UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2008
 
OR
 
o
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
(I.R.S. Employer
incorporation or organization)
Identification No.)

12959 Coral Tree Place
Los Angeles, California 90066
(Address of principal executive offices)

(310) 482-5800
(Registrant’s telephone number, including area code)
 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨ 
 
Indicate by check mark whether the registrant 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  o   Accelerated filer  þ     
   
 Non-accelerated filer  o (Do not check if a smaller reporting company)   Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
 
As of July 31, 2008, there were approximately 19,397,484 shares of the Registrant’s Common Stock issued and outstanding.
 
 


 

 
STAMPS.COM INC.
 
FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED JUNE 30, 2008
 
TABLE OF CONTENTS

   
Page
PART I - FINANCIAL INFORMATION
2
   
 ITEM 1.
 FINANCIAL STATEMENTS
2
     
 ITEM 2.
 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 
 
 AND RESULTS OF OPERATIONS
10
 
   
 ITEM 3.
 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
18
     
 ITEM 4.
 CONTROLS AND PROCEDURES
18
     
PART II - OTHER INFORMATION
19
   
 ITEM 1A.
 RISK FACTORS
20
     
 ITEM 2.
 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
20
     
 ITEM 3.
 DEFAULTS UPON SENIOR SECURITIES
20
     
 ITEM 4.
 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
20
     
 ITEM 5.
 OTHER INFORMATION
20
     
 ITEM 6.
 EXHIBITS
21
 
SPECIAL NOTICE REGARDING PURCHASES OF MORE THAN 5% OF OUR STOCK
 
We currently have significant federal and state net operating loss carry-forwards (NOL). Under applicable law, our NOL assets could be adversely affected by the acquisition by any person, company or investment firm of more than 5% of our outstanding stock or the acquisition of any additional shares by 5% holders. Our articles of incorporation have provisions (the “NOL Protective Measures”) which prohibit transfers of our stock that would create new 5% shareholders or increase the ownership of existing 5% shareholders. Accordingly, any person, company or investment firm that wishes to become a 5% shareholder must first obtain a waiver of the NOL Protective Measures from our board of directors. In addition, any person, company or investment firm which is a 5% shareholder can not make any additional purchases of our stock without a waiver from our board of directors. Failure to do so can mean loss of the shares and responsibility for any damages to the Company, which could be substantial. Details of the NOL Protective Measures are contained in our definitive Proxy filed on April 2, 2008.
 
Accordingly, we strongly urge you to contact us prior to allowing your ownership interest in our stock to exceed 775,000 shares.
 
1

 
PART I - FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
STAMPS.COM INC.
BALANCE SHEETS
(In thousands, except per share data)
 
   
June 30,
 
December 31,
 
   
2008
 
2007
 
   
(unaudited)
     
Assets
         
Current assets:
         
Cash and cash equivalents 
 
$
55,413
 
$
43,667
 
Restricted cash 
   
554
   
554
 
Short-term investments 
   
24,215
   
22,084
 
Trade accounts receivable, net 
   
2,954
   
2,519
 
Other accounts receivable 
   
501
   
1,209
 
Other current assets 
   
3,051
   
2,489
 
Total current assets
   
86,688
   
72,522
 
Property and equipment, net 
   
3,271
   
3,790
 
Intangible assets, net 
   
510
   
871
 
Long-term investments 
   
11,197
   
24,518
 
Deferred income taxes. 
   
3,671
   
 
Other assets 
   
4,058
   
3,252
 
Total assets
 
$
109,395
 
$
104,953
 
               
Liabilities and Stockholders’ Equity
             
Current liabilities:
             
Accounts payable and accrued expenses 
 
$
11,067
 
$
9,935
 
Deferred revenue 
   
2,366
   
2,576
 
Total current liabilities
   
13,433
   
12,511
 
Commitments and contingencies
             
Stockholders’ equity:
             
Common stock, $.001 par value
             
Authorized shares 47,500 in 2008 and 2007
             
Issued shares: 24,329 in 2008 and 24,258 in 2007
             
Outstanding shares: 19,398 in 2008 and 19,813 in 2007 
   
47
   
47
 
Additional paid-in capital 
   
624,802
   
622,781
 
Accumulated deficit 
   
(460,051
)
 
(466,555
)
Treasury stock, at cost, 4,931 shares in 2008 and 4,445 shares in 2007 
   
(68,237
)
 
(63,737
)
Accumulated other comprehensive loss 
   
(599
)
 
(94
)
Total stockholders’ equity 
   
95,962
   
92,442
 
Total liabilities and stockholders’ equity
 
$
109,395
 
$
104,953
 
 
The accompanying notes are an integral part of these financial statements.
 
2

 
STAMPS.COM INC.
STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited) 
 
   
Three Months ended
June 30,
 
Six Months ended
June 30,
 
   
2008
 
2007
 
2008
 
2007
 
Revenues:
                 
Service
 
$
15,577
 
$
13,506
 
$
30,774
 
$
27,167
 
Product
   
2,583
   
2,457
   
5,066
   
4,815
 
Insurance
   
377
   
356
   
765
   
730
 
PhotoStamps
   
2,873
   
4,635
   
5,877
   
7,811
 
Other 
   
   
453
   
   
906
 
Total revenues
   
21,410
   
21,407
   
42,482
   
41,429
 
Cost of revenues:
                         
Service
   
2,262
   
2,411
   
5,004
   
4,754
 
Product
   
948
   
839
   
1,828
   
1,638
 
Insurance
   
119
   
111
   
239
   
226
 
PhotoStamps
   
2,092
   
3,058
   
4,219
   
5,141
 
Other 
   
   
26
   
   
52
 
Total cost of revenues
   
5,421
   
6,445
   
11,290
   
11,811
 
Gross profit
   
15,989
   
14,962
   
31,192
   
29,618
 
Operating expenses:
                         
Sales and marketing
   
8,780
   
7,926
   
17,403
   
15,757
 
Research and development 
   
2,102
   
2,077
   
4,045
   
4,222
 
General and administrative
   
4,457
   
3,218
   
8,400
   
5,965
 
Total operating expenses
   
15,339
   
13,221
   
29,848
   
25,944
 
Income from operations 
   
650
   
1,741
   
1,344
   
3,674
 
Other income:
                         
Interest income 
   
736
   
1,174
   
1,653
   
2,387
 
Other income 
   
   
   
21
   
 
Total other income
   
736
   
1,174
   
1,674
   
2,387
 
Income before income taxes 
   
1,386
   
2,915
   
3,018
   
6,061
 
Income tax expense (benefit) 
   
80
   
115
   
(3,486
)
 
207
 
Net income 
 
$
1,306
 
$
2,800
 
$
6,504
 
$
5,854
 
Net income per share (see Note 3):
                         
Basic Basic
 
$
0.07
 
$
0.13
 
$
0.33
 
$
0.27
 
Diluted
 
$
0.07
 
$
0.13
 
$
0.33
 
$
0.27
 
Weighted average shares outstanding
                         
Basic Basic
   
19,382
   
21,352
   
19,553
   
21,610
 
Diluted
   
19,712
   
21,742
   
19,831
   
22,034
 

The accompanying notes are an integral part of these financial statements.
 
3

 
STAMPS.COM INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
   
Six Months ended
June 30,
 
   
2008
 
2007
 
Operating activities:
         
Net income 
 
$
6,504
 
$
5,854
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation and amortization
   
1,208
   
1,542
 
Stock-based compensation expense
   
1,682
   
1,088
 
Deferred income tax
   
(3,671
)
 
 
Changes in operating assets and liabilities:
             
Trade accounts receivable
   
(435
)
 
(15
)
Other accounts receivable
   
708
   
220
 
Prepaid expenses
   
(562
)
 
(195
)
Other assets
   
(806
)
 
(380
)
Deferred revenue
   
(210
)
 
98
 
Accounts payable and accrued expenses
   
1,132
   
(1,518
)
Net cash provided by operating activities 
   
5,550
   
6,694
 
               
Investing activities:
             
Sale of short-term investments 
   
19,125
   
24,768
 
Purchase of short-term investments 
   
(21,536
)
 
(21,186
)
Sale of long-term investments 
   
19,541
   
18,918
 
Purchase of long-term investments
   
(6,445
)
 
(6,421
)
Acquisition of property and equipment 
   
(328
)
 
(453
)
Net cash provided by investing activities 
   
10,357
   
15,626
 
               
Financing activities:
             
Proceeds from exercise of stock options 
   
171
   
785
 
Issuance of common stock under ESPP
   
168
   
268
 
Repurchase of common stock 
   
(4,500
)
 
(19,308
)
Net cash used in financing activities 
   
(4,161
)
 
(18,255
)
Net increase in cash and cash equivalents 
   
11,746
   
4,065
 
Cash and cash equivalents at beginning of period 
   
43,667
   
11,740
 
               
Cash and cash equivalents at end of period 
 
$
55,413
 
$
15,805
 

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


STAMPS.COM
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO JUNE 30, 2008 AND 2007 IS UNAUDITED)
 
1.
Summary of Significant Accounting Policies
 
Basis of Presentation
 
We prepared the financial statements included herein without audit pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States (US) generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. We believe that the disclosures are adequate to make the information presented not misleading. We recommend that these financial statements be read in conjunction with the financial statements and the notes thereto included in our latest annual report on Form 10-K.
 
In our opinion, these unaudited financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly our financial position as of June 30, 2008, the results of operations for the three and six months ended June 30, 2008 and cash flows for the six months ended June 30, 2008. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.
 
Use of Estimates and Risk Management
 
The preparation of financial statements in conformity with US generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates and such differences may be material to the financial statements. Examples include estimates of loss contingencies, promotional coupon redemptions, deferred income taxes and estimates regarding the useful lives of patents and other amortizable intangibles.
 
We are involved in various litigation matters as a claimant and a defendant. We record any amounts recovered in these matters when received. We record liabilities for claims against us when the loss is probable and estimable. Amounts recorded are based on reviews by outside counsel, in-house counsel and management. Actual results could differ from estimates.
 
Revenue Recognition
 
We recognize revenue from product sales or services rendered, as well as from licensing the use of our software and intellectual property, 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.
 
Service revenue is based on monthly convenience fees 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 our products, including PhotoStamps, 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 by our best estimate of expected product returns, are estimated using historical experience. We recognize licensing revenue ratably over the contract period. 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 who purchase postage for use through our NetStamps, shipping label or mailing features, pay face value, and the funds are transferred directly from the customers to the United States Postal Service (USPS). We do not recognize revenue for this postage as it is purchased by our customers directly from the USPS. PhotoStamps revenue includes the price of postage.
 
On a limited basis, we allow third parties to offer products and promotions to the Stamps.com 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 is currently immaterial.
 
5

 
STAMPS.COM
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO JUNE 30, 2008 AND 2007 IS UNAUDITED)
 
We provide our customers with the opportunity to purchase parcel insurance directly through our software. Insurance revenue represents the gross amount charged to the customer for purchasing insurance and the related cost represents the amount paid to the insurance broker, Parcel Insurance Plan. We recognize revenue on insurance purchases upon the ship date of the insured package.
 
Revenue from gift cards, which is recognized at the time of redemption, is currently immaterial to our financial statements. Because we do not yet have meaningful historical data upon which to base estimates for gift cards that will never be redeemed (“breakage”), we have not recorded any breakage income related to our gift card program.
 
2.
Legal Proceedings
 
Please refer to "Part II - Other Information - Item 1 - Legal Proceedings" of this report for a discussion of our current legal proceedings.
 
3.
Net Income per Share
 
Net income per share represents net income attributable to common stockholders divided by the weighted average number of common shares outstanding during a reported period. The diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, including convertible preferred stock and stock options and warrants (commonly and hereafter referred to as “common stock equivalents”), were exercised or converted into common stock. Diluted net income per share is calculated by dividing net income during a reported period by the sum of the weighted average number of common shares outstanding plus common stock equivalents for the period. The following table reconciles share amounts utilized to calculate basic and diluted net income per share (in thousands, except per share data):
 
   
Three Months Ended
June 30,
 Six Months Ended
June 30,
 
   
2008
 
2007
 
2008
 
2007
 
Net income 
 
$
1,306
 
$
2,800
 
$
6,504
 
$
5,854
 
                           
Basic - weighted average common shares 
   
19,382
   
21,352
   
19,553
   
21,610
 
Diluted effect of common stock equivalents 
   
330
   
390
   
278
   
424
 
Diluted - weighted average common shares 
   
19,712
   
21,742
   
19,831
   
22,034
 
                           
Earnings per share:
                         
Basic 
 
$
0.07
 
$
0.13
 
$
0.33
 
$
0.27
 
Diluted 
 
$
0.07
 
$
0.13
 
$
0.33
 
$
0.27
 

The calculation of dilutive shares excludes the effect of the following options that are considered anti-dilutive (in thousands):
 
   
 Three Months Ended
June 30,
 
 Six Months Ended
June 30,
 
   
2008
 
2007
 
2008
 
2007
 
Anti-dilutive stock options shares
   
2,200
   
1,276
   
2,226
   
1,273
 
 
6


STAMPS.COM
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO JUNE 30, 2008 AND 2007 IS UNAUDITED)
 
4.
Stock-Based Employee Compensation
 
We account for stock-based awards to employees and directors pursuant to Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), and related SEC rules included in Staff Accounting Bulletin No. 107 (SAB 107). SFAS 123R requires us to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model and to 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. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Compensation expense recognized for all employee stock options granted is recognized using the straight-line single method over their respective vesting periods of three to four years.
 
The following table sets forth the stock-based compensation expense that we recognized under SFAS 123R for the periods indicated (in thousands):
 
   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2008
 
2007
 
2008
 
2007
 
Stock-based compensation expense relating to:
                 
Employee and director stock options
 
$
903
 
$
627
 
$
1,652
 
$
1,041
 
Employee stock purchases
   
   
   
30
   
47
 
Total stock-based compensation expense
 
$
903
 
$
627
 
$
1,682
 
$
1,088
 
                 
Stock-based compensation expense relating to:
               
Cost of revenues
 
$
69
 
$
69
 
$
144
 
$
144
 
Sales and marketing
   
172
   
83
   
348
   
156
 
Research and development
   
146
   
123
   
298
   
274
 
General and administrative
   
516
   
352
   
892
   
514
 
Total stock-based compensation expense
 
$
903
 
$
627
 
$
1,682
 
$
1,088
 

In our SFAS 123R calculations, we use the Black-Scholes option valuation model, which requires us to make a number of highly complex and subjective assumptions, including stock price volatility, expected term, risk-free interest rates and actual and projected employee stock option exercise behaviors. In the case of options we grant, our assumption of expected volatility was based on the historical volatility of our stock price for the period January 1, 2002 through the date of the option grant. We base the risk-free interest rate on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The estimated expected life represents the weighted-average period the stock options are expected to remain outstanding determined based on an analysis of historical exercise behavior.
 
The following are the weighted average assumptions used in the Black-Scholes valuation model for the periods indicated:
 
   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2008
 
2007
 
2008
 
2007
 
Expected dividend yield
   
   
   
   
 
Risk-free interest rate
   
3.06
%
 
4.70
%
 
2.93
%
 
4.69
%
Expected volatility
   
51
%
 
48
%
 
51
%
 
48
%
Expected life (in years)
   
5
   
5
   
5
   
5
 
Expected forfeiture rate
   
16
%
 
16
%
 
16
%
 
16
%
 
7


STAMPS.COM
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO JUNE 30, 2008 AND 2007 IS UNAUDITED)
 
5.
Intangible Assets
 
Our intangible assets consist of patents, trademarks and other intellectual property with a gross carrying value of $8.3 million as of June 30, 2008 and December 31, 2007 and accumulated amortization of approximately $7.8 million as of June 30, 2008 and $7.4 million as of December 31, 2007. The expected useful lives of our amortizable intangible assets range from 4 to 17 years. During 2007, we assessed whether events or changes in circumstances occurred that could potentially indicate that the carrying amount of our intangible assets may not be recoverable. We concluded that there were no such events or changes in circumstances during the year ended December 31, 2007 and determined that the fair value of our intangible assets were in excess of their carrying value as of December 31, 2007. Aggregate amortization expense on patents and trademarks was approximately $92 thousand and $362 thousand for the three and six months ended June 30, 2008, respectively and $270 thousand and $544 thousand for the three and six months ended June 30, 2007, respectively.
 
6.
Comprehensive Income
 
The following table provides the data required to calculate comprehensive income (in thousands):
 
   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2008
 
2007
 
2008
 
2007
 
Net income
 
$
1,306
 
$
2,800
 
$
6,504
 
$
5,854
 
Unrealized (loss) income on investments
   
(187
)
 
(6
)
 
(505
)
 
84
 
Comprehensive income
 
$
1,119
 
$
2,794
 
$
5,999
 
$
5,938
 
 
7.
Income Taxes
 
During the six months ended June 30, 2008, our income tax benefit consists of alternative minimum federal and state taxes and a tax benefit relating to the release of a portion of our deferred tax asset valuation allowance. Our effective income tax rate differs from the statutory income tax rate primarily as a result of the partial release of our valuation allowance for the future benefits to be received from our deferred tax assets as well as our use of net operating losses to offset current tax expense. A valuation allowance was originally recorded against our deferred tax assets as we determined the realization of these assets did not meet the more likely than not criteria in accordance with SFAS No. 109, “Accounting for Income Taxes.” During the first quarter of 2008, we determined that a full valuation allowance against our deferred tax assets was not necessary. In making such determination we considered all available positive and negative evidence including our recent earnings trend and expected continued future taxable income. During the first quarter of 2008, we recorded a partial reversal of deferred tax valuation allowance of $3.7 million primarily consisting of net operating loss carryforwards, research tax credits carryforwards and current tax provision of $106 thousand for corporate alternative minimum federal and state taxes, resulting in an overall tax benefit of $3.6 million. We continue to maintain a valuation allowance for the remainder of our deferred tax assets. During the three and six months ended June 30, 2008, we recorded a current tax provision for corporate alternative minimum federal and state taxes of approximately $80 thousand and $186 thousand, respectively.
 
We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48) on January 1, 2007. Under FIN 48, we are required to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The adoption of FIN 48 did not have a material effect on our financial statements. We have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements.
 
8


STAMPS.COM
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION WITH RESPECT TO JUNE 30, 2008 AND 2007 IS UNAUDITED)
 
Our policy is to recognize interest and penalties expense, if any, related to unrecognized tax benefits as a component of income tax expense.  As of June 30, 2008, we have not recorded any interest and penalty expense.
 
Our determination on the analysis of uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities. These include the 2004 through 2006 tax years for federal purposes and the 2003 through 2006 tax years for California purposes.
 
8.
Fair Value Measurements
 
We adopted SFAS No. 157, “Fair Value Measurement” (SFAS 157) on January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. The fair value hierarchy for disclosure of fair value measurements under SFAS 157 is as follows:
 
Level 1 -
Valuations based on unadjusted quoted prices for identical assets in an active market
 
Level 2 -
Valuations based on quoted prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets
 
Level 3 -
 Valuations based on inputs that are unobservable and involve management judgment and our own assumptions about market participants and pricing
 
The following table summarizes our financial assets measured at fair value on a recurring basis in accordance with SFAS 157 (in thousands):
 
       
Fair Value Measurement at Reporting Date Using
 
 
 
Description
 
June 30, 2008
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
                   
Cash and cash equivalents
 
$
55,413
 
$
55,413
             
Available-for-sale debt securities
   
35,966
   
 
$
35,966
   
 
Total
 
$
91,379
 
$
55,413
 
$
35,966
   
 
 
The fair value of our available-for-sale debt securities included in the Level 2 category is based on the market values obtained from an independent pricing service that were evaluated using pricing models that vary by asset class and may incorporate available trade, bid and other market information and price quotes from well established independent pricing vendors and broker-dealers.
 
9

 
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This Quarterly Report on Form 10-Q 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”). These statements relate to expectations concerning matters that are not historical facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in this report. 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 which we may make orally or in writing from time to time, are based on beliefs and assumptions made by, and information currently available to us . 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 may differ from our expectations, and those differences may be material. We are not undertaking any obligation to update any forward-looking statements. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.
 
Please refer to the risk factors under “Item 1A. Risk Factors” as well as those described elsewhere in our public filings. The risks included 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.

Stamps.com, NetStamps, PhotoStamps, Hidden Postage, Stamps.com Internet postage and the Stamps.com logo are our trademarks. This report also references trademarks of other entities.
 
SPECIAL NOTICE REGARDING PURCHASES OF MORE THAN 5% OF OUR STOCK
 
We currently have significant federal and state net operating loss carry-forwards (NOL). Under applicable law, our NOL assets could be adversely affected by the acquisition by any person, company or investment firm of more than 5% of our outstanding stock or the acquisition of any additional shares by 5% holders. Our articles of incorporation have provisions (the “NOL Protective Measures”) which prohibit transfers of our stock that would create new 5% shareholders or increase the ownership of existing 5% shareholders. Accordingly, any person, company or investment firm that wishes to become a 5% shareholder must first obtain a waiver of the NOL Protective Measures from our board of directors. In addition, any person, company or investment firm which is a 5% shareholder can not make any additional purchases of our stock without a waiver from our board of directors. Failure to do so can mean loss of the shares and responsibility for any damages to the Company, which could be substantial. Details of the NOL Protective Measures are contained in our definitive Proxy filed on April 2, 2008.
 
Accordingly, we strongly urge you to contact us prior to allowing your ownership interest in our stock to exceed 775,000 shares.
 
We estimate that as of June 30, 2008, we were approximately at 35% compared with the 50% level that would trigger impairment of our NOL asset.
 
Overview
 
Stamps.comÒ is the leading provider of Internet-based postage solutions. Our customers use our service to mail and ship a variety of mail pieces including postcards, envelopes, flats and packages using a wide range of United States Postal Service (USPS) mail classes including First Class Mail(R), Priority Mail(R), Express Mail(R), Media Mail(R), Parcel Post(R), and others. Our customers include home businesses, small businesses, corporations and individuals. We were the first ever USPS-licensed vendor to offer PC Postage(R) in a software-only business model in 1999. On August 10, 2004, we publicly launched a market test of PhotoStamps(R), a new form of postage that allows consumers to turn digital photos, designs or images into valid US postage. Any reference in this document to our PC Postage business does not include our PhotoStamps business.
 
10

 
We were founded in September 1996 to investigate the feasibility of entering into the USPS Information-Based Indicia Program and to initiate the certification process for our PC Postage service. In January 1998, we were incorporated in Delaware as StampMaster, Inc., thereafter 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 office is located at 12959 Coral Tree Place, Los Angeles, California, 90066, and our telephone number is (310) 482-5800.
 
Our Services and Products

We offer the following products and services to our customers:
 
PC Postage Service
 
Our USPS-approved PC Postage service enables users to print information-based indicia, or electronic stamps, directly onto envelopes, plain paper, or labels using ordinary laser or inkjet printers. Our service currently supports a variety of USPS classes including First-Class MailÒ, Priority MailÒ, Express MailÒ, Parcel PostÔ, Media MailÔ, Bound Printed Matter, and international mail. Customers can also add USPS Special Services such as Delivery Confirmation(TM), Signature Confirmation(TM), Registered Mail, Certified Mail, Insured Mail, Return Receipt, Collect on Delivery and Restricted Delivery to their mail pieces. Our service requires only a standard PC, printer and Internet connection. Our free software can be downloaded from the Internet or installed from a CD-ROM. After installing the software and completing the registration process, customers can purchase and print postage 24 hours a day, seven days a week. When a customer purchases postage for use through our service, the customer pays face value, and the funds are transferred directly from the customer’s account to the USPS’s account. The majority of new customers currently signing up for our service pay a monthly convenience fee ranging from $15.99 to 49.99 based on individual product, pricing and promotions.
 
We offer our customers three primary ways to print PC Postage. First, our NetStamps(R) feature and Photo NetStamps(R) feature enable customers to print postage for any value and for most classes of mail on NetStamps or Photo NetStamps labels. Photo NetStamps allow customers to use digital photos, designs or images with NetStamps as compared to the standard designs available with regular NetStamps. After they are printed, NetStamps and Photo NetStamps can be used just like regular stamps. Second, our shipping feature tab allows customers to print postage for packages on plain 8.5” x 11” paper or on special labels, and to add electronic Delivery or Signature Confirmation at discounted prices. Third, our mailing feature tab is typically used to print the postage and address directly on envelopes or on other types of mail or labels, in a single-step process that saves time and provides a professional look. Our PC Postage services also incorporate address verification technology that verifies each destination address for mail sent using our service against a database of all known addresses in the United States. As an added convenience, our PC Postage services have been designed to integrate into common small business and productivity software applications such as word processing, contact and address management, and accounting and financial applications.
 
PhotoStamps(R)
 
In May 2007, we launched our fourth market test of PhotoStamps, a patented form of postage that allows consumers to turn digital photos, designs or images into valid US postage. With this product, individuals or businesses can now create customized US postage using pictures of their children, pets, vacations, celebrations, business logos and more. PhotoStamps is used as regular postage to send letters, postcards or packages. The product is available via our separately-marketed website at www.photostamps.com. 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 20 individual PhotoStamps, and orders arrive via US Mail in a few business days. PhotoStamps is currently available under authorization of the USPS for its fourth phase market test, with an authorization for one year through May 2009.
 
Mailing & Shipping Supplies Store
 
Our Mailing & Shipping Supplies Store (our “Supplies Store”) is available to our customers from within our PC Postage software, and sells NetStamps labels, shipping labels, other mailing labels, dedicated postage printers, OEM and private label inkjet and laser toner cartridges, scales, and other mailing and shipping-focused office supplies. Our Supplies Store features a store catalog, same day shipping capabilities, strong messaging of our free or discounted shipping promotions, strong cross sell during checkout, product search capabilities, and new expedited and rush shipping options. We plan to continue to increase the breadth of products offered in our Supplies Store.
 
11

 
Branded Insurance
 
We offer Stamps.com branded insurance 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. We also offer official USPS insurance alongside our branded insurance product. Our insurance is provided in partnership with Parcel Insurance Plan and is underwritten by Fireman's Fund.
 
Critical Accounting Policies
 
General
 
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements which have been prepared in accordance with US generally accepted accounting principles. 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 and litigation. 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.
 
Revenue Recognition
 
We recognize revenue from product sales or services rendered, as well as from licensing the use of our software and intellectual property, 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 collectibility is reasonably assured.
 
Our service revenue is based on monthly convenience fees 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 our products, including PhotoStamps, 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. We recognize licensing revenue ratably over the contract period. Commissions from the advertising or sale of products by a third party vendor to our customers are recognized when the revenue is earned and collection is deemed probable. We recognize revenue on insurance purchases upon the ship date of the insured package.
 
Intangibles
 
We make an assessment of the estimated useful lives of our patents and other amortizable intangibles. These estimates are made using various assumptions that are subjective in nature and could change as economic and competitive conditions change. If events were to occur that would cause our assumptions to change, the amounts recorded as amortization would be adjusted.
 
Contingencies and Litigation 
 
We are involved in various litigation matters as a claimant and as a defendant. We record any amounts recovered in these matters when collection is certain. We record liabilities for claims against us when the losses are probable and estimable. Any amounts recorded would be based on reviews by outside counsel, in-house counsel and management. Actual results may differ from estimates.
 
Promotional Expense 
 
New PC Postage customers are typically offered promotional items that are redeemed using coupons that are qualified for redemption after a customer is successfully billed beyond an initial trial period. This includes free postage and a free digital scale and is expensed in the period in which a customer qualifies using estimated redemption rates based on historical data. Promotional expense that is included in the cost of service is incurred as customers qualify and thereby may not correlate directly with changes in revenue as the revenue associated with the acquired customer is earned over the customer's lifetime.
 
12

 
Recent Accounting Pronouncements
 
In April 2008, the FASB issued Financial Statement Position No. SFAS 142-3, “Determination of the Useful Life of Intangible Assets” (FSP SFAS 142-3). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). The intent of FSP SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other applicable accounting literature. FSP SFAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date.
 
Recent Development
 
On July 16, 2008, our Board of Directors approved a new share repurchase program, which will replace the current share repurchase plan effective August 4, 2008, authorizing us to purchase up to 2 million shares of our common stock over the next seven months. We have no commitments to make any purchases, and the timing of purchases, if any, and the number of shares to be bought at any one time will depend on market conditions and our assessment of risk that our NOL asset could be impaired if such repurchases were under taken. Share purchase may be made from time to time on the open market or in negotiated transactions at our discretion in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. Our purchase of any of our shares is subject to limitations that may be imposed on such purchases by applicable laws and regulations and the rules of the Nasdaq Stock Market.
 
Results of Operations
 
Total revenue was $21.4 million during both the second quarter of 2008 and 2007. Total revenue during the six months ended June 30, 2008 was $42.5 million, an increase of 3% from $41.4 million during the six months ended June 30, 2007. PC Postage subscriber related revenue, including service revenue, product revenue and insurance revenue in the second quarter of 2008 was $18.5 million, an increase of 14% from $16.3 million in the second quarter of 2007, and was $36.6 million in the six months ended June 30, 2008, an increase of 12% from $32.7 million in the six months ended June 30, 2007. PhotoStamps revenue in the second quarter of 2008 was $2.9 million, a decrease of 38% from $4.6 million in the second quarter of 2007, and was $5.9 million in the six months ended June 30, 2008, a decrease of 25% from $7.8 million in the six months ended June 30, 2007.
 
The PC Postage marketing channels we use to acquire customers include partnerships, online advertising, affiliate channel, direct mail, traditional media advertising, enhanced promotion online channel, and others. In the enhanced promotion channel, we work with various companies to advertise our service in a variety of sites on the Internet. These companies typically offer an additional promotion directly to the customer in order to get the customer to try our service. Because our enhanced promotion channel is characterized by higher customer attrition rates and lower customer acquisition costs than our other channels, we believe it is more instructive to look at our enhanced promotion channel separately from our non-enhanced promotion channels.
 
We estimate that subscriber related revenue for customers acquired through our enhanced promotion channel in the second quarter of 2008 was $2.4 million, an increase of 11% from $2.2 million in the second quarter of 2007, and was $4.9 million in the six months ended June 30, 2008, an increase of 8% from $4.5 million in the six months ended June 30, 2007. We estimate that subscriber related revenue for customers acquired through our non-enhanced promotion channels in the second quarter of 2008 was $16.1 million, an increase of 14% from $14.1 million in the second quarter of 2007, and was $31.7 million in the six months ended June 30, 2008, an increase of 13% from $28.2 million in the six months ended June 30, 2007. The smaller increase in enhanced promotion subscriber revenue in relation to the increase in non-enhanced promotion revenue was attributable to our decision to shift our marketing strategy and customer acquisition spending to focus on our non-enhanced promotion channels.
 
We define paid customers as ones from whom we successfully collected service fees at least once during the quarter. Total number of paid customers originally acquired through our non-enhanced promotion channels in the second quarter of 2008 was 314 thousand, an increase of 16% from 270 thousand in the second quarter of 2007.
 
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We believe that the increase in paid customers in the second quarter of 2008 was attributable to our increased customer acquisition spending. For customers originally acquired through our non-enhanced promotion channels, our average subscriber related monthly revenue per paid customer in the second quarter of 2008 was $17.14, a decrease of 2% from $17.44 in the second quarter of 2007. This decrease is primarily attributable to lower store and insurance revenue per paid customer.
 
The following table sets forth our results of operations as a percentage of total revenue for the periods indicated:
 
   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
   
2008
 
2007
 
2008
 
2007
 
Total Revenues 
             
Service
   
72.8
%
 
63.1
%
 
72.5
%
 
65.6
%
Product 
   
12.0
%
 
11.5
%
 
11.9
%
 
11.6
%
Insurance 
   
1.8
%
 
1.7
%
 
1.8
%
 
1.8
%
PhotoStamps 
   
13.4
%
 
21.7
%
 
13.8
%
 
18.9
%
Other
   
0.0
%
 
2.0
%
 
0.0
%
 
2.1
%
Total revenues
   
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of revenues 
                         
Service
   
10.6
%
 
11.3
%
 
11.8
%
 
11.5
%
Product 
   
4.4
%
 
3.9
%
 
4.3
%
 
4.0
%
Insurance 
   
0.6
%
 
0.5
%
 
0.6
%
 
0.6
%
PhotoStamps 
   
9.8
%
 
14.3
%
 
9.9
%
 
12.4
%
Other
   
0.0
%
 
0.1
%
 
0.0
%
 
0.1
%
Total cost of revenues 
   
25.4
%
 
30.1
%
 
26.6
%
 
28.6
%
Gross profit 
   
74.6
%
 
69.9
%
 
73.4
%
 
71.4
%
Operating expenses:
                         
Sales and marketing
   
41.0
%
 
37.0
%
 
41.0
%
 
38.0
%
Research and development
   
9.8
%
 
9.7
%
 
9.5
%
 
10.1
%
General and administrative
   
20.8
%
 
15.0
%
 
19.8
%
 
14.4
%
Total operating expenses
   
71.6
%
 
61.7
%
 
70.3
%
 
62.5
%
Income from operations 
   
3.0
%
 
8.2
%
 
3.1
%
 
8.9
%
Other income (expense), net
   
3.4
%
 
5.5
%
 
3.9
%
 
5.8
%
Income before income taxes
   
6.4
%
 
13.7
%
 
7.0
%
 
14.7
%
Income tax expense (benefit)
   
0.4
%
 
0.5
%
 
(8.2
%)
 
0.5
%
                           
Net income 
   
6.0
%
 
13.2
%
 
15.2
%
 
14.2
%
 
Revenue 
 
Our revenue is derived primarily from five sources: (1) service fees charged to customers for use of our PC Postage service; (2) product revenue from the direct sale of consumables and supplies through our Supplies Store (3) insurance revenue from our branded insurance offering; (4) PhotoStamps revenue from our PhotoStamps business; and (5) other revenue, consisting of licensing revenue and advertising revenue derived from advertising programs with our existing customers.
 
Service revenue increased 15% to $15.6 million in the second quarter of 2008 from $13.5 million in the second quarter of 2007 and increased 13% to $30.8 million in the six months ended June 30, 2008 from $27.2 million in the six months ended June 30, 2007. These increases in service revenue were primarily due to the increase in our successfully billed customers as a result of the growth in our customer base. As a percentage of total revenue, service revenue increased ten percentage points to 73% in the second quarter of 2008 from 63% in the second quarter of 2007 and increased six percentage points to 72% in the six months ended June 30, 2008 from 66% in the six months ended June 30, 2007, primarily as a result of the increase in service revenue and the decrease in revenue from our PhotoStamps product. As a percentage of revenue, service revenue may continue to increase over future periods as we expect to experience a lower total volume of PhotoStamps sales as a result of our reduction in consumer PhotoStamps marketing spending. Further, we plan to continue to increase our level of spending on PC Postage customer acquisition in order to grow our service revenue in future periods.
 
14

 
Product revenue increased 5% to $2.6 million in the second quarter of 2008 from $2.5 million in the second quarter of 2007 and increased 5% to $5.1 million in the six months ended June 30, 2008 from $4.8 million in the six months ended June 30, 2007. The increase was primarily attributable to the following: (1) growth in our paid customer base; (2) marketing the store to our existing customer base; (3) the additional SKUs we added to our store; and (4) growth in postage printed, which helps drive sales of consumable supplies such as labels. Total postage printed by customers using our service during the second quarter of 2008 was $77 million, a 20% increase from the $65 million printed during the second quarter of 2007. As a percentage of total revenue, product revenue remained at approximately 12% during each of the second quarter of 2008 and 2007 and six months ended June 30, 2008 and 2007. We expect product revenue to increase in future periods as we expect continued growth in paid customers and in the volume of postage printed.
 
Insurance revenue increased 6% to $377 thousand in the second quarter of 2008 from $356 thousand in the second quarter of 2007 and increased 5% to $765 thousand in the six months ended June 30, 2008 from $730 thousand in the six months ended June 30, 2007, primarily as a result of an increase in the average of dollar value insured per transaction. As a percentage of total revenue, insurance revenue remained at 2% during each of the second quarter of 2008 and 2007 and six months ended June 30, 2008 and 2007. We expect insurance revenue to increase in future periods as we expect continued growth in our paid customer base.
 
PhotoStamps revenue decreased 38% to $2.9 million in the second quarter of 2008 from $4.6 million in the second quarter of 2007 and decreased 25% to $5.9 million in the six months ended June 30, 2008 from $7.8 million in the six months ended June 30, 2007. As a percentage of total revenue, PhotoStamps revenue decreased nine percentage points to 13% in the second quarter of 2008 from 22% in the second quarter of 2007 and decreased five percentage points to 14% in the six months ended June 30, 2008 from 19% in the six months ended June 30, 2007. Total PhotoStamps sheets shipped during the second quarter of 2008 was approximately 171 thousand, a 41% decrease compared to 291 thousand in the second quarter of 2007. Average revenue per sheet shipped in the second quarter of 2008 was $16.8 compared to $15.9 in the second quarter of 2007. The decrease in sheets shipped was primarily attributable to a decrease in both consumer and business PhotoStamps orders. We reduced our PhotoStamps sales and marketing spending in the second quarter of 2008 compared with the second quarter of 2007 and plan to continue to reduce our sales and marketing spending on PhotoStamps in future periods to improve profitability in that business. We expect that the reduction will result in lower PhotoStamps revenue in future periods.
 
Because of the expiration of a licensing agreement in June 2007, we did not have any other revenue in the second quarter of 2008 and six months ended June 30, 2008, compared to $453 thousand in the second quarter of 2007 and $906 thousand in the six months ended June 30, 2007. .
 
Cost of Revenue
 
Cost of revenue principally consists of the cost of customer service, certain promotional expenses, system operating costs, credit card processing fees, the cost of postage for PhotoStamps, image review, printing and fulfillment costs for PhotoStamps, parcel insurance offering costs, customer misprints and products sold through our Supplies Store and the related costs of shipping and handling. Cost of revenue decreased 16% to $5.4 million in the second quarter of 2008 from $6.4 million in the second quarter of 2007 and decreased 4% to $11.3 million in the six months ended June 30, 2008 from $11.8 million in the six months ended June 30, 2007. As a percentage of total revenue, cost of revenue decreased five percentage points to 25% in the second quarter of 2008 from 30% in the second quarter of 2007 and decreased two percentage points to 27% in the six months ended June 30, 2008 from 29% in the six months ended June 30, 2007.
 
Cost of service revenue decreased 6% to $2.3 million in the second quarter of 2008 from $2.4 million in the second quarter 2007. The decrease during the quarter is primarily attributable to a change in our assumption of future coupon redemptions relating to our promotional expense, which provided a one time benefit during the second quarter of 2008 of approximately $266 thousand compared to an expense of $384 thousand in the second quarter of 2007. Promotional expense includes free postage and a free digital scale offered to new customers. Cost of service revenue increased 5% to $5.0 million in the six months ended June 30, 2008 from $4.8 million in the six months ended June 30, 2007. The increase during the six months ended June 30, 2008 is primarily attributable to higher customer support related expenses resulting from expanding our support personnel and efforts to improve the overall customer experience. Promotional expense was $199 thousand and $792 thousand in the six months ended June 30, 2008 and 2007, respectively. As a percentage of total revenue, cost of service revenue was 11% in each of the second quarter of 2008 and 2007 and was 12% in each of the six months ended June 30, 2008 and 2007.
 
15

 
Cost of product revenue increased 13% to $948 thousand in the second quarter of 2008 from $839 thousand in the second quarter 2007 and increased 12% to $1.8 million in the six months ended June 30, 2008 from $1.6 million in the six months ended June 30, 2007. As a percentage of total revenue, cost of product revenue was approximately 4% in each of the second quarter of 2008 and 2007 and six months ended June 30, 2008 and 2007. The increase, on an absolute basis, is mainly attributable to the increase in product sales. See “Product Revenue” in Results of Operation above for further discussion. We expect the cost of product sales to increase in future periods if we continue to increase product sales.
 
Cost of insurance revenue increased 7% to $119 thousand in the second quarter of 2008 from $111 thousand in the second quarter of 2007 and increased 6% to $239 thousand in the six months ended June 30, 2008 from $226 thousand in the six months ended June 30, 2007. The increase is mainly attributable to the higher average insurance sales price as a result of the increase in the dollar value insured per transaction. As a percentage of total revenue, cost of insurance revenue was approximately 1% in each of the second quarter of 2008 and 2007 and six months ended June 30, 2008 and 2007. We expect the cost of insurance to increase in future periods if we continue to increase insurance revenue.
 
Cost of PhotoStamps revenue decreased 32% to $2.1 million in the second quarter of 2008 from $3.1 million in the second quarter of 2007 and decreased 18% to $4.2 million in the six months ended June 30, 2008 from $5.1 million in the six months ended June 30, 2007, primarily due to the decrease in PhotoStamps revenue during those periods. As a percentage of total revenue, cost of PhotoStamps revenue decreased four percentage points to 10% in the second quarter of 2008 from 14% in second quarter of 2007 and decreased two percentage points to 10% in the six months ended June 30, 2008 from 12% in the six months ended June 30, 2007. The gross margin from PhotoStamps revenue is significantly lower than that of our other sources of revenue because we include the stated value of USPS postage as part of our cost of PhotoStamps revenue. As a result, future increases in PhotoStamps sales would further increase the overall cost of PhotoStamps revenue as a percentage of total revenue. While we expect PhotoStamps revenue to decrease in future periods, cost of PhotoStamps revenue may grow in future periods if high volume business PhotoStamps orders, which carry a lower gross margin compared with PhotoStamps website orders, compose a higher percentage of total orders.
 
Cost of other revenue decreased 100% from $26 thousand in the second quarter of 2007 and $52 thousand in the six months ended June 30, 2007, primarily due to the expiration of one of our licensing agreements in June 2007.
 
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 11% to $8.8 million in the second quarter of 2008 from $7.9 million in the second quarter 2007 and increased 10% to $17.4 million in the six months ended June 30, 2008 from $15.8 million in the six months ended June 30, 2007. As a percentage of total revenue, sales and marketing expenses increased four percentage points to 41% in the second quarter of 2008 from 37% in the second quarter of 2007 and increased three percentage points to 41% in the six months ended June 30, 2008 from 38% in the six months ended June 30, 2007. The increase, both on an absolute basis and as a percentage of total revenue, is primarily due to our decision to increase various marketing program expenditures relating to the acquisition of customers for our PC Postage business, partially offset by a decrease in marketing expenditures related to our PhotoStamps business. Ongoing marketing programs include the following: traditional media advertising, partnerships, customer referral programs, customer re-marketing efforts, telemarketing, direct mail and online advertising. We expect to increase our sales and marketing expenses in our PC Postage business throughout 2008, and to decrease sales and marketing expenses in our PhotoStamps business as we focus on profitability in that business.
 
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 was $2.1 million in each of the second quarter of 2008 and 2007 and decreased 4% to 4.0 million in the six months ended June 30, 2008 from $4.2 million in the six months ended June 30, 2007. The decrease during the six months ended June 30, 2008 is primarily due to lower headcount related expenses. As a percentage of total revenue, research and development expense was approximately 10% in each of the second quarter of 2008 and 2007 and six months ended June 30, 2008 and 2007. We expect research and development expense to increase in future periods due to our plan to increase in headcount related expenses.
 
16

 
General and Administrative 
 
General and administrative expense principally consists of compensation and related costs for executive and administrative personnel, fees for legal and other professional services, depreciation of equipment and software used for general corporate purposes and amortization of intangible assets. General and administrative expense increased 39% to $4.5 million in the second quarter of 2008 from $3.2 million in the second quarter of 2007 and increased 41% to $8.4 million in the six months ended June 30, 2008 from $6.0 million in the six months ended June 30, 2007. As a percentage of total revenue, general and administrative expense increased six percentage points to 21% in the second quarter of 2008 from 15% in the second quarter of 2007 and to 20% in the six months ended June 30, 2008 from 14% in the six months ended June 30, 2007. The increase, both on an absolute basis and as a percentage of total revenue, is primarily due to the increase in legal expenses from litigation of the Kara Technologies lawsuit. Additionally, we incurred a one time litigation charge of $710 thousand during the second quarter of 2008 relating to a lawsuit by Sterling Reality Organization Co. stemming from our iShip business which we divested in 2001. We currently expect general and administrative expenses to continue to increase in future periods as we continue to experience increased activity in existing litigation matters, although unpredictable changes in timing of litigation matters may result in periods of declining expenses.
 
Other Income, Net
 
Other income, net consists of interest income from cash equivalents and short-term and long-term investments. Other income, net decreased 37% to $736 thousand in the second quarter of 2008 from $1.2 million in the second quarter of 2007 and decreased 30% to $1.7 million in the six months ended June 30, 2008 from $2.4 million in the six months ended June 30, 2007. As a percentage of total revenue, other income, net decreased three percentage points to 3% in the second quarter of 2008 from 6% in the second quarter of 2007 and decreased two percentage points to approximately 4% in the six months ended June 30, 2008 from 6% in the six months ended June 30, 2007. The decrease, both on an absolute basis and as a percentage of total revenue, is primarily due to lower rates and lower investment balances as we sold certain investments and used the cash to repurchase shares of our common stock. We expect other income to decrease in future periods as a result of lower invested cash balance and lower interest rates.
 
Liquidity and Capital Resources
 
As of June 30, 2008 and December 31, 2007 we had approximately $91.4 million and $90.8 million, respectively, in cash, restricted cash and short-term and long-term investments. We invest available funds in short and long-term securities including money market funds, corporate bonds, asset backed securities, and government and agency bonds, and do not engage in hedging or speculative activities.
 
In November 2003, we entered into a facility lease agreement commencing in March 2004 for our new corporate headquarters with aggregate lease payments of approximately $4 million through February 2010.
 
The following table is a schedule of our contractual obligations and commercial commitments, which is comprised of the future minimum lease payments under operating leases at June 30, 2008 (in thousands):
 
   
Operating
 
Six months ending December 31, 2008
 
$
379
 
Years ending December 31:
       
2009 
   
794
 
2010 
   
134
 
   
$
1,307
 
 
Net cash provided by operating activities was $5.6 million and $6.7 million during the six months ended June 30, 2008 and 2007, respectively. The decrease in net cash provided by operating activities resulted primarily from the decrease in PhotoStamps and licensing revenue.
 
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Net cash provided by investing activities was $10.4 million and $15.6 million during the six months ended June 30, 2008 and 2007, respectively. The decrease in net cash provided by investing activities is mainly due to the sale of investments in the first quarter of 2008 to fund the repurchase of stock. We did not repurchase any stock in the second quarter of 2008.
 
Net cash used in financing activities was $4.2 million and $18.3 million during the six months ended June 30, 2008 and 2007, respectively. The decrease is mainly due to the reduction of our stock repurchase program.
 
We believe our available cash and marketable securities, together with the cash flow from operations, will be sufficient to fund our business for the foreseeable future.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. Our cash equivalents and investments are comprised of money market, U.S. government obligations and public corporate debt securities with weighted average maturities of 153 days at June 30, 2008. Our cash equivalents and investments, net of restricted cash, approximated $90.8 million and had a related weighted average interest rate of approximately 3.2%. Interest rate fluctuations can impact the carrying value of our 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.
 
As we do not have any operations outside of the United States, we are not exposed to foreign currency risks.
 
ITEM 4. 
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
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 in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management including our Principal Executive Officer and our Principal Financial Officer, to allow timely decisions regarding required disclosure.
 
Changes in Internal Controls
 
During the second quarter ended June 30, 2008, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
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PART II - OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
 
On October 22, 2004, Kara Technology Incorporated filed suit against us in the United States District Court for the Southern District of New York, alleging, among other claims, that we infringed certain Kara Technology patents and that we misappropriated trade secrets owned by Kara Technology, most particularly with respect to our NetStamps feature. Kara Technology seeks an injunction, unspecified damages, and attorneys’ fees. On February 9, 2005, the court granted our motion to transfer this suit to the United States District Court for the Central District of California. On August 23, 2006, the court granted our summary judgment motions on the trade secret and other non-patent claims. On April 3, 2008, the court granted our summary judgment motion that PhotoStamps does not infringe and denied our summary judgment motions that NetStamps does not infringe and the patents are invalid. On June 27, 2008, at the conclusion of trial, the jury issued its verdict in our favor, finding that NetStamps does not infringe the Kara Technology patents.
 
On November 22, 2006, we filed a lawsuit against Endicia, Inc. and PSI Systems, Inc. in the United States District Court for the Central District of California for infringement of eleven of our patents covering, among other things, Internet postage technology. On January 8, 2007, Endicia, Inc. and PSI Systems, Inc. filed counterclaims asking for a declaratory judgment that all eleven patents are invalid, unenforceable and not infringed. The Court has scheduled a trial commencement date of May 12, 2009.
 
In May and June 2001, we were named, together with certain of our current and former board members and/or officers, as a defendant in 11 purported class-action lawsuits, filed in the U.S. District Court for the Southern District of New York. The lawsuits allege violations of the Securities Act and the Exchange Act in connection with our initial public offering and a secondary offering of our common stock. The lawsuits also name as defendants the principal underwriters in connection with our public offerings, and allege that the underwriters engaged in improper commission practices and stock price manipulations in connection with the sale of our common stock. The lawsuits allege that we and/or certain of our officers or directors knew of or recklessly disregarded these practices by the underwriter defendants, and failed to disclose them in our public filings. Plaintiffs seek damages and statutory compensation, including interest, costs and expenses (including attorneys’ fees). All of these lawsuits have been consolidated for pretrial purposes before U.S. District Court Judge Shira Scheindlin.
 
In October 2002, pursuant to a stipulation and tolling agreement with plaintiffs, our current and former board members and/or officers were dismissed without prejudice. That agreement was extended as to those individuals by an addendum dated as of September 2007. In June 2003, we approved a proposed Memorandum of Understanding among the plaintiffs, issuers and insurers as to terms for a settlement of the litigation against us, which was further documented in a Stipulation and Agreement of Settlement filed with the court. The proposed settlement, which would not have required us to make any payments, was preliminarily approved by the court in February 2005 and was the subject of a fairness hearing in April 2006.
 
In October 2004, however, the court issued an order regarding class certification in certain related matters. In December 2006, the U.S. Court of Appeals for the Second Circuit vacated that order, and determined that the related matters could not be certified as a class as currently defined. That appellate decision rendered uncertain whether our proposed settlement could be finally approved and consummated, and, in June 2007, the proposed settlement was terminated. As a result, plaintiffs have filed an amended complaint and proposed an alternative class definition in related litigation. If such a class definition does not receive final court approval and/or a later settlement is not consummated for any reason, we intend to defend the lawsuits vigorously.
 
On August 30, 2007, Sterling Realty Organization Co. filed suit against us in the Superior Court for the State of Washington for King County, alleging they are entitled under the doctrine of equitable subrogation to recover a $575,929 sales tax related payment for improvements under a lease related to our discontinued iShip business, which we sold in 2001. The lawsuit also seeks pre-judgment interest and costs. On June 27, 2008, the Court granted summary judgment to the plaintiff in the amount of $575,413.66 plus prejudgment interest of $94,210. We have recorded these litigation charges in our financial statements as of June 30, 2008.
 
We are subject to various other routine legal proceedings and claims incidental to our business, or which involve primarily a claim for damages that does not exceed 10% of our consolidated assets. We believe that the ultimate results from these actions will not have a material adverse effect on our financial position, results of operations or cash flows.
 
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ITEM 1A.
RISK FACTORS
 
There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our 2007 Annual Report on Form 10-K.
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 
 
We did not have any unregistered sales of common stock during the quarter ended June 30, 2008.
 
Issuer Purchases of Equity Securities
 
We did not have any purchases of our equity securities during the quarter ended June 30, 2008.
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
Not applicable.
 
ITEM 4. 
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
Our annual meeting of stockholders was held on May 22, 2008. At that meeting, three proposals were submitted to a vote of our stockholders: (1) to elect one director (Ken McBride) to serve for a three-year term ending in the year 2011 or until his successor is duly elected and qualified; (2) to approve an amendment to our Amended and Restated Certificate of Incorporation to preserve the tax treatment of our tax net operating losses, and (3) to ratify the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2008.
 
At the close of business on the record date for the meeting (which was April 11, 2008), there were 24,304,445 shares of common stock outstanding and entitled to be voted at the meeting. Holders of 17,424,375 shares of common stock (representing a like number of votes) were present at the annual meeting, either in person or by proxy. The following table sets forth the results of the voting:
 
Proposal 1
             
 
For
 
Withheld
     
Election of a Director: 
 
16,656,130
 
768,245
     
Ken McBride 
 
 
         
   
 
         
Proposal 2
 
For
 
Against
 
Abstain
 
Amendment to Preserve Tax Treatment of our
 
 17,042,157
 
 344,087
 
 38,131
 
tax net operating losses
 
 
         

Proposal 3
 
For
 
Against
 
Abstain
 
Appointment of Ernst & Young LLP (auditors)
 
 17,105,012
 
 313,726
 
 5,637
 
 
Each of the proposals set forth above received more than the required number of votes for approval and were therefore duly and validly approved by the stockholders.
 
ITEM 5.
OTHER INFORMATION
 
None.
 
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ITEM 6.
EXHIBITS 
 
3.1
Amended and Restated Certificate of Incorporation of Stamps.com Inc.
 
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
     
 
STAMPS.COM INC.
 
(Registrant)
 
 
 
 
 
 
August 8, 2008  By:   /s/ KEN MCBRIDE
 
Ken McBride
Chief Executive Officer
 
   
 
 
 
 
 
 
August 8, 2008  By:   /s/ KYLE HUEBNER
 
Kyle Huebner
Chief Financial Officer