Stamps.com 2012 Annual Report Download - page 59

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STAMPS.COM INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Beginning in the second quarter of 2011, we began recognizing breakage revenue related to our PhotoStamps retail boxes utilizing the
redemption recognition method. Under the redemption recognition method, we recognize breakage revenue from unredeemed retail boxes in
proportion to the revenue recognized from the retail boxes that have been redeemed. During the second quarter of 2011, we recognized $2.2
million, which was $0.15 on a per share basis using fully diluted shares as of June 30, 2011 (revenue divided by fully diluted shares outstanding,
exclusive of any current or prior period costs related to the retail programs), of retail box breakage revenue, of which $2.1 million related to a
cumulative catch-
up for previously sold and unredeemed PhotoStamps retail boxes originally recorded as deferred revenue. The retail box
breakage revenue recognized was recorded in PhotoStamps revenue. We continue to recognize retail box breakage revenue from PhotoStamps
retail boxes using the redemption recognition method. During 2012 and 2011 PhotoStamps retail box breakage revenue was approximately
$260,000 and $2.3 million, respectively.
Cost of Service Revenue
Cost of service revenue principally consists of the cost of customer service, certain promotional expenses, system operating costs, credit card
processing fees and customer misprints that do not qualify for reimbursement from the USPS. Cost of product revenue principally consists of
the cost of products sold through our Mailing & Shipping Supplies Store and the related costs of shipping and handling. The cost of insurance
revenue principally consists of parcel insurance offering costs. Cost of PhotoStamps revenue principally consists of the face value of postage,
image review costs and printing and fulfillment costs.
Promotional Expense
New PC Postage customers are typically offered promotional items that are redeemed using coupons that are qualified for redemption after a
customer is successfully billed beyond an initial trial period. We account for our promotional expense in accordance with Accounting Standard
Codification (“ASC”) 605-50-25, “Recognition – Vendor’s Accounting for Consideration Given to a Customer”,
by recognizing a liability for
promotional expense based on estimated amounts that will be claimed by customers unless the liability for promotional expense cannot be
reasonable and reliably estimated. This includes free postage and a free digital scale and is expensed in the period in which a customer qualifies
using estimated redemption rates based on historical data. Promotional expense, which is included in cost of service, is incurred as customers
qualify and thereby may not correlate directly with changes in revenue, as the revenue associated with the acquired customer is earned over the
customer’s lifetime. During 2012, 2011 and 2010 promotional expense was $3.5 million, $3.6 million and $2.7, respectively.
Research and Development Costs
Research and development expense principally consist 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.
Sales and Marketing
Sales and marketing expense principally consists of spending to acquire new customers and compensation and related expenses for personnel
engaged in sales, marketing, and business development activities. Ongoing marketing programs include the following: traditional advertising,
partnerships, customer referral programs, customer re-marketing efforts, telemarketing, direct sales, direct mail, and online advertising.
Advertising Costs
We expense the costs of producing advertisements as incurred, and expense the costs of communicating and placing the advertising in the period
in which the advertising space or airtime is used. For the years ended December 31, 2012, 2011 and 2010, advertising and tradeshow costs were
$8.7 million, $7.0 million and $5.5 million, respectively.
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