Stamps.com 2012 Annual Report Download - page 32

Research and Development
Research and development expense principally consists of compensation for personnel involved in the development of our services, depreciation
of equipment and software, and expenditures for consulting services and third party software. Research and development expense increased 9%
to $10.2 million in 2012 from $9.4 million in 2011. The increase is primarily due to headcount-
related expenses as we continued to invest in the
development and enhancement of our PC Postage solution. Research and development expenses as a percent of total revenue was consistent at
9% for both 2011 and 2012.
General and Administrative
General and administrative expense principally consists of compensation and related costs for executive and administrative personnel, fees for
legal and other professional services, depreciation of equipment and software used for general corporate purposes and amortization of intangible
assets. General and administrative expense increased 4% to $14.8 million in 2012 from $14.2 million in 2011. The increase is primarily due to
the one-
time relocation expense we incurred associated with the move to our new corporate headquarters and headcount related expenses.
General and administrative expenses as a percent of total revenue decreased slightly from 14% in 2011 to 13% in 2012 as a result of lower
litigation expenses in 2012 following the settlement of our patent infringement lawsuit with Endicia in the first quarter of 2012.
Interest and Other Income, Net
Interest and other income, net primarily consists of interest income from cash equivalents, short-term and long-term investments and rental
income from our corporate headquarters in El Segundo, California. Interest and other income, net decreased 4% to $541,000 in 2012 from
$562,000 in 2011. The decrease is primarily due to lower yields on our investment balances including certain investments in our portfolio that
matured and were replaced with lower yield investments.
Provision for Income Taxes
Income tax benefit increased 64% to $13.9 million in 2012 from $8.5 million in 2011. During 2012, our income tax benefit consisted of a
reduction of a portion of our valuation allowance on our deferred tax asset (as described below) and federal and state alternative minimum taxes.
Our effective income tax rate differs from the statutory income tax rate primarily as a result of the reduction of a portion of our valuation
allowance.
We evaluated the appropriateness of our deferred tax assets and related valuation allowance in accordance with Accounting Standards
Codification (“ASC”)
740 based on all available positive and negative evidence. On March 6, 2012, we entered into a binding agreement with
PSI Systems, Inc. (“PSI”)
to resolve all outstanding patent litigation among the parties. Because the PSI litigation settlement occurred during the
first quarter of 2012, we eliminated what had previously been negative evidence at that time. The litigation settlement then became positive
evidence because (1) it eliminated the hard-to-
predict fluctuations in litigation expenditures, which we expected to be material in future
forecasts, (2) it eliminated the potential for a material negative financial judgment against us and (3) it eliminated the possibility of an injunction
against us. We believed the other positive and negative evidence we evaluated was consistent (e.g., no material change had occurred) relative to
our evaluation of this evidence in prior periods. Based on this discrete event, we extended our forecast of projected taxable income from two
years to three years for the portion of our deferred tax asset for which it was more likely than not that a tax benefit would be realized under ASC
740 as of March 31, 2012. As a result, we released a portion of our valuation allowance totaling $11.9 million during the first quarter of 2012.
During the fourth quarter of 2012, we re-
evaluated positive and negative evidence relating to our gross deferred tax assets and valuation
allowance noting that there was no additional discrete event subsequent to the first quarter of 2012. During the fourth quarter of 2012, we
updated our three year forecast of projected taxable income. Based on the updated forecast and a change in the California state tax laws, we
recorded another release of a portion of our valuation allowance in the fourth quarter of 2012 totaling approximately $2.5 million. As of
December 31, 2012, we recorded approximately $31 million of net deferred tax assets, and we continued to maintain a valuation allowance for
the remainder of our gross deferred tax assets.
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