TeleNav 2010 Annual Report Download - page 53

granted, based on the department in which the option holder works. We allocate overhead, such as rent and
depreciation, to each expense category based on headcount. Our operating expenses have increased in absolute
dollars from fiscal 2008 to fiscal 2010 and we expect them to continue to increase in fiscal 2011 as we continue
to build our infrastructure and add employees across all categories to support our growth, develop new services
and products, and expand into international markets.
Research and development. Research and development expenses consist primarily of personnel costs for our
development employees and use of outside consultants. We have focused our research and development efforts
on improving the ease of use and functionality of our existing services, as well as developing new service and
product offerings in our existing markets and in new markets. The majority of our research and development
employees are located in our development centers in China and, as a result, a substantial portion of our research
and development expense is subject to changes in foreign exchange rates, notably the Chinese renminbi, or RMB.
Sales and marketing. Sales and marketing expenses consist primarily of personnel costs for our sales and
marketing staff, commissions earned by our sales personnel and the cost of marketing programs and advertising.
As we primarily rely on our wireless carrier partners to market and promote our services to their subscribers, our
sales and marketing expenses consist primarily of the cost of supporting our wireless carrier partners and
attracting new wireless carrier partners to offer our LBS. We cooperate with our wireless carrier partners in
marketing our LBS solutions to their subscribers by preparing marketing materials and working with them on
promotional campaigns. We also promote our service offerings through a variety of other programs and online
advertisements.
General and administrative. General and administrative expenses consist primarily of personnel costs for
our executive, finance, legal, human resources and administrative personnel, consultants, legal, audit and tax
consulting and other professional fees and corporate expenses.
Other income (expense), net. Other income (expense), net consists of interest we earn on our cash and cash
equivalents, and the expense resulting from the change in fair value of our outstanding Series E preferred stock
warrants. We classify these warrants as liabilities on our balance sheets and record changes in their fair value
from period to period in other income (expense), net on our consolidated statements of income. As of
December 31, 2009, all remaining outstanding Series E preferred stock warrants had been exercised and the
warrant liability was reclassified to preferred stock.
Provision for income taxes. Our provision for income taxes primarily consists of corporate income taxes
related to profits earned from our LBS in the United States. We expect our income tax expense to increase as a
percentage of pretax income because of the concentration of earnings in the United States and as a result of our
recent utilization of federal tax credits which are no longer available. Our effective tax rate could be reduced if
our international revenue substantially increases as a percentage of revenue, due to the lower corporate tax rates
available in certain countries outside the United States and the availability of net operating loss carryforwards in
those countries.
Critical accounting policies and estimates
We prepare our consolidated financial statements in accordance with accounting principles generally
accepted in the United States, or GAAP. In many cases, the accounting treatment of a particular transaction is
specifically dictated by GAAP and does not require our judgment in its application. In other cases, our judgment
is required in selecting among available alternative accounting policies that allow different accounting treatment
for similar transactions. The preparation of consolidated financial statements also requires us to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related
disclosures. We base our estimates on historical experience and various other assumptions that we believe are
reasonable under the circumstances. In many instances, we could reasonably use different accounting estimates,
and in some instances changes in the accounting estimates are reasonably likely to occur from period to period.
50