Green Dot 2011 Annual Report Download - page 43

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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 commissions 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, online and in-store
promotions. 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 compensation 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 consulting 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 the payment networks, which process transactions for us. 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, unrecovered 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 telephone 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, business development, 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.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with GAAP. The preparation of our consolidated
financial statements requires our management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical
experience, current circumstances and various other assumptions that our management believes to be 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. Accordingly, actual
results could differ significantly from the estimates made by our management. To the extent that there are differences
between our estimates and actual results, our future financial statement presentation, financial condition, results of
operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to
understanding our historical and future performance, as these policies relate to the more significant areas involving
management’s judgments and estimates.
Revenue Recognition
We recognize revenue when the price is fixed or determinable, persuasive evidence of an arrangement exists,
the product is sold or the service is performed, and collectibility of the resulting receivable is reasonably assured.
We defer and recognize new card fee revenues on a straight-line basis over the period commensurate with our
service obligation to our customers. We consider the service obligation period to be the average card lifetime. We