Enom 2014 Annual Report Download - page 41

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38
Product Revenue
Marketplaces
We recognize product revenue from sales of Society6 products upon delivery, net of estimated returns based on historical
experience. We recognize product revenue from the sale of prints through Saatchi Art when the prints are delivered and the return
period has expired. Payments received in advance of delivery and, with respect to the Saatchi Art prints, prior to completion of the
return period are included in deferred revenue in the accompanying consolidated balance sheets. Product revenue is recorded at the
gross amount due to the following factors: we are the primary obligor in a transaction, we have inventory and credit risk, and we have
latitude in establishing prices and selecting suppliers. Product revenue is recognized net of sales allowances and return allowances. We
periodically provide incentive offers to customers to encourage purchases, including percentage discounts off current purchases, free
shipping and other offers. VAT, sales and other taxes are not included in product revenue because we are a pass-through conduit for
collecting and remitting any such taxes. Substantially all of our product revenue is currently generated through Society6.
Service Costs
Service costs consist of payments relating to our revenue-sharing arrangements, such as Internet connection and co-location
charges and other platform operating expenses, including depreciation of the systems and hardware used to build and operate our
content creation and distribution platform; expenses related to creating, rewriting, or auditing certain content units; and personnel
costs related to in-house editorial, customer service and information technology. In the near term, we expect increases in costs
associated with our investment in new business initiatives that we believe will support future growth, including refining, auditing and
consolidating our content library.
Product Costs
Product costs consist of outsourced product manufacturing costs, artist royalties, and personnel costs. In the near term, we
expect our product costs to increase as our product revenue continues to grow.
Shipping and Handling
Shipping and handling charged to customers are recorded in service revenue or product revenue, as applicable. Associated costs
are recorded in service costs or product costs.
Sales and Marketing
Sales and marketing expenses consist primarily of sales and marketing personnel costs, sales support, public relations,
advertising, marketing and general promotional expenditures. Fluctuations in our sales and marketing expenses are generally the result
of our efforts to drive growth in our product and service offerings. We currently anticipate that our sales and marketing expenses will
slightly increase in the near term as a percentage of revenue as we grow our marketing activities to support our Content Solutions and
Marketplaces offerings.
Product Development
Product development expenses consist primarily of expenses incurred in our software engineering, product development and
web design activities and related personnel costs. Fluctuations in our product development expenses are generally the result of hiring
personnel to support and develop our platform, including the costs to further develop our content algorithms, improve our online
properties including our owned and operated websites and related applications, and future product and service offerings. We currently
anticipate that our product development expenses will slightly increase in the near term as a percentage of revenue as we continue to
invest in product development personnel to support the growth of our business.
General and Administrative
General and administrative expenses consist primarily of personnel costs from our executive, legal, finance, human resources
and information technology organizations and facilities related expenditures, as well as third-party professional fees and insurance.
Professional fees are largely comprised of outside legal, audit and information technology consulting. We currently anticipate that
general and administrative expenses will remain relatively flat in the near term.