Green Dot 2010 Annual Report Download - page 49

shares still subject to repurchase if there were an early expiration of our right to repurchase). We record the
fair value recognized as stock-based retailer incentive compensation, a contra-revenue component of our
total operating revenues. In addition, it is possible that, in the future, a warrant to purchase Class B
common stock will vest and become exercisable upon the achievement of certain performance goals by
PayPal. If this warrant vests, we will need to determine its fair value on the vesting date using an option
pricing model, such as Black-Scholes, and will record that value as additional contra-revenue.
Operating Expenses
We classify our operating expenses into the following four categories:
Sales and Marketing Expenses — Sales and marketing expenses consist primarily of the sales
commissions we pay to our retail distributors and brokers for sales of our GPR and gift cards and reload
services in their stores, advertising and marketing expenses, and the costs of manufacturing and
distributing card packages, placards and promotional materials to our retail distributors and personalized
GPR cards to consumers who have activated their cards. We generally establish sales commission
percentages in long-term distribution agreements with our retail distributors, and aggregate sales com-
missions are determined by the number of prepaid cards and cash transfers sold at their respective retail
stores. We incur advertising and marketing expenses for television and online advertisements of our
products and through retailer-based print promotions and in-store displays. Advertising and marketing
expenses are recognized as incurred and typically deliver a benefit over an extended period of time. For
this reason, these expenses do not always track changes in our operating revenues. Our manufacturing
and distribution costs vary primarily based on the number of GPR cards activated.
Compensation and Benefits Expenses — Compensation and benefits expenses represent the com-
pensation and benefits that we provide to our employees and the payments we make to third-party
contractors. While we have an in-house customer service function, we employ third-party contractors to
conduct all call center operations, handle routine customer service inquiries and provide temporary
support in the area of IT operations and elsewhere. Compensation and benefits expenses associated with
our customer service and loss management functions generally vary in line with the size of our active card
portfolio, while the expenses associated with other functions do not.
Processing Expenses — Processing expenses consist primarily of the fees charged to us by the
banks that issue our prepaid cards, the third-party card processor that maintains the records of our
customers’ accounts and processes transaction authorizations and postings for us, and Visa and
MasterCard, which process transactions for us through their respective payment networks. These costs
generally vary based on the total number of active cards in our portfolio and gross dollar volume.
Other General and Administrative Expenses — Other general and administrative expenses consist
primarily of professional service fees, telephone and communication costs, depreciation and amortization
of our property and equipment, transaction losses (losses from customer disputed transactions, unre-
covered customer purchase transaction overdrafts and fraud), rent and utilities, and insurance. We incur
telephone and communication costs primarily from customers contacting us through our toll-free tele-
phone numbers. These costs vary with the total number of active cards in our portfolio as do losses from
unrecovered customer purchase transaction overdrafts and fraud. Costs associated with professional
services, depreciation and amortization of our property and equipment, and rent and utilities vary based
upon our investment in infrastructure, risk management and internal controls and are generally not
correlated with our operating revenues or other transaction metrics.
Income Tax Expense
Our income tax expense consists of the federal and state corporate income taxes accrued on income
resulting from the sale of our products and services. Since the majority of our operations are based in
California, most of our state taxes are paid to that state.
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