UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December  31, 2016
 
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)
 
Registrant’s Telephone Number, Including Area Code: (310) 482-5800
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of Each Exchange on Which Registered
Common Stock, $.001 par value
 
The NASDAQ Stock Market, LLC
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes ☒  No ☐

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes ☐  No ☒

Indicate by check mark whether the Registrant: (1)  has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2)  has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒
 


Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ☒
Accelerated filer ☐
   
Non-accelerated filer ☐
Smaller reporting company ☐
(do not check if smaller reporting company)
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   No

As of June 30, 2016, the aggregate market value of voting common stock held by non-affiliates of the Registrant was $1,378,980,564 (based upon the closing price of $87.42 per share for shares of the Registrant’s Common Stock as reported by The NASDAQ Stock Market on that date). As of January 31, 2017, there were 16,847,816 shares of the Registrant’s Common Stock issued and outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the 2017 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission are incorporated by reference in Part III of this Form 10-K.
 

STAMPS.COM INC. AND SUBSIDIARIES
FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER  31, 2016

TABLE OF CONTENTS
 
     
Page
       
PART I.
 
1
     
 
ITEM 1.
BUSINESS.
1
       
 
ITEM 1A.
RISK FACTORS.
16
       
 
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
27
       
 
ITEM 2.
PROPERTIES.
27
       
 
ITEM 3.
LEGAL PROCEEDINGS.
27
       
 
ITEM 4.
MINE SAFETY DISCLOSURES.
27
       
PART II.
28
     
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
28
       
 
ITEM 6.
SELECTED FINANCIAL DATA.
31
       
 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
33
       
 
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
52
       
 
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
53
       
 
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
53
       
 
ITEM 9A.
CONTROLS AND PROCEDURES.
53
       
 
ITEM 9B.
OTHER INFORMATION.
54
       
PART III.
 
56
     
 
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
56
       
 
ITEM 11.
EXECUTIVE COMPENSATION.
56
       
 
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
56
       
 
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
56
       
 
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
56
       
PART IV.
 
57
       
 
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
57
 
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PART I.
 
This Annual Report on Form 10-K (“Report”) contains “forward-looking statements” within the meaning of Section  27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section  21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “projects,” “seeks,” “intends,” “plans,” “could,” “would,” “may” or other similar expressions in this Report. Our forward-looking statements relate to future events or our future performance and include, but are not limited to, statements concerning our business strategy, future commercial revenues, market growth, capital requirements, new product introductions, expansion plans and the adequacy of our funding. Other statements contained in this Report that are not historical facts are also forward-looking statements.

We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. We caution investors that any forward-looking statements presented in this Report, or that we may make orally or in writing from time to time, are based on beliefs and assumptions made by us and information available to us at the time made. Such statements are based on assumptions, and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations, and those differences may be material. Accordingly, investors should use caution in relying on forward-looking statements to anticipate future results or trends.

For discussion of some of the factors that could affect our results, see Item 7.“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 1A.“Risk Factors.”

This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report.

Our pending and registered trademarks include Stamps.com, Endicia, ShipStation, ShipWorks, ShippingEasy, NetStamps, Stamps.com Internet Postage, PhotoStamps, PictureItPostage, Photo NetStamps and the Stamps.com logo. This Report also references trademarks of other entities.  References in this Report to “we” “us” “our” or “Company” are references to Stamps.com Inc. and its subsidiaries.
 
ITEM 1.
BUSINESS.

Overview

Stamps.com® is a leading provider of Internet-based mailing and shipping solutions in the United States. Under the Stamps.com and Endicia brands, customers use our United States Postal Service (“USPS”) only solutions to mail and ship a variety of mail pieces and packages through the USPS.  Customers using our solutions receive discounted postage rates compared to USPS.com and USPS retail locations on certain mail pieces such as First Class letters and domestic and international Priority Mail® and Priority Mail Express® packages.   Stamps.com was the first ever USPS-approved PC Postage vendor to offer a software only mailing and shipping solution in 1999.  Endicia became a USPS-approved PC Postage vendor in 2000. Under the ShipStation®, ShipWorks® and ShippingEasyTM brands, customers use our multi-carrier solutions to ship packages through multiple carriers such as the USPS, UPS, FedEx and others. Our customers include individuals, small businesses, home offices, medium-size businesses, large enterprises, e-commerce merchants and warehouse shippers.

Mailing and Shipping Business References

When we refer to our “mailing and shipping business,” we are referring to our mailing and shipping products and services including our USPS and multi-carrier mailing and shipping solutions, mailing and shipping integrations, mailing and shipping supplies stores and branded insurance offerings. We do not include our customized postage business when we refer to our mailing and shipping business. When we refer to our “mailing and shipping revenue,” we are referring to our service, product and insurance revenue generated by our mailing and shipping customers. We do not include our customized postage revenue generated by our customized postage business in our “mailing and shipping revenue.”
 
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Services and Products

Mailing and Shipping Business

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

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

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

Our mailing and shipping solutions incorporate address verification technology that verifies each destination address for mail or packages sent using our solutions against a database of all known addresses in the United States. Our mailing and shipping solutions are also integrated with common small business and productivity software applications such as word processing, contact and address management, and accounting and financial applications. Our shipping solutions feature integrations with hundreds of partners and carriers including popular shipping management products, shopping carts, online marketplaces and other e-commerce solutions.

We target different customer categories with service plans that provide various features and capabilities. We target smaller offices, home offices, and smaller online sellers that need a more basic set of mailing and shipping features. We target larger enterprises that need a richer set of mailing capabilities such as multiple-user functionality, automated Certified Mail forms, additional reference codes and higher allowable postage balances. We target shippers such as e-commerce merchants, online retailers, fulfillment houses, warehouses, and large retailers that need shipping specific features such as direct integration into the customer’s order databases, faster label printing speed and the ability to customize and save shipping profiles. We target large corporations with multiple geographic locations that need enhanced reporting and the ability for a central location, such as a corporate headquarters, to have greater visibility and control over postage expenditures across their distributed network of locations.  We target large volume mailers that need features designed for presort mail, Certified Mail, and bulk address updating.

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

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

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

ShipWorks, which we acquired on August 29, 2014, offers software-based multi-carrier shipping solutions that target e-commerce merchants, online retailers, fulfillment houses and warehouses.  ShipWorks offers simple, powerful and easy to use solutions for shippers. ShipWorks’ solutions feature over 80 integrations with partners and carriers, including marketplaces, shopping carts and e-commerce platforms. ShipWorks offers multi-carrier shipping options and features including importing orders from any marketplace or shopping cart, easily comparing shipping rates and services, sending email notifications to buyers, updating online order status, generating reports and many more.

ShipStation, which we acquired on June 10, 2014, offers web-based multi-carrier shipping solutions under the brand names ShipStation and Auctane that target e-commerce merchants, online retailers, fulfillment houses and warehouses.  ShipStation’s solutions feature over 100 integrations with partners and carriers, including marketplaces, shopping carts and e-commerce platforms. ShipStation offers multi-carrier shipping options and automation features like custom hierarchical rules and product profiles that allow customers to easily and automatically optimize their shipping. Using ShipStation, an online retailer or e-commerce merchant can ship their orders from wherever they sell and however they ship.

Mailing and Shipping Integrations

As part of our mailing and shipping services, we offer back-end integration solutions where we provide the electronic postage for transactions to partners who manage the front-end users. Our solutions integrate directly into the most popular e-commerce platforms, allowing web store managers to completely automate their order fulfillment process by processing, managing, and shipping orders from virtually any e-commerce source through a single interface without manual data entry. Managers can retrieve order data and print complete shipping labels for all types of packages.
 
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We have an integration partnership with Amazon.com that makes our domestic and international shipping labels for certain USPS package classes available to Amazon.com Marketplace users. The integration allows Marketplace users to automatically pay for postage using their Marketplace Payments account, set a default ship-from address so they do not have to type or write it for each shipment, and automatically populate the ship-to address on the label. Domestic and international mail classes are supported and Marketplace users may request carrier pickup from the USPS. A transaction fee per shipping label printed is charged to Marketplace users who are not Stamps.com subscription customers.

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

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

Mailing & Shipping Supplies Stores

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

Branded Insurance

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

International

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

Customized Postage

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

Customer Value Proposition for our Mailing and Shipping Business

Shippers

Our shipping customers save time and optimize their shipping operations in a number of ways including:

(1)
Our solutions allow customers to easily access as many as 20 domestic and international carriers from a single user interface;

(2)
Our solutions support all of a customer’s selling channels from a single user interface including multiple marketplaces, shopping carts, their own websites and e-commerce platforms;

(3)
Our solutions allow customers to organize their daily shipping tasks such as search, filter and combining orders into a single unified list;

(4)
Our solutions support operations and label printing with address verification, rate and delivery time comparisons, using high volume scales and printers, adding integrated insurance and generating packing slips;

(5)
Our solutions allow customers to automate and simplify the processing of a large volume of daily orders through batch processing, custom hierarchical rules, shipping presets and automated customer emails;

(6)
Our solutions provide a complete record of all packages sent with the ability to retrieve delivery status information quickly and easily;

(7)
Our USPS solutions allow customers to generate a single bar-coded form that represents multiple packages in a single shipment so that the USPS can scan the single form to accept all of the packages at once and the customer gets a record that all the packages were accepted by the USPS; and

(8)
Our solutions allow customers to send USPS packages with the value of the postage hidden which is a useful feature for e-commerce shippers that may not want the recipient to see actual shipping cost information.

Our shipping customers save money in a number of ways including:

(1)
Our solutions allow customers to receive discounts for most USPS packages.  For example, our customers receive an average discount of 13.6% compared to retail postal rates for Commercial Base Pricing (“CBP”) and an average discount of 16.8% for Commercial Plus Pricing (“CPP”) on Priority Mail.  Additionally, higher volume customers may qualify for additional package discounts;

(2)
Our multi-carrier solutions allow customers to optimize between carriers by selecting the lowest cost option based on package size, weight, destination distance and delivery times;

(3)
Our USPS solutions allow customers to access cost effective USPS package classes such as First Class packages, media mail and parcel select; and

(4)
Our solutions allow customers to reduce their customer support costs by automatically generating and sending package delivery status e-mails to customers.
 
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Small Businesses and Large Enterprises

Our small business and large enterprise customers can also save money in a number of ways including:

(1)
Our USPS solutions allow customers to receive discounts on single piece First Class letter postage rates compared to USPS post offices and other retail USPS locations.  For example, a one ounce letter would cost customers using our solutions $0.46 cents instead of the $0.49 cent retail rate;

(2)
Our USPS solutions allow customers to receive a discounted rate for most USPS packages compared to USPS.com or retail postal rates;

(3)
Our USPS solutions allow customers to calculate the exact amount of postage that is required for a mail piece or package depending on mail class, mail form, weight and distance to the destination which allows our customers to avoid overpaying for postage;

(4)
Our USPS solutions allow customers to automatically check and validate destination addresses against the USPS address database so customers do not waste postage on undeliverable-as-addressed mail;

(5)
Our USPS solutions provide customers with advanced reporting and administrative controls that improve the tracking and control of postage spend allowing customers to proactively manage and reduce their postage spend. The advanced reporting and controls capability is particularly relevant to our large enterprise customers who are managing postage across multiple locations; and

(6)
Our USPS solutions allow customers to save up to 50% or more versus the total cost of an entry or mid-level traditional postage meter. The total cost of a traditional postage meter can include hardware rental fees, including items such as a postage meter and scale, maintenance and repair costs, insurance fees, fees to purchase postage and the cost to purchase proprietary ink cartridges.

Our small business and large enterprise customers can also save time in a number of ways including:

(1)
Our USPS solutions allow small business customers to mail or ship from their home, office, warehouse or business 24 hours a day, 7 days a week avoiding the time that would ordinarily be spent on a trip to the post office or other retail shipping locations;

(2)
Our USPS solutions allow customers to generate mass mailings quickly and easily by printing the address and postage together in a single step process. In addition, printing the address and postage together saves customers time on a single mail piece or package by combining a two-step process into a one-step process that produces more professional looking mail;

(3)
Our solutions integrate with most small business productivity applications such as word processors, financial applications and address books so our customers can save time by utilizing these integrations to print postage through their existing applications; and

(4)
Our USPS solutions provide customers with centralized electronic reporting so they can easily access and manage their records in one place. The electronic reporting provides greater visibility into postage activity compared to other USPS solutions such as post offices and traditional meters. The advanced reporting and controls capability is particularly relevant to our large enterprise customers who are managing postage spend across multiple locations.
 
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Marketing of our Mailing and Shipping Business

We target our mailing and shipping marketing at small businesses, home offices, medium-size businesses, large enterprises, e-commerce shippers and warehouse shippers. We market our mailing and shipping solutions through the following channels:
 
(1)
Affiliate Channels. We utilize the traffic and customers of smaller web sites and other businesses or individuals that are too small to qualify for a partnership directly with us by offering financial incentives for these small businesses and individuals to drive traffic to our web site through a third party affiliate management company;

(2)
Direct Mail. We send direct mail pieces to prospective  customers with prospect lists purchased from third parties or obtained from partners;

(3)
Direct Sales. We utilize a direct sales force that sells our mailing and shipping solutions to large enterprises and high volume shippers;

(4)
Offline Marketing Programs. We utilize various other offline advertising and marketing programs including telemarketing, tradeshows, retail and other programs;

(5)
Partnerships. We work with strategic partners in order to leverage their web site traffic, marketing programs, and existing customer base to distribute our mailing and shipping software. For example, these partnerships may result in a link to our website from a partner’s website, a copy of our software included along with a partner’s software product, the distribution of our software at a retail location, or the bundling of our software with a hardware device;

(6)
Remarketing. We remarket our solutions to former customers. Our remarketing efforts are generally focused on new features that may relate to the reasons former customers stopped using our service. We utilize e-mail and regular mail to communicate new features of our products to our former customers;

(7)
Shipping Integrations. We market our solutions through partner integrations with e-commerce platforms, multi-carrier shipping management solutions, shopping cart software and other order-entry management applications;

(8)
Traditional Media. We utilize television commercials and a variety of traditional and internet-based radio endorsements to advertise our solutions;

(9)
Online Advertising. We work with companies to advertise our services online through paid searches, banner ads, permission-based emails, and other online advertising vehicles; and

(10)
USPS Referrals. We utilize the nationwide USPS Account Manager network to market our solutions to customers. We market to the account managers by attending regional and national meetings and forums, and participating in local vendor calls.  We also receive referrals directly from the USPS website at www.USPS.com.

Marketing of Customized Postage

We target our customized postage products to both consumers and businesses. We market our customized postage products through the following channels:

(1)
Direct Sales. Direct sales where we target businesses and not-for-profit organizations for high volume orders;
 
(2)
Online Advertising. Online advertising including paid search and other online advertising methods;

(3)
Partnerships. Partnerships including Snapfish, Shutterfly and others; and

(4)
Marketing. Marketing to customers who have purchased customized postage in the past.
 
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2017 Business Strategy

Mailing and Shipping Business
 
Our 2017 Mailing and Shipping business strategy includes the initiatives and plans listed below. These initiatives and plans are subject to change without notice based on our analysis of market and business conditions, and constitute “forward-looking statements,” and accordingly are subject to the cautionary statements, qualifications and limitations on forward-looking statements we discuss at the beginning of Part I of this Report.

(1) Leverage our portfolio of mailing and shipping solutions to drive growth.

With the acquisitions of Endicia, ShipStation, ShipWorks and ShippingEasy, we now have a full and diverse suite of solutions across these brands, and we believe that we have a very complete product solution that will meet the needs of our current and of our target customers. Our customers’ needs vary based on their specific situations including: (1) specific technology or operating system support such as Windows versus Mac and web-based versus client-based solutions; (2) breadth and depth of product features; (3) product ease-of-use which is often traded off versus product capability and complexity; (4) ease and speed for processing large volumes of packages in the fewest number of steps; (5) breadth and depth of integrations with partner solutions such as e-Commerce tools, shopping carts, and online marketplaces; and (6) number of private carrier supported (e.g., UPS, FedEx, DHL, regional carriers, international carriers, etc.). For example, a particular e-commerce shipper may need a web-based solution running on a Mac that has deep product features for processing large batches of packages in just a few steps, and that customer may require an integration with eBay, Amazon and Shopify for importing customer orders, and may also require support to ship packages via USPS, FedEx, DHL, Canada Post and Australia Post.  In this case, the customer needs would be met using our ShipStation solution. Our goal is to be able to meet the needs of as many customers as possible so that we can maximize our customer acquisition, maximize our average annual revenue per paid customer, reduce our churn, and increase overall customer usage.

(2) Capitalize on synergy opportunities with our acquired companies.

During 2016 we continued to see the benefits from our 2014 acquisitions of ShipStation and ShipWorks, and we successfully integrated and realized our expected synergies from our 2015 acquisition of Endicia.  During 2016 we completed our acquisition of ShippingEasy and began the integration of that business as well.  Across all of our products and services, we are realizing synergies in sales and marketing, operations, customer service, and product development, and we believe that we have built a strong platform for pursuing all of our target markets.  In the marketing area Stamps.com and the acquired companies have historically targeted many of the same customers and we plan to continue utilizing our marketing expertise to accelerate growth, particularly with our newer multi-carrier solutions.  In addition, we invest financial resources to enhance the scope and magnitude of our marketing efforts of the various acquired brands, and we bring a national sales force that sells all of the various solutions, offering a more complete set of options when selling solutions to customers.  We also believe that the technology expertise in our companies is synergistic as ShipStation and ShippingEasy’s web-based expertise complements the client-based expertise of Stamps.com, Endicia and ShipWorks, and together our combined teams are able to leverage and educate each other in new and unfamiliar technologies, and this may result in more rapid and lower cost product innovation.

(3) Invest for growth in the shipping part of our business.

Our shipping customers include e-commerce merchants, warehouses, fulfillment houses, large retailers and other types of shippers. E-commerce shipping is the fastest growing part of the mailing and shipping industry. According to the U.S. Commerce Department, e-commerce sales grew is growing at approximately 16% year over year, and a large percentage of our company investments are being made to target e-commerce shippers.  For 2017 and beyond we expect to continue making these large investments in order to attract these types of shippers to our solutions.  Shipping customers are more expensive to acquire than small business customers but yield higher longer-term return on investment with their typical characteristics including higher average revenue per paid customer, lower monthly customer cancellation rates and higher postage usage when compared to other small businesses that predominately use our services to send mail.
 
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(4) Expand the features and functionality of our solutions, particularly in the shipping part of our business.
 
We plan to continue to enhance our technology and solutions for our target customers that include e-commerce merchants, warehouses, fulfillment houses, large retailers and other types of shippers. We will enhance and add new features and functionality that will improve the value proposition of our solutions for shippers.  We plan to add new integrations for easier data export and import from the tools that customers use and add new carrier and partner integrations. We also plan to continue to build our support for new products such as inventory management, customer management and mobile solutions.

(5) Increase our sales and marketing investment.

Based on recent analysis and trends, we expect to get a strong return on our investment from our mailing and shipping customers because they have a high expected lifetime value relative to the expected cost of acquiring those customers. Accordingly, we plan to increase our total sales and marketing expense in 2017 versus 2016.  We plan to continue increasing our investment in direct sales, direct mail, traditional media, radio, television, search engine marketing, search engine optimization as well as refining our customer acquisition process through affiliates, partners, telemarketing and other areas.

(6) Enhance our enterprise solutions sales and marketing efforts.

Our solutions targeted at enterprise customers continue to have a stronger customer value proposition compared to postage meters and our customers continue to be attracted to our enterprise solution versus a postage meter. We believe this customer preference is based on our lower total cost of ownership and the greater visibility into individual employee activity available from our centralized front-end reporting tool that has capabilities that are not available with a postage meter such as real time data, improved web-based postage management tools, and enhanced web-based financial and administrative controls for central decision makers.  For 2017 we plan to increase, optimize and refine our enterprise customer lead generation and sales and marketing efforts.

Customized Postage

In 2017 we plan to continue marketing customized postage, but with limited spending and expectations. In recent years, we reduced our consumer-focused marketing spending in order to lower our customer acquisition costs and improve our expected returns and profitability in the customized postage business. We plan to continue our programs of focused direct-to-website marketing spending with a goal of keeping the overall cost per acquisition at a level that provides an attractive financial return.  We also plan to continue our efforts to generate high volume business orders which have become a larger part of our customized postage business in recent years.

Competition

As a result of our acquisitions of ShippingEasy, Endicia, ShipStation and ShipWorks, the number of companies with which we compete has expanded.  We compete with all of the alternate ways that consumers and businesses may access the services of the USPS, including retail mailing and shipping locations, USPS online products, USPS software solutions, traditional postage meters, and other USPS-approved PC Postage products. We also compete with other multi-carrier products, e-commerce products with shipping capabilities, shipping technology products available from private carriers, package manifesting systems, and large enterprise software solutions with shipping functionality such as transportation management, warehouse management, or enterprise resource planning systems.

Retail Mailing and Shipping Locations

The majority of our small business customers use our USPS solutions as an alternative to visiting USPS or other retail locations. The USPS owns and operates approximately 32,000 retail post offices across the United States. Many of the USPS retail post offices also feature a USPS kiosk for self-serve mailing and shipping services with more convenient access and over extended access hours. The USPS authorizes thousands of additional contract post offices, community post offices and village post offices which allow third parties to operate post offices that are not owned by the USPS, such as those available in Hallmark stores. We also compete for mailing and shipping customers with alternatives such as postage stamps and prepaid USPS shipping labels available at grocery stores and at discount chains such as Costco. We also compete with USPS mailing and shipping services available at small business mailing and shipping centers such as UPS Stores or FedEx Offices stores, and those available inside office supply stores such as Staples and Office Depot. Further, we have not been approved to offer our customers “Forever” postage rates which are rates that do not ever expire and do not require extra postage following a postage rate increase.
 
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We believe customers choose our products over retail mailing and shipping services because of the convenience of our solution, the breadth of features that we offer, the quality of our support organization and ability to mail or ship from their home or business without making a trip to retail locations. We believe customers choose retail locations over our solutions because of the additional fees that we typically charge, the convenience of utilizing a retail location, and/or the preference for a Forever postage label.

USPS Online Products

We compete with online services available at USPS.com. Users of USPS.com are able to print shipping labels using similar tools that we offer. But the services and features available at USPS.com are provided without service fees, creating a disadvantage for us because we typically charge service fees in our business model. The services at USPS.com also integrate well with other USPS online services such as package tracking, post office locators, and other USPS services. Additionally, USPS.com accepts PayPal for payment of postage but we are not approved to do so. USPS.com also features a mobile application for more convenient customer access to USPS services.

USPS services are also integrated directly into web shipping solutions available through eBay, PayPal and Amazon.com. Sellers operating within these marketplaces may purchase USPS shipping labels in a convenient manner as part of the standard checkout flow. In all of these online marketplaces, customers can print postage for shipping without paying a monthly service fee like we typically charge. These solutions also feature USPS package rate discounts that are similar to ours, and in some cases superior to the discounts we are approved to offer customers.  eBay in particular has offered its sellers USPS-approved postage rates that are lower than the rates other online USPS providers are approved to offer.  For postage payment these web shipping solutions use the USPS’s electronic verification system (eVS), the USPS’s solution branded ePostage or another approved USPS PC postage vendor.

We believe customers choose our solutions over USPS online products because of the capabilities and performance of our products, the breadth of features that we offer, and the quality of our support organization. We believe customers choose USPS online products to meet their shipping needs over our solutions because of the additional fees that we may charge, the convenience of using one of these online products, and/or the package rates which may be superior to the package rates we are able to offer.

USPS Software Solutions

We compete with USPS private-labeled downloadable software and API (application program interface) solutions which are offered under the brand names Click-N-Ship for Business, Click-N-Ship Business Pro and USPS Web Tools. These solutions are targeted at higher volume business users or partners and include enhanced features for higher volume customers compared to those available at USPS.com. For postage payment these solutions utilize the USPS’s electronic verification system (eVS), or utilize the USPS’s solution branded ePostage, which are two similar systems for providing access to USPS shipping without needing PC Postage. eVS and ePostage offer more convenient solutions to higher-volume shippers with certain advantages we cannot offer such as: (1) labels can be printed “offline” without requiring an internet connection; (2) labels are not charged to a customer’s account until they are inserted into the mail stream; (3) eVS/ePostage labels do not expire and can be used at any time; (4) eVS/ePostage labels do not need to be saved and submitted for refunds; and (5) eVS/ePostage labels are able to support newer USPS features such as package intercept and re-routing, or certain USPS returns products.  Additionally, all USPS software solutions are made available to customers with no additional monthly or transaction fees, and they may also be offered with discounts on the postage rates that are superior to the discounts that we are able to provide to our customers.
 
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We believe customers choose our solutions over USPS software solutions because of the capabilities and performance of our products, the breadth of features that we offer, and the quality of our sales and support organization. We believe customers choose USPS software solutions over our solutions because of the additional fees that we may charge, the convenience of using one of these software products, and/or the package rates which are offered to the customer and which may be superior to the package rates we offer.

Traditional Postage Meters

We compete with traditional postage meters offered by Pitney Bowes, Neopost, FP Mailing Solutions and Hasler in the U.S. market. Postage meters offer customers a simple user interface and often work better in a higher volume mail preparation process since postage meters can add postage after an envelope has already been stuffed and sealed, and can automatically weigh an envelope and add the appropriate postage.  Additionally, more expensive postage meters can add postage to envelopes at rates that are faster than postage can be added using our USPS solutions since we are limited by the speed of an office printer.

We believe that customers choose our mailing and shipping services over traditional postage meters because of our lower total cost of ownership and/or the greater visibility and financial controls we provide and which are not readily available with postage meters.  We believe customers choose postage meters over our solutions because of the ease of use, speed, and/or convenience of those products.

Other USPS-Approved PC Postage Vendors

We compete with other USPS-approved postage vendors. Currently, Pitney Bowes is the only other such vendor in addition to Stamps.com and Endicia.  However, EasyPost is currently in the USPS approval process to become an approved USPS PC Postage vendor and we compete with Shippo, an approved USPS ePostage provider.

Pitney Bowes is the current leader in the U.S. traditional postage meter business and offers software and web-based PC Postage services and integrations similar to our mailing and shipping services and integrations under the brand names pbSmartPostageTM and SendProTM. Pitney Bowes also offers shipping application programming interfaces (APIs) that customers and partners can integrate with Pitney Bowes solutions to obtain shipping labels. Pitney Bowes shipping APIs facilitate the web shipping solutions available through eBay and PayPal where sellers operating within those marketplaces may purchase USPS shipping labels in a convenient manner. Pitney Bowes also offers a customized postage offering similar to our PhotoStamps and PictureItPostage offerings under the brand name Custom Postage from Pitney Bowes through a partnership with Zazzle.com, a private U.S. company that specializes in manufacturing and marketing of custom products.

We believe that our customers choose our mailing and shipping solutions over those of the other PC Postage vendor because of our superior user interface, our larger breadth of features, our extensive partner integrations and our quality of customer service and support. For example, (1) we are the only mailing and shipping service that is tightly integrated into the native capabilities of Microsoft Office for use with Office’s mailing capabilities such as mail merge and envelope printing; (2) we are the only PC Postage provider with an integration partnership with Amazon.com for international shipping for their Marketplace users; (3) we support more address books than any other PC Postage software; and (4) we are the only company that offers customers the additional choice of our Themed and Photo NetStamps labels. Based on USPS data and our estimates, we believe we have the highest number of PC Postage customers of any PC Postage provider.
 
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Private Carrier Technology Solutions

We compete with private carriers who offer their own shipping technology solutions such as UPS WorldShip, UPS.com, FedEx Ship Manager and Fedex.com. These private carrier solutions are provided at no cost to the customer and in many cases also include free implementation, free hardware such as printers or scales, and free consumables and other supplies. When customers evaluate carriers’ technology solutions, among other factors, they consider the cost and complexity of the technology product needed to access a particular carrier’s services.

We believe customers choose our solutions over private carrier technology solutions in order to utilize the package services of the USPS, to access multiple carriers from a single interface and because of the capabilities and performance of our products, the breadth of features that we offer, and the quality of our sales and support organization. We believe customers choose private carrier technology solutions over our solutions when they decide to utilize one of the private carriers instead of the USPS, as well as because of the additional free implementation, hardware or supplies the carrier offers, the quality of the carrier’s sales and support organization, and/or the technical capabilities of the private carrier’s solution. In some cases a customer may use both our USPS solution and a private carrier technology solution to meet their different needs.

Multi-Carrier E-commerce Solutions

ShippingEasy, ShipStation and ShipWorks provide multi-carrier solutions targeted at shippers such as warehouses, fulfillment houses, e-commerce shippers, large retailers, and other types of high volume shippers enabling the use of more than just the USPS for their business. In this area of our business, we compete with alternative means available to those categories of customer, including: other similar multi-carrier solutions (some of which are offered for free for lower volume users); warehouse and transportation management systems that offer multi-carrier shipping capabilities; package manifesting systems; e-commerce shopping carts that offer multi-carrier shipping solutions; and inventory management solutions or listing management solutions that offer multi-carrier solutions.

We believe customers choose our multi-carrier e-commerce products over alternative solutions because of the capabilities and performance of our products, the breadth of features that we offer, the value of our product, and the quality of our sales and support organization. We believe customers choose other multi-carrier e-commerce solutions over our solutions because of the higher fees that we may charge, the convenience of utilizing an integrated multi- carrier shipping solution as part of an overall e-commerce product, and the breadth and depth of features available in a larger enterprise solution that also includes multi-carrier shipping.

Industry Overview

Small and Home Businesses

According to statistics provided by the U.S. Census Bureau, there were approximately 6 million small businesses with 1 – 99 employees and approximately 24 million sole proprietorships.  In addition we believe there are approximately 24 million non-income generating home offices such as those used for corporate after-hours work or telecommuting, that we can service with our current solutions.  Our mailing and shipping solutions target the home office, home business, small office and small business customers.  We believe that some portion of the approximately 30 million small businesses and sole proprietorships and approximately 24 million home offices are potential customers for our solutions.

U.S. Mailing & Shipping

According to the USPS Fiscal 2016 Annual Report, the total USPS revenue was $71.4 billion during its fiscal year ended September 30, 2016. Of this amount approximately $48.4 billion was represented by mail classes that are supported using our current solution (First Class Mail, First Class Packages, Priority Mail, Priority Mail Express, Media Mail, Parcel Select, International Mail, and special services including Certified Mail, Return Receipt, USPS tracking and package insurance).  The $48.4 billion in supported mail classes is comprised of (1) $27.3 billion in First Class mail; (2) $17.3 billion in shipping and package services; (3) $2.7 billion in international mail; and (4) $1.1 billion in special services. We believe that some portion of the $48.4 billion in supported mail classes was generated by users who are potential customers for our solutions.
 
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Our multi-carrier shipping solutions ShippingEasy, ShipStation and ShipWorks also address the potential market represented by the private carriers.  According to data derived from the UPS 2015 Annual Report on Form 10-K, UPS earned $36.7 billion of U.S. Domestic Package revenue on 4 billion packages shipped.  According to data derived from the FedEx 2016 Annual Report on Form 10-K, FedEx earned approximately $36.4 billion on approximately 3 billion packages shipped via FedEx Ground and FedEx Express Packages.  When taken together, we estimate that the top 3 carriers (UPS, FedEx and the USPS) have U.S. domestic package revenue of approximately $90 billion.  According to data derived from Deutsche Post DHL Group’s 2015 Annual Report, we estimate there is approximately $1.8 billion represented by DHL Express International shipments originating in the U.S. We believe some portion of the approximately $92 billion package revenue was generated by users who are potential customers for our solutions.

E-commerce

According to the U.S. Department of Commerce, total e-commerce sales for 2016 were estimated at $395 billion, an increase of 15.1% over 2015.  E-commerce sales accounted for 8.1% of total retail sales in 2016 which was up from 7.3% of total retail sales in 2015.  We believe the growth in e-commerce sales drives growth in the number of e-commerce packages shipped and that e-commerce merchants are potential customers of our solutions.

The PC Postage Certification and Regulatory Approval Process

Our technology must meet strict U.S. government security standards.  Our PC Postage products complete extensive USPS testing and evaluation in the areas of operational reliability, financial integrity and security to become certified for commercial distribution.  The USPS certification process to become an USPS-approved PC Postage vendor is a standardized extensive process. The process includes testing and reviews by the USPS and an independent test laboratory, and certification of meeting Federal Information Processing Standards. While the USPS has no published timeline or estimated time to complete the process, it took the existing approved vendors years to complete.  Stamps.com was approved in 1999 and Endicia was approved in 2000.

Our Technology

Our servers are located in high-security data centers and operate with proprietary security software. These servers create the data used to generate information-based indicia. They also process postage purchases using secure technology that meets USPS security requirements. Our services currently include Windows-based and Mac-based client applications and web-based applications that support a variety of label and envelope options and a wide range of printers.  In addition, our applications employ an internally developed user authentication mechanism for additional security.

Our transaction processing servers are a combination of secure, commercially available and internally developed technologies that are designed to provide secure and reliable transactions. Our implementation of security system hardware meets government standards for security and data integrity. The performance and scalability of our PC Postage system is designed to allow many users to simultaneously process postage transactions through our system. Our database servers are designed and built with industry-leading database technologies.

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 a portfolio of issued and pending US and international patents.  We also have a number of registered and unregistered trademarks. We plan to apply for more patents and trademarks in the future. Our issued in force and pending patents have a range of expiration dates from 2017 until 2036. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-- Research and Development” for the amount spent during each of the last three fiscal years on Company-sponsored research and development activities.
 
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Employees

As of December  31, 2016, we had approximately 700 employees, not including temporary or contract workers, across all of our companies including Stamps.com, Endicia, ShippingEasy, ShipStation and ShipWorks. Our employees work in various departments including customer support, research and development, sales and marketing, information technology and general administration. None of our employees are represented by a labor union. We believe that we have a good relationship with our employees.

Segments, Geographical and Revenue Information

We operate in a single reportable segment, “Internet Mailing and Shipping Solutions.”

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

In 2015, we completed the reassessment of our segment reporting in light of our Endicia acquisition. Based on this reassessment, we identified two operating segments in accordance with ASC 280-10-50-1 through 50-9, Segment Reporting, consisting of Endicia and the remaining consolidated company.  Although the primary business activities for both operating segments consisted of providing Internet-based mailing and shipping solutions, each operating segment had discrete financial information available and our Chief Executive Officer, in his capacity as the CODM, reviewed the financial and operating metrics for the Endicia operating segment separately from those of the rest of the Company to inform resource allocation decisions and to assess performance. The primary purpose of the CODM reviewing Endicia’s financial information was to inform resource allocation decisions relating to achieving potential acquisition related synergies including the following areas: (1) cost reductions for compensation and related expenses associated with duplicative personnel; (2) the planned level of sales and marketing spend; and (3) cost reductions from elimination of duplicative operational expenses and vendors.  We aggregated operating segments into one reportable segment in accordance with ASC 280-10-50-11, because we concluded that: (1) both operating segments had similar economic characteristics; (2) both operating segments had similar products, production processes, customers, distribution methods and regulatory environments; and (3) aggregation would be consistent with the objectives and basic principles of ASC 280.   As our one aggregated operating segment accounted for 100% of our revenue, net income and assets, it constituted our sole reportable segment in 2015.

In 2016, we substantially realized the previously identified synergies and merged Endicia’s operations and employee groups into the existing consolidated structure which resulted in the CODM no longer needing to review Endicia’s performance and financial information separately.  As a result, the Company's CODM now reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating performance.  Based on our evaluation in accordance with ASC 280, including consideration of the ShippingEasy acquisition, we concluded that we had one operating segment in 2016. As our one operating segment accounted for 100% of our revenue, net income and assets, it constituted our sole reportable segment in 2016.

In 2014, all of our operations, revenue and assets were within the United States. In 2015 and 2016, primarily as a result of our Endicia acquisition, we had international revenue and assets that were less than 1% of total revenue and assets, with the remainder in the United States.
 
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During 2016, 2015 and 2014, we did not recognize revenue from any one customer that represented 10% or more of our total revenues.

See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations for years ended December 31, 2016 and 2015,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations for years ended December 31, 2015 and 2014,” for the percentage of total revenue contributed by categories of similar products or services that accounted for 10% or more of consolidated revenue. Our product and insurance revenues are subject to seasonal variations with the first and fourth calendar quarters being typically seasonally stronger and the second and third calendar quarters being typically seasonally slower. Our service revenue is subject to seasonal variation driven by our growth in packages shipped where the fourth calendar quarter is typically seasonally stronger due to the holiday shipping season and to a lesser extent, by customer acquisition which is typically seasonally stronger in the first and fourth calendar quarters and typically seasonally slower in the second and third calendar quarters. Our customized postage revenue is typically seasonally stronger in the fourth calendar quarter due to the holidays but can fluctuate from quarter to quarter based on high volume business orders.

Company Information
 
We were founded in September 1996 and we were incorporated in Delaware in January 1998 as StampMaster, Inc., changing our name to Stamps.com Inc. in December  1998. We completed our initial public offering in June 1999.  Our common stock is listed on the NASDAQ Stock Market under the symbol “STMP.”

Our principal executive offices are located at 1990 E. Grand Avenue, El Segundo, CA 90245, and our telephone number is (310) 482-5800.

Available Information

We make available on our website (www.stamps.com), free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such material is electronically filed or furnished to the SEC (information contained on our website is not part of this Annual Report on Form 10-K). Our Annual Report on Form 10-K may also be obtained free of charge by written request to Investor Relations, Stamps.com Inc., 1990 E. Grand Avenue, El Segundo, CA 90245.
 
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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 Securities and Exchange Commission (the “SEC”) before you decide to invest in our Company or to maintain or increase your investment. The risks included in this section are not exhaustive, and additional factors could adversely affect our business and financial performance. We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 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 current expectations, assumptions, estimates and projections about us and the Internet. See the discussion of forward-looking statements on page 1 of Part I of this Report.

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 below in this section as well as: (1) the costs of our marketing programs to establish and promote our brands; (2) the demand for our services and products; (3) our ability to develop and maintain strategic distribution relationships; (4) the number, timing and significance of new products or services introduced by us and by our competitors; (5) our ability to develop, market and introduce new and enhanced products and services on a timely basis; (6) the level of service and price competition; (7) our operating expenses; (8) USPS regulation and policies relating to PC Postage; (9) the modification or termination of financial compensation arrangements with the USPS, strategic business partners and other carriers; and (10) general economic factors.

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

Our ability to generate gross margins depends upon our 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 trial periods, discounts on fees, postage and supplies, and other promotions. In addition, we may offer new pricing plans for new and existing customers. 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 customer base, 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.

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 these 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. 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.
 
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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. Also customers may feel the costs for service are too high, they may be going out of business, or they may have 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 seek 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 and offices, small and medium sized 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 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.

The modification or termination of agreements with our integration partners could adversely affect our business.

We have partnership agreements with many integration partners in the high volume shipping area of our business. These partners integrate our mailing and shipping services into their offerings and provide customers that use our services through their products. The modification or termination of any of these agreements by us or our partners could result in lost customers, reduced postage printed and lost revenue, and our results of operations could be adversely affected.
 
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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 payments. 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 of a change in our business practices that increase the fees on a cost-per-transaction basis. If these fees for accepting payment methods increase in future periods, it would adversely affect our results of operations.

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.

Credit card fraud and our response to it could adversely affect our business.

We routinely receive orders placed with fraudulent credit card data. We do not carry insurance against the risk of credit card fraud, so our failure to adequately control fraudulent credit card transactions could reduce our net revenues and our profit. We may suffer losses as a result of postage purchases placed with fraudulent credit card data even if the associated financial institution approved payment. If we are unable to detect or control credit card fraud, our liability for these transactions could harm our business, prospects, financial condition and results of operation. Further, to the extent our efforts to prevent fraudulent transactions result in our inadvertent refusal to fill legitimate business requests, we would lose the benefit of legitimate potential sales and risk the alienation of legitimate customers.

Default on the credit we may provide for printing postage to one or more of our larger customers could adversely impact our results of operations.

As we acquire larger customers that require larger postage volumes to support their businesses, we offer invoicing and extend credit terms to certain of these customers to facilitate their access to postage and use of our services. If one or more of these customers were to default on amounts owed, it could 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 (including settlements cost, judgments and legal expenses) and business 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.
 
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Pending or future litigation could have a material adverse effect on our financial position or results of operations.
 
Litigation is uncertain, and the outcome of individual cases is often not predictable with any degree of certainty.  We establish loss provisions only for matters in which losses are 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.  Future litigation could involve potential compensatory or punitive damage claims, or sanctions, that, if awarded could require us to pay damages or make other expenditures in amounts that could exceed any loss provisions we may have established or otherwise could have a material adverse effect on our financial position or results of operations.  Future litigation could also involve injunctive relief, where a court could prohibit, or materially restrict, our ability to compete in certain businesses or opportunities, any of which could have a material adverse effect on our business operations or financial results. For information concerning material litigation in which we are involved, please see the “Legal Proceedings” section in the Notes to Consolidated Financial Statements contained elsewhere in this Report.

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 a portfolio of issued and pending US and international patents.  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, the costs of enforcing our patents can be material, and 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 and revenues. Furthermore, if we fail to provide adequate security, the USPS could prohibit us from selling postage over the Internet.
 
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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 similar or larger system interruptions again in the future. In addition, we are susceptible to system and operational disruptions caused by substantial changes to the demand for our services and surges in the use of our service by customers. Any substantial system interruptions in the future, whatever the cause, could result in the loss of data and could completely impair our ability to generate revenues from our service. Our servers also periodically experience directed attacks intended to cause a disruption in service. Any attempts by hackers to disrupt our service or our internal systems, if successful, could harm our business, be expensive to remedy and damage our reputation.

Our insurance may not be sufficient to cover expenses related to system and operational disruptions or attacks on our Web site, servers or internal systems. We do not presently have a full disaster recovery plan in effect to cover the loss of all facilities and equipment. We do, however, have a secondary location that mirrors our core system 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.

We may be exposed to risks and costs associated with the collection of credit card data and the secure transmission of confidential information over public networks.

A significant portion of our customer transactions requires the collection of certain customer data, such as credit card information. We and other parties involved in processing customer transactions must be able to transmit confidential information, including credit card information, securely over public networks. Third parties may have the technology or knowledge to breach the security of customer transaction data. Although we have security measures related to our systems and the privacy of our customers, we cannot guarantee these measures will effectively prevent others from obtaining unauthorized access to our information and our customers’ information. Any person who circumvents our security measures could destroy or steal valuable information or disrupt our operations.

We experience attempted cyber-attacks of varying degrees on a regular basis. Our security measures may also be breached due to employee error, malfeasance, system errors or vulnerabilities, including vulnerabilities of our vendors, or otherwise. Such breach or unauthorized access, increased government surveillance, or attempts by outside parties to fraudulently induce employees, users, or customers to disclose sensitive information in order to gain access to our data or our users’ or customers’ data could result in significant legal and financial exposure, damage to our reputation, and a loss of confidence in the security of our websites, products and services that could potentially have an adverse effect on our business. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose users and customers.

Any security breach could also expose us to risks of data loss, litigation and liability, and could seriously disrupt operations and harm our reputation, any of which could adversely affect our financial condition and results of operations.

In addition, state and federal laws and regulations are increasingly enacted to protect consumers against identity theft. These laws and regulations will likely increase the costs of doing business and if we fail to implement appropriate security measures, or to detect and provide prompt notice of unauthorized access as required by some of these laws and regulations, we could be subject to potential claims for damages and other remedies, which could adversely affect our business and results of operations.
 
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We are exposed to various risks associated with the credit and capital markets.

Our cash equivalents and investments are comprised of money market, U.S. government obligations, asset-backed securities and public corporate debt securities.  Global credit and capital markets can be suddenly and unexpectedly impaired, such as during the global economic crisis experienced in the last decade, and there can be no assurance that such markets will recover quickly or at all. Declines in the fair value of securities in our investment portfolio could lead to an increased risk that an other than temporary impairment exists.  Uncertainties in the credit and capital markets or credit rating downgrades on any investments in our portfolio could cause impairment to our investment portfolio, which could negatively affect our financial condition, cash flow, and reported earnings.

We could be subject to changes in our tax rates, the adoption of new U.S. or international tax legislation or exposure to additional state tax liabilities which may adversely impact our financial results.

We are subject to examination of our income tax returns by the U.S. Internal Revenue Service and other domestic and, potentially, foreign tax authorities. In addition, the application of other indirect taxes (such as sales and use tax, value added tax, goods and services tax, business tax and gross receipt tax) to a business such as Stamps.com is a complex and evolving issue. State or local authorities may attempt to collect taxes on our income based on this evolving area. The application of existing, new or future laws could have adverse effects on our business, prospects and operating results. There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which we conduct or will conduct business.

Our level of indebtedness could adversely affect our financial flexibility and our competitive position.

Our level of indebtedness could have significant effects on our business.  For example, it could (1) make it more difficult for us to satisfy our obligations with respect to our current indebtedness and any other indebtedness we may incur in the future; (2) increase our vulnerability to adverse changes in general economic, industry and competitive conditions; (3) require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other elements of our business strategy and other general corporate purposes, including share repurchases and payment of dividends; (4) limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; (5) restrict us from exploiting business opportunities; (6) make it more difficult to satisfy our financial obligations, including payments on our indebtedness; (7) place us at a competitive disadvantage compared to our competitors that have less indebtedness; (8) limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes; and (9) adversely affect our financial results as the interest rate on our debt is subject to changes in the London Interbank Offered Rate and changes in certain financial measures and thus could increase in future periods.

To service our debt and fund our other capital requirements, we will require a significant amount of cash, and our ability to generate cash will depend on many factors beyond our control.

Our ability to meet our debt service obligations and to fund working capital, capital expenditures and investments in our business, will depend upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. For example, this could include general and regional economic, financial, competitive, legislative, regulatory and other factors. We cannot ensure that we will generate cash flow from operations, or that future borrowings will be available, in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional indebtedness or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations.
 
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Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms, or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our debt obligations.

Our Credit Agreement imposes certain limitations on our ability to make dividend payments and to engage in further borrowing, which could hamper our control over liquidity.

Our Credit Agreement, dated as of November 18, 2015 (the “Credit Agreement”), imposes certain requirements in order for us to make dividend payments to our shareholders.  As of December 31, 2016 such requirements were: (1) our Consolidated Total Leverage Ratio (as defined in the Credit Agreement) must be less than 2.75 to 1.00; (2) our Fixed Charge Coverage Ratio (as defined in the Credit Agreement) must be greater than 1.25 to 1.00; and (3) our Liquidity (as defined in the Credit Agreement) immediately after giving effect to such dividend must be greater than $20 million.  As of December 31, 2016, our Consolidated Total Leverage Ratio was 0.9 to 1:00; our Fixed Charge Coverage Ratio was 22.1 to 1:00 and our Liquidity was approximately $117 million. Adverse changes in our financial condition and results of operations could result in the Credit Agreement prohibiting us from paying any dividends or incurring additional debt in the future.

Risks Related to Our Industry

Postal Reform may negatively affect or cause disruptions to our services and business.

The USPS has reached its congressionally mandated debt limit and faces ongoing fiscal liquidity issues. The USPS also does not have any presidentially appointed Governors. It has embarked on cost cutting initiatives and has asked Congress to enact various Postal Reform measures. Newly appointed Governors could change the focus of cost cutting initiatives. Among the measures discussed are cutbacks in delivery schedules and locations, mail processing capability, and retail post office hours and locations. Any such changes actually approved and implemented may adversely affect the products and services we are able to offer our customers and could therefore seriously harm our business. Additionally, absent Congressional action, any USPS fiscal crisis could interrupt basic USPS operations, as well as payments to USPS suppliers such as us, each of which could also seriously harm our business.

Regulations or fee assessments may cause disruptions or discontinuance of our business.

We are subject to continued USPS scrutiny and other government regulations. The availability of our services is dependent upon us continuing to meet USPS performance specifications and regulations. The USPS 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 we fail to meet USPS requirements, we may be prohibited from offering our services, and our business would be severely and negatively impacted. In addition, the USPS could suspend or terminate our approval or offer services that compete against us, any of which could stop or negatively impact the commercial adoption of our services. 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 services.

Our business is subject to regulation by other federal and state government agencies, and our failure to comply, or allegations thereof, could restrict our ability to generate revenue, require us to pay fines and/or disgorge certain profits, or otherwise have an adverse effect on our financial condition and results of operations.
 
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The USPS could also decide that PC Postage should no longer be an approved postage service due to security concerns, financial difficulties within the USPS or other issues. Our business would suffer dramatically if we were unable promptly to adapt our services to any new requirements or specifications or if the USPS were to discontinue PC Postage as an approved postage method. Alternatively, the USPS 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 USPS itself. If we are unable to compete successfully, particularly against large, traditional providers of postage products, such as Pitney Bowes, who enter the online postage market, our revenues and operating results will suffer.

The USPS could decide that our customized postage products should no longer be approved products for such reasons as the belief that they present an unacceptable risk to USPS revenues, exposes the USPS or its customers to legal liability, or causes public or political embarrassment or harm to the USPS in any way. If the USPS were to discontinue our customized postage products, our revenues and operating results would suffer.

In addition, USPS 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 USPS projects.

Finally, any approved USPS market test or new service that benefits us could also ultimately be suspended or cancelled by the USPS, causing disruptions to our business.

The USPS could modify or terminate agreements and other financial compensation arrangements.

The USPS could decide to amend, renegotiate or terminate agreements or financial compensation arrangements that exist now or in the future. For instance, if the USPS decides to amend, renegotiate or terminate our credit card cost sharing agreements, which govern the allocation of credit card fees paid by the USPS and us, our revenues and operating results could suffer. In addition, if the USPS decides to amend or renegotiate our arrangements under which we are compensated directly by the USPS for shipping customers or integration partners who print a certain amount of postage, our revenue and operating results may be negatively impacted. If the USPS decides to terminate our agreements or our integration partners’ agreements under which we are compensated directly or indirectly by the USPS or integration partners for shipping customers who print a certain amount of postage, our revenue and operating results would suffer.

The USPS could modify or terminate discounts our customers receive.

The USPS could decide to amend or terminate the discounts our customers and integration partners receive. Customers using our services receive discounted postage rates, either from Stamps.com or from integration partners that provide discounted rates, compared to USPS retail rates on certain mail pieces such as First Class letters and packages, domestic and international Priority Mail and Priority Mail Express packages, and other discounts available to high-volume shipping customers. We also earn compensation by offering customers a discounted postage rate that is provided to the customers by our integration partners. If the USPS decides to withdraw certain discounts or even remove the discounts entirely, our revenue and operating results will suffer. If the Postal Regulatory Commission decides the discounts are unlawful and require the USPS to cancel or change them, then our revenue and operating results would suffer.
 
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If we are unable to compete successfully against alternative methods of accessing relevant mailing and shipping services, our revenues and operating results will suffer.
 
We compete with all of the alternate ways that consumers and businesses may access mailing and shipping services from the USPS, including the following: online services available at USPS.com; USPS retail locations; USPS kiosks; multi-carrier solutions; integrated web shipping solutions such as eBay/PayPal or Amazon.com; traditional postage meters; other USPS-approved PC Postage vendors; USPS permit manifesting solutions; and commercial retail locations that sell postage or shipping services (for example grocery stores, discount warehouses, small business mailing and shipping centers, office supply chains, and others). Some of these alternative means of accessing USPS services are available with no additional markup over the face value of postage and some are available with discounted postage rates that are better than the discounts that we are able to provide to our customers. With our 2016 acquisition of ShippingEasy and our 2014 acquisitions of ShipStation and ShipWorks, we also now compete with multi-carrier solutions providers. We also compete with the technology solutions available from private carriers that allow customers to access those private carriers, and which are typically provided to the customers for no additional fees.

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. 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 face competitive pressures from new technologies or the expansion of existing technologies approved for use by the USPS. 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.

Strategic business partners or private carriers could modify or terminate agreements and other financial compensation arrangements.

Strategic business partners, such as multi-carrier software providers, e-commerce platforms, private shipping services, shipping service resellers, or others, could decide to amend, renegotiate or terminate agreements or financial compensation arrangements that exist now or in the future. For instance, if these partners amend, renegotiate or terminate agreements allowing us to integrate their services with our products and services, our revenues and operating results could suffer and our ability to attract customers that rely on these services could suffer.

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.
 
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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 abilities (1) to develop, license or acquire leading technologies useful in our business, (2) to enhance our existing services, (3) to develop new services or features and technology that address the increasingly sophisticated and varied needs of our current and prospective users, and (4) to 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.

We may expand through acquisitions of, or investments in, other companies or technologies, which may result in additional dilution to our stockholders and consume resources that may be necessary to sustain our business.
 
As part of our business efforts to acquire complementary services, technologies or businesses we may (1) issue additional equity securities that would dilute our stockholders; (2) use cash that we may need in the future to operate our business; and (3) incur additional debt or refinance existing debt that could have terms unfavorable to us or that we might be unable to repay.

Business acquisitions, such as the PSI Systems, Inc. (Endicia), ShippingEasy Group, Inc. (ShippingEasy), Auctane LLC (ShipStation) and Interapptive, Inc. (ShipWorks) acquisitions also involve risks of unknown liabilities and potential litigation associated with the acquired business. In addition, we may not realize the anticipated benefits of any acquisition, including securing the services of key employees. Incurring unknown liabilities or the failure to realize the anticipated benefits of an acquisition could seriously harm our business.

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

Changes in the laws and regulations applicable to the Internet or us, including those relating to user privacy, pricing, content, copyrights, distribution, characteristics and quality of products and services, and export controls, could seriously harm our business, financial condition and results of operations. 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, state income taxes, libel and personal privacy, and changes in their interpretation could similarly harm us. 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.

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 actual or perceived violations of their laws.

We do not collect sales or consumption taxes in some jurisdictions.

An increasing number of states have considered or adopted laws or administrative practices that attempt to impose obligations on out-of-state retailers to collect taxes on their behalf. A successful assertion by one or more states or foreign countries requiring us to remit taxes where we do not do so could result in substantial tax liabilities, including for past sales, as well as penalties and interest.
 
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Risks Related to Our Stock

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

Certain 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. Such provisions include: (1) authorizing our board of directors to issue “blank check” preferred stock without stockholder approval; (2) providing for a classified board of directors with staggered, three-year terms; (3) prohibiting us from engaging in a “business combination” with an “interested stockholder” (as such terms are defined in Section 203 of the Delaware General Corporation Law) for a period of three years after the date of the transaction in which the person became an interested stockholder unless certain conditions are met; (4) prohibiting cumulative voting in the election of directors; (5) requiring that a two-thirds vote of our outstanding shares to amend our bylaws; (6) affording the ability to call special meetings of stockholders exclusively to our board of directors; and (7) establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

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

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

If the existing waiver of our NOL Protective Measures were revoked so that the measures operated again to prevent new "5% shareholders," the NOL Protective Measures could be deemed to have an “anti-takeover” effect because, among other things, they would restrict the ability of a person, entity or group to accumulate more than 5% of our common stock and the ability of persons, entities or groups now owning more than 5% of our common stock to acquire additional shares of our common stock without the approval of our Board of Directors.  As a result, our Board of Directors might be able to prevent any future takeover attempt. Therefore, the NOL Protective Measures could discourage or prevent accumulations of substantial blocks of shares in which our stockholders might receive a substantial premium above market value and might tend to insulate management against the possibility of removal.

The USPS may object to a change of control of our common stock.

The USPS may raise national security or similar concerns to prevent foreign persons from acquiring significant ownership of our common stock or of our Company. The USPS 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 USPS 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 postage solutions.
 
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Our stock price is volatile.

The price at which our common stock has traded 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: (1) variations in our operating results; (2) variations between our actual operating results and the expectations of securities analysts investors and the financial community; (3) sales by stockholders holding larger blocks of our stock; (4) announcements of developments affecting our business, systems or expansion plans by us or others; and (5) 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.

ITEM 1B.
UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.
PROPERTIES.

Our corporate headquarters are located in El Segundo, California where we own a 99,600 square foot facility. We have approximately 29,000 square feet in Mountain View, California under a lease expiring in October 2018; an aggregate of approximately 40,000 square feet at three separate locations in Austin, Texas under leases expiring in December 2017, June 2021 and December 2021; and approximately 10,000 square feet in St Louis, Missouri under a lease expiring in June 2022. We believe that our existing facilities are suitable and adequate for our present purposes.

ITEM 3.
LEGAL PROCEEDINGS.

We are subject to various routine legal proceedings and claims incidental to our business, and we do not believe that these proceedings and claims would reasonably be expected to have a material adverse effect on our financial position, results of operations or cash flows.
 
Although management at present believes that the ultimate outcome of the various routine proceedings, individually and in the aggregate, will not materially harm our financial position, results of operations, cash flows, or overall trends, legal proceedings are subject to inherent uncertainties, and unfavorable rulings or other events could occur. An unfavorable outcome for an amount in excess of management’s present expectations may result in a material adverse impact on our business, results of operations, financial position, and overall trends.
 
ITEM 4.
MINE SAFETY DISCLOSURES.

Not applicable.
 
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PART II.

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our common stock is traded on The NASDAQ Stock Market under the symbol “STMP”.  The following table sets forth the range of high and low dividend adjusted closing sales prices reported on The NASDAQ Stock Market for our common stock for the following periods:
 
   
High
   
Low
 
Fiscal Year 2015
           
First Quarter
 
$
67.78
   
$
44.30
 
Second Quarter
 
$
74.61
   
$
60.67
 
Third Quarter
 
$
88.25
   
$
66.07
 
Fourth Quarter
 
$
113.35
   
$
71.71
 
Fiscal Year 2016
               
First Quarter
 
$
122.25
   
$
83.67
 
Second Quarter
 
$
99.80
   
$
76.50
 
Third Quarter
 
$
99.61
   
$
68.82
 
Fourth Quarter
 
$
115.85
   
$
89.90
 

Recent Share Prices

The following table sets forth the closing sales prices per share of our common stock on The NASDAQ Stock Market on (i) December 30, 2016 and (ii) January 31, 2017.
 
   
Closing
Price
 
December 30, 2016
 
$
114.65
 
January 31, 2017
 
$
121.55
 
 
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Stock Performance Graph

The information contained in this section shall not be deemed to be “soliciting material” or “filed” with the SEC, or subject to Regulation 14A or 14C under the Exchange Act, or to the liabilities of Section 18 of the Exchange Act, and shall not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically request that such information be treated as soliciting material or specifically incorporate it by reference into such a filing.

The following line graph compares the cumulative total return to stockholders of our common stock from December 31, 2011 to December 31, 2016 to the cumulative total return over such period of (i) NASDAQ Market Index and (ii) NASDAQ Internet Index, an equal-dollar-weighted index composed of leading companies involved in Internet commerce, service and software.  The graph assumes that $100 was invested on December 31, 2011 in our common stock and in each of the other two indices and the reinvestment of all dividends, if any.


The graph is presented in accordance with SEC requirements. Stockholders are cautioned against drawing any conclusions from this data, as past results are not necessarily indicative of future performance.

 
Company/Index
  
Base
December 31,
   
Year ended December 31,
 
2011
   
2012
   
2013
   
2014
   
2015
   
2016
 
Stamps.com Inc.
 
$
100.00
   
$
96.44
   
$
161.12
   
$
183.66
   
$
419.48
   
$
438.77
 
NASDAQ Market Index
 
$
100.00
   
$
115.91
   
$
160.32
   
$
181.80
   
$
192.21
   
$
206.63
 
NASDAQ Internet Index
 
$
100.00
   
$
120.07
   
$
198.68
   
$
196.28
   
$
235.12
   
$
243.37
 
 
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Holders

As of January 31, 2017, there were approximately 402 stockholders of record and 16,847,816 shares of our common stock outstanding.

Dividend Policy

We did not pay any dividends during 2016 or 2015.

Future declaration and payment of dividends will be in the discretion of our Board of Directors and will be dependent upon our future earnings, financial condition and capital requirements. Our Credit Agreement also imposes certain requirements in order for us to make dividend payments.

Securities Authorized for Issuance under Equity Compensation Plans

Equity Compensation Plan Information

The following table provides information as of December 31, 2016 with respect to shares of our common stock that may be issued under our existing stock incentive plans:

Plan Category
 
Number of shares of
common stock to be issued
upon exercise of
outstanding options,
warrants and rights
(a)
   
Weighted average exercise
price of outstanding
options, warrants and
rights
   
Number of shares of
common stock remaining
available for future
issuance under the equity
compensation plans
(excluding shares reflected
in column (a))
 
Equity compensation plans approved by security holders
   
3,293,000
   
$
49.95
     
1,370,000
 
ShippingEasy Stock Options (1)
   
62,000
   
$
86.89
     
0
 
ShippingEasy Performance Awards (2)
   
87,000
     
n/a
     
0
 
Total
   
3,442,000
             
1,370,000
 

(1) Reflects the Stamps.com 2016 ShippingEasy Equity Inducement Plan which provided for the issuance of an aggregate of 62,000 stock options to purchase Stamps.com common stock on July 1, 2016. The plan was exempt from stockholder approval requirements as an employment inducement grant plan under applicable Nasdaq Listing Rule 5635(c)(4) as inducements material to the new employees entering into employment with Stamps.com.

(2) Reflects the inducement equity awards to two executives of ShippingEasy covering an aggregate of up to approximately 87,000 shares of common stock if earnings targets for ShippingEasy are achieved over a two and one-half year period beginning July 1, 2016.  The plan was exempt from stockholder approval requirements as an employment inducement grant plan under applicable Nasdaq Listing Rule 5635(c)(4) as inducements material to the new employees entering into employment with Stamps.com.
 
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Recent Sales of Unregistered Securities

We did not have any unregistered sales of common stock during 2016, except that as previously disclosed on two separate Current Reports on Form 8-K, the acquisition of Auctane LLC involved the issuance of 576,675 earn out shares in 2016 and the acquisition of ShippingEasy Inc. involved the grants on July 1, 2016 of 62,000 stock options to employees of ShippingEasy, subject to vesting, and the issuance of an aggregate of approximately 87,000 shares of stock to two employees of ShippingEasy, subject to performance criteria being satisfied.  The issuance of such shares was exempt from the registration provisions of the 1933 Act by virtue of Section 4(a)(2) thereof and/or Regulation D thereunder.

Issuer Purchases of Equity Securities
 
Period
 
Total Number of
Shares Purchased
   
Average Price Paid
per Share
   
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
   
Approximate Dollar
Value of Shares That
May Yet be
Purchased Under the
Plans or Programs
(in 000’s)
 
October 1, 2016 –October 31, 2016
   
86,455
   
$
93.59
     
86,455
   
$
14,513
 
November 1, 2016 –November 30, 2016
   
118,782
   
$
105.93
     
118,782
   
$
79,301
 
December 1, 2016 –December 31, 2016
   
110,999
   
$
112.39
     
110,999
   
$
66,826
 

On July 27, 2016, our Board of Directors approved a new stock repurchase plan authorizing us to repurchase up to $40 million of our common stock during the next six months.  On October 25, 2016, our Board of Directors approved a new stock repurchase plan, which became effective November 7, 2016, that replaced our prior stock repurchase plan and authorized us to repurchase up to $90 million over the six months following the effective date of the plan.

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

ITEM 6.
SELECTED FINANCIAL DATA.

We have derived the selected consolidated statements of operations data for the years ended December 31, 2016,  2015 and 2014 and the selected consolidated balance sheet data as of December 31, 2016 and 2015 from our audited consolidated financial statements and related notes included elsewhere in this Form 10-K. We have derived the selected consolidated statements of operations data for the years ended December 31, 2013 and 2012 and the selected consolidated balance sheet data as of December 31, 2014, 2013 and 2012 from our audited consolidated financial statements not included in this Form 10-K. The following data should be read in conjunction with the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section and our financial statements, including the notes thereto, included elsewhere in this Report. Our historical results are not necessarily indicative of the results to be expected for any future period and the results for any interim period are not necessarily indicative of the results to be expected in the full year.
 
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Year ended December 31,
 
2016 (1)
   
2015 (2)
   
2014 (3, 4)
   
2013
   
2012
 
(in thousands, except per share data)
 
Statement of Operations Data:
     
Mailing and Shipping revenue
 
$
350,591
   
$
206,687
   
$
141,796
   
$
123,108
   
$
110,003
 
Customized Postage revenue
   
13,615
     
7,229
     
5,450
     
4,710
     
5,651
 
Other revenue
   
99
     
41
     
23
     
1
     
7
 
Total revenues
   
364,305
     
213,957
     
147,269
     
127,819
     
115,661
 
Cost and expenses:
                                       
Cost of revenues
   
62,972
     
43,935
     
32,906
     
27,500
     
27,756
 
Sales and marketing
   
78,830
     
56,144
     
43,659
     
39,449
     
38,755
 
Research and development
   
35,158
     
20,711
     
13,309
     
10,958
     
10,243
 
General and administrative
   
67,125
     
42,399
     
25,147
     
15,794
     
14,749
 
Contingent consideration charges
   
     
46,088
     
8,438
     
     
 
Litigation settlement
   
     
10,000
     
     
     
 
Income (loss) from operations
   
120,220
     
(5,320
)
   
23,810
     
34,118
     
24,158
 
Interest expense
   
(3,552
)
   
(397
)
   
     
     
 
Interest income and other income, net
   
306
     
146
     
375
     
480
     
541
 
Income (loss) before income taxes
   
116,974
     
(5,571
)
   
24,185
     
34,598
     
24,699
 
Income tax expense (benefit)
   
41,745
     
(1,373
)
   
(12,697
)
   
(9,555
)
   
(13,859
)
Net income (loss)
 
$
75,229
   
$
(4,198
)
 
$
36,882
   
$
44,153
   
$
38,558
 
Basic net income (loss) per share
 
$
4.36
   
$
(0.26
)
 
$
2.30
   
$
2.81
   
$
2.40
 
Diluted net income (loss) per share
 
$
4.12
   
$
(0.26
)
 
$
2.25
   
$
2.71
   
$
2.30
 
Weighted average shares outstanding used in basic per-share calculation
   
17,245
     
16,436
     
16,011
     
15,691
     
16,079
 
Weighted average shares outstanding used in diluted per-share calculation
   
18,251
     
16,436
     
16,417
     
16,298
     
16,793
 

     
As of December 31,
 
2016
   
2015
   
2014
   
2013
   
2012
 
Balance Sheet Data:
 
(in thousands)
 
Cash, cash equivalents and investments
 
$
108,443
   
$
75,208
   
$
57,630
   
$
87,210
   
$
46,619
 
Working capital
   
87,888
     
4,784
     
31,901
     
81,890
     
38,035
 
Debt, net of debt issuance costs
   
147,354
     
161,620
     
     
     
 
Total assets
   
610,129
     
528,614
     
254,731
     
187,118
     
130,852
 
Total stockholders’ equity
   
372,712
     
238,969
     
205,031
     
171,765
     
112,954
 

(1) The third and fourth quarter results of 2016 include the impact of the Company’s acquisition of ShippingEasy.
 
(2) The fourth quarter results of 2015 through the results of 2016 include the impact of the Company’s acquisition of Endicia.

(3) The third and fourth quarter results of 2014 through the results of 2016 include the impact of the Company’s acquisition of Shipworks.

(4) The second, third and fourth quarter results of 2014 through the results of 2016 include the impact of the Company’s acquisition of ShipStation.
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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6. “Selected Financial Data” of this Report and our financial statements and the related notes thereto included in this Report. This discussion contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results including those set forth in Item 1A. “Risk Factors” of this Report. We call your attention to the discussion of forward-looking statements on page 1 of Part I of this Report, which is incorporated into, and is intended to accompany, this Item 7.

Overview

Stamps.com® is a leading provider of Internet-based mailing and shipping solutions in the United States. Under the Stamps.com and Endicia brands, customers use our USPS only solutions to mail and ship a variety of mail pieces and packages through the USPS.  Customers using our solutions receive discounted postage rates compared to USPS.com and USPS retail locations on certain mail pieces such as First Class letters and domestic and international Priority Mail® and Priority Mail Express® packages.  Stamps.com was the first ever USPS-approved PC Postage vendor to offer a software only mailing and shipping solution in 1999.  Endicia became a USPS-approved PC Postage vendor in 2000. Under the ShipStation®, ShipWorks® and ShippingEasyTM brands, customer use our multi-carrier solutions to ship packages through multiple carriers such as the USPS, UPS, FedEx and others. Our customers include individuals, small businesses, home offices, medium-size businesses, large enterprises, e-commerce merchants and warehouse shippers.

Mailing and Shipping Business References

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

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

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

We previously referred to our "Non-Core mailing and shipping business" as the portion of our mailing and shipping business that targeted a more consumer oriented customer through the online enhanced promotion marketing channel.
 
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In light of the growth in our Core mailing and shipping business and decline in our Non-Core mailing and shipping business, we concluded that the Non-Core mailing and shipping business was not material enough to break out separately in 2015 or subsequently, as it no longer provides investors with material additional insights into our business.

When we refer to our “mailing and shipping revenue,” we are referring to our service, product and insurance revenue generated by all of our mailing and shipping customers.

Acquisitions

ShippingEasy

On June 16, 2016, we entered into a definitive agreement to acquire ShippingEasy for approximately $55.0 million. ShippingEasy, an Austin, Texas based company, offers web-based multi-carrier shipping solutions.  On July 1, 2016, we completed our acquisition of ShippingEasy. The purchase price was subject to adjustments for changes in ShippingEasy’s net working capital.  The net purchase price including adjustments for net working capital totaled approximately $55.4 million and was funded from current cash and investment balances.

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

We also issued inducement stock option grants for an aggregate of 62,000 shares of Stamps.com common stock to 48 new employees in connection with our acquisition of ShippingEasy. The stock options were granted as inducements material to the new employees entering into employment with Stamps.com.

Endicia

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

As part of the funding for our acquisition of Endicia, we entered into a credit agreement with a group of banks on November 18, 2015, which provides for a term loan of $82.5 million and a revolving credit facility with a maximum borrowing of $82.5 million (collectively, the “Credit Agreement”). The Credit Agreement is secured by substantially all our assets. We funded our acquisition with cash of $56.5 million and debt from our Credit Agreement of $164.5 million, totaling $221.0 million. The $221.0 million consists of the following: 1) purchase price of $214.2 million, 2) $1.5 million of debt issuance costs and 3) the transfer of Endicia’s ending cash balance on November 17, 2015 of $5.3 million. Total debt issuance costs of $1.8 million, which includes $300 thousand of costs incurred prior to closing, were recorded as debt discount and are being accreted as interest expense over the life of the Credit Agreement. Our Credit Agreement matures on November 18, 2020. During the first quarter of 2016, we adjusted the purchase price of Endicia by $573,000 to $214.7 million.
 
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ShipWorks

On August 29, 2014, we acquired 100% of the outstanding equity of Interapptive, Inc., which operates ShipWorks, in a cash transaction.  ShipWorks, based in St. Louis, Missouri, offers software-based multi-carrier shipping solutions.  The total purchase price for ShipWorks was approximately $22.1 million and was funded from cash and investment balances.

ShipStation

On June 10, 2014, we acquired 100% of the outstanding equity of Auctane LLC, which operates ShipStation, in a cash and contingent stock transaction.  ShipStation, based in Austin, Texas, offers web-based multi-carrier shipping solutions primarily under the brands ShipStation and Auctane. The total purchase price for ShipStation was approximately $66.2 million which was funded from cash and investment balances.

The performance linked earn-out payment of Stamps.com shares (or contingent consideration) to former equity members of Auctane LLC was based on the achievement of certain financial measures within time periods subsequent to the acquisition.  There were two periods in which the earn-out payment was calculated. The first earn-out period was based on the achievement of certain financial measures during the six months ended December 31, 2014.  The second earn-out period was based on the achievement of certain financial measures during the twelve months ended December 31, 2015.  ShipStation achieved the financial measures for both earn-out periods and, as a result, we made earn-out payments of 192,225 shares in the first quarter of 2015 and 576,675 shares in the first quarter of 2016.

Under ASC 805, Business Combinations, we were required to re-measure the fair value of the contingent consideration at each reporting period.  As a result of the re-measured fair value, we incurred contingent consideration charges in our consolidated statement of operations of $8.4 million in 2014 and $46.1 million in 2015.

Please see Note 3 – “Acquisitions” and Note 7 – “Debt” in our Notes to Consolidated Financial Statements for further description.

Results of Operations

The results of our operations during the year ended December 31, 2016 includes operations of ShippingEasy for the period from July 1, 2016 through December 31, 2016 and the operations of Endicia, ShipStation, and ShipWorks for the full fiscal year 2016.  The results of our operations during the year ended December 31, 2015 includes operations of Endicia for the period from November 18, 2015 through December 31, 2015 and the operations of ShipStation and ShipWorks for the full fiscal year 2015.  Please see Note 3 – “Acquisitions” in our Notes to Consolidated Financial Statements for further description. Accordingly, care should be used in comparing periods that include the operations of Endicia and ShippingEasy with those that do not include such operations.

Years Ended December 31, 2016 and 2015

Total revenue increased 70% to $364.3 million in 2016 from $214.0 million in 2015. Mailing and shipping revenue, which includes service revenue, product revenue and insurance revenue, was $350.6 million in 2016, an increase of 70% from $206.7 million in 2015. Customized Postage revenue increased 88% to $13.6 million in 2016 from $7.2 million in 2015.
 
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The following table sets forth the breakdown of revenue for 2016 and 2015 and the resulting percent change (revenue in thousands):
 
   
2016
   
2015
   
% Change
 
Revenues
                 
Service
 
$
313,057
   
$
176,672
     
77
%
Product
   
20,234
     
18,283
     
11
%
Insurance
   
17,300
     
11,732
     
47
%
Mailing and shipping revenue
   
350,591
     
206,687
     
70
%
Customized postage
   
13,615
     
7,229
     
88
%
Other
   
99
     
41
     
141
%
Total revenues
 
$
364,305
   
$
213,957
     
70
%

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

The following table sets forth the number of paid customers in the period for our mailing and shipping business (in thousands):
 
Year
 
First
Quarter
   
Second
Quarter
   
Third
Quarter
   
Fourth
Quarter
   
Annual
Average
 
                               
2016
   
649
     
646
     
648
     
681
     
656
 
2015
   
557
     
565
     
569
     
633
     
581
 

The following table sets forth the growth in paid customers and ARPU for our mailing and shipping business (in thousands except ARPU and percentage):
 
   
2016
   
2015
   
% Change
 
Paid customers for the year
   
656
     
581
     
13
%
ARPU
 
$
534
   
$
356
     
50
%
Mailing and shipping revenue
 
$
350,591
   
$
206,687
     
70
%

The increase in paid customers is primarily the result of (1) a reduction in our average Monthly Churn rate from 3.3% in 2015 to 3.0% in 2016 and (2) the addition of paid customers as a result of our Endicia acquisition in the fourth quarter of 2015. The acquisition of ShippingEasy did not result in any incremental paid customers in our metrics as ShippingEasy had a pre-existing partnership with Endicia at the time of their acquisition in which Endicia earned revenue through a revenue sharing arrangement for ShippingEasy’s customers and as a result, ShippingEasy’s customers were already included in our paid customers prior to the acquisition.

The increase in our ARPU was primarily the result of (1) the addition of paid customers from our acquisition of Endicia where the ARPU for those paid customers was higher as compared to the ARPU from the existing Stamps.com customers, (2) recognizing all of the revenue on ShippingEasy’s customers where we, prior to the acquisition, recognized only a portion of that revenue under ShippingEasy’s revenue sharing partnership with Endicia and (3) the growth in our shipping business where we have the ability to better monetize postage volume as compared to monthly flat rate subscription fees.
 
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Revenue by Product

The following table shows our components of revenue and their respective percentages of total revenue for the periods indicated (in thousands except percentage):
 
 
Revenues
  
2016
   
2015
 
         
Service
 
$
313,057
   
$
176,672
 
Product
   
20,234
     
18,283
 
Insurance
   
17,300
     
11,732
 
Customized postage
   
13,615
     
7,229
 
Other
   
99
     
41
 
Total revenues
 
$
364,305
   
$
213,957
 
Revenue as a percentage of total revenues
               
Service
   
86
%
   
83
%
Product
   
6
%
   
9
%
Insurance
   
5
%
   
5
%
Customized postage
   
4
%
   
3
%
Other
   
0
%
   
0
%
Total revenues
   
100
%
   
100
%

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

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

Service revenue increased 77% to $313.1 million in 2016 from $176.7 million in 2015. The increase in service revenue consisted of a 13% increase in our annual average paid customers and a 57% increase in our average service revenue per paid customer.

The increase in paid customers is primarily the result of (1) a reduction in our average Monthly Churn rate from 3.3% in 2015 to 3.0% in 2016 and (2) the addition of paid customers as a result of our Endicia acquisition in the fourth quarter of 2015. The acquisition of ShippingEasy did not result in any incremental paid customers in our metrics as ShippingEasy had a pre-existing partnership with Endicia at the time of their acquisition in which Endicia earned revenue through a revenue sharing arrangement for ShippingEasy’s customers and as a result, ShippingEasy’s customers were already included in our paid customers prior to the acquisition.

The increase in our average service revenue per paid customer (“Service Revenue APRU”) was primarily the result of (1) the addition of paid customers from our acquisition of Endicia where the Service Revenue ARPU for those paid customers was higher as compared to the Service Revenue ARPU from the existing Stamps.com customers, (2) recognizing all of the revenue on ShippingEasy’s customers where we, prior to the acquisition, recognized only a portion of that revenue under ShippingEasy’s revenue sharing partnership with Endicia and (3) the growth in our shipping business where we have the ability to better monetize postage volume as compared to monthly flat rate subscription fees.
 
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Product revenue increased 11% to $20.2 million in 2016 from $18.3 million in 2015. The increase is primarily attributable to our Endicia acquisition, as Endicia generated $2.9 million of product revenue in 2016 but only $0.6 million in shorter period of 2015 for which Endicia is included in our results. Product revenue is primarily driven by labels, such as NetStamps and DYMOStamps, which are used for mailing.  As our growth in postage has been driven more by shipping than mailing over the recent years, our growth in product revenue has been lower than our growth in total revenue.

Insurance revenue increased 47% to $17.3 million in 2016 from $11.7 million in 2015. The increase in insurance revenue was primarily attributable to our acquisitions whose solutions target shipping customers who are more likely than mailing customers to purchase insurance.

Customized postage revenue increased 88% to $13.6 million in 2016 from $7.2 million in 2015.  The increase was primarily attributable to (1) an increase in PhotoStamps high volume business orders, which increased by $2.9 million and (2) the addition of PictureItPostage as a result of our Endicia acquisition, which added $4.1 million for the full year of 2016 as compared to the shorter period of 2015 for which Endicia is included in our results. The increase in customized postage revenue was partially offset by a $0.6 million decrease in PhotoStamps revenue from orders placed through the PhotoStamps website. The decrease in revenue from website orders is primarily attributable to a reduction in our PhotoStamps sales and marketing spending.

Cost of Revenue

The following table shows cost of revenues and cost of revenues as a percentage of associated revenue for the periods indicated (in thousands except percentage):
 
 
Cost of revenues
  
2016
   
2015
 
         
Service
 
$
39,999
   
$
27,967
 
Product
   
6,695
     
5,971
 
Insurance
   
5,432
     
3,984
 
Customized postage
   
10,846
     
6,013
 
Total cost of revenues
 
$
62,972
   
$
43,935
 
Cost as percentage of associated revenue
               
Service
   
13
%
   
16
%
Product
   
33
%
   
33
%
Insurance
   
31
%
   
34
%
Customized postage
   
80
%
   
83
%
Total cost as a percentage of total revenues
   
17
%
   
21
%

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

Cost of service revenue increased 43% to $40.0 million in 2016 from $28.0 million in 2015. The increase was primarily attributable to higher customer service costs, which increased by $6.0 million, to support our growing customer base and higher credit card processing fees, which increased by $3.0 million, associated with our higher revenue.  Promotional expenses were not material in 2016. Cost of service revenue as a percent of service revenue declined from 16% in 2015 to 13% in 2016.  The decline was primarily attributable to achieving scale efficiencies in areas such as customer service from our growth in revenue.

Cost of product revenue increased 12% to $6.7 million in 2016 from $6.0 million in 2015. The 12% increase in cost of product revenue was primarily attributable to the increase in product revenue over the same time period. Cost of product revenue as a percent of product revenue was 33% in 2016 which was consistent with 2015.
 
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Cost of insurance revenue increased 36% to $5.4 million in 2016 from $4.0 million in 2015.  The increase in cost of insurance revenue resulted from growth in the number of insurance transactions, which was primarily attributable to our acquisitions.  Cost of insurance revenue as a percent of insurance revenue declined from 34% in 2015 to 31% in 2016.  The decline was primarily attributable to the insurance offerings of our acquired companies having higher prices for parcel insurance as compared to the rest of the Company.

Cost of customized postage revenue increased 80% to $10.8 million in 2016 from $6.0 million in 2015. The increase in cost of customized postage revenue is primarily due to the increase in our customized postage revenue. Cost of customized postage revenue as a percent of customized postage revenue declined from 83% in 2015 to 80% in 2016. The decline was primarily the result of the addition of Endicia’s PictureItPostage revenue which has a lower cost of customized postage revenue as a percent of customized postage revenue as compared to PhotoStamps. PictureItPostage does not have a material level of high volume business orders which typically have a higher cost of customized postage revenue as a percent of customized postage revenue as compared to consumer website orders.

Operating Expenses

The following table outlines the components of our operating expense and their respective percentages of total revenue for the periods indicated (in thousands except percentage):
 
 
Operating Expenses:
  
2016
   
2015
 
         
Sales and marketing
 
$
78,830
   
$
56,144
 
Research and development
   
35,158
     
20,711
 
General and administrative
   
67,125
     
42,399
 
Contingent consideration charges
   
     
46,088
 
Legal settlements and reserves
   
     
10,000
 
Total operating expenses
 
$
181,113
   
$
175,342
 
Operating expenses as a percentage of total revenue:
               
Sales and marketing
   
22
%
   
26
%
Research and development
   
10
%
   
10
%
General and administrative
   
18
%
   
20
%
Contingent consideration charges
   
     
22
%
Legal settlements and reserves
   
     
5
%
Total operating expenses as a percentage of total revenues
   
50
%
   
82
%

Sales and Marketing

Sales and marketing expense principally consists of spending to acquire new customers and compensation and related expenses for personnel engaged in sales, marketing, and business development activities. Our sales and marketing programs include direct sales, customer referral programs, customer re-marketing efforts, direct mail, online advertising, partnerships, telemarketing, and traditional advertising.

Sales and marketing expense increased 40% to $78.8 million in 2016 from $56.1 million in 2015. The increase is primarily due to (1) an increase in headcount-related expenses excluding stock-based compensation expense of $10.4 million, (2) an increase in stock-based compensation expense of $2.6 million and (3) an increase in discretionary marketing spend of $6.5 million.  The increases in headcount-related and stock-based compensation expenses were due to both the addition of headcount resulting from our Endicia and ShippingEasy acquisitions as well as increased headcount in the rest of the Company.

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.
 
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Research and development expense increased 70% to $35.2 million in 2016 from $20.7 million in 2015. The increase is primarily due to (1) an increase in headcount-related expenses excluding stock-based compensation of $7.1 million and (2) an increase in stock-based compensation expense of $3.5 million. The increases in headcount-related and stock-based compensation expenses were due to both the addition of headcount resulting from our Endicia and ShippingEasy acquisitions as well as increased headcount in the rest of the Company to support our expanded product offerings and technology infrastructure investments.

General and Administrative

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

General and administrative expense increased 58% to $67.1 million in 2016 from $42.4 million in 2015. The increase was primarily attributable to (1) an increase in the amortization of acquired intangibles related to our acquisitions of $10.6 million, (2) an increase in headcount-related expenses excluding stock-based compensation of $6.2 million, and (3) an increase in stock-based compensation expense of $9.7 million.  The increases were partially offset by a decrease in acquisition and integration related expenses of approximately $3.3 million as the expenses for the ShippingEasy acquisition in 2016 were less than the expenses for the Endicia acquisition in 2015. The increases in headcount-related and stock-based compensation expenses were due to both the addition of headcount resulting from our Endicia and ShippingEasy acquisitions as well as increased headcount in the rest of the Company to support our growth in the business and corporate infrastructure investments.

Contingent Consideration Charges

Contingent consideration charges are attributable to the change in the fair value of our contingent consideration liability related to the acquisition of ShipStation. We did not incur any contingent consideration charges in 2016. Contingent consideration charge was $46.1 million in the year ended December 31, 2015. The decrease was due to ShipStation fully achieving all of their financial measure targets for the second earn-out in accordance with the purchase agreement and the distribution of the shares of stock comprising the final earn-out in the first quarter 2016.  See Note 3 – “Acquisition” in our Notes to Consolidated Financial Statements for further description of our contingent consideration liability related to the acquisition of ShipStation.

Litigation Settlement

In 2015, we incurred a $10.0 million expense related to our litigation settlement with Express One.  We did not incur a similar litigation settlement expense in 2016.

Interest and Other Income

Interest and other income primarily consist of interest income from cash, cash equivalents and short-term and long-term investments. Interest and other income increased to $306,000 in 2016 from $146,000 in 2015.  The increase is primarily due to gains on the disposal of assets.

Interest Expense

Interest expense consists of interest expense from the debt under our credit facility and the associated accretion of debt issuance costs. Interest expense was $3.2 million in 2016 compared to $397,000 in 2015.  The increase in interest expense was primarily due to the debt being outstanding for the full year 2016 compared to only approximately one and half months in 2015. The interest expense resulted from the debt incurred in connection with our acquisition of Endicia in the fourth quarter of 2015. See Note 7 – “Debt” in our Notes to Consolidated Financial Statements for further discussion.
 
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Provision for Income Taxes

In 2015, our net income tax benefit of $1.4 million was comprised of a deferred income tax benefit of $2.8 million consisting of nondeductible temporary tax items including contingent consideration, stock compensation and amortizable intangibles, partially offset by a current income tax expense of $1.4 million consisting of federal alternative minimum tax and various state taxes. In addition, the deferred income tax benefit reflected a change in the federal statutory rate from 34% to 35%.

In 2016, our income tax expense of $41.7 million consisted of current income tax expense of $8.1 million consisting of federal alternative minimum tax and various state taxes and deferred income tax expense of $33.6 million consisting of temporary tax items including utilization of net operating losses, contingent consideration, stock compensation and differences in the book and tax lives of amortizable intangibles. Our effective income tax rate differed from the statutory income tax rate primarily as a result of permanent tax adjustments for nondeductible items, research and development tax credits, and changes in state tax rates including the addition and reduction of uncertain tax positions of the prior and of the current year.

As of December 31, 2016 and 2015, we had net deferred tax assets of approximately $48.8 million and $57.2 million, respectively. We evaluated the appropriateness of our deferred tax assets and related valuation allowance in accordance with ASC 740 based on all available positive and negative evidence, including our recent earnings trend and expected future income. As of December 31, 2016 and 2015, we did not have any valuation allowance against our gross deferred tax assets.

Trend Analysis

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

We expect customized postage revenue to increase in 2017 compared to 2016. We expect our customized postage revenue growth in 2017 to be a smaller percentage than the growth in 2016, as 2016 reflects a full year of Endicia results, as opposed to approximately one and a half months in 2015. High volume business orders for customized postage can fluctuate significantly from quarter to quarter and therefore historical trends may not be indicative of future results for customized postage revenue.

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

We expect our stock-based compensation expense to be higher in 2017 compared to 2016 based on stock-based compensation expense incurred in the fourth quarter and the expectation of stock option grants to new hires in 2017.

We expect our interest expense in 2017 to be largely consistent with 2016.
 
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We expect our effective tax rate for 2017 to be higher than 2016 as we benefitted from certain research and development tax credits earned in prior years in 2016 which we do not expect to recur at the same levels in 2017. There are other factors that impact taxable income compared to book income which can be difficult to predict and can change from quarter-to-quarter.

We expect we will utilize the remainder of our federal net operating losses and other tax credits during 2017 and thus we expect to become a cash tax payer for 2017.

As discussed earlier in this Report, our expectations are subject to substantial uncertainty and our results are subject to macro-economic factors and other factors which could cause these trends to be worse than our current expectation or which could cause actual results to be materially different than our current expectations. These expectations are “forward looking statements,” are made only as of the date of this Report and are subject to the qualifications and limitations on forward-looking statements discussion on page 1 of Part I of this Report and the risks and other factors set forth in Item 1A “Risk Factors.”  Our business has grown through acquisitions during 2014 through 2016; however the expectations above do not assume any future acquisitions or dispositions, any of which could have a significant impact on our current expectations.  As described in our forward-looking statements discussion, we do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report.

Years Ended December 31, 2015 and 2014

Total revenue increased 45% to $214.0 million in 2015 from $147.3 million in 2014. Mailing and shipping revenue, which includes service revenue, product revenue and insurance revenue, was $206.7 million in 2015, an increase of 46% from $141.8 million in 2014. Customized postage revenue increased 33% to $7.2 million in 2015 from $5.4 million in 2014.

The following table sets forth the breakdown of revenue for 2015 and 2014 and the resulting percent change (revenue in thousands):
 
 
Revenues
  
2015
   
2014
   
% Change
 
               
Service
 
$
176,672
   
$
115,696
     
53
%
Product
   
18,283
     
16,883
     
8
%
Insurance
   
11,732
     
9,217
     
27
%
Mailing and shipping revenue
   
206,687
     
141,796
     
46
%
Customized postage
   
7,229
     
5,450
     
33
%
Other
   
41
     
23
     
77
%
Total revenues
 
$
213,957
   
$
147,269
     
45
%

We define “paid customers” for the quarter as ones from whom we successfully collected service fees or otherwise earned revenue at least once during that quarter, and we define average paid customers for the year as the average of the paid customers for each of the four quarters during the year.

The following table sets forth the number of paid customers in the period for our Core mailing and shipping business (in thousands):
 
Year
 
First
Quarter
   
Second
Quarter
   
Third
Quarter
   
Fourth
Quarter
   
Annual
Average
 
                               
2015
   
557
     
565
     
569
     
633
     
581
 
2014
   
506
     
505
     
512
     
525
     
512
 
 
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The following table sets forth the growth in paid customers and average annual revenue per paid customer for our mailing and shipping business (in thousands except average annual revenue per paid customer and percentage):
 
     
2015
   
2014
   
% Change
 
               
Paid customers for the year
   
581
     
512
     
14
%
Average annual revenue per paid customer
 
$
356
   
$
277
     
28
%
Mailing and shipping revenue
 
$
206,687
   
$
141,796
     
46
%

The increase in paid customers is primarily the result of (1) a higher number of Stamps.com paid customers compared to the prior year as a result of our increased spending in our mailing and shipping sales and marketing channels, (2) the addition of paid customers from ShipStation and ShipWorks as a result of our acquisitions in 2014 and (3) the addition of paid customers from Endicia as a result of our acquisition in the fourth quarter of 2015.

The increase in our ARPU was primarily the result of (1) the addition of paid customers from our acquisitions of ShipStation, ShipWorks and Endicia where the ARPU for those paid customers is higher as compared to the ARPU from the existing Stamps.com customers and (2) the growth in our high volume shipping business where we have the ability to better monetize postage volume as compared to monthly flat rate subscription fees.

Revenue by Product

The following table shows our components of revenue and their respective percentages of total revenue for the periods indicated (in thousands except percentage):
 
 
Revenues
  
2015
   
2014
 
         
Service
 
$
176,672
   
$
115,696
 
Product
   
18,283
     
16,883
 
Insurance
   
11,732
     
9,217
 
Customized postage
   
7,229
     
5,450
 
Other
   
41
     
23
 
Total revenues
 
$
213,957
   
$
147,269
 
Revenue as a percentage of total revenues
               
Service
   
83
%
   
79
%
Product
   
9
%
   
11
%
Insurance
   
5
%
   
6
%
Customized postage
   
3
%
   
4
%
Other
   
0
%
   
0
%
Total revenues
   
100
%
   
100
%

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

For service revenue, we earn revenue in several different ways: (1) customers may pay us a monthly fee based on a subscription plan; (2) customers may qualify under our USPS partnership to have their service fees waived or refunded and then we are compensated directly by the USPS; (3) we may earn transaction related revenue based on customers purchasing postage or printing shipping labels; (4) we may earn compensation by offering customers a discounted postage rate that is provided to the customers by our integration partners; and (5) we may earn other types of revenue shares or other compensation from specific customers or integration partners.
 
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Service revenue increased 53% to $176.7 million in 2015 from $115.7 million in 2014. The 53% increase in service revenue consisted of a 14% increase in our annual average paid customers and 35% increase in our annual average service revenue per paid customer.

Product revenue increased 8% to $18.3 million in 2015 from $16.9 million in 2014. The increase is primarily attributable to an increase in sales of mailing and shipping labels and label printers as we continue to grow our customer base. Postage printed typically helps drive sales of consumables supplies such as labels. Total postage printed by customers using our mailing and shipping solutions in 2015 was $2.7 billion, a 51% increase from the $1.8 billion printed in 2014.

Insurance revenue increased 27% to $11.7 million in 2015 from $9.2 million in 2014. The increase in insurance revenue was primarily attributable to our acquisitions whose solutions target shipping customers who are more likely than mailing customers to purchase insurance.

Customized postage revenue increased 33% to $7.2 million in 2015 from $5.4 million in 2014.  The increase was primarily attributable to (1) an increase in PhotoStamps high volume business and (2) the addition of PictureItPostage as a result of our Endicia acquisition.  The increase in customized postage revenue was partially offset by a decrease in PhotoStamps revenue from orders placed through the PhotoStamps website. The decrease in revenue from website orders is primarily attributable to a reduction in our PhotoStamps sales and marketing spending in 2015 compared with 2014.

Cost of Revenue

The following table shows cost of revenues and cost of revenues as a percentage of its associated revenue for the periods indicated (in thousands except percentage):
 
 
Cost of revenues
  
2015
   
2014
 
         
Service
 
$
27,967
   
$
19,687
 
Product
   
5,971
     
5,516
 
Insurance
   
3,984
     
3,210
 
Customized postage
   
6,013
     
4,493
 
Total cost of revenues
 
$
43,935
   
$
32,906
 
Cost as percentage of associated revenue
               
Service
   
16
%
   
17
%
Product
   
33
%
   
33
%
Insurance
   
34
%
   
35
%
Customized postage
   
83
%
   
82
%
Total cost as a percentage of total revenues
   
21
%
   
22
%

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

Cost of service revenue increased 42% to $28.0 million in 2015 from $19.7 million in 2014. The increase was primarily attributable to higher customer service costs to support our growing customer base, higher credit card processing fees associated with our higher revenue and higher promotional expenses.  Promotional expenses, which represents a material portion of total cost of service revenue, is expensed in the period in which a customer qualifies for the promotion while the revenue associated with the acquired customer is earned over the customer's lifetime. As a result, promotional expense for newly acquired customers may exceed the revenue earned from those customers in that period. Promotional expense increased 11% to $3.4 million in 2015 from $3.1 million in 2014. The increase in our promotional expense was primarily due to higher customer acquisition.  The 42% increase in cost of service revenue was less than the 53% increase in service revenue over the same time period.
 
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Cost of product revenue increased 8% to $6.0 million in 2015 from $5.5 million in 2014. The 8% increase in cost of product revenue was consistent with the 8% increase in product revenue over the same time period.

Cost of insurance revenue increased 24% to $4.0 million in 2015 from $3.2 million in 2014.  The increase in cost of insurance revenue resulted from growth in the number of insurance transactions, which was primarily attributable to our acquisitions.  The 24% increase in cost of insurance revenue was less than the 27% increase in insurance revenue.

Cost of customized postage revenue increased 34% to $6.0 million in 2015 from $4.5 million in 2014. The cost of customized postage revenue resulted from the growth in high volume business orders. The 34% increase in cost of customized postage revenue was consistent with the 33% increase in customized postage revenue over the same time period.

Operating Expenses

The following table outlines the components of our operating expense and their respective percentages of total revenue for the periods indicated (in thousands except percentage):
 
 
Operating expenses:
  
2015
   
2014
 
         
Sales and marketing
 
$
56,144
   
$
43,659
 
Research and development
   
20,711
     
13,309
 
General and administrative
   
42,399
     
25,147
 
Contingent consideration charges
   
46,088
     
8,438
 
Legal settlements and reserves
   
10,000
     
 
Total operating expenses
 
$
175,342
   
$
90,553
 
Operating expenses as a percentage of total revenue:
               
Sales and marketing
   
26
%
   
30
%
Research and development
   
10
%
   
9
%
General and administrative
   
20
%
   
17
%
Contingent consideration charges
   
22
%
   
6
%
Legal settlements and reserves
   
5
%
   
 
Total operating expenses as a percentage of total revenues
   
82
%
   
61
%

Sales and Marketing

Sales and marketing expense principally consists of spending to acquire new customers and compensation and related expenses for personnel engaged in sales, marketing, and business development activities.  Sales and marketing expense increased 29% to $56.1 million in 2015 from $43.7 million in 2014. The increase is primarily due to (1) the addition of sales and marketing expense from our ShipStation, ShipWorks and Endicia acquisitions, (2) an increase in stock-based compensation expense and (3) an increase in sales and marketing spending and activity in our mailing and shipping business as we continued to focus on acquiring customers.  Our sales and marketing programs include direct sales, customer referral programs, customer re-marketing efforts, direct mail, online advertising, partnerships, telemarketing, and traditional advertising.

Research and Development

Research and development expense principally consists of compensation for personnel involved in the development of our services, depreciation of equipment and software and expenditures for consulting services and third party software. Research and development expense increased 56% to $20.7 million in 2015 from $13.3 million in 2014. The increase is primarily due to (1) the addition of research and development expense from our ShipStation, ShipWorks and Endicia acquisitions and (2) an increase in headcount-related expenses including stock-based compensation expense to support our expanded product offerings and technology infrastructure investments.
 
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General and Administrative

General and administrative expense principally consists of compensation and related costs for executive and administrative personnel, fees for legal and other professional services, depreciation of equipment, software and building used for general corporate purposes and amortization of intangible assets.  General and administrative expense increased 69% to $42.4 million in 2015 from $25.1 million in 2014. The increase was primarily attributable to (1) the addition of general and administrative expense from our ShipStation, ShipWorks and Endicia acquisitions, (2) an increase in headcount and headcount related expenses and infrastructure investments to support the growth in our business, (3) an increase in stock-based compensation expense, (4) an increase in legal expenses for matters not related to our acquisitions, (5) expenses related to the signing of the definitive agreement to acquire Endicia, (6) expenses related to the regulatory review process for our acquisition of Endicia and (7) an increase in the amortization of acquired intangibles also related to our acquisitions.

Contingent Consideration Charges

Contingent consideration charges are attributable to the change in the fair value of our contingent consideration liability related to the acquisition of ShipStation. Contingent consideration charges increased 446% to $46.1 million in 2015 from $8.4 million in 2014. The increase was primarily due to the adjustment of the contingent consideration liability as a result of the former ShipStation owners fully achieving all of their financial measures in accordance with the purchase agreement and an increase in our stock price.  See Note 3 – “Acquisition” in our Notes to Consolidated Financial Statements for further description of our contingent consideration liability related to the acquisition of ShipStation.

Litigation Settlement

On August 14, 2014, Rapid Enterprises, LLC, D/B/A Express One, filed suit against ShipStation and some of its executives in the Third Judicial District Court for Salt Lake County, Utah, alleging, among other claims, that ShipStation breached its contract with Express One by violating an exclusivity provision. Express One sought an injunction, damages, attorneys’ fees and court costs.

On August 6, 2015, Stamps.com and Express One entered into a settlement agreement that resolved all disputes between the parties.  Stamps.com agreed to pay Express One $10.0 million in exchange for Express One’s dismissal and permanent withdrawal of Express One’s tort claims.  In addition, the parties agreed to continue and expand their business relationship going forward. The amount was expensed and paid in 2015.

Interest and Other Income

Interest and other income primarily consists of interest income from cash equivalents, short-term and long-term investments and rental income from our corporate headquarters in El Segundo, California.  Interest and other income, net decreased to $146,000 in 2015 from $375,000 in 2014.  The decrease was primarily attributable to (1) lower yields on our investment balances including certain investments in our portfolio that matured and were replaced with lower yield investments and (2) lower rental income.

Interest Expense

Interest expense consists of interest expense payments from the debt under our credit facility and the associated accretion of debt issuance costs.  Interest expense was $397,000 in 2015 compared to $0 in 2014.  The interest expense resulted from the debt incurred in connection with our acquisition of Endicia in 2015. See Note 7 – “Debt” in our Notes to Consolidated Financial Statements for further discussion.
 
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Provision for Income Taxes

In 2015, our net income tax benefit of $1.4 million was comprised of $2.8 million of deferred income tax benefit consisting of nondeductible temporary tax items including contingent consideration, stock compensation and amortizable intangibles, partially offset by $1.4 million of current income tax expense consisting of federal alternative minimum tax and various state taxes. In addition, the deferred income tax benefit reflected the change in the federal statutory rate from 34% to 35%. In 2014, our net income tax benefit of $12.7 million consisted of a $13.6 million income tax benefit resulting from the release of our valuation allowance offset by a current income tax expense of $0.9 million consisting of federal and state alternative minimum taxes.  On June 10, 2014 we completed our acquisition of ShipStation.  On August 29, 2014 we completed our acquisition of ShipWorks. Based on these discrete events, we analyzed our deferred tax assets including our remaining tax loss carry-forward. After completing our forecast of future income taking into consideration the potential synergies of our acquisitions, we believed we had met the more likely than not threshold that we would be able to utilize our remaining tax loss carry-forwards in the foreseeable future.  As a result, we released the remaining valuation allowance during the fourth quarter of 2014. During 2014 we recorded current income tax expense for alternative minimum federal and state taxes of $856,000 and income tax benefit for the release of our valuation allowance totaling approximately $13.6 million, yielding to a net income tax benefit of $12.7 million.  During 2015 we recorded current income tax expense for alternative minimum federal and state taxes of approximately $1.4 million. Because we did not have any valuation allowance release in 2015, our net income tax benefit decreased 89% to $1.4 million in 2015 from $12.7 million in 2014.

We evaluated the appropriateness of our deferred tax assets and related valuation allowance in accordance with ASC 740 based on all available positive and negative evidence, including our recent earning trend and expected future income. As of December 31, 2015 and 2014, we do not have any valuation allowance against our gross deferred tax assets.

Liquidity and Capital Resources

As of December 31, 2016 and 2015, we had $108 million and $75 million, respectively, in cash, cash equivalents and short-term and long-term investments. We invest available funds in short-term and long-term securities, including money market funds, corporate bonds, asset backed securities, and US government and agency bonds, and do not engage in hedging or speculative activities.

Net cash provided by operating activities was approximately $148 million and $46 million in 2016 and 2015, respectively. The increase in net cash provided by operating activities was primarily attributable to an increase in our net income, depreciation and amortization, stock compensation expense offset by the impact of the stock option windfall tax benefit and deferred income tax expense and from net changes in our operating assets and liabilities in 2016 as compared to 2015.
 
Net cash used in investing activities was approximately $55 million and $210 million in 2016 and 2015, respectively.  The decrease in net cash used in investing activities was primarily due to the acquisition of ShippingEasy, of $55.4 million in 2016 as compared to the acquisition of Endicia of $214.2 million in 2015. (See Note 3 – “Acquisitions” in our Notes to Consolidated Financial Statements for further description).
 
Net cash used in financing activities was approximately $51 million in 2016 and net cash provided by financing activities was approximately $188 million in 2015. The change in net cash provided by (used in) financing activities was primarily due to (1) an optional repayment of debt of $10 million and stock repurchases of $80.6 million in 2016 which we did not have in 2015 and (2) the proceeds from debt, net of debt issuance costs of $162.6 million in 2015 in connection with our acquisition of Endicia which we did not have in 2016.

The following table is a schedule of our significant contractual obligations and commercial commitments as of December 31, 2016 (in thousands):
 
Twelve Month Period Ending December 31,
 
Operating
Lease Obligations
 
2017
 
$
4,048
 
2018
   
3,563
 
2019
   
1,369
 
2020
   
1,396
 
2021
   
1,052
 
Thereafter
   
 
Total   $ 11,428  
 
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On November 18, 2015, we entered into a Credit Agreement with a group of banks, which provides for a term loan of $82.5 million and a revolving credit facility with a maximum borrowing of $82.5 million. Our Credit Agreement matures on November 18, 2020. In connection with entering into the Credit Agreement, we incurred approximately $1.8 million in debt issuance costs which were recorded as debt discount and are being accreted as interest expense over the life of the Credit Agreement. Interest expense associated with debt issuance costs for the year ended December 31, 2016 was approximately $373,000.

Borrowings under the term loan are payable in quarterly installments which began on December 31, 2015. We pay interest on our Credit Agreement equal to the London Interbank Offered Rate plus an applicable margin, between 1.25% to 2.00%, based upon certain financial measures. As of December 31, 2016, our applicable margin was 1.25% and the interest rate on our outstanding loan was approximately 2.13%.  We are subject to certain customary quarterly financial covenants under our Credit Agreement such as a maximum total leverage ratio and a minimum fixed charge coverage ratio. As of December 31, 2016, we were in compliance with the covenants of the Credit Agreement.

The Credit Agreement includes negative covenants, subject to exceptions, restricting or limiting our ability to among other things, incur additional indebtedness, grant liens, repurchase stock, pay dividends and engage in certain investment, acquisition and disposition transactions. The Credit Agreement imposes certain requirements in order for us to make dividend payments.  As of December 31, 2016, such requirements were: (1) our Consolidated Total Leverage Ratio, as defined in the Credit Agreement, must be less than 2.75 to 1.00; (2) our Fixed Charge Coverage Ratio, as defined in the Credit Agreement, must be greater than 1.25 to 1.00; and (3) our Liquidity as defined in the Credit Agreement must be greater than $20 million.  As of December 31, 2016, our Consolidated Total Leverage Ratio was 0.9 to 1.00, our Fixed Charge Coverage Ratio was 22.1 to 1.00 and our Liquidity was approximately $117 million.  Based on our actual financial condition and results of operations, we do not believe that the provisions of the Credit Agreement currently represent a restriction to our ability to pay dividends in permissible amounts.

The contractual maturities of our debt obligations due subsequent to December 31, 2016 are as follows (in thousands):
 
   
Amount
 
2017
 
$
6,703
 
2018
   
8,766
 
2019
   
10,828
 
2020
   
122,522
 
2021
   
 
Total debt
   
148,819
 
         
Less: debt issuance costs
   
(1,465
)
Total debt, net of debt issuance costs
 
$
147,354
 
 
The estimated interest payments related to our debt due subsequent to December 31, 2016 are as follows (in thousands):
 
   
Amount
 
2017
 
$
3,177
 
2018
   
3,019
 
2019
   
2,817
 
2020
   
2,497
 
2021
   
 
Total
 
$
11,510
 
 
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The above estimated interest payments assume an interest rate of 2.13%, which is our interest rate as of December 31, 2016, and assume the entire amount of our revolver credit is paid on the maturity date of November 18, 2020.

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

Critical Accounting Policies and Judgments

General

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to patents, contingencies, litigation and goodwill and intangibles acquired relating to our acquisitions. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Business Combinations

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

Contingencies and Litigation

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

Fair Value of Financial Instruments

Carrying amounts of certain of our financial instruments, including cash, cash equivalents, accounts receivable and accounts payable, approximate fair value due to their short maturities. The fair values of investments are determined using quoted market prices for those securities or similar financial instruments.  The Company’s outstanding debt held by third-party financial institutions is carried at cost, adjusted for debt issuance costs. The Company’s debt is not publicly traded and the carrying amounts typically approximate fair value for debt that accrues interest at a variable rate for companies with similar financial characteristics as the Company, which are considered Level 2 inputs.
 
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The $63.2 million fair value of the contingent consideration liability related to our acquisition of ShipStation as of December 31, 2015 was calculated by multiplying the expected earn-out shares by our stock price.  During 2015 we recorded approximately $47.4 million of changes relating to our contingent consideration liability of which $46.1 million was recorded in contingent consideration changes and $1.3 million was recorded in marketing and research and development costs, all within operating expenses.  The   See Note 3 – “Acquisitions” for a further description of the contingent consideration relating to ShipStation.

Goodwill
 
Goodwill represents the excess of the fair value of consideration given over the fair value of the tangible assets, identifiable intangible assets and liabilities assumed in a business combination.  We are required to test goodwill for impairment annually and whenever events or circumstances indicate the fair value of a reporting unit may be below its carrying value.  Goodwill is reviewed for impairment annually on October 1. A reporting unit is the operating segment or a business that is one level below that operating segment. Reporting units are aggregated as a single reporting unit if they have similar economic characteristics. We aggregated our reporting units into a single reporting unit because we determined they have similar economic characteristics. There was no impairment to our goodwill related to our acquisitions.

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

Impairment of Long-Lived Assets and Intangible Assets

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

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

Income Taxes

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

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

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

Product sales, net of return allowances, are recorded when the products are shipped and title passes to customers. Sales of items, including customized postage, sold to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier. Return allowances for expected product returns, which reduce product revenue, are estimated using historical experience. Commissions from the advertising or sale of products by a third party vendor to our customer base are recognized when the revenue is earned and collection is deemed probable.

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

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

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 2016, 2015 and 2014.

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

Stock-Based Compensation

We estimate the fair value of share-based payment awards on the date of grant using an option-pricing model and recognize stock-based compensation expense during each period based on the value of that portion of share-based payment awards that is ultimately expected to vest during the period, reduced for estimated forfeitures. We estimate forfeitures at the time of grant based on historical data and revise, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Compensation expense recognized for all employee stock options granted is recognized using the straight-line method over their respective vesting periods of up to five years. Starting in the third quarter of 2016, our stock-based compensation expense included performance based inducement equity awards relating to the ShippingEasy acquisition as described in Note 3 - Acquisitions.

Trademarks, Patents and Intangible Assets

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

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") an updated standard on revenue recognition. This ASU will supersede the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, and most industry-specific guidance.  ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using US generally accepted accounting principles (“US GAAP”) and International Financial Reporting Standards.  The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so the companies may be required to use more judgment and make more estimates than under current authoritative guidance. ASU 2014-09 will be effective for the Company in the first quarter of fiscal 2018 and may be applied on a full retrospective or modified retrospective approach.  The Company has reviewed the ASU 2014-09 updated standard on revenue recognition.  The Company is currently in the process of reviewing its material contracts to assess the impact of the new standard.  While the Company has performed a review of the impact on certain contracts, it has not completed a review of all material contracts.  As a result, the Company is currently still in the process of evaluating the adoption method and the impact the adoption of this standard will have on its consolidated financial statements.

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

In March 2016, the FASB simplified certain areas of accounting for stock-based compensation, including accounting for the income tax consequences of stock-based compensation, determining the classification of awards as either equity or liabilities, classifying certain items within the statement of cash flows and introducing an accounting policy election to account for forfeitures of non-vested awards as they occur. The simplified guidance is effective for the Company in the first quarter of 2017. Depending on the area simplified, the guidance is effective either prospectively, retrospectively or using a modified retrospective approach. Early adoption is permitted. The adoption of this standard will not have a material impact on our consolidated financial statements.

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 revised guidance will be applied prospectively, and is effective for the Company in the first quarter of 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The Company is evaluating the effect this new standard will have on its financial statements.

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

On November 18, 2015, we entered into a Credit Agreement with a group of banks, which provides for a term loan of $82.5 million and a revolving credit facility with a maximum borrowing of $82.5 million. Our Credit Agreement matures on November 18, 2020. As of December 31, 2016, the debt outstanding under our Credit Agreement, gross of debt issuance costs, was $148.8 million.  Borrowings under the term loan are payable in quarterly installments which began on December 31, 2015. We pay interest on our Credit Agreement at a rate equal to the London Interbank Offered Rate plus an applicable margin, which is between 1.25% to 2.00%, based upon certain financial measures. As of December 31, 2016, our applicable margin was 1.25% and the interest rate on our outstanding loan was approximately 2.13%. Interest expense would not be significantly affected by either a 10% increase or decrease in the rates of interest on our debt.
 
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We have not used derivative financial instruments in our investment portfolio.  None of the instruments in our investment portfolio are held for trading purposes. Our cash equivalents and investments consist of money market, U.S. government obligations, asset-backed securities and public corporate debt securities with weighted average maturities of 75 days at December 31, 2016. Our cash equivalents and investments approximated $108.4 million at December 31, 2016 and had a weighted average interest rate of 0.4%. Interest rate fluctuations impact the carrying value of the portfolio. The fair value of our portfolio of marketable securities would not be significantly affected by either a 10% increase or decrease in the rates of interest due primarily to the short-term nature of the portfolio.  We do not believe that the future market risks related to the above securities will have a material adverse impact on our financial position, results of operations or liquidity.

ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our consolidated financial statements, schedules and supplementary data, as listed under Item 15, appear in a separate section of this Report beginning on page F-1.

ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.
CONTROLS AND PROCEDURES.

Evaluation of disclosure controls and procedures

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

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

Management’s report on internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (COSO) in Internal Control-Integrated Framework. Based on our assessment and those criteria, management, including our Chief Executive Officer and Chief Financial Officer, concluded that our internal control over financial reporting was effective as of December 31, 2016.  Management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of ShippingEasy Group, Inc., which are included in the 2016 consolidated financial statements of Stamps.com Inc. and subsidiaries and constituted approximately $60 million of total assets as of December 31, 2016, approximately $11 million of revenues and approximately $3 million of net income for the year then ended.  Securities and Exchange Commission guidelines permit companies to exclude acquisitions from their assessment of internal control over financial reporting during the first year following an acquisition.
 
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Ernst & Young LLP, the independent registered public accounting firm who also audited our consolidated financial statements, has issued an attestation report on the effectiveness of internal control over financial reporting as of December 31, 2016, which is included herein.

Changes in internal controls

During the quarter ended December 31, 2016, 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.

ITEM 9B.
OTHER INFORMATION.

None.
 
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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of
Stamps.com Inc. and subsidiaries

We have audited Stamps.com Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). Stamps.com Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s report on internal control over financial reporting appearing under item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As indicated in the accompanying Management’s report on internal control over financial reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls ShippingEasy Group, Inc. which is included in the 2016 consolidated financial statements of Stamps.com Inc. and subsidiaries and constituted approximately $60 million of total assets as of December 31, 2016, approximately $11 million of revenues and approximately $3 million of net income for the year then ended. Our audit of internal control over financial reporting of Stamps.com Inc. and subsidiaries also did not include an evaluation of the internal control over financial reporting of ShippingEasy Group, Inc.

In our opinion, Stamps.com Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Stamps.com Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016 of Stamps.com Inc. and subsidiaries and our report dated March 1, 2017 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP
 
Los Angeles, California
March 1, 2017
 
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PART III.

ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information required under this item is incorporated by reference herein to our proxy statement for our 2017 annual meeting of stockholders, which will be filed with the SEC by not later than 120 days after our fiscal year end.

ITEM 11.
EXECUTIVE COMPENSATION.

The information required under this item is incorporated by reference herein to our proxy statement for our 2017 annual meeting of stockholders, which will be filed with the SEC by not later than 120 days after our fiscal year end.

ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required under this item is incorporated by reference herein to our proxy statement for our 2017 annual meeting of stockholders, which will be filed with the SEC by not later than 120 days after our fiscal year end.

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required under this item is incorporated by reference herein to our proxy statement for our 2017 annual meeting of stockholders, which will be filed with the SEC by not later than 120 days after our fiscal year end.

ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.

The information required under this item is incorporated by reference herein to our proxy statement for our 2017 annual meeting of stockholders, which will be filed with the SEC by not later than 120 days after our fiscal year end.
 
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PART IV.

ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a)          Documents filed as part of this report.

1.          Financial Statements.  Our following financial statements are included in a separate section of this Annual Report on Form 10-K commencing on the pages referenced below:

Stamps.com Inc. and Subsidiaries Financial Statements
 
 
Page
Report of Independent Registered Public Accounting Firm.
F-1
Consolidated Balance Sheets at December 31, 2016 and 2015.
F-2
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014.
F-3
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016, 2015 and 2014.
F-4
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014.
F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014.
F-6
Notes to Consolidated Financial Statements.
F-7

2.          Financial Statement Schedules.  All of our financial statement schedules have been omitted because they are not applicable, not required, or the information is included in the financial statements or notes thereto.

3.          Exhibits.  The following Exhibits are incorporated herein by reference or are filed with this report as indicated below:
 
Exhibit
Number
Description
   
3.1
Amended and Restated Certificate of Incorporation of the Company.(11)
   
3.2
Bylaws of the Company.(3)
   
3.3
Resolution Amending Bylaws of Stamps.com Inc. (13)
   
3.4
Amendment to Bylaws of Stamps.com Inc. (24)
   
4.1
Specimen common stock certificate.(4)
   
10.1
Patent Assignment from Mohan P. Ananda to the Company, dated January 20, 1998.(1)
   
10.2
Assignment and License Agreement between the Company and Mohan P. Ananda, dated January 20, 1998.(1)
   
10.3
1998 Stock Plan and Forms of Notice of Grant and Stock Option Agreement.(2) +++
   
10.4
1999 Stock Incentive Plan (as amended and restated on April 25, 2000).(7) +++
   
10.5
1999 Employee Stock Purchase Plan (as amended and restated on February 9, 2000).(6) +++
 
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Exhibit
Number
Description
   
10.6
Form of Amended and Restated Indemnification Agreement between the Company and its directors and officers.(18) +++
   
10.7
Patent License and Settlement Agreement dated December 19, 2003 by and between Stamps.com Inc. and Pitney Bowes Inc. (8) +
   
10.8
Agreement dated July 14, 2004 by and between Stamps.com Inc., eBay Inc. and PayPal, Inc. (9) ++
   
10.9
Form of Notice of Grant of Stock Option (1999 Stock Incentive Plan).(5) +++
   
10.10
Form of Stock Option Agreement (1999 Stock Incentive Plan).(5) +++
   
10.11
Form of Addendum to Stock Option Agreement—Involuntary Termination Following Corporate Transaction/Change in Control (1999 Stock Incentive Plan).(5) +++
   
10.12
Form of Addendum to Stock Option Agreement—Limited Stock Appreciation Right (1999 Stock Incentive Plan).(5) +++
   
10.13
Form of Stock Issuance Agreement (1999 Stock Incentive Plan).(5) +++
   
10.14
Form of Addendum to Stock Issuance Agreement—Involuntary Termination Following Corporate Transaction/Change in Control (1999 Stock Incentive Plan).(5) +++
   
10.15
Form Automatic Stock Option Agreement (1999 Stock Incentive Plan).(5) +++
   
10.16
Form Notice of Grant of Non-Employee Director—Automatic Stock Option (Initial) (1999 Stock Incentive Plan).(5) +++
   
10.17
Form Notice of Grant of Non-Employee Director—Automatic Stock Option (Annual) (1999 Stock Incentive Plan).(5) +++
   
10.18
Form of Enrollment/Change Form for Employee Stock Purchase Plan.(5) +++
   
10.19
Form of Stock Purchase Agreement for Employee Stock Purchase Plan.(5) +++
   
10.20
Stock Purchase Agreement (12) +++
   
10.21
2010 Equity Incentive Plan.(25) +++
   
2014 Amendment to the Stamps.com Inc. 2010 Equity Incentive Plan.(17) +++
   
10.23
2016 Amendment to the Stamps.com Inc. 2010 Equity Incentive Plan.(17) +++
   
10.24
Form of Stock Option Agreement.(14) +++
   
10.25
Settlement Agreement among the Company, Kara Technology Incorporated and Salim Kara.(15)
 
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Exhibit
Number
Description
   
10.26
Agreement of Purchase And Sale and Joint Escrow Instructions.(16)
   
10.27
Stock Purchase Agreement made and entered into as of March 22, 2015, by and among Stamps.com Inc., a Delaware corporation, PSI Systems, Inc., a California corporation, and Newell Rubbermaid Inc., a Delaware corporation.(20) +
   
10.28
 
Commitment Letter, by and among Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Bank, National Association, Wells Fargo Securities, LLC, JPMorgan Chase Bank, N.A., and J.P. Morgan Securities LLC and Stamps.com Inc., dated March 22, 2015.(20)
   
10.29
 
Settlement Agreement and Mutual Release of Claims made and entered into on August 6, 2015, by and between Stamps.com Inc., Auctane, LLC d/b/a ShipStation, Interapptive, Inc. d/b/a ShipWorks, Kenneth T. McBride, Jason Hodges, Nathan Jones, and Curtis Mitchell, on the one hand, and Rapid Enterprises, LLC d/b/a Express One and J. Colby Clark, on the other hand.(21)
   
10.30
 
Credit Agreement made and entered into as of November 18, 2015, by and among Stamps.com Inc., a Delaware corporation, Wells Fargo Bank, National Association (“Wells Fargo”), JPMorgan Chase Bank, N.A., and Bank of America, N.A., the lenders from time to time party thereto (each a “Lender” and collectively, the “Lenders”), and Wells Fargo as administrative agent for the Lenders. (22) +
   
10.31
Collateral Agreement made and entered into as of November 18, 2015, by and among Stamps.com Inc., a Delaware corporation, the Grantors (as defined therein), in favor of Wells Fargo Bank, National Association as administrative agent for the benefit of the Secured Parties (as defined therein).(22)
   
10.32
Agreement and Plan of Merger, dated as of June 16, 2016, by and among ShippingEasy Group, Inc., Stamps.com Inc., SEG Merger Sub, Inc. and Tim Jugmans. Pursuant to Item 601(b)(2) of Regulation S-K, the registrant hereby agrees to supplementally furnish to the SEC upon request any omitted schedule or exhibit to the Agreement and Plan of Merger. (23) +
   
10.33
Management Incentive Plan, dated as of July 1, 2016, by and among ShippingEasy, Inc., Stamps.com Inc. and the Participant Representative (as defined therein), and acknowledged and agreed to by Katie May and Barry Cox. (23) +
   
14
Code of Ethics.(10)
   
21
List of Subsidiaries: PhotoStamps Inc., a California corporation; Auctane LLC, a Texas limited liability company; Interapptive Inc., a Missouri corporation; PSI Systems, Inc., a California corporation d/b/a Endicia; ShippingEasy Group, Inc., a Delaware corporation.
   
Consent of Ernst & Young LLP.(17)
   
Power of Attorney by Mohan P. Ananda.(17)
   
Power of Attorney by David C. Habiger.(17)
   
Power of Attorney by G. Bradford Jones.(17)
   
Power of Attorney by Lloyd I. Miller.(17)
 
59

Table of Contents
Exhibit
Number
Description
   
Power of Attorney by Theodore R. Samuels.(17)
   
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.(17)
   
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.(17)
   
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(17) (furnished, not filed)
   
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(17) (furnished, not filed)


XBRL Exhibits

101.INS 
XBRL Instance Document
   
101.SCH 
XBRL Taxonomy Extension Schema Document
   
101.CAL 
XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF 
XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB 
XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE 
XBRL Taxonomy Extension Presentation Linkbase Document
 

(1)
Incorporated herein by reference to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on April 26, 1999 (File No. 333-77025).

(2)
Incorporated herein by reference to Amendment No. 1 to the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on May 13, 1999 (File No. 333-77025).

(3)
Incorporated herein by reference to Amendment No. 2 to the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on June 7, 1999 (File No. 333-77025).

(4)
Incorporated herein by reference to Amendment No. 4 to the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on June 22, 1999 (File No. 333-77025).

(5)
Incorporated herein by reference to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 28, 1999 (File No. 333-81733).

(6)
Incorporated herein by reference to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on March 30, 2000 (File No. 333-33648).

(7)
Incorporated herein by reference to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 1, 2000 (File No. 333-42764).

(8)
Incorporated herein by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 22, 2003 (File No. 000-26427).

(9)
Incorporated herein by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on July 16, 2004 (File No. 000-26427).

(10)
Incorporated herein by reference to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2008 (File No. 000-26427).

(11)
Incorporated herein by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on August 8, 2008 (File No. 000-26427).

(12)
Incorporated herein by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 15, 2010 (File No. 000-26427).
 
60

Table of Contents
(13)
Incorporated herein by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on April 23, 2010 (File No. 000-26427).

(14)
Incorporated herein by reference to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 28, 2010 (File No. 333-168360).

(15)
Incorporated herein by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 8, 2010 (File No. 000-26427).

(16)
Incorporated herein by reference to the Company’s Form 10-K filed with the Securities and Exchange Commission on March 14, 2012 (File No. 000-26427).

(17)
Filed with the Securities and Exchange Commission with this Annual Report on Form 10-K.

(18)
Incorporated herein by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on April 29, 2014 (File No. 000-26427).

(19)
Incorporated herein by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on June 16, 2014 (File No. 000-26427).

(20)
Incorporated herein by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 11, 2015 (File No. 000-26427).

(21)
Incorporated herein by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on November 9, 2015 (File No. 000-26427).

(22)
Incorporated herein by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 24, 2015 (File No. 000-26427).

(23)
Incorporated herein by reference to the Company’s Form 10-Q filed with the Securities and Exchange Commission on August 9, 2016 (File No. 000-26427).

(24)
Incorporated herein by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 20, 2012 (File No. 000-26427).

(25)
Incorporated herein by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 28, 2010 (File No. 000-26427).

+
Confidential treatment requested and received as to certain portions.

++
Confidential treatment has been requested for certain confidential portions of this exhibit pursuant to Rule 24b-2 under the Exchange Act. In accordance with Rule 24b-2, these confidential portions have been omitted from this exhibit and filed separately with the Securities and Exchange Commission.

+++
Denotes management contract or compensatory plan, contract or arrangement.
 
61

Table of Contents
Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of
Stamps.com Inc. and subsidiaries

We have audited the accompanying consolidated balance sheets of Stamps.com Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stamps.com Inc. and subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Stamps.com Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated March 1, 2017 expressed an unqualified opinion thereon.
 
 
/s/ ERNST & YOUNG LLP
 
 
Los Angeles, California
 
March 1, 2017
 
 
F-1

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

        
December 31,
 
2016
   
2015
 
Assets
           
Current assets:
           
Cash and cash equivalents
 
$
106,932
   
$
65,126
 
Short-term investments
   
1,511
     
8,553
 
Accounts receivable, net
   
62,756
     
55,052
 
Other current assets
   
13,081
     
8,345
 
Total current assets
   
184,280
     
137,076
 
                 
Property and equipment, net
   
36,829
     
31,707
 
Goodwill
   
239,705
     
197,807
 
Intangible assets, net
   
97,027
     
95,950
 
Long-term investments
   
     
1,529
 
Deferred income taxes, net
   
48,782
     
57,224
 
Other assets
   
3,506
     
7,321
 
Total assets
 
$
610,129
   
$
528,614
 
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable and accrued expenses
 
$
86,205
   
$
60,816
 
Deferred revenue
   
3,858
     
4,000
 
Current portion of debt, net of debt issuance costs
   
6,329
     
4,267
 
Contingent consideration
   
     
63,209
 
Total current liabilities
   
96,392
     
132,292
 
Long-term debt, net of debt issuance costs          
   
141,025
     
157,353
 
Total liabilities
   
237,417
     
289,645
 
                 
Commitments and contingencies
               
Stockholders’ equity:
               
Common stock, $.001 par value
               
Authorized shares: 47,500 in 2016 and 2015
               
Issued shares: 30,507 in 2016 and 29,463 in 2015
               
Outstanding shares: 16,897 in 2016 and 16,697 in 2015
   
53
     
52
 
Additional paid-in capital
   
855,344
     
716,253
 
Treasury stock, at cost, 13,610 shares in 2016 and 12,766 in 2015
   
(252,981
)
   
(172,410
)
Accumulated deficit
   
(229,715
)
   
(304,944
)
Accumulated other comprehensive income
   
11
     
18
 
Total stockholders’ equity
   
372,712
     
238,969
 
Total liabilities and stockholders’ equity
 
$
610,129
   
$
528,614
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
F-2

Table of Contents
STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

     
Year Ended December 31,
 
2016
   
2015
   
2014
 
Revenues:
                 
Service
 
$
313,057
   
$
176,672
   
$
115,696
 
Product
   
20,234
     
18,283
     
16,883
 
Insurance
   
17,300
     
11,732
     
9,217
 
Customized postage
   
13,615
     
7,229
     
5,450
 
Other
   
99
     
41
     
23
 
Total revenues
   
364,305
     
213,957
     
147,269
 
Cost of revenues (exclusive of amortization of intangible assets, which is included in general and administrative expense):
                       
Service
   
39,999
     
27,967
     
19,687
 
Product
   
6,695
     
5,971
     
5,516
 
Insurance
   
5,432
     
3,984
     
3,210
 
Customized postage
   
10,846
     
6,013
     
4,493
 
Total cost of revenues
   
62,972
     
43,935
     
32,906
 
Gross profit
   
301,333
     
170,022
     
114,363
 
Operating expenses:
                       
Sales and marketing
   
78,830
     
56,144
     
43,659
 
Research and development
   
35,158
     
20,711
     
13,309
 
General and administrative
   
67,125
     
42,399
     
25,147
 
Contingent consideration charges
   
     
46,088
     
8,438
 
Litigation settlement
   
     
10,000
     
 
Total operating expenses
   
181,113
     
175,342
     
90,553
 
Income (loss) from operations
   
120,220
     
(5,320
)
   
23,810
 
Interest expense
   
(3,552
)
   
(397
)
   
 
Interest and other income
   
306
     
146
     
375
 
Income (loss) before income taxes
   
116,974
     
(5,571
)
   
24,185
 
Income tax expense (benefit)
   
41,745
     
(1,373
)
   
(12,697
)
Net income (loss)
 
$
75,229
   
$
(4,198
)
 
$
36,882
 
Net income (loss) per share
                       
Basic
 
$
4.36
   
$
(0.26
)
 
$
2.30
 
Diluted
 
$
4.12
   
$
(0.26
)
 
$
2.25
 
Weighted average shares outstanding
                       
Basic
   
17,245
     
16,436
     
16,011
 
Diluted
   
18,251
     
16,436
(1) 
   
16,417
 
 
(1)
Common equivalent shares are excluded from the diluted loss per share as their effect is anti-dilutive.
 
The accompanying notes are an integral part of these consolidated financial statements.
 
F-3

Table of Contents
STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)

     
Year Ended December 31,
 
2016
   
2015
   
2014
 
                   
Net income (loss)
 
$
75,229
   
$
(4,198
)
 
$
36,882
 
Other comprehensive loss, net of tax:
                       
Unrealized loss on investments
   
(7
)
   
(43
)
   
(79
)
Comprehensive income (loss)
 
$
75,222
   
$
(4,241
)
 
$
36,803
 

The accompanying notes are an integral part of these consolidated financial statements.
 
F-4

Table of Contents
STAMPS.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)

  
Common Stock
                               
Shares
   
Amount
   
Additional
Paid-in
Capital
   
Treasury
Stock at Cost
   
Accumulated
Deficit
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
 
Balance at December 31, 2013
   
16,187
   
$
51
   
$
668,724
   
$
(159,522
)
 
$
(337,628
)
 
$
140
   
$
171,765
 
Net income
   
     
     
     
     
36,882
     
     
36,882
 
Unrealized loss on investments
   
     
     
     
     
     
(79
)
   
(79
)
Stock-based compensation expense
   
     
     
4,799
     
     
     
     
4,799
 
Exercise of stock options
   
203
     
     
3,314
     
     
     
     
3,314
 
Shares issued under the Employee Stock Purchase Plan
   
42
     
     
1,238
     
     
     
     
1,238
 
Stock repurchase
   
(435
)
   
     
     
(12,888
)
   
     
     
(12,888
)
Balance at December 31, 2014
   
15,997
   
$
51
   
$
678,075
   
$
(172,410
)
 
$
(300,746
)
 
$
61
   
$
205,031
 
Net loss
   
     
     
     
     
(4,198
)
   
     
(4,198
)
Unrealized loss on investments
   
     
     
     
     
     
(43
)
   
(43
)
Stock option windfall tax benefit
   
     
     
618
     
     
     
     
618
 
Issuance of shares for contingent consideration
   
192
     
     
9,225
     
     
     
     
9,225
 
Stock-based compensation expense
   
     
     
15,895
     
     
     
     
15,895
 
Exercise of stock options
   
459
     
1
     
10,886
     
     
     
     
10,887
 
Shares issued under the Employee Stock Purchase Plan
   
49
     
     
1,554
     
     
     
     
1,554
 
Balance at December 31, 2015
   
16,697
   
$
52
   
$
716,253
   
$
(172,410
)
 
$
(304,944
)
 
$
18
   
$
238,969
 
Net income
   
     
     
     
     
75,229
     
     
75,229
 
Unrealized loss on investments
   
     
     
     
     
     
(7
)
   
(7
)
Stock option windfall tax benefit
   
     
     
26,784