Rosetta Stone 2013 Annual Report Download - page 40

Table of Contents
protection for changes in the manufacturer suggested retail value granted to resellers for the inventory that they have on hand at the date the price protection is
offered is recorded as a reduction to revenue.
We offer customers the ability to make payments for packaged software purchases in installments over a period of time, which typically ranges
between three and five months. Given that these installment payment plans are for periods less than 12 months, a successful collection history has been
established and these fees are fixed and determinable, revenue is recognized at the time of sale, assuming the remaining revenue recognition criteria have been
met. Packaged software is provided to customers who purchase directly from our company with a limited right of return. We also allow our retailers to return
unsold products, subject to some limitations. In accordance with ASC subtopic 985-605-15, Software: Revenue Recognition: Products ("ASC 985-605-
15"), product revenue is reduced for estimated returns, which are based on historical return rates.
In connection with packaged software product sales and online software subscriptions, technical support is provided to customers, including
customers of resellers, via telephone support at no additional cost for up to six months from the time of purchase. As the fee for technical support is included
in the initial licensing fee, the technical support and services are generally provided within one year, the estimated cost of providing such support is deemed
insignificant and no unspecified upgrades/enhancements are offered, technical support revenues are recognized together with the software product and license
revenue. Costs associated with the technical support are accrued at the time of sale.
Sales commissions from non-cancellable SaaS contracts are deferred and amortized in proportion to the revenue recognized from the related contract.

We account for stock-based compensation in accordance Accounting Standards Codification topic 718,  ("ASC
718"). Under ASC 718, all stock-based awards, including employee stock option grants, are recorded at fair value as of the grant date and recognized as
expense in the statement of operations on a straight-line basis over the requisite service period, which is the vesting period.
As of December 31, 2013 and 2012, there were approximately $6.8 million and $6.8 million of unrecognized stock-based compensation expense related
to non-vested stock option awards that are expected to be recognized over a weighted average period of 2.53 and 2.52 years, respectively.
The following table presents the stock-based compensation expense for stock options and restricted stock included in the related financial statement line
items (in thousands):






Included in cost of revenue:
Cost of product revenue
$ 109
$110
$30
Cost of subscription and service revenue
66
178
25
Total included in cost of revenue
175
288
55
Included in operating expenses:
Sales and marketing
1,840
1,185
1,932
Research and development
1,460
1,547
2,448
General and administrative
5,766
4,989
7,918
Total included in operating expenses
9,066
7,721
12,298
Total
$9,241
$ 8,009
$ 12,353
In accordance with ASC topic 718, the fair value of stock-based awards to employees is calculated as of the date of grant. Compensation expense is then
recognized on a straight-line basis over the requisite service period of the award. We use the Black-Scholes pricing model to value our stock options, which
requires the use of estimates, including future stock price volatility, expected term and forfeitures. Stock-based compensation expense recognized is based on
the estimated portion of the awards that are expected to vest. Estimated forfeiture rates were applied in the expense calculation. The fair value of each option
grant is estimated on the date of grant using the Black Scholes option pricing model as follows:
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