL INFORMATION WITH RESPECT TO MARCH 31, 2007 AND 2006 IS UNAUDITED)

 

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in the Company’s Statement of Income for the three months ended March 31, 2007 and 2006 included 1) compensation expense for share-based payment awards granted prior to, but not yet vested as of January 1, 2006 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and 2) compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.

 

Compensation expense recognized for all employee stock options awards granted is recognized using the straight-line single method over their respective vesting periods of three or four years. As stock-based compensation expense recognized in the Statement of Income for the three months ended March 31, 2007 and 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.

 

SFAS 123R requires the cash flow resulting from tax benefits resulting from tax deduction in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. Prior to fiscal 2005 the Company had a history of net operating losses and because it is uncertain as to when and if it may realize its deferred tax assets, the Company has placed a valuation allowance against its otherwise recognizable deferred tax asset. Therefore, there are no excess tax benefits recorded in the financing cash inflow that would have been classified as an operating cash inflow if the Company had not adopted SFAS 123R. During the three months ended March 31, 2007 and 2006, the Company received $510,000 and $5.3 million, respectively, in cash from stock options exercised and from shares issued through the Employee Stock Purchase Program.

 

Upon adoption of SFAS 123R the Company continued to use the Black-Scholes option valuation model, which requires management to make certain assumptions for estimating the fair value of employee stock options granted at the date of the grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management’s opinion the existing models may not necessarily provide a reliable single measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with SFAS 123R using an option valuation model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

 

For options granted, the Company's assumption of expected volatility for valuing options using the Black-Scholes model was based on the historical volatility of the Company's stock price for the period January 1, 2002 through the date of option grant because management believes the historical volatility since January 1, 2002 is more representative of prospective volatility. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant.

 

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

 

		Three Months Ended March 31,
		2007			2006
Expected dividend yield			—			—
Risk-free interest rate			4.67%			4.56%
Expected volatility			47%			49%
Expected life (in years)			5			5
Expected forfeiture rate			16%			12%

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STAMPS.COM

NOTES TO FINANCIAL STATEMENTS

(ALL INFORMATION WITH RESPECT TO MARCH 31, 2007 AND 2006 IS UNAUDITED)

  

The following table summarizes stock option activity related to the Company’s plan for the three months ended March 31, 2007:

		Number of Stock Options (in thousands)			Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (in years)			Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2006			2,197		$	17.52
Granted			66			15.26
Exercised			(34	)		7.12
Forfeited or expired			(18	)		21.80
Balance at March 31, 2007			2,211			17.58					$	6,296
Exercisable at March 31, 2007			1,806			16.51			5.7		$	6,231

 

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the company’s closing stock price of $14.37 at March 30, 2007, representing the last trading day of three months ended March 31, 2007, which would have been received by award holders had all award holders exercised their awards that were in-the-money as of that date.

The weighted average grant date fair value of options granted during the three months ended March 31, 2007 and 2006 was $7.15 and $14.54, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006 was $288,441 and $5,780,940, respectively.

The following table summarizes the status of the Company’s nonvested shares as of March 31, 2007:

		Number of Stock Options (in thousands)			Weighted Average Grant Date Fair Value
Nonvested at December 31, 2006			432		$	11.28
Granted			66		$	7.15
Vested			(43	)	$	10.34
Forfeited			(50	)	$	21.80
Nonvested at March 31, 2007			405		$	10.74

As of March 23, 2007, there was approximately $3.7 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 2.7 years.

 

5. Goodwill and Intangible Assets

 

  



 

 

Section 382 Update

 

Under Internal Revenue Code Section 382, a change in ownership can occur whenever there is a shift in ownership by more than 50 percentage points by one or more 5% shareholders within a three-year period. When a change of ownership is triggered, our net operating loss ("NOL" or "NOLs") asset may be impaired. We estimate that, as of March 31, 2007 we were approximately at 25% compared with the 50% level that would trigger impairment of our NOL asset. As part of our ongoing program to preserve future use of our NOL assets, Stamps.com requests that all of our current stockholders and prospective investors contact us prior to allowing their ownership interest to reach a five-percent level.

 

Results of Operations

 

Total revenue for the first quarter 2007 was approximately $20 million, a decrease of 3% compared to the first quarter 2006. Although PC postage revenue was up 2%, PhotoStamps revenue was down 18% year over year for the first quarter. The decrease in total revenue resulted mainly from the decline in PhotoStamps revenue, which largely resulted from a decrease in our marketing of PhotoStamps during the quarter. Total postage printed using our service during the first quarter 2007 was up 9% compared to the first quarter 2006. During the first quarter 2007, we added to our PC Postage business approximately 55,000 new paid customers who where successfully billed for the first time and we lost approximately 50,000 existing paid customers, resulting in an increase during the quarter to net paid customers of 5,000.

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The following table sets forth our results of operation as a percentage of total revenue for the periods indicated:

 

		Three Months Ended March 31,
		2007			2006
Total Revenues
Service			68	%		66	%
PhotoStamps			16	%		19	%
Products			12	%		11	%
Other			4	%		4	%
Total revenues			100	%		100	%
Cost of revenues
Service			12	%		13	%
PhotoStamps			10	%		12	%
Products			4	%		3	%
Other			1	%		1	%
Total cost of revenues			27	%		29	%
Gross profit			73	%		71	%
Operating expenses:
Sales and marketing			39	%		33	%
Research and development			11	%		11	%
General and administrative			14	%		15	%
Total operating expenses			64	%		59	%
Income from operations			9	%		12	%
Other income, net			6	%		5	%
Income before income taxes			15	%		17	%
Provision for income taxes			0	%		0	%
Net income			15	%		17	%

 

Revenue. Revenue is derived primarily from four sources: (1) service fees charged to customers for use of our PC Postage service; (2) PhotoStamps revenue from the sale of PhotoStamps; (3) product sales consisting of Supplies Store revenue from the direct sale of consumables and supplies; and (4) other revenue consisting of advertising revenue from controlled access advertising to our existing customer base, insurance revenue from our branded insurance offering, and licensing revenue. Total revenue decreased from $20.5 million in the first quarter 2006 to $20.0 million in the first quarter 2007, a decrease of 3%. 

 

Service fee revenue increased from $13.5 million in the first quarter 2006 to $13.7 million in the first quarter 2007, an increase of 2%. The increase in service fee revenue is primarily due to an increase in average service fee revenue per paid customer. We successfully billed approximately 324,000 customers during the first quarter 2006 and 2007. Average monthly service fee revenue per paid customer increased from $16.68 during the first quarter 2006 to $16.87 during first quarter 2007. As a percentage of total revenue, service fee revenue increased two percentage points to 68% in the first quarter 2007 as compared to 66% in the first quarter 2006. The increase in service fee revenue as a percentage of total revenue is attributable to the decrease in revenue from our PhotoStamps product. As a percentage of total revenue, service fee revenue may decline over future periods if PhotoStamps revenue increases in those periods.

 

PhotoStamps revenue decreased from $3.9 million in the first quarter 2006 to $3.2 million in the first quarter 2007, a decrease of 18%. As a percentage of total revenue, PhotoStamps revenue decreased three percentage points to 16% in the first quarter of 2007 as compared to 19% in the first quarter of 2006. The decrease, both on an absolute basis and as a percentage of total revenue is primarily due to the decline in our PhotoStamps-based marketing efforts during the quarter. In addition, average revenue per PhotoStamps sheet declined due to a higher mix of business PhotoStamps orders, which carry a lower per sheet price. Total PhotoStamps sheets shipped during the first quarter 2007 was approximately 189,000 as compared to 210,000 in the first quarter 2006. PhotoStamps revenue may grow both on an absolute basis and as a percentage of total revenue in future periods if our level of marketing activity for PhotoStamps increases. PhotoStamps marketing activity decreased in this period as we focused our marketing efforts towards our PC Postage business.

 

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Product revenue was approximately $2.4 million in the first quarter 2007 and 2006. As a percentage of total revenue, product revenue was 12% during the first quarter 2007 and 2006. We expect product revenue to increase on an absolute basis as we plan to continue to increase the breadth of products offered in our Supplies Store.

 

Other revenue decreased from $832,000 in the first quarter 2006 to $827,000 in the first quarter 2007, a decrease of 1%. As a percentage of total revenue, other revenue was 4% during the first quarter of 2006 and 2007. Included in other revenue is our branded insurance program which was approximately $378,000 in the first quarter 2006 and $375,000 in the first quarter 2007, or approximately 2% of total revenue. We expect other revenue to decrease both on an absolute basis and as a percentage of total revenue in future periods as we focus our marketing efforts on Service fee and PhotoStamps revenue.

 

Cost of Revenue. Cost of revenue principally consists of the cost of customer service, certain promotional expenses, system operating costs, credit card processing fees, the cost of postage for PhotoStamps, image review, printing and fulfillment costs for PhotoStamps, parcel insurance offering costs, customer misprints and products sold through our Supplies Store and the related costs of shipping and handling. Cost of revenue decreased from $5.9 million in the first quarter 2006 to $5.4 million in the first quarter 2007, a decrease of 10%.

 

Cost of service revenue decreased from $2.6 million in the first quarter 2006 to $2.3 million in the first quarter 2007, a decrease of 10%. As a percentage of total revenue, cost of service revenue decreased one percentage point to 12% in the first quarter 2007 as compared to 13% in the first quarter 2006. The decrease, both on an absolute basis and as a percentage of total revenue is mainly attributable to the decrease in the redemption rate of promotional items.

 

Included in cost of service revenue are promotional expenses. This includes free postage and a free digital scale offered to new customers, and was approximately $408,000 and $691,000 in the first quarters of 2007 and 2006, respectively. Promotional expense, which represents a material portion of total cost of service revenue, is expensed in the period in which a customer qualifies for the promotion. However, the revenue associated with the acquired customer is earned over the customer's lifetime. Therefore, promotional expense for newly acquired customers may be higher than the revenue earned from those customers in that period.

 

Cost of PhotoStamps revenue decreased from $2.4 million in the first quarter 2006 to $2.1 million in the first quarter 2007, a decrease of 14%. As a percentage of total revenue, cost of PhotoStamps decreased two percentage points to 10% in the first quarter 2007, as compared to 12% in the first quarter 2006. The decrease, both on an absolute basis and as a percentage of total revenue, is primarily due to the decrease in PhotoStamps sheets ordered and the decline in related marketing activity. Additionally, the gross margin from PhotoStamps is significantly lower than that of our other sources of revenue because we include the stated value of US Postal Service postage as part of our cost of PhotoStamps revenue. As a result, future increases in PhotoStamps sales would further increase the overall cost of Photostamps revenue as a percentage of total revenue. Cost of PhotoStamps revenue may grow both on an absolute basis and as a percentage of total revenue in future periods.

 

Cost of product revenue increased from $753,000 in the first quarter 2006 to $799,000 in the first quarter 2007, an increase of 6%. The increase is primarily due to the increase in our shipping and handling cost. As a percentage of total revenue, cost of product revenue increased one percentage point to 4% in the first quarter 2007 as compared to 3% in the first quarter 2006. We expect the cost of product sales to increase in future periods, which is consistent with our expectation that product sales may also increase in future periods.

 

Cost of other revenue decreased from $143,000 in the first quarter 2006 to $141,000 in the first quarter 2007, a decrease of 1%. The decrease is primarily due to the decrease in insurance premium cost of sales. As a percentage of total revenue, cost of other revenue remained at 1% during the first quarters of 2007 and 2006.

 

Sales and Marketing. Sales and marketing expense principally consists of costs associated with strategic partnership relationships, advertising, and compensation and related expenses for personnel engaged in sales, marketing, and business development activities. Sales and marketing expense increased from $6.8 million in the first quarter 2006 to $7.8 million in the first quarter 2007, an increase of 15%. As a percentage of total revenue, sales and marketing expense increased six percentage points to 39% in the first quarter 2007 as compared to 33% in the first quarter 2006. The increase, both on an absolute basis and as a percentage of total revenue, is primarily due to the increase in various marketing program expenditures relating to the acquisition of customers for our PC Postage business partially offset by a decrease in marketing expenditures related to PhotoStamps. Ongoing marketing programs include the following: traditional advertising, partnerships, customer referral programs, customer re-marketing efforts, telemarketing, direct mail, and online advertising. We currently expect sales and marketing expenses to increase significantly in fiscal 2007 as compared to fiscal 2006 as we plan to increase our marketing activity in order to increase customer acquisition as we plan to increase our direct mail activity.

 

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Research and Development. Research and development expense principally consists of compensation for personnel involved in the development of our services, depreciation of equipment and software and expenditures for consulting services and third party software. Research and development expense decreased from $2.3 million in the first quarter 2006 to $2.1 million in the first quarter 2007, a decrease of 8%. This decrease is primarily due to the decrease in SFAS 123R stock-based compensation and temporary labor expenses. As a percentage of total revenue, research and development expense was 11% in the first quarters of 2007 and 2006. We currently expect research and development expenses to increase in fiscal 2007 as compared to fiscal 2006 as we plan to hire additional employees in this area.

 

General and Administrative. General and administrative expense principally consists of compensation and related costs for executive and administrative personnel, fees for legal and other professional services, depreciation of equipment and software used for general corporate purposes and amortization of intangible assets. General and administrative expense decreased from $3.2 million in the first quarter 2006 to $2.7 million in the first quarter 2007, a decrease of 13%. The decrease in general and administrative expense is primarily due to the decrease in legal expense. As a percentage of total revenue, general and administrative expense decreased one percentage point to 14% in the first quarter 2007 as compared to 15% in the first quarter 2006. We currently expect general and administrative expenses to increase in fiscal 2007 as compared to fiscal 2006 as we expect an increase in legal activity and spending as a result of increased activity in existing litigation.

 

Other Income, Net. Other income, net consists of interest income from cash equivalents and short-term and long-term investments. Other income, net increased from $1.1 million in the first quarter 2006 to $1.2 million in the first quarter 2007, an increase of 13%. As a percentage of total revenue, other income, net increased one percentage point to 6% in the first quarter 2007 as compared to 5% in the first quarter 2006. The increase, both on an absolute basis and as a percentage of total revenue is due to the increase in interest rates.

 

Liquidity and Capital Resources

 

As of March 31, 2007 and 2006 we had approximately $104 million and $114 million, respectively, in cash, restricted cash and short-term and long-term investments. We invest available funds in short and long-term money market funds, commercial paper, corporate notes and municipal securities and do not engage in hedging or speculative activities.

 

In November 2003, we entered into a facility lease agreement commencing in March 2004 for our new corporate headquarters with aggregate lease payments of approximately $4 million through February 2010.

 

 

		Operating
Nine months ending December 31, 2007		$	536
Years ending December 31:
2008			751
2009			794
2010			134
2011			-
		$	2,215

 

 

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During the first quarter 2007 we repurchased approximately 370,000 shares of common stock for approximately $5.3 million. We will consider repurchasing stock throughout our current repurchase program by evaluating such factors as the price of the stock, the daily trading volume and the availability of large blocks and any additional constraints because of material inside information we may possess.

 

Net cash provided by operating activities was $2.5 million and $5 million during the three months ended March 31, 2007 and 2006, respectively. The decrease in net cash provided by operating activities resulted primarily from the payment of marketing expenses which principally consist of costs associated with strategic partnership relationships and advertising.

 

Net cash provided by investing activities was $5.8 million during the three months ended March 31, 2007. Net cash used in investing activities was $8.2 million during the three months ended March 31, 2006. The decrease in net cash used in investing activities resulted primarily from the sale of investments to fund the repurchase of stock, as noted above.

 

Net cash used in financing activities was $4.8 million during the three months ended March 31, 2007. Net cash provided by financing activities was $5.3 million during the three months ended March 31, 2006. The decrease in net cash provided by financing activities resulted primarily from the repurchase of our stock, as noted above.

 

We believe our available cash and marketable securities, together with the cash flow from operations will be sufficient to fund our business for the foreseeable future.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. Our cash equivalents and investments are comprised of money market, U.S. government obligations and public corporate debt securities with weighted average maturities of 288 days at March 31, 2007. Our cash equivalents and investments, net of restricted cash, approximated $103 million and had a related weighted average interest rate of approximately 5.31%. Interest rate fluctuations impact the carrying value of the portfolio. We do not believe that the future market risks related to the above securities will have a material adverse impact on our financial position, results of operations or liquidity.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Changes in Internal Controls

 

During the first quarter ended March 31, 2007, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1.     LEGAL PROCEEDINGS

 

On October 22, 2004, Kara Technology Incorporated filed suit against us in the United States District Court for the Southern District of New York, alleging, among other claims, that Stamps.com infringed certain Kara Technology patents and that Stamps.com misappropriated trade secrets owned by Kara Technology, most particularly with respect to our NetStamps feature. Kara Technology seeks an injunction, unspecified damages, and attorneys’ fees. On February 9, 2005, the court granted our motion to transfer this suit to the United States District Court for the Central District of California. On August 23, 2006, the court granted our summary judgment motions on the trade secret and other non-patent claims. The court has scheduled a “Markman” hearing to construe the terms of the Kara Technology patents for May 31, 2007, and has scheduled a trial commencement date of July 31, 2007. We dispute Kara Technology’s claims and intend to defend the lawsuit vigorously.

 

On November 22, 2006, we filed a lawsuit against Endicia, Inc. and PSI Systems, Inc. in the United States District Court for the Central District of California for infringement of 11 Stamps.com patents covering, among other things, Internet postage technology. On January 8, Endicia, Inc. and PSI Systems, Inc. filed counterclaims asking for declaratory judgment that all 11 patents are invalid, unenforceable and not infringed. We dispute the counterclaims and intend to prosecute the lawsuit vigorously.

 

In May and June 2001, we were named, together with certain of our current and former board members and/or officers, as a defendant in 11 purported class-action lawsuits, filed in the U.S. District Court for the Southern District of New York. The lawsuits allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 in connection with our initial public offering and secondary offering of our common stock. The lawsuits also name as defendants the principal underwriters in connection with our public offerings, and allege that the underwriters engaged in improper commission practices and stock price manipulations in connection with the sale of our common stock. The lawsuits allege that we and/or certain of our officers or directors knew of or recklessly disregarded these practices by the underwriter defendants, and failed to disclose them in our public filings. Plaintiffs seek damages and statutory compensation, including interest, costs and expenses (including attorneys’ fees). Over 1,000 similar lawsuits have been brought against over 250 companies which issued stock to the public in 1998-2000, and their underwriters. All of these lawsuits have been consolidated for pretrial purposes before U.S. District Court Judge Shira Scheindlin.

 

In October 2002, pursuant to a stipulation and tolling agreement with plaintiffs, our current and former board members and/or officers were dismissed from these lawsuits without prejudice. In June 2003, we approved a proposed Memorandum of Understanding among the plaintiffs, issuers and insurers as to terms for a settlement of the litigation against us, which was further documented in a Stipulation and Agreement of Settlement filed with the court. The proposed settlement, which would not require Stamps.com to make any payments, was preliminarily approved by the court in February 2005 and was the subject of a fairness hearing in April 2006, but remains subject to final approval by the court.

 

We have placed our underwriters on notice of our rights to indemnification, pursuant to our agreements with the underwriters, but under the terms of the proposed settlement, we cannot assert these claims except as a defense to a claim against us by the underwriters. We have also provided notice to our directors' and officers' insurers who have agreed to fund the proposed settlement.

 

In October 2004, the court issued an order regarding class certification in certain related matters. In December 2006, the U.S. Court of Appeals for the Second Circuit vacated that order, and determined that the related matters could not be certified as a class as currently defined. The appellate court's decision renders uncertain whether our proposed settlement can be finally approved and consummated. If the proposed settlement does not receive final approval or is not consummated for any reason, we intend to defend the lawsuits vigorously because we believe that the claims against us and our officers and directors are without merit.

 

We are not currently involved in any other material legal proceedings, nor are we aware of any other material legal proceedings pending against us.

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ITEM 1A. RISK FACTORS

 

You should carefully consider the following risks and the other information in this Report and our other filings with the SEC before you decide to invest in our company or to maintain or increase your investment. The risks and uncertainties described below are not the only ones facing Stamps.com. Additional risks and uncertainties may also adversely impact and impair our business. If any of the following risks actually occur, our business, results of operations or financial condition would likely suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

 

This Report contains forward-looking statements based on the current expectations, assumptions, estimates and projections about Stamps.com and the Internet. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements as a result of many factors, including those described in this section and elsewhere in this Report. Stamps.com does not undertake to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

 

Risks Related to Our Business

 

We may not successfully implement strategies to increase the adoption of our services and products which would limit our growth, adversely affect our business and cause the price of our common stock to decline.

 

Our continuing profitability depends on our ability to successfully implement our strategy of increasing the adoption of our services and products. Factors that might cause our revenues, margins and operating results to fluctuate include the factors described in the subheadings below as well as:

 

·

The costs of our marketing programs to establish and promote the Stamps.com brands;

 

·

The demand for our services and products;

 

·

Our ability to develop and maintain strategic distribution relationships;

 

·

The number, timing and significance of new products or services introduced by us and by our competitors;

 

·

Our ability to develop, market and introduce new and enhanced products and services on a timely basis;

 

·

The level of service and price competition;

 

·

Our operating expenses;

 

·

US Postal Service regulation and policies relating to PC Postage and PhotoStamps; and

 

·

General economic factors.

 

We implemented pricing plans that may adversely affect our future revenues and margins.

 

Our ability to generate gross margins depends upon the ability to generate significant revenues from a large base of active customers. In order to attract customers in the future, we may run special promotions and offers such as free trials, discounts on fees, postage and supplies, and other promotions. We cannot be sure that customers will be receptive to future fee structures and special promotions that we may implement. Even though we have established a sizeable base of users, we still may not generate sufficient gross margins to remain profitable. In addition, our ability to generate revenues or sustain profitability could be adversely affected by the special promotions or additional changes to our pricing plans.

 

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If we do not successfully attract and retain skilled personnel for permanent management and other key personnel positions, we may not be able to effectively implement our business plan.

 

Our success depends largely on the skills, experience and performance of the members of our senior management and other key personnel. Any of the individuals can terminate his or her employment with us at any time. If we lose key employees and are unable to replace them with qualified individuals, our business and operating results could be seriously harmed. In addition, our future success will depend largely on our ability to continue attracting and retaining highly skilled personnel. As a result, we may be unable to successfully attract, assimilate or retain qualified personnel. Further, we may be unable to retain the employees we currently employ or attract additional qualified personnel to replace those key employees that may depart. The failure to attract and retain the necessary personnel could seriously harm our business, financial condition and results of operations.

 

The success of our business will depend upon the continued acceptance by customers of our service.

 

We must minimize the rate of loss of existing customers while adding new customers. Customers cancel their subscription to our service for many reasons, including a perception that they do not use the service sufficiently. That the costs for service are too high, because they are going out of business, or other issues that are not satisfactorily resolved. We must continually add new customers both to replace customers who cancel and to continue to grow our business beyond our current customer base. If too many of our customers cancel our service, or if we are unable to attract new customers in numbers sufficient to grow our business, our operating results will be adversely affected. Further, if excessive numbers of customers cancel our service, we may be required to incur significantly higher marketing expenditures than we currently anticipate to replace these customers with new customers.

 

If we fail to effectively market and sell our services and products, our business will be substantially harmed and could fail.

 

In order to acquire customers and achieve widespread distribution and use of our services and products, we must develop and execute cost-effective marketing campaigns and sales programs. We currently rely on a combination of marketing techniques to attract new customers including direct mail, online marketing and business partnerships. We may be unable to continue marketing our services and products in a cost-effective manner. If we fail to acquire customers in a cost-effective manner, our results of operations will be adversely affected.

 

If we fail to meet the demands of our customers, our business will be substantially harmed and could fail.

 

Our services and products must meet the commercial demands of our customers, which include home businesses, small businesses, corporations and individuals. We cannot be sure that our services will appeal to or be adopted by an ever-growing range of customers. If we are unable to ship products such as items from our Supplies Store or PhotoStamps in a timely manner to our customers, our business may be harmed. Moreover, our ability to obtain and retain customers depends, in part, on our customer service capabilities. If we are unable at any time to address customer service issues adequately or to provide a satisfactory customer experience for current or potential customers, our business and reputation may be harmed. If we fail to meet the demands of our customers our results of operations will be adversely affected.

 

A failure to further develop and upgrade our services and products could adversely affect our business.

 

Any delays or failures in developing our services and products, including upgrades of current services and products, may have a harmful impact on our results of operations. The need to extend our core technologies into new features and services and to anticipate or respond to technological changes could affect our ability to develop these services and features. Delays in features or upgrade introductions could cause a decline in our revenue, earnings or stock price. We cannot determine the ultimate effect these delays or the introduction of new features or upgrades will have on our revenue or results of operations.

 

Increases in payment processing fees would increase our operating expenses and adversely affect our results of operations.

 

Our customers pay for our services predominately using credit cards and debit cards and, to a lesser extent, by use of automated clearing house, (“ACH”). Our acceptance of these payment methods requires our payment of certain fees. From time to time, these fees may increase, either as a result of rate changes by the payment processing companies or as a result in a change in our business practices which increase the fees on a cost-per-transaction basis. If these fees for accepting payment methods increase in future periods, it may adversely affect our results of operations.

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A decline in our ability to effectively bill our customers by credit card and debit card would adversely affect our results of operations.

 

Our ability to effectively charge our customers through credit cards and debit cards is subject to many variables, including our own billing technology and practices, the practices and rules of payment processing companies, and the practices and rules of issuing financial institutions. If we do not effectively charge and bill our customers in future periods through credit cards and debit cards, it would adversely affect our results of operations.

 

Third party assertions of violations of their intellectual property rights could adversely affect our business.

 

Substantial litigation regarding intellectual property rights exists in our industry. Third parties may currently have, or may eventually be issued, patents upon which our products or technology infringe. Any of these third parties might make a claim of infringement against us. We may become aware of, or we may increasingly receive correspondence claiming, potential infringement of other parties’ intellectual property rights. We could incur significant costs and diversion of management time and resources to defend claims against us regardless of their validity. Any associated costs and distractions could have a material adverse effect on our business, financial condition and results of operations. In addition, litigation in which we are accused of infringement might cause product development delays, require us to develop non-infringing technology or require us to enter into royalty or license agreements, which might not be available on acceptable terms, or at all. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our business could be significantly harmed or fail. Any loss resulting from intellectual property litigation could severely limit our operations, cause us to pay license fees, or prevent us from doing business.

 

A failure to protect our own intellectual property could harm our competitive position.

 

We rely on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our rights in our products, services, know-how and information. We have 59 issued US patents, 86 pending US patent applications, 9 international patents and 9 pending international patent applications. We also have a number of registered and unregistered trademarks. We plan to apply for more patents in the future. We may not receive patents for any of our patent applications. Even if patents are issued to us, claims issued in these patents may not protect our technology. In addition, a court might hold any of our patents, trademarks or service marks invalid or unenforceable. Even if our patents are upheld or are not challenged, third parties may develop alternative technologies or products without infringing our patents. If our patents fail to protect our technology or our trademarks and service marks are successfully challenged, our competitive position could be harmed. We also generally enter into confidentiality agreements with our employees, consultants and other third parties to control and limit access and disclosure of our confidential information. These contractual arrangements or other steps taken to protect our intellectual property may not prove to be sufficient to prevent misappropriation of technology or deter independent third party development of similar technologies. Additionally, the laws of foreign countries may not protect our services or intellectual property rights to the same extent as do the laws of the United States.

 

System and online security failures could harm our business and operating results.

 

Our services depend on the efficient and uninterrupted operation of our computer and communications hardware systems. In addition, we must provide a high level of security for the transactions we execute. We rely on internally-developed and third-party technology to provide secure transmission of postage and other confidential information. Any breach of these security measures would severely impact our business and reputation and would likely result in the loss of customers. Furthermore, if we are unable to provide adequate security, the US Postal Service could prohibit us from selling postage over the Internet.

 

Our systems and operations are vulnerable to damage or interruption from a number of sources, including fire, flood, power loss, telecommunications failure, break-ins, earthquakes and similar events. Our Internet host provider does not guarantee that our Internet access will be uninterrupted, error-free or secure. Our servers are also vulnerable to computer viruses, physical, electrical or electronic break-ins and similar disruptions. We have experienced minor system interruptions in the past and may experience them again in the future. Any substantial interruptions in the future could result in the loss of data and could completely impair our ability to generate revenues from our service. We do not presently have a full disaster recovery plan in effect to cover the loss of facilities and equipment. In addition, we do not have a fail-over site that mirrors our infrastructure to allow us to operate from a second location. We have business interruption insurance; however, we cannot be certain that our coverage will be sufficient to compensate us for losses that may occur as a result of business interruptions.

 

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A significant barrier to electronic commerce and communications is the secure transmission of confidential information over public networks. Anyone who is able to circumvent our security measures could misappropriate confidential information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against potential security breaches or to alleviate problems caused by any breach. We rely on specialized technology from within our own infrastructure to provide the security necessary for secure transmission of postage and other confidential information. Advances in computer capabilities, new discoveries in security technology, or other events or developments may result in a compromise or breach of the algorithms we use to protect customer transaction data. Should someone circumvent our security measures, our reputation, business, financial condition and results of operations could be seriously harmed. Security breaches could also expose us to a risk of loss or litigation and possible liability for failing to secure confidential customer information. As a result, we may be required to expend a significant amount of financial and other resources to protect against security breaches or to alleviate any problems that they may cause.

 

Risks Related to Our Industry

 

US Postal Service regulations or fee assessments may cause disruptions or discontinuance of our business.

 

We are subject to continued US Postal Service scrutiny and other government regulations. The availability of our services is dependent upon our service continuing to meet US Postal Service performance specifications and regulations. The US Postal Service could change its certification requirements or specifications for PC Postage or revoke or suspend the approval of one or more of our services at any time. If at any time our service fails to meet US Postal Service requirements, we may be prohibited from offering this service and our business would be severely and negatively impacted. In addition, the US Postal Service could suspend or terminate our approval or offer services which compete against us, any of which could stop or negatively impact the commercial adoption of our service. Any changes in requirements or specifications for PC Postage could adversely affect our pricing, cost of revenues, operating results and margins by increasing the cost of providing our service.

 

The US Postal Service could also decide that PC Postage should no longer be an approved postage service due to security concerns or other issues. Our business would suffer dramatically if we are unable to adapt our services to any new requirements or specifications or if the US Postal Service were to discontinue PC Postage as an approved postage method. Alternatively, the US Postal Service could introduce competitive programs or amend PC Postage requirements to make certification easier to obtain, which could lead to more competition from third parties or the US Postal Service itself. If we are unable to compete successfully, particularly against large, traditional providers of postage products like Pitney Bowes who enter the online postage market, our revenues and operating results will suffer.

 

The US Postal Service could decide to suspend or cancel the current market test of PhotoStamps, and may do so in the event that there is sufficient cause to believe that the market test presents unacceptable risk to US Postal Service revenues, degrades the ability of the US Postal Service to process or deliver mail produced by the test participants, exposes the US Postal Service or its customers to legal liability, or causes public or political embarrassment or harm to the US Postal Service in any way. If the US Postal Service decides to suspend or cancel the market test of PhotoStamps, our revenues and operating results will likely suffer.

 

Additionally, the US Postal Service could decide to amend, renegotiate or terminate our credit card cost sharing agreement, which is a key agreement that governs the allocation of credit card fees paid by the US Postal Service and us for the postage purchased by our customers. If the US Postal Service decides to amend, renegotiate or terminate our credit card cost sharing agreement, our revenues and operating results will likely suffer.

 

In addition, US Postal Service regulations may require that our personnel with access to postal information or resources receive security clearance prior to doing relevant work. We may experience delays or disruptions if our personnel cannot receive necessary security clearances in a timely manner, if at all. The regulations may limit our ability to hire qualified personnel. For example, sensitive clearance may only be provided to US citizens or aliens who are specifically approved to work on US Postal Service projects.

 

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If we are unable to compete successfully, particularly against large, traditional providers of postage products such as Pitney Bowes, our revenues and operating results will suffer.

 

The PC Postage segment of the market for postage is relatively new and is competitive. At present, Pitney Bowes and Endicia.com are authorized PC Postage providers with commercially available software and Zazzle.com and FujiFilm offer a competitive product to PhotoStamps using Pitney Bowes technology. If any more providers become authorized, or if Pitney Bowes or Endicia.com provide enhanced offerings, our operations could be adversely impacted. We also compete with other forms of postage, including traditional postage meters provided by companies such as Pitney Bowes, postage stamps and permit mail.

 

We may not be able to establish or maintain a competitive position against current or future competitors as they enter the market. Many of our competitors have longer operating histories, larger customer bases, greater brand recognition, greater financial, marketing, service, support, technical, intellectual property and other resources than us. As a result, our competitors may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to web site and systems development than us. This increased competition may result in reduced operating margins, loss of market share and a diminished brand. We may from time to time make pricing, service or marketing decisions or acquisitions as a strategic response to changes in the competitive environment. These actions could result in reduced margins and seriously harm our business.

 

We could face competitive pressures from new technologies or the expansion of existing technologies approved for use by the US Postal Service. We may also face competition from a number of indirect competitors that specialize in electronic commerce and other companies with substantial customer bases in the computer and other technical fields. Additionally, companies that control access to transactions through a network or Web browsers could also promote our competitors or charge us a substantial fee for inclusion. In addition, changes in postal regulations could adversely affect our service and significantly impact our competitive position. We may be unable to compete successfully against current and future competitors, and the competitive pressures we face could seriously harm our business.

 

If we do not respond effectively to technological change, our services and products could become obsolete and our business will suffer.

 

The development of our services, products and other technology entails significant technical and business risks. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our online operations. The Internet and the electronic commerce industry are characterized by rapid technological change; changes in user and customer requirements and preferences; frequent new product and service introductions embodying new technologies; and the emergence of new industry standards and practices.

 

The evolving nature of the Internet or the postage markets could render our existing technology and systems obsolete. Our success will depend, in part, on our ability to license or acquire leading technologies useful in our business; enhance our existing services; develop new services or features and technology that address the increasingly sophisticated and varied needs of our current and prospective users; and respond to technological advances and emerging industry and regulatory standards and practices in a cost-effective and timely manner.

 

Future advances in technology may not be beneficial to, or compatible with, our business. Furthermore, we may not be successful in using new technologies effectively or adapting our technology and systems to user requirements or emerging industry standards on a timely basis. Our ability to remain technologically competitive may require substantial expenditures and lead time. If we are unable to adapt in a timely manner to changing market conditions or user requirements, our business, financial condition and results of operations could be seriously harmed.

 

Our operating results could be impaired if we or the Internet become subject to additional government regulation and legal uncertainties.

 

Due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet, relating to user privacy, pricing, content, copyrights, distribution, characteristics and quality of products and services, and export controls.

 

The adoption of any additional laws or regulations may hinder the expansion of the Internet. A decline in the growth of the Internet could decrease demand for our products and services and increase our cost of doing business. Moreover, the applicability of existing laws to the Internet is uncertain with regard to many issues, including property ownership, export of specialized technology, sales tax, libel and personal privacy. Our business, financial condition and results of operations could be seriously harmed by any new legislation or regulation. The application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services could also harm our business.

 

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We have employees and offer our services in multiple states, and we may in the future expand internationally. These jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each state or foreign country. Our failure to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties. Other states and foreign countries may also attempt to regulate our services or prosecute us for violations of their laws. Further, we might unintentionally violate the laws of foreign jurisdictions and those laws may be modified and new laws may be enacted in the future.

 

Risks Related to Our Stock

 

Changes in stock option accounting rules will have an adverse affect on our operating results.

 

We use options to acquire our common stock to attract, incentivize and retain our employees in a competitive marketplace. Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” allowed companies the choice of either using a fair value method of accounting for options that would result in expense recognition for all options granted, or using an intrinsic value method, as prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method. Prior to our adoption of SFAS No. 123 (revised 2004), “Share Based Payment,” or Statement 123R, on January 1, 2006, we had elected to apply APB No. 25 and accordingly we generally did not recognize any expense with respect to employee options to acquire our common stock in periods ended on or prior to December 31, 2005 as long as such options were granted at exercise prices equal to the fair value of our common stock on the date of grant.

 

Statement 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. This cost will be measured based on the fair value of the equity instruments issued. We adopted Statement 123R on January 1, 2006, which is the first day of our 2006 fiscal year. We expect the adoption of Statement 123R to have an adverse effect on our operating results, as we continue to use options to attract, incentivize and retain our employees.

 

The tax value of our net operating losses could be impaired if we trigger a change of control pursuant to Section 382 of the Internal Revenue Code.

 

Under Internal Revenue Code Section 382 rules, a change in ownership can occur whenever there is a shift in ownership by more than 50 percentage points by one or more five-percent shareholders within a three-year period. When a change of ownership is triggered, the NOLs may be impaired. We estimate that, as of March 31, 2007 we were approximately at 25% compared with the 50% level that would trigger impairment of our NOL asset. As part of our ongoing program to preserve future use of our NOL assets, Stamps.com requests that all of our investors contact us prior to allowing their ownership interest to reach a five-percent level.

 

Our charter documents could deter a takeover effort, which could inhibit your ability to receive an acquisition premium for your shares.

 

The provisions of our certificate of incorporation, bylaws and Delaware law could make it difficult for a third party to acquire us, even if it would be beneficial to our stockholders. In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which could prohibit or delay a merger or other takeover of our Company, and discourage attempts to acquire us.

 

The US Postal Service may object to a change of control of our common stock.

 

The US Postal Service may raise national security or similar concerns to prevent foreign persons from acquiring significant ownership of our common stock or of Stamps.com. The US Postal Service also has regulations regarding the change of control of approved PC Postage providers. These concerns may prohibit or delay a merger or other takeover of our Company. Our competitors may also seek to have the US Postal Service block the acquisition by a foreign person of our common stock or our Company in order to prevent the combined company from becoming a more effective competitor in the market for PC Postage.

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Our stock price is volatile

 

The price at which our common stock has traded since our initial public offering in June 1999 has fluctuated significantly. The price may continue to be volatile due to a number of factors, including the following, some of which are beyond our control:

 

·

variations in our operating results,

 

·

variations between our actual operating results and the expectations of securities analysts,

 

·

investors and the financial community,

 

·

announcements of developments affecting our business, systems or expansion plans by us or others,

 

·

and market volatility in general.

 

As a result of these and other factors, investors in our common stock may not be able to resell their shares at or above their original purchase price. In the past, securities class action litigation often has been instituted against companies following periods of volatility in the market price of their securities. This type of litigation, if directed at us, could result in substantial costs and a diversion of management’s attention and resources.

 

Shares of our common stock held by existing stockholders may be sold into the public market, which could cause the price of our common stock to decline.

 

If our stockholders sell into the public market substantial amounts of our common stock purchased in private financings prior to our initial public offering, or purchased upon the exercise of stock options or warrants, or if there is a perception that these sales could occur, the market price of our common stock could decline. All of these shares are available for immediate sale, subject to the volume and other restrictions under Rule 144 of the Securities Act of 1933.

 

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

 

We did not have any unregistered sales of common stock during the first quarter ended March 31, 2007.

 

Issuer Purchases of Equity Securities

Period	Total Number of shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs
January 1, 2007 - January 31, 2007	368,357	$14.41	368,357	$ 7,997,000
February 1, 2007 - February 28, 2007	—	—	—	$ 27,997,000
March 1, 2007 - March 31, 2007	1,800	$14.00	1,800	$ 27,972,000

 

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS 

 

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

 

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

 

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

 

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

 

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SIGNATURES

 

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

 

	STAMPS.COM INC.
	(Registrant)
May 10, 2007	By:	/s/ KEN MCBRIDE
		Ken McBride
		Chief Executive Officer
May 10, 2007	By:	/s/ KYLE HUEBNER
		Kyle Huebner
		Chief Financial Officer

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