Stamps.com 2010 Annual Report Download - page 13

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TABLE OF CONTENTS
business advertising mail, and an additional 5.5 billion pieces per year are sent from businesses to consumers as First Class
correspondence mail. We believe that consumer-to-consumer and business-to-consumer advertising mail are two potential
markets for use of PhotoStamps.
The PC Postage Certification and Regulatory Approval Process
Our technology must meet strict U.S. government security standards. Our PC Postage products (including any follow-on
technology) must complete extensive USPS testing and evaluation in the areas of operational reliability, financial integrity and
security to become certified for commercial distribution, and each additional implementation of a particular product or function
requires additional evaluation and approval by the USPS prior to commercial distribution. The USPS certification process to
become an USPS approved PC Postage vendor is a standardized, ten-stage process that took the existing approved vendors years
to complete. Each stage requires USPS review and authorization to proceed to the next stage of the certification process. The
USPS has no published timeline or estimated time to complete each of the ten stages of the program. The most significant stage
requires a vendor to complete three phases of beta testing. In 1999 we were approved and launched the first software-only PC
Postage service. In May 2009 we successfully completed the market test of our PhotoStamps product.
We continue to ask the USPS for new PC Postage benefits such as additional discounts on the face value of postage and
commissions on postage. There are many factors that go into the evaluation of our requests, and we have no guarantee that USPS
will grant any of our requests. Our customers currently receive discounted rates relative to prices available at retail post offices
for Priority Mail, Express Mail, Priority Mail International and Express Mail International and for electronic confirmation
services such as Delivery Confirmation and Signature Confirmation.
Our Technology
Our servers are located in a high-security data center 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 service currently uses a Windows-based client application that supports a variety of label and
envelope options and a wide range of printers. In addition, our application employs 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 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 and are scalable as needed.
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.
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.
Section 382 Update
We currently have federal and state NOL carry-forwards of approximately $226 million and $148 million, respectively,
which when combined with our other tax credits and tax assets have a potential value of up to $94 million in tax savings over the
next 15 years. Under Internal Revenue Code Section 382 rules, if a “change of ownership” is triggered, our NOL asset may be
impaired. A change in ownership can occur whenever there is a shift in ownership by more than 50 percentage points by one or
more “5% shareholders” within a three-year period. We estimate that as of December 31, 2010 we were at approximately a 22%
level compared with the 50% level that would trigger impairment of our NOL asset.
9