<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 0-27417
E-STAMP CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 76-0518563
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
850 Saginaw Drive, Second Floor
Redwood City, California, 94063
(Address of principal executive office and zip code)
(650) 554-8454
(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
filing requirements for the past 90 days.
YES [X] NO [ ]
As of May 8, 2000, 39,150,269 shares of the Registrant's common stock
were outstanding.
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E-STAMP CORPORATION
FORM 10-Q
March 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
<S> <C>
a. Condensed Balance Sheets as of March 31, 2000 (Unaudited)
and December 31, 1999.......................................... 3
b. Condensed Statements of Operations for the three months ended
March 31, 2000 and 1999 (Unaudited)............................ 4
c. Condensed Statements of Cash Flows for the three months ended
March 31, 2000 and 1999 (Unaudited)............................ 5
d. Notes to Condensed Financial Statements (Unaudited)............ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 12
Risk Factors................................................... 15
Item 3. Qualitative and Quantitative Disclosure About Market Risk.......... 24
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 25
Item 2. Changes In Securities and Use of Proceeds.......................... 26
Item 4. Submission of Matters to a Vote of Security Holders................ 26
Item 6. Exhibits and Reports on Form 8-K................................... 26
Signatures..................................................... 27
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
E-STAMP CORPORATION
CONDENSED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(UNAUDITED) *
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 91,261 $ 118,689
Accounts receivable, net ......................... 1,184 $ 490
Inventory ........................................ 2,358 2,120
Prepaid marketing expenses ....................... 7,222 6,156
Prepaid and other current assets ................. 2,528 6,222
----- -----
Total current assets ......................... 104,553 133,677
Property and equipment, net .................... 4,106 2,740
Deposits and other assets ...................... 2,829 --
------------ ------------
Total assets .................................. $ 111,488 $ 136,417
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 2,199 $ 707
Accrued liabilities .............................. 7,079 8,164
Deferred Revenue ................................. 40 193
Current portion of obligations under capital lease 14 23
------------ ------------
Total current liabilities .................... 9,332 9,087
Commitments and contingencies
Common stock subject to rescission .................. 2,776 2,776
Stockholders' equity:
Common stock ..................................... 35 35
Additional paid-in capital ....................... 221,961 222,063
Notes receivable from employees and officers ..... (3,308) (3,540)
Deferred stock compensation ...................... (11,893) (15,327)
Deferred distribution costs ...................... (1,900) (2,850)
Accumulated deficit .............................. (105,515) (75,827)
------------ ------------
Total stockholders' equity .......................... 102,156 127,330
------- -------
Total liabilities and stockholders' equity .......... $ 111,488 $ 136,417
============ ============
</TABLE>
*The condensed balance sheet at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
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E-STAMP CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended
------------------------------
March 31,
---------
2000 1999
------------ ------------
<S> <C> <C>
Net revenues ................................................................. $ 1,490 -
Cost of sales ................................................................ (1,879) -
------------ ------------
Gross profit (loss) .......................................................... (389) -
Operating expenses:
Research and development ................................................... 5,231 2,080
Sales and marketing ........................................................ 19,512 860
General and administrative ................................................. 1,577 713
Amortization of deferred stock compensation ................................ 3,434 962
Amortization of deferred distribution costs ................................ 950 -
------------ ------------
Total operating expenses ..................................................... 30,704 4,615
------------ ------------
Loss from operations ......................................................... (31,093) (4,615)
Interest income .............................................................. 1,437 105
Interest expense ............................................................. (32) (1)
------------ ------------
Net loss ..................................................................... (29,688) (4,511)
Accretion on redeemable convertible preferred stock .......................... - (440)
------------ ------------
Net loss attributable to common stock ........................................ $ (29,688) $ (4,951)
============ ============
Basic and diluted loss per common share ...................................... $ (0.82) $ (0.35)
============ ============
Shares used in computing basic and diluted loss per common share ............. 36,086 14,010
Pro forma basic and diluted net loss per common share ........................ $ (0.82) $ (0.20)
============ ==========
Shares used in computing pro forma basic and diluted net loss per common share 36,086 22,370
</TABLE>
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E-STAMP CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
----------------------------
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Operating activities
Net loss .................................................................. $ (29,688) $ (4,511)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 406 93
Amortization of deferred stock compensation ............................. 3,434 962
Amortization of deferred distribution costs ............................. 950 --
Changes in assets and liabilities:
Accounts receivable ................................................ (694) --
Notes receivable from employees and officers ....................... 232 --
Prepaid marketing expenses ......................................... (1,066) --
Prepaid and other current assets ................................... 3,677 (64)
Inventory .......................................................... (238) --
Current liabilities ................................................ 254 129
------------ ------------
Net cash used in operating activities ..................................... (22,733) (3,391)
Investing activities
Purchase of property and equipment ........................................ (1,772) (143)
Deposits and other assets ................................................. (2,829) --
------------ ------------
Net cash used in investing activities ..................................... (4,601) (143)
Financing activities
Repayments of lease obligations ........................................... (9) (7)
Proceeds from issuance of common stock, net of repurchases ................ (85) (4)
------------ ------------
Net cash used in financing activities ..................................... (94) (11)
Net decrease in cash and cash equivalents ................................. (27,428) (3,545)
Cash and cash equivalents at beginning of period .......................... 118,689 10,218
------------ ------------
Cash and cash equivalents at end of period ................................ $ 91,261 $ 6,673
============ ============
</TABLE>
See accompanying notes.
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E-STAMP CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Background and Basis of Presentation
E-Stamp Corporation, a Delaware corporation, was formed on August 23,
1996. Effective September 1, 1996, Post N Mail, L.L.C., formed on April 26,
1994, was merged (the "Merger") into E-Stamp Corporation (collectively, the
"Company" or "E-Stamp"). Upon completion of the Merger, all of the assets of
Post N Mail, L.L.C. were acquired by E-Stamp Corporation. The Merger was
accounted for as a combination of entities under common control. Each unit of
Post N Mail, L.L.C. ownership received 5,000 shares of E-Stamp common stock. The
financial statements have been presented to reflect the Merger for all periods
presented. The Company began shipping its products in the third quarter of 1999
and emerged from the development stage at that time.
The condensed financial statements of E-Stamp as of and for the three-
month periods ended March 31, 2000 and 1999 included herein are unaudited, but
include all adjustments (consisting only of normal recurring adjustments) that
the management of E-Stamp Corporation believes necessary for a fair presentation
of the financial position as of the reported dates and the results of operations
for the respective periods presented. Interim financial results are not
necessarily indicative of results for a full year. The condensed financial
statements should be read in conjunction with the audited financial statements
and related notes for the year ended December 31, 1999 included in our Form 10-K
for the year ended December 31, 1999.
Revenue Recognition
The Company currently generates revenue from software license fees,
postage convenience fees, technology license fees, and the sale of postage
supplies.
Software license fees are amounts paid by end-users and resellers for a
perpetual license to the Company's software. The Company's software package
allows the end-user to apply for a USPS license. When the Company is notified
that the USPS has approved the license, the Company ships a secure internet
postage device, necessary for the use of the Company's software, to the end-
user. Revenues from software license fees are recognized in accordance with
AICPA Statement of Position 97-2, "Software Revenue Recognition," ("SOP 97-2")
and Statement of Position 98-4, "Deferral of the Effective Date of a Provision
of SOP 97-2, Software Revenue Recognition." ("SOP 98-4") Revenues from software
license fees are recognized when delivery of the secure Internet postage device
and the software are complete, when persuasive evidence of an arrangement
exists, collection is probable, the fee is fixed or determinable and no
significant obligations remain.
Technology license fees represent revenue earned from original equipment
manufacturers, which incorporate the Company's Internet postage technology into
their product. Technology license fee revenue is recognized in accordance with
SOP 97-2 and SOP 98-4 when the technology has been delivered, when persuasive
evidence of an arrangement exists, collection is probable, the fee is fixed or
determinable and no significant obligations remain.
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E-STAMP CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
1. Background and Basis of Presentation (continued)
Revenue Recognition (continued)
Postage convenience fees are amounts paid by end-users for the delivery
of postage by the Company to the end-user. The convenience fees are based on the
amount of postage ordered by the end-user. Revenues from postage convenience
fees are recognized when the postage is downloaded into the secure postage
hardware device.
The Company recognizes revenues related to the postage supplies when the
supplies are delivered.
Revenue recognized during the three months ended March 31, 2000 from
arrangements deemed to be nonmonetary exchange of the Company's products and
services totaled approximately $321,000. Revenue from these exchanges is
recorded at the fair value of the products and services provided or received,
whichever is more clearly evident. There was no corresponding cost of revenues
related to these transactions.
For the three months ended March 31, 2000, one licensee accounted for
26% of net revenues.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions", or SOP 98-9. SOP 98-9 amends
SOP 98-4 to extend the deferral of the application of certain passages of SOP
97-2 provided by SOP 98-4 through fiscal years beginning on or before March 15,
1999. All other provisions of SOP 98-9 are effective for transactions entered
into in fiscal years beginning after March 15, 1999. The Company does not expect
the final adoption of SOP 98-9 to have a material impact on its future revenues
or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition,"
which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the SEC. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. The Company is currently
reviewing the SAB and assessing its potential impact upon its results of
operations.
Net Loss Per Share
Net loss per share has been computed in accordance with the Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"), which
requires disclosure of basic and diluted earnings per share. Basic earnings per
share excludes any dilutive effects of options, shares subject to repurchase,
warrants, and convertible securities. The Company's potentially dilutive
securities were antidilutive and therefore were not included in the computation
of weighted-average shares used in computing diluted net loss per share.
Therefore, the Company's basic and diluted net loss are the same. Pro forma
basic and diluted net loss per common share, as presented in the condensed
statements of operations, has been computed for the three months ended March 31,
2000 and 1999 as described above, and also gives effect to the conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance.
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E-STAMP CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
1. Background and Basis of Presentation (continued)
Net Loss Per Share (continued)
The following table presents the calculation of basic and diluted and
pro forma basic and diluted net loss per share (in thousands, except per share
data):
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Basic and diluted:
Net loss ................................................. $ (29,688) $ (4,511)
Accretion on redeemable convertible preferred stock ...... - (440)
------------ ------------
Net loss attributable to common stock .................... $ (29,688) $ (4,951)
============ ============
Weighted-average shares of common stock outstanding ...... 39,118 14,965
Less: weighted-average shares subject to repurchase ...... (3,032) (955)
------ ------
Weighted-average shares used in computing basic and
diluted net loss per share ............................. 36,086 14,010
====== ======
Basic and diluted net loss per share ..................... $(0.82) $(0.35)
====== ======
Pro forma basic and diluted:
Net loss ................................................. $ (29,688) $ (4,511)
============ ============
Shares used above ........................................ 36,086 14,010
Pro forma adjustment to reflect weighted effect of assumed
conversion of convertible preferred stock .............. - 8,360
------ ------
Shares used in computing pro forma basic and diluted net
loss per share ......................................... 36,086 22,370
============ ============
Pro forma basic and diluted net loss per share ........... $ (0.82) $ (0.20)
============ ============
</TABLE>
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<PAGE>
E-STAMP CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
2. Stockholders' Equity
Stock Subject to Rescission
Shares issued under the Company's 1996 Employee Plan, 1996 Director Plan
and 1999 Stock Plan (the "Plans") may not have qualified for exemption from
registration or qualification under federal and state securities laws and
therefore may be subject to rescission.
On February 2, 2000, the Company filed a rescission offer for 5,687,279
shares of common stock pursuant to a registration statement filed under the
Securities Act of 1933, as amended, covering shares of common stock issued under
the Plans. The Company has offered to rescind any prior sales at the price per
share paid therefor (average $1.22 per share) plus interest thereon at a
statutory rate as the case may be from the date of purchase by the purchaser to
the expiration of the rescission offer. The rescission offer will expire
approximately 30 days after the effectiveness of the registration statement
relating to the rescission stock. The registration statement has not yet been
declared effective by the Securities and Exchange Commission. If all of the
holders of these shares accept the Company's offer, the Company would be
required to make aggregate payments of up to $6.9 million plus statutory
interest.
Offerees who do not accept the rescission offer will, for purposes of
applicable federal and state securities laws, be deemed to hold registered
shares under the Act which will be freely tradable in the public market as of
the effective date of the registration statement with respect to the rescission
stock. The Act does not expressly provide that a rescission offer will terminate
a purchaser's right to rescind a sale of stock, which was not registered under
the Act as required. Accordingly, should the rescission offer be rejected by any
or all offerees, the Company may continue to be contingently liable under the
Act for the purchase price of the rescission stock up to an aggregate amount of
approximately $6.9 million plus statutory interest.
The Company has reclassified the amounts paid in for outstanding shares
subject to rescission outside of permanent equity in the accompanying balance
sheets.
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E-STAMP CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
2. Stockholders' Equity (continued)
Stock Subject to Repurchase
As of March 31, 2000 and December 31, 1999 the Company had 2,715,141 and
3,349,192 shares of common stock outstanding which were subject to repurchase,
respectively. These shares are the result of the exercise of unvested stock
options by employees in exchange for notes and cash. These shares vest over the
four-year vesting period of the underlying exercised stock options. The right to
repurchase these shares is at the sole discretion of the Company.
3. Marketing and Distribution Agreements
The Company has entered into agreements for online advertising with
America Online, Yahoo!, Inc., Microsoft Corporation, EarthLink Operations, Inc.,
Intuit Inc., and eBay Inc. Aggregate noncancelable advertising commitments
related to these agreements total approximately $ 14.1 million and $10.0 million
for the nine months ending December 31, 2000 and the year ending December 31,
2001, respectively. The Company could be subject to additional payments under
these agreements if advertising exceeds established levels of page views or
generates and exceeds established levels of new customers.
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E-STAMP CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
4. Operating Lease
The Company entered into an operating lease agreement on February 25,
2000 for office space in Mountain View, California. The term of the lease is 85
months and there are no renewal terms. The rental commitment relating to this
lease for the years 2000, 2001, 2002, 2003, 2004 and thereafter are $2,906,000,
$3,580,000, $3,690,000, $3,801,000 and $12,759,000, respectively.
5. Contingencies
Pitney Bowes Litigation
On June 10, 1999, Pitney Bowes filed suit against the Company in U.S.
District Court for the District of Delaware alleging infringement of Pitney
Bowes patents. The suit alleges that the Company is infringing seven patents
held by Pitney Bowes related to postage application systems and seeks treble
damages, a preliminary and permanent injunction from further alleged
infringement, attorneys' fees and other unspecified damages. On July 30, 1999,
the Company filed an answer to Pitney Bowes' complaint in which it denied all
allegations of patent infringement and asserted certain affirmative and other
defenses based on statutory and common law grounds, including inequitable
conduct on the part of Pitney Bowes in its procurement of patents in proceedings
before the U.S. Patent and Trademark Office. As part of the answer, the Company
also brought various counterclaims against Pitney Bowes claiming Pitney Bowes'
violation of Section 2 of the Sherman Act and intentional and tortious
interference with E-Stamp's business relations based, in part, upon allegations
that Pitney Bowes has unlawfully maintained its monopoly power in the postage
metering market through a scheme to defraud the U.S. Patent and Trademark Office
and its efforts to discourage potential investors and strategic partners from
investing and entering into partnerships with the Company. The Company's suit
seeks compensatory and treble damages, injunctive relief and recovery of
attorneys' fees. On September 21, 1999, Pitney Bowes filed a motion to strike or
dismiss certain of the Company's affirmative defenses and counterclaims or, in
the alternative, to bifurcate discovery and trial of those counterclaims. The
Company filed its response to the motion on October 20, 1999. The U.S. District
Court for the District of Delaware held a hearing on November 18, 1999 regarding
Pitney Bowes' motion, but as of March 31, 2000, a decision has not been
rendered. Management continues to investigate the claims against the Company as
well as infringement by Pitney Bowes of Company's patents, and may assert
additional defenses or pursue additional counterclaims or independent claims
against Pitney Bowes in the future. Regardless of the outcome, any litigation
may require that we incur significant litigation expenses and may result in
significant division of management. An unfavorable outcome may have a material
adverse effect on the Company's financial position or results of operations.
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<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report on Form 10-Q contains forward-looking statements, including,
but not limited to, those specifically identified as such, that involve risks
and uncertainties. The statements contained in this report on Form 10-Q that are
not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including without limitation
statements regarding our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this report
on Form 10-Q are based on information available to us on the date hereof, and
we assume no obligation to update any such forward-looking statements. Our
actual results could differ materially from those anticipated in these forward-
looking statements as a result of a number of factors, including, but not
limited to, those set forth in the "Risk Factors" contained in this
management's discussion and analysis of financial condition and results of
operations and elsewhere in this report on Form 10-Q.
Overview
We provide an Internet postage service that enables users to
conveniently purchase, download and print Internet postage directly from their
personal computers without the need to maintain a persistent Internet
connection. We pioneered the development of Internet postage, including being
one of the first companies to approach the U.S. Postal Service with the idea of
printing postage from a personal computer. We have incurred net losses in each
quarterly and annual period since our inception and as of March 31, 2000, we had
accumulated aggregate losses of $105.5 million. The quarter ended September 30,
1999 was the first quarter in which we generated revenue. From November 1994 to
March 1998, we incurred operating costs primarily related to the development of
our Internet postage service in accordance with U.S. Postal Service guidelines
and specified criteria. In March 1998, after extensive development and
interaction with the U.S. Postal Service, we began the three-phase beta test
certification process required by the U.S. Postal Service to qualify Internet
postage vendors for commercial distribution of Internet postage under the U.S.
Postal Service's Information Based Indicia Program. On August 9, 1999, we
received final approval from the U.S. Postal Service for our Internet postage
service. On that date, we were the first company to commercially launch a
national Internet postage service. During the three months ended March 31, 2000,
we shipped 32,599 units of our Internet postage product.
The revenue and income potential of our business and market is unproven,
and our limited operating history makes it difficult to evaluate our prospects.
We expect to continue to incur net losses for the foreseeable future and may
never achieve profitable operations. We recognize revenue from an initial
software license fee for our Internet postage product, ongoing convenience fees
for the purchase of postage over the Internet, the sale of ancillary postage
supplies and technology license fees. Our costs of revenues include the costs of
manuals, packaging, the postage device, credit card and electronic funds
transfer fees, the address management system, support costs, as well as
fulfillment costs, and direct costs from the sale of postage supplies.
We also licensed our technology to a third party for incorporation
into the third party's products and began recognizing the license fees during
the three months ended March 31, 2000. We plan to pursue additional
relationships similar to this licensing arrangement.
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<PAGE>
We recorded amortization of deferred stock compensation in the amount of
$3.4 million during the three months ended March 31, 2000. At March 31, 2000, we
had a total of $11.9 million remaining to be amortized over the corresponding
vesting periods of the stock options. Such amounts are related to option grants
and will be amortized in accordance with our accounting policy over the
remaining vesting period of the grants through mid-2003.
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended
March 31, 1999
Revenue. We generate revenue from software license fees, postage
convenience fees, sale of postage supplies and technology license fees. Software
license fees are amounts paid by end-users and resellers for a perpetual license
to our software. Postage convenience fees are amounts paid by end-users for the
delivery of postage by us to the end-user. Supplies revenue are amounts paid by
end-users for purchase of various postal supplies. Technology license fees are
amounts paid by a licensee for the Company's Internet postage technology.
Revenue for the three months ended March 31, 2000 totaled $1.5 million.
There was no revenue for the three months ended March 31, 1999. Revenue for the
three months ended March 31, 2000 included $0.4 million of technology licensing
revenue, largely due to a $1.0 million licensing agreement with Kewill
Electronic Commerce, with a small additional contribution from a foreign postal
authority.
Cost of Sales. Cost of sales includes costs related to product
shipments, including materials, labor and other direct or allocated costs
incurred in their manufacture or delivery. It also includes cost of customer
support services and technical support. Cost of sales for the three months ended
March 31, 2000 totaled $1.9 million. There were no costs of sales for the three
months ended March 31, 1999. We expect that our gross margin will be positive in
future periods as our sales volume increases. The foregoing expectation is a
forward-looking statement that involves risks and uncertainties and the actual
results could vary materially as a result of a number of factors, including
those set forth under "Risk Factors."
Research and Development. Research and development expenses include
expenses for research, design and development of our Internet postage service,
expenses related to obtaining patents from the U.S. Patent and Trademark Office,
and server and network operations. Research and development expenses increased
152% to $5.2 million for the three months ended March 31, 2000 from $2.1 million
for the three months ended March 31, 1999. Of the $3.1 million increase in
research and development expenses in the three months ended March 31, 2000, $1.8
million of this amount reflected increases in research and development, employee
headcount, consulting and contractor expenses. We expect the dollar amount of
research and development expenses to increase in future periods to support
further development of our Internet postage service and our browser-based
service and expenses related to the development of other products and services.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related benefits for sales and marketing personnel, strategic
partner marketing, package design, advertising and promotional expenses, and
tradeshow expenses. Sales and marketing expenses increased 2168% to $19.5
million for the three months ended March 31, 2000 from $0.9 million for the
three months ended March 31, 1999. Of the $18.6 million increase in sales and
marketing expenses in the three months ended March 31, 2000, $17.0 million of
this amount reflected costs associated with our marketing campaigns related to
our Internet postage service, advertising and expenses associated with strategic
partners. The increase also reflected increases in our sales and marketing
personnel.
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<PAGE>
General and Administrative. General and administrative expenses consist
primarily of compensation for administrative and executive staff, fees for
professional services, and depreciation expense. General and administrative
expenses increased 121% to $1.6 million for the three months ended March 31,
2000 from $0.7 million for the three months ended March 31, 1999. Of the $0.9
million increase in general and administrative expenses in the three months
ended March 31, 2000, $0.5 million related to increases in administrative staff.
We expect general and administrative expenses to increase in dollar
amount due to further additions in staffing and as we incur additional costs
necessary to prepare and manage the infrastructure for business expansion, for
legal services and costs associated with being a public company.
Amortization of Deferred Stock Compensation. Amortization of deferred
stock compensation was $3.4 million for the three months ended March 31, 2000,
compared to $1.0 million for the three months ended March 31, 1999. There was no
deferred stock compensation recorded during the three months ended March 31,
2000. During the three months ended March 31, 1999, we recorded aggregate
deferred stock compensation of $10.9 million for options awarded to employees
with exercise prices below the deemed fair value for financial reporting
purposes of our common stock on their respective grant dates.
Interest Income, Net. Interest income, net, consists primarily of
earnings on our cash and cash equivalents, net of interest expenses attributable
to equipment leases and any taxes. Interest income, net, increased 1251% to $1.4
million for the three months ended March 31, 2000 from $0.1 million for the
three months ended March 31, 1999. The increase in interest income, net, was due
to increased cash balances resulting from the recent initial public offering of
our common stock.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through
private and public sales of equity securities. We have received net proceeds of
approximately $73.9 million in private placements of our equity securities and
net proceeds of $125.4 million from the initial public offering of our common
stock. As of March 31, 2000, we had cash and cash equivalents totaling $91.2
million.
Net cash used in operating activities totaled $22.7 million for the
three months ended March 31, 2000 and $3.4 million for the three months ended
March 31, 1999. Cash used in operating activities for each period presented
resulted primarily from net operating losses in those periods.
Net cash used in investing activities totaled $4.6 million for the three
months ended March 31, 2000 and $0.1 million for the three months ended March
31, 1999. Cash used in investing activities for each period presented resulted
primarily from the acquisition of computer and office equipment and the payments
of long term deposits for the Company's leased facilities.
We believe that our current cash balances and cash flows from
operations, if any, will be sufficient to meet our present growth strategies and
related working capital and capital expenditure requirements for at least the
next twelve months. Our current plan contemplates significant increases in
spending when compared to our historical expenditures, consistent with the
planned growth in our business. We currently intend to use a portion of cash to
satisfy our payment obligations under our rescission offer, if any are required.
If all of the holders of the shares and options under our recission offer accept
the offer, the Company would be required to make aggregate payments of up to
$6.9 million plus statutory interest. We do not expect our payment obligations
under our rescission offer to have a material effect on the Company's financial
position. Our forecast of the period of time through which our financial
resources will be adequate to support operations is a forward-looking statement
that involves risks and uncertainties. Our actual funding requirements may
differ
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materially from this as a result of a number of factors including our plans to
fully support the commercial release of our desktop Internet postage service,
our introduction of new services and our investments in systems infrastructure
and staffing. We may require substantial working capital to fund our business
and we may need to raise additional capital prior to this time or thereafter. We
cannot be certain that additional funds will be available on satisfactory terms
when needed, if at all. If we are unable to raise additional necessary capital
in the future, we may be required to curtail our operations significantly.
Raising additional equity capital would have a dilutive effect on existing
stockholders.
Risk Factors
We have a limited operating history with a history of losses, only began
offering our Internet postage service on a commercial basis in August 1999,
expect to incur losses in the future, and may never achieve profitability.
We have a very limited operating history. You should consider our
prospects in light of the risks and difficulties frequently encountered by early
stage companies in new and rapidly evolving markets. We cannot be certain that
we will achieve profitability or, if achieved, that we will be able to sustain
or increase profitability on a quarterly or annual basis. As of March 31,
2000, we had an accumulated deficit of $105.5 million. We have incurred
increasing losses and had a net loss for the year ended December 31, 1999 of
$57.5 million and a net loss for the three months ended March 31, 2000 of
$29.7 million. We have not achieved profitability and expect to continue to
incur net losses for the foreseeable future. We expect to incur increasing
sales and marketing, research and development and administrative expenses. As
a result, we will need to generate significant revenues to achieve and
maintain profitability.
The success of our business will depend upon acceptance by customers of our
Internet postage service.
We expect that our Internet postage service will generate a substantial
portion, if not all, of our near-term future revenues. As a result, we depend on
the commercial acceptance of our Internet postage service. If we fail to
successfully gain commercial acceptance of our Internet postage service, we will
be unable to generate significant revenues. The market for Internet postage has
not developed, and we cannot assure you that it will develop. We cannot predict
the extent to which users will be willing to use the Internet to purchase
postage rather than using traditional methods. To the extent users choose to
purchase postage over the Internet, we cannot be certain that these customers
will use our service.
Intellectual property infringement claims, including claims asserted by Pitney
Bowes against us, could prevent or hinder our ability to sell Internet postage.
We face the risk that other parties' intellectual property positions
will impair successful development of the Internet postage market or our ability
to effectively participate in it. Pitney Bowes filed a patent infringement
lawsuit against us in U.S. District Court in June 1999. The suit alleges
infringement of seven
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patents owned by Pitney Bowes related to postage application systems and seeks
treble damages, a preliminary and permanent injunction, attorneys' fees and
other unspecified damages. On July 30, 1999, we filed our answer to Pitney
Bowes' complaint. Pendency of the litigation can be expected to result in
significant expenses to us and the diversion of management time and other
resources, the extent of which cannot be quantified with any reasonable accuracy
given the early stage of this litigation. If Pitney Bowes is successful in its
claims against us, then we may be hindered or even prevented from competing in
the Internet postage market and our operations would be severely harmed. The
Pitney Bowes suit could result in limitations on how we implement our services,
delays and costs associated with redesigning our services and payments of
license fees and other monies. An injunction obtained by Pitney Bowes could
eliminate our ability to market critical products or services.
Pitney Bowes may be unwilling to discuss licensing or cross-licensing
arrangements with us, which could adversely impact our ability to compete in the
market for Internet postage products and services.
Although we and Pitney Bowes, prior to filing of the current litigation,
had been in discussions regarding cross-licensing a number of our patents and
Pitney Bowes' patents, some of which are identified in Pitney Bowes' complaint,
we cannot predict whether these discussions will resume in the future or the
impact of Pitney Bowes' intellectual property claims on our business or the
Internet postage market. Since commencement of the litigation, we have not had
discussions with Pitney Bowes regarding licensing or cross-licensing
arrangements nor do we have information concerning Pitney Bowes' present
willingness to engage in discussions.
Our quarterly results are subject to significant fluctuations, and our stock
price may decline if we do not meet expectations.
Since August 1999, we have generated only nominal revenues from our
operations. Accordingly, we have little basis upon which to predict future
operating results. We expect that our revenues, margins and operating results
will fluctuate significantly due to a variety of factors. Factors affecting our
quarterly results include:
. the costs of our marketing programs to establish the E-Stamp brand name
and generate market demand for our Internet postage service;
. timing of the commercial release of additional Internet postage services
developed by us, which depends in part on the timing of U.S. Postal
Service approval for any such services;
. the number, timing and significance of new products or services
introduced by our competitors, which are outside our control;
. the level of service and price competition;
. changes in our operating expenses as we expand operations; and
. general economic factors, which are outside our control.
Timing of commercial release of new products or services by us and our
competitors and general economic factors will also affect our long-term
financial results. Substantially all of our operating expenses are related to
personnel costs, marketing programs and overhead, which cannot be adjusted
quickly and are therefore relatively fixed in the short term. Our operating
expense levels are based, in significant part, on our expectations of future
revenues. If our expenses exceed increased revenues, both gross margins and
results of operations could be harmed because of increased costs and expenses in
the short term. Due to the foregoing factors and the other risks discussed in
this document, you should not rely on period-to-period comparisons of our
results of operations as an indication of future performance. It is possible
that in some future periods our
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results of operations will be below public expectations. In this event, the
market price of our common stock is likely to fall.
If the U.S. Postal Service discontinues Internet postage as an approved postage
method because of counterfeiting or other issues or revokes approval of our
Internet postage service, our business will fail.
We continue to be subject to U.S. Postal Service scrutiny and other
government regulations. The U.S. Postal Service could discontinue Internet
postage as an approved postage method because of counterfeiting of Internet
postage, security or other issues, in which case our business would fail.
Further, if we are unable to successfully complete subsequent evaluations by the
U.S. Postal Service, to adapt our Internet postage service to any new
requirements or specifications or to provide adequate security, the U.S. Postal
Service could revoke its approval of our Internet postage service, in which case
our business would fail.
The commercial roll-out of our Internet postage service is currently limited to
100,000 customers and the U.S. Postal Service could continue to require periodic
reviews before authorizing greater numbers of customers.
Under the Information Based Indicia Program, the commercial roll-out of
our Internet postage service is currently limited to 100,000 customers. The U.S.
Postal Service will evaluate our service when we obtain approximately 100,000
customers. If we do not successfully complete this evaluation, the U.S. Postal
Service could delay or even prevent use of our Internet postage service by more
than 100,000 customers. The U.S. Postal Service could continue to require
additional periodic reviews before authorizing greater numbers of customers. Any
such delay in our ability to expand our customer base would result in loss of
revenue and could harm our ability to build our brand and obtain market
acceptance of our Internet postage service.
We cannot be certain that we will be able to continue to satisfy existing, new
or changed U.S. Postal Service regulations in the future, and if we are not able
to do so our ability to distribute our Internet postage service would be
adversely affected.
If we encounter difficulties with continuing compliance with U.S. Postal
Service regulations, our ability to distribute or extend the distribution of our
Internet postage service could be adversely affected. Any change in the current
or future regulatory environment could have an adverse impact on our business
and could harm our operating results and profitability.
New accounting pronouncements may require us to change our revenue recognition
policy and report substantially lower revenues in the future.
Based on generally accepted accounting principles, we recognize revenues
from software license fees and technology licensing when delivery has been
completed, persuasive evidence of an arrangement exists, collection is probable,
the fee is fixed or determinable and no significant obligations remain. In
December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101--Revenue Recognition in Financial Statements ("SAB 101"), which
summarizes the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. We are currently
reviewing SAB 101 and assessing its potential revenue impact upon the results of
our operations. If we are required to change our accounting policies based on
SAB 101, we would report this change in our financial statements for the three
months ended June 30, 2000. This change could require us to recognize revenues
generated from software license fees and technology licensing over the term of
these arrangements. As a result, we could be required to defer the recognition
of these revenues. This could cause the market price of our common stock to
experience a significant decline.
If we cannot successfully manage the commercial availability of our Internet
postage service, our ability to attract and retain customers will be harmed.
Our reputation and our ability to attract, retain and provide services
to our customers depend upon the reliable performance of our Web site, network
infrastructure and transaction-processing systems. If we are unable at any time
to provide our customers with our Internet postage service in a satisfactory
manner, our
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customers may become dissatisfied and could cease using our Internet postage
service. We have very limited experience conducting marketing campaigns, and we
may fail to generate significant interest in our Internet postage service. On
the other hand, if we generate extensive interest in our service, we cannot
assure you that we will be able to effectively manage commercial availability of
our Internet postage service due to the strains this demand will place on our
Web site, network infrastructure and our transaction-processing systems.
If we are unable to maintain and develop our marketing and distribution
relationships, our Internet postage service may not achieve commercial
acceptance.
We have established marketing and distribution relationships with a
limited number of third parties. We rely heavily upon these relationships to
build our E-Stamp brand and to accelerate the adoption of our Internet postage
service. We have limited experience in establishing and maintaining these
relationships. If we are unable to successfully maintain our existing
relationships or to establish new relationships, our Internet postage service
may not achieve commercial acceptance. In addition, a number of these third
parties are still in the process of establishing the marketing, promotional and
distribution activities for our service called for under our agreements with
them. We cannot assure you that these efforts will be achieved in a timely and
successful manner and this would limit their usefulness in promoting adoption of
our service.
We rely heavily upon third parties to market and distribute our Internet postage
service to customers.
We rely upon third parties to market and distribute our Internet postage
service. We cannot assure you that we will be able to develop and maintain
satisfactory relationships with such parties on acceptable commercial terms, if
at all, or that we will be able to obtain adequate distribution channels for our
service. Our marketing and distribution relationships with third parties, which
include providing links to our website and distributing our product through
bundling arrangements, may not generate significant traffic on our website or
otherwise generate significant interest in our service. Our retail distribution
arrangements, which include office supply, computer or other retailers, may not
generate significant sales of our Internet postage software. If we are unable to
provide adequate distribution channels for our Internet postage service,
customers will have difficulty purchasing our product, which would severely harm
our ability to grow our business. We depend upon the U.S. Postal Service and
other delivery services for the delivery of our secure postage device. Strikes
or other service interruptions affecting delivery services used by us would have
a material adverse effect on our ability to deliver our Internet postage service
to our customers.
If we do not achieve broad brand recognition, our ability to attract customers
will suffer dramatically.
We must quickly build our E-Stamp brand to gain market acceptance for
our service. If we fail to gain market acceptance for our Internet postage
service, our ability to attract customers will be severely harmed. To establish
our brand awareness, we must invest substantial resources to develop our
products, pursue marketing and distribution relationships, implement marketing
initiatives, and provide a high quality experience to our users. We cannot be
certain that we will have sufficient resources to build our brand and achieve
commercial acceptance of our service.
Subsequent Internet postage services, if successfully developed by us, will
require additional U.S. Postal Service approvals that may delay their commercial
introduction.
We began the U.S. Postal Service approval process for our
browser-based service in February 2000. Our current Internet postage service
took approximately 18 months to complete the beta test portion of the U.S.
Postal Service's approval process. We cannot assure you of the duration of the
approval process for our
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browser-based service or any subsequent service, or that these services will
ever be approved by the U.S. Postal Service. Further, we cannot assure you
that we will be able to successfully develop our future services in a timely
manner or at all. Failure to receive timely U.S. Postal Service approval for
our browser-based service or subsequent services could limit our ability to
successfully grow our business.
We have experienced significant growth in our expenses and operations in recent
periods, and any failure to manage this growth could damage our ability to
obtain market acceptance for our Internet postage service.
Our ability to successfully offer our Internet postage service and
implement our business plan requires an effective planning and management
process. We have increased, and plan to continue to increase, the scope of our
operations and have experienced, and expect to continue to experience,
significant growth in our expenses and operations. If we are unable to manage
growth effectively or experience disruptions during our expansion, our ability
to market and extend distribution of our Internet postage service and our
ability to develop future services will be seriously harmed. To manage the
expected growth of operations and personnel, we will need to improve existing
and implement new transaction-processing, operational and financial systems,
procedures and controls. In addition, we will need to expand, train and manage
an increasing employee base and to expand our finance, administrative and
operations staff. Our current expansion has placed, and we expect our future
expansion to continue to place, a significant strain on our managerial,
operational and financial resources. Our current and planned personnel, systems,
procedures and controls may be inadequate to support our future operations.
If the sole supplier of our Internet postage hardware device is unable to timely
meet our commercial supply needs, our ability to expand our customer base will
be severely limited and we will lose revenue.
Dallas Semiconductor Corporation is the single source of supply for our
secure Internet postage device. We do not have a guaranteed supply arrangement
with Dallas Semiconductor, and we order such devices on a purchase order basis.
Any difficulties encountered by our sole supplier that result in product
defects, production delays, cost overruns, or the inability to fulfill orders on
a timely basis would hurt our reputation and result in loss of revenue. If we
cannot obtain an adequate supply of our Internet postage device, we will be
unable to timely deliver our Internet postage device to customers and, without
the device, customers would be unable to purchase postage using our Internet
postage service. Neither we nor our supplier maintain an extensive inventory of
our Internet postage device. We cannot assure you that our supplier will timely
meet our commercial supply needs or that alternative suppliers will be available
in the future. We have not qualified any alternative sources for the supply of
our secure Internet postage device.
If the U.S. Postal Service, the sole supplier of digital certificates for our
Internet postage device, is unable to timely meet our commercial supply needs,
our ability to expand our customer base will be severely limited and we will
lose revenue.
Under the Information-Based Indicia Program, a digital certificate is
required to be issued for each secure Internet postage device. Currently, the
U.S. Postal Service is the only approved source of supply of digital
certificates. We do not have a guaranteed supply arrangement with the U.S.
Postal Service with regard to the supply of digital certificates. If we cannot
obtain an adequate supply of digital certificates, we will be unable to timely
deliver our Internet postage device to customers and, without the device,
customers would be unable to print postage using our Internet postage service.
We cannot assure you that the U.S. Postal Service will timely meet our
commercial supply needs or that we will have the ability to obtain digital
certificates from alternative suppliers in the future.
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If the U.S. Postal Service charges us a fee for digital certificates, our gross
margins will be adversely impacted.
The U.S. Postal Service recently invoiced us for fees in connection with
digital certificates issued by the U.S. Postal Service to our customers. We have
disputed these fees, but it is too early to ascertain the outcome. Should the
U.S. Postal Service pursue a claim against us successfully for these fees, our
gross margins will be adversely impacted.
System failures could harm our reputation, result in loss of revenue and
substantially and adversely affect our ability to attract or retain customers.
Our business and reputation with customers depend upon the efficient and
uninterrupted operation of our Web site, processing systems and network
infrastructure, including critical portions of this infrastructure that are
hosted by third parties, for registration of new customers and processing of
Internet postage transactions. In addition, our service depends upon continuous
operation of the U.S. Postal Service's secure postage accounting vault for our
customers to purchase postage. We have experienced complete system failure for
short periods of up to four hours during initial commercial launch of our
service. In addition, we experienced a partial system failure for a two-day
period in May 2000. We may suffer additional interruptions in our service in the
future. Problems or system failures at either our location or third party
locations could result in interruptions in our service. Unscheduled downtime of
our service may result in loss of revenue and if these system failures persist,
our business, reputation and brand could be severely harmed. We cannot assure
you that we will be able to timely expand our systems infrastructure to support
growth in traffic from our customers.
Our systems and those hosted by third parties are vulnerable to damage or
interruption which could harm our reputation and result in a loss of revenue.
Our systems and those hosted by third parties are vulnerable to damage
or interruption as a result of fire, flood, power loss, telecommunications
failure, software errors or bugs, hardware failures or computer viruses,
computer hacking and other acts of misconduct, earthquakes and similar events.
Our postage processing systems are located in Northern California, a seismically
active region. We do not have fully redundant systems, a formal disaster
recovery plan or alternative providers of hosting services, and we do not carry
sufficient business interruption insurance to compensate us for losses that may
occur. Despite any precautions we may take, problems or system failures at our
third party hosted facilities could result in interruptions in our service,
which could injure our reputation and cause us to lose revenue.
The inability to expand our system's capacity may limit our growth.
Our inability to add additional software and hardware or to upgrade our
technology, transaction processing systems or network infrastructure to timely
accommodate increased Web site traffic or transaction volume could have adverse
consequences. These consequences include unanticipated system disruptions,
slower response times, degradation in levels of customer support and impaired
quality of the user's experience on our service and delays in reporting accurate
financial information. We may be unable to effectively upgrade and expand our
systems in a timely manner or to integrate smoothly any newly developed or
purchased technologies with our existing systems. These difficulties could harm
or limit our ability to expand our business.
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The Internet postage market is highly competitive and we may be unable to
compete successfully against new entrants and established industry competitors
with significantly greater financial resources.
The market for Internet postage products and services is new, rapidly
evolving and intensely competitive. Our primary competitors include traditional
providers of postage products and services, including Pitney Bowes and Neopost,
that have longer operating histories, larger customer bases, greater brand
recognition, greater financial, marketing, service, support, technical,
intellectual property and other resources than us. We also compete with
providers of traditional postage products and delivery services, such as the
U.S. Postal Service, Federal Express and United Parcel Service. In addition to
providers of traditional postage products and services, we compete with three
other Information Based Indicia Program vendors, Neopost, Pitney Bowes and
Stamps.com. Many of our competitors may be able to devote greater resources to
marketing and promotional campaigns, adopt more aggressive pricing policies and
devote substantially more resources to Web site and systems development than us.
This increased competition may result in reduced operating margins, loss of
market share and a diminished brand recognition.
A breach of our online security would harm our reputation and could interrupt
service to our customers.
A fundamental requirement to conduct electronic commerce is the secure
transmission of information over public networks. We rely on encryption and
authentication technology to provide the security necessary for transmission of
postage and other confidential information. Any breach of these security
measures would severely impact our reputation and would likely result in the
loss of customers. Advances in computer capabilities, new discoveries in the
field of cryptography, or other events or developments may result in a
compromise or breach of the algorithms we use to protect customer transaction
data. Security breaches could also expose us to a risk of loss or litigation and
possible liability for failing to secure confidential customer information.
Accordingly, we may be required to expend significant capital and other
resources to protect against potential security breaches or to alleviate
problems caused by any breach.
If we are unable to successfully protect our intellectual property, our
competitive position will be harmed.
We rely on a combination of patent, trademark, service mark, copyright
and trade secret laws, contractual restrictions on disclosure and transferring
title and other methods in an effort to establish and protect proprietary rights
in our services, know-how and information. If our patents or other intellectual
property fail to protect our technology, our competitive position could be
harmed. In addition, third parties may develop alternative technologies or
products that do not infringe on any of our patents or other intellectual
property. Steps taken to protect our intellectual property may not 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.
Failure to expand Internet infrastructure could limit our future growth.
The recent growth in Internet traffic has caused frequent periods of
decreased performance, and if Internet usage continues to grow rapidly, the
Internet's infrastructure may not be able to support these demands and its
performance and reliability may decline. If outages or delays on the Internet
occur frequently or increase in frequency, overall Web usage, including usage of
our Web site to purchase Internet postage,
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could grow more slowly or decline. Our ability to increase the speed and scope
of our services to users is ultimately limited by and dependent upon the speed
and reliability of the Internet.
We depend on key personnel and attracting qualified employees for our future
success.
Our success depends to a significant degree upon the continued
contributions of our executive management team and other senior level financial,
technical, marketing and sales personnel. The loss of the services of any of
these key employees or members of our senior management team could have a
material adverse effect on our business and results of operations. We anticipate
that the number of our employees may increase significantly during the current
year as we increase our research and development activities and sales and
marketing efforts. Our success depends upon our ability to attract and retain
additional highly qualified senior management and technical, sales and marketing
personnel to support planned growth of our operations. Competition for qualified
employees is intense, particularly in the Internet and high technology
industries. The process of locating and hiring personnel with the combination of
skills and attributes required to carry out our strategy is time-consuming and
costly. The loss of key personnel or our inability to attract additional
qualified personnel to supplement or, if necessary, to replace existing
personnel, could have a material adverse effect on our business and results of
operations.
Rapid technological change may make our Internet postage service obsolete or
cause us to incur substantial costs to adapt to these changes.
The use of the Internet for the purchase and sale of goods and services
is characterized by rapidly changing technology, evolving industry standards and
frequent new product announcements. To be successful, we must adapt to these
rapid changes by continually improving the performance, features and reliability
of our products and services, and to develop new products and services, or else
our products and services may become noncompetitive or obsolete. We also could
incur substantial costs to modify our service or infrastructure and to develop
new products and services, in order to adapt to these changes. Our business,
operating results and financial condition could be harmed if we incur
significant costs without adequate results, or find ourselves unable to adapt
rapidly to these changes.
We may be unable to effectively manage any future acquisitions of new or
complementary businesses, products or technology.
We may pursue the acquisition of new or complementary businesses,
including individual products or technologies, in an effort to enter into new
markets, diversify our sources of revenue and expand our services. At present,
we have no commitments or agreements for any material acquisitions or
investments. To the extent we pursue new or complementary businesses, we may not
be able to expand our services and related operations in a cost-effective or
timely manner. We may experience increased costs, delays and diversions of
management's attention when integrating any new businesses. We may lose key
personnel from our operations or those of any acquired business. Furthermore,
any new business or service we launch that is not favorably received by users
could damage our reputation and brand name. We also cannot be certain that we
will generate satisfactory revenues from any expanded services to offset related
costs. Any expansion of our operations would also require significant additional
expenses, and these efforts may strain our management, financial and operational
resources. Additionally, future acquisitions may also result in potentially
dilutive issuances of equity securities, the incurrence of additional debt, the
assumption of known and unknown liabilities, and the amortization of expenses
related to goodwill and other intangible assets, all of which could harm our
business, financial condition and operating results.
Internet postage cannot currently be used internationally which may limit our
future growth.
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At present, Internet postage approved by the U.S. Postal Service can
only be used to send mail from one United States address to another. Unless and
until foreign postal authorities create a certification process and recognize
information-based indicia postage, our Internet postage service will not be able
to address foreign markets, which may limit our future growth. Efforts in Europe
and other foreign markets related to adoption of Internet postage are at a very
preliminary stage. We cannot assure you that foreign postal authorities will
adopt policies and processes for Internet postage that are compatible with those
approved by the U.S. Postal Service on a timely basis or at all.
If we market our services internationally, regulation by international agencies
could disrupt our operations.
If foreign postal authorities in the future accept postage generated by
our services and if we obtain the necessary foreign certification or approvals,
we would be subject to ongoing regulation by international governments and
agencies. If we achieve significant international acceptance of our services,
our business activities will be subject to a variety of potential risks,
including the adoption of laws and regulatory requirements, political and
economic conditions, difficulties protecting our intellectual property rights
and actions by third parties that would restrict or eliminate our ability to do
business in some jurisdictions. If we begin to transact business in foreign
currencies, we will become subject to the risk attendant to transacting in
foreign currencies, including the potential adverse effects of exchange rate
fluctuations.
We may need additional capital and failure to obtain such capital could harm our
ability to market our Internet postage service and to develop future services.
We require substantial working capital to fund our business. We cannot
be certain that additional financing will be available to us on favorable terms
when required, or at all. Since our inception, we have experienced negative cash
flow from operations and expect to experience significant negative cash flow
from operations in the future. We currently anticipate that our available funds,
which include the net proceeds of our recent public offering, will be sufficient
to meet our anticipated needs for working capital and capital expenditures
through 2000. The estimate of the time period during which these proceeds will
be sufficient is a forward-looking statement that is subject to risks and
uncertainties. Our actual funding requirements may differ materially from this
as a result of the number of factors, including our plans to fully support the
commercial release and support of our Internet postage service, our development
and introduction of new services and our investments in expanding our systems
infrastructure and staffing. We may need to raise additional funds prior to the
end of 2000 or at a later date.
Regulatory and legal uncertainties could inhibit development of the Internet as
a marketplace for electronic commerce services.
A number of laws and regulations may be adopted with respect to the
Internet relating to user privacy, pricing, content, copyrights, distribution,
and characteristics and quality of products and services that could adversely
affect adoption of the Internet for electronic commerce services, which would
harm our ability to attract and retain customers. Moreover, the applicability of
existing laws to the Internet is uncertain with regard to many issues such as
property ownership, export of encryption technology, sales tax, libel and
personal privacy. 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 adversely
affect demand for our Internet postage service and could increase our cost of
doing business.
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U.S. Postal service regulations require a user of our Internet postage service
to print both the destination address and the digital stamp.
U.S. Postal Service regulations require a user of our Internet postage
service to print both the destination address and the digital stamp. Users may
not take the time to type in destination addresses to print a digital stamp for
use with pre-printed payment envelopes. In addition, the digital stamp may be
too large to fit on many return envelopes. As a result, users will generally not
use our service to print digital stamps for smaller return envelopes.
Our Internet postage will not print unless the U.S. Postal Service address
verification CD-ROM is loaded in the drive of the user's personal computer and
verifies the destination address.
The U.S. Postal Service requires that each digital stamp be encoded with
the destination address, which must be verified by the U.S. Postal Service's
address verification CD-ROM before the digital stamp is printed. Destination
addresses in the U.S. Postal Service database are subject to change as persons
or businesses establish a new address or for other reasons. As a result, we will
be required to periodically mail to users of our service updated address
verification CD-ROMs. Until an updated CD-ROM is received, a user will be unable
to print a digital stamp for a new address that was not included in the U.S.
Postal Service database at the time the existing CD-ROM was manufactured.
Internet related stock prices are especially volatile and this volatility could
cause our stock price to fluctuate dramatically, which could result in
substantial losses to investors.
The stock market and specifically the stock of Internet related
companies have been very volatile. This broad market volatility and industry
volatility may reduce the price of our common stock, because our business is
Internet-based without regard to our operating performance.
ITEM 3. Qualitative and Quantitative Disclosure about Market Risk
Disclosures About Market Risk
The following discusses our exposure to market risk related to changes
in interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially as a result of a number of
factors, including those set forth under the caption "Risk Factors--We have a
limited operating history with a history of losses, only began offering our
Internet postage service on a commercial basis in August 1999, expect to incur
losses in the future, and may never achieve profitability," and "--We may need
additional capital and failure to obtain such capital could harm our ability to
market our Internet postage service and to develop future services."
Interest Rate Risk
As of March 31, 2000, we did not have any outstanding short or long-term
debt. Increases in interest rates could, however, increase the interest expense
associated with our future borrowings, if any. We do not hedge against interest
rate increases.
Equity Price Risk
As of March 31, 2000, we did not hold any equity investments.
Foreign Currency Exchange Rate Risk
-24-
<PAGE>
We realize all of our revenues in U.S. dollars, and as of March 31,
2000, all of our revenues were derived from customers in the United States.
Therefore, we do not believe we have any significant direct foreign currency
exchange rate risk. We do not hedge against foreign currency exchange rate
changes.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On June 10, 1999, Pitney Bowes filed suit against us in the U.S.
District Court for the District of Delaware alleging infringement of Pitney
Bowes patents. The suit alleges that we are infringing seven patents held by
Pitney Bowes related to postage application systems and seeks treble damages, a
preliminary and permanent injunction from further alleged infringement,
attorneys' fees and other unspecified damages. One week later, Pitney Bowes
filed a similar complaint against one of our competitors, Stamps.com, alleging
infringement of two of the seven Pitney Bowes patents alleged in the E-Stamp
complaint. On July 30, 1999, we filed our answer to Pitney Bowes' complaint in
which we deny all allegations of patent infringement and assert affirmative and
other defenses based on statutory and common law grounds, including inequitable
conduct on the part of Pitney Bowes in its procurement of patents in proceedings
before the U.S. Patent and Trademark Office. As part of the answer, we also
brought various counterclaims against Pitney Bowes claiming Pitney Bowes'
violation of Section 2 of the Sherman Act and intentional and tortious
interference with E-Stamp's business relations based, in part, upon our
allegations that Pitney Bowes has unlawfully maintained its monopoly power in
the postage metering market through a scheme to defraud the U.S. Patent and
Trademark Office and its efforts to discourage potential investors and
businesses from investing and entering into agreements with us. Our suit seeks
compensatory and treble damages, injunctive relief and recovery of attorneys'
fees. On September 21, 1999, Pitney Bowes filed a motion to strike or dismiss
certain of our affirmative defenses and counterclaims or, in the alternative, to
bifurcate discovery and trial of those counterclaims; our response to the motion
was filed on October 20, 1999. The U.S. District Court for the District of
Delaware held a hearing on November 18, 1999, regarding Pitney Bowes' motion,
but as of the date hereof, a decision has not been rendered. We are continuing
to investigate the claims against us as well as infringement by Pitney Bowes of
our patents, and may assert additional defenses or pursue additional
counterclaims or independent claims against Pitney Bowes in the future.
Pendency of the litigation can be expected to result in significant
expenses to us and the diversion of management time and other resources. If
Pitney Bowes is successful in its claims against us, then we may be hindered or
even prevented from competing in the Internet postage market and our operations
would be severely harmed. For example, the Pitney Bowes suit could result in
limitations on how we implement our services, delays and costs associated with
redesigning our services and payments of license fees and other payments. An
injunction obtained by Pitney Bowes could eliminate our ability to market
critical products or services.
On May 10, 1999, in U.S. District Court, E-Stamp obtained a temporary
restraining order against Dave Lahoti ordering Mr. Lahoti to refrain from using
his Web site, which he had registered as "estamps.com." On June 14, 1999, the
U.S. District Court granted a preliminary injunction requiring Mr. Lahoti to
refrain from using his Web site in connection with Internet postage and to place
a disclaimer identifying that his Web site is not associated with E-Stamp
Corporation. On February 7, 2000, the U.S. District Court found Mr. Lahoti in
contempt of the preliminary injunction, and ordered Mr. Lahoti to transfer to E-
Stamp administrative control of the domain name "estamps.com" and to pay to E-
Stamp attorney's fees and costs incurred by E-Stamp in connection with the
contempt order. We are seeking a permanent injunction in connection with this
matter. Mr. Lahoti has denied the material allegations and has set forth his
affirmative defenses.
-25-
<PAGE>
Item 2. Changes In Securities and use of Proceeds
From January 1, 2000 to March 31, 2000, we granted options to purchase
an aggregate of 880,050 shares of common stock to our directors, executive
officers, employees and consultants at a weighted exercise price of $12.03 per
share. During that same period, options to purchase 46,517 shares were
exercised at an aggregate exercise price of $0.61 per share.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibit is filed herewith.
27.1 Financial data schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during
the three months ended March 31, 2000.
-26-
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated: May 15, 2000
/s/ Edward F. Malysz
---------------------
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
-27-
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