UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2010
Commission file number 000-21783
(Exact name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
77-0142404
(I.R.S. Employer Identification Number)
810 West Maude Avenue
Sunnyvale, CA 94085
(Address of Principal Executive Offices including Zip Code)
(408) 727-1885
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
COMMON STOCK, PAR VALUE $.001 PER SHARE
Name of each exchange on which registered
NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:133) YES ⌧ NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. (cid:133) YES ⌧ NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. ⌧ YES (cid:133) NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). (cid:133) YES (cid:133) NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this
Form 10-K. ⌧
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:133)
Accelerated filer ⌧
Smaller reporting company (cid:133)
Non-accelerated filer (cid:133)
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)
Yes (cid:133)
No ⌧
Based on the closing sale price of the Registrant's common stock on the NASDAQ Capital Market System on September 30, 2009, the aggregate market value
of the voting stock held by non-affiliates of the Registrant was $54,517,980. For purposes of this disclosure, shares of common stock held by persons who
hold more than 5% of the outstanding shares of common stock and shares held by officers and directors of the Registrant have been excluded because such
persons may be deemed to be affiliates. The determination of affiliate status for this purpose is not necessarily a conclusive determination for any other
purpose.
The number of shares of the Registrant's common stock outstanding as of May 24, 2010 was 63,575,488.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III incorporate information by reference from the Proxy Statement to be filed within 120 days of March 31, 2010 for the
2010 Annual Meeting of Stockholders.
8X8, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 2010
Part I.
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
(Removed and Reserved)
Part II.
Item 5. Market for Registrant's Common Stock and Related Security Holder Matters
Item 6.
Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Part III.
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Part IV.
Item 15. Exhibits and Financial Statement Schedules
Signatures
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ITEM 1. BUSINESS
Forward-Looking Statements and Risk Factors
PART I
Statements contained in this annual report on Form 10-K, or Annual Report, regarding our expectations, beliefs, estimates,
intentions or strategies are forward-looking statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Any statements contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. For example, words such as “may,” “will,” “should,” “estimates,” “predicts,” “potential,”
“continue,” “strategy,” “believes,” “anticipates,” “plans,” “expects,” “intends,” and similar expressions are intended to identify
forward-looking statements. You should not place undue reliance on these forward-looking statements. Actual results and
trends may differ materially from historical results or those projected in any such forward-looking statements depending on a
variety of factors. These factors include, but are not limited to, customer acceptance and demand for our voice over Internet
protocol, or VoIP, telephony products and services, the reliability of our services, the prices for our services, customer renewal
rates, customer acquisition costs, actions by our competitors, including price reductions for their telephone services, potential
federal and state regulatory actions, compliance costs, potential warranty claims and product defects, our needs for and the
availability of adequate working capital, our ability to innovate technologically, the timely supply of products by our contract
manufacturers, potential future intellectual property infringement claims that could adversely affect our business and operating
results, and our ability to retain our listing on the NASDAQ Capital Market. The forward-looking statements may also be
impacted by the additional risks faced by us as described in this Report, including those set forth under the section entitled
"Factors that May Affect Future Results." All forward-looking statements included in this Annual Report are based on
information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made in this Annual Report, which attempt to advise
interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Our fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in this Annual Report, refers to the
fiscal year ending March 31 of the calendar year indicated (for example, fiscal 2010 refers to the fiscal year ended March 31,
2010). Unless the context requires otherwise, references to “we,” “us,” “our,” “8x8” and the “Company” refer to 8x8, Inc. and
its consolidated subsidiaries.
Overview
8x8 develops and markets telecommunications services for Internet protocol, or IP, telephony and video applications as well as
web-based conferencing and unified communications services. We offer the 8x8 VoIP (Voice over Internet Protocol) voice and
video digital phone service, 8x8 Virtual Office hosted PBX service, 8x8 Complete Contact Center service, 8x8 Trunking
service, 8x8 Hosted Key System service, 8x8 MobileTalk service, 8x8 Virtual Meeting web conferencing service and the 8x8
Virtual Office Pro unified communications solution. We launched 8x8 digital phone service in November 2002, the 8x8
Virtual Office hosted PBX business service in March 2004, the 8x8 videophone service in June 2004, the 8x8 Complete
Contact Center in July 2007, the 8x8 MobileTalk service in November 2007, the 8x8 Trunking service in June 2008, the 8x8
Hosted Key System service in July 2008, the 8x8 Virtual Meeting web conferencing service in September 2009 and the 8x8
Virtual Office Pro unified communications solution in January 2010. In May 2010, we acquired Central Host, Inc., a provider
of managed hosting and cloud-based computing solutions and began offering 8x8 Managed Hosting and Cloud-Based
Computing solutions to business customers.
Between November 2002 and April 2009, we marketed our services under the Packet8 brand. In May 2009, we began
marketing our services under the 8x8 brand. As of March 31, 2010, we had more than 20,000 business customers who use our
services as their primary business telephone system. Each business customer subscribes to a number of various lines and
services (e.g. physical phone extensions, virtual extensions, fax lines, toll free numbers, receptionist software, unified
communications services, etc.)
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The 8x8 voice and video broadband phone service enables broadband Internet users to add digital voice and video
communications services to their high-speed Internet connections. Customers can choose a regular direct-dial phone number
from any of the rate centers offered by the service and then use an existing telephone to make and receive calls over a standard
broadband Internet connection. All 8x8 telephone accounts come with bundled voice mail, caller ID, call waiting, call waiting
caller ID, call forwarding, hold, line-alternate, 3-way conferencing, web and voice-prompt access to account controls, and
online billing. In addition, we offer videophones and video telephony software in conjunction with our service plans that
connect to a customer’s high-speed Internet network to deliver all of the voice features above, as well as unlimited video calls,
to any other 8x8 videophone customer worldwide.
The 8x8 Virtual Office suite of business phone services offers small and medium-sized businesses feature-rich, HD (high
definition) audio-enhanced communications services that eliminate the need for traditional telecommunications services and
business phone systems. The 8x8 Virtual Office solution essentially replaces an on-premise PBX (private branch exchange),
telephone system with a hosted, Internet-based business phone service that is delivered over a managed or unmanaged Internet
connection. We sell pre-programmed IP telephones with speakerphones and a display screen, in conjunction with our Virtual
Office service plans, which enable our business customers to access additional Virtual Office features through on-screen phone
menus. The 8x8 Virtual Office Pro unified communications solution, introduced in January 2010, bundles the 8x8 Virtual
Office hosted PBX phone service with other essential businesses software communications services such as web conferencing,
call recording and archiving, Internet fax, chat, voicemail and presence management and a mobile iPhone/iPad extension in a
competitively priced offering. 8x8 Virtual Office Pro takes the functionality of an already powerful hosted PBX phone service
to a new level with high fidelity HD voice, remote accessibility via any web browser or smart phone and integration with vital
collaboration tools.
Available Information
We maintain a corporate Internet website at the address http://www.8x8.com. The contents of this website are not incorporated
in or otherwise to be regarded as part of this Annual Report. We file reports with the Securities and Exchange Commission, or
SEC, which are available on our website free of charge. These reports include annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to such reports, each of which is provided on our website as soon
as reasonably practical after we electronically file such materials with or furnish them to the SEC. You can also read and copy
any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can
obtain additional information about the operation of the Public Reference Room by calling the SEC at 1.800.SEC.0330. In
addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC, including 8x8.
Industry Background
The technology we employ to deliver our service, known as Voice over Internet Protocol (VoIP), enables communications over
the Internet through the compression of voice, video and/or other media into data packets that can be efficiently transmitted
over data networks and then converted back into the original media at the other end. Data networks, such as the Internet or
local area networks, or LANs, have always utilized packet-switched technology to transmit information between two
communicating terminals (for example, a PC downloading a page from a web server, or one computer sending an e-mail
message to another computer). IP is the most commonly used protocol for communicating on these packet switched networks.
VoIP allows for the transmission of voice and data over these same packet-switched networks, providing an alternative to
traditional telephone networks which use a fixed electrical path to carry voice signals through a series of switches to a
destination.
As a result of the potential cost savings and added features of VoIP, consumers, enterprises, traditional telecommunication
service providers and cable television providers view VoIP as the future of telecommunications. VoIP has experienced
significant growth in recent years due to:
• Demand for lower cost telephone service;
•
Improved quality and reliability of VoIP calls due to technological advances, increased network development and
greater bandwidth capacity; and
• New product innovations that allow VoIP providers to offer services not currently offered by traditional telephone
companies.
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The traditional telephone networks maintained by many local and long distance telephone companies, known as the public-
switched telephone networks, or PSTN, were designed solely to carry low-fidelity audio signals with a high level of reliability.
Although these traditional telephone networks are very reliable for voice communications, we believe these networks are not
well-suited to service the explosive growth of digital communication applications for the following reasons:
• They are expensive to build because each subscriber's telephone must be individually connected to the central office
switch, which is usually several miles away from a typical subscriber's location;
• They transmit data at very low rates and resolutions, making them poorly suited for delivering high-fidelity audio,
entertainment-quality video or other rich multimedia content;
• They use dedicated circuits for each telephone call which allot fixed bandwidth throughout the duration of each call,
whether or not voice is actually being transmitted which is an inefficient use of the investment in the network; and
• They may experience difficulty in providing new or differentiated services or functions, such as video
communications, that the network was not originally designed to accommodate.
Until recently, traditional telephone companies have avoided the use of packet-switched networks for transmitting voice calls
due to the potential for poor sound quality attributable to latency issues (delays) and lost packets which can prevent real-time
transmission. Recent improvements in packet-switching technology, compression and broadband access technologies, as well
as improved hardware and provisioning techniques, have significantly improved the quality and usability of packet-switched
voice calls.
Historically, packet-switched networks were built mainly for carrying non real-time data, although they are now fully capable
of transmitting real time data. The advantages of such networks are their efficiency, flexibility and scalability. Bandwidth is
only consumed when needed. Networks can be built in a variety of configurations to suit the number of users, client/server
application requirements and desired availability of bandwidth, and many terminals can share the same connection to the
network. As a result, significantly more traffic can be transmitted over a packet-switched network, such as a home network or
the Internet, than a circuit-switched telephony network. Packet-switching technology allows service providers to converge
their traditionally separate voice and data networks and more efficiently utilize their networks by carrying voice, video,
facsimile and data traffic over the same network. The improved efficiency of packet switching technology creates network cost
savings that can be passed on to the consumer in the form of lower telephony rates.
The growth of the Internet in recent years has proven the scalability of these underlying packet-switched networks. As
broadband connectivity, including cable modem and digital subscriber line (or DSL), has become more available and less
expensive, it is now possible for service providers like 8x8 to offer voice and video services that run over these IP networks to
businesses and residential consumers. Providing such services has the potential to both substantially lower the cost of telephone
service and equipment to these customers and increase the breadth of features available to our subscribers. Services like full-
motion, two-way video are now supported by the bandwidth spectrum commonly available to broadband customers, whether
business or residential.
Our Strategy
Our objective is to provide reliable, scalable, and profitable worldwide Internet-based communications services with
unmatched quality by leveraging our patented software technologies to deliver innovative, competitively priced offerings. We
foster an environment that empowers our employees to provide the best service to our customers and partners at every point of
interaction. We intend to bring the best possible voice, video and unified communications services, at an affordable price, to
businesses and residential consumers and enhance the ways in which these customers communicate with each other and the
world.
Specific strategies to accomplish this objective include:
• Focus on our 8x8 Virtual Office hosted PBX and 8x8 Virtual Office Pro unified communications services.
Toward the end of fiscal 2006, we began to shift the focus of our sales and marketing efforts to growing the 8x8
Virtual Office services and applications. 8x8 Virtual Office currently generates higher margins for us than our
residential consumer service offerings. The businesses that subscribe to this service pay for the premise
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equipment and generate higher monthly service revenues. In addition, they are more likely to subscribe to our
add-on services and are less likely to leave the service.
• Capitalize on our technological expertise to introduce new products and features. Over the past 10 years, we
have developed or acquired several core technologies that form the backbone of our video and VoIP service
which we intend to use to develop product enhancements and future products. We developed the core software
associated with the Virtual Office product line including the call control engine, protocol stacks and network
address translation (NAT) traversal firmware for the customer premise equipment. As a result, we are able to
update the software functionality of our services without third party assistance and limit the distribution of our
unique customer premise equipment features such as NAT traversal to customer premise equipment that is sold in
conjunction with our services. We were the first VoIP service provider to ship two-way video-enabled hardware,
and our 8x8 Virtual Office services are among the most feature-rich hosted VoIP business services in the
industry.
• Offer the best possible service and support to our customers with a world class customer support organization.
We have an established call center and customer support group at our headquarters in Sunnyvale, California and
outsourced call center operation located in Santa Maria, California. We also have invested in significant upgrades
to our existing back office infrastructure to enhance the support we can provide to new and existing subscribers,
as well as our distribution partners. Our strengths include customer service from technically sophisticated
customer service agents providing support from onshore facilities located in California.
Our 8x8 Services
Our services work over virtually any high-speed Internet connection worldwide to allow calls to or from any phone in the
world, whether that phone is an IP phone or a PSTN phone. 8x8’s service utilizes IP customer premise equipment to enable
plug and play installation and a familiar dial tone user interface. The 8x8 service also uses web-based technologies to enable
unified communications services such as web conferencing and Internet fax as well as account setup, account management,
billing and customer support. We have developed proprietary implementation of standards-based technologies underlying our
8x8 service, which works with third party carriers to terminate VoIP calls on the PSTN network. As part of the 8x8 service, we
currently resell IP telephones and videophones which utilize derivatives of our licensed semiconductor technology and unique
software modifications to the protocol and application code that enable them to connect to the 8x8 IP services platform. We
continue to enhance and develop new functionality in the software code that is embedded in these devices.
8x8 VoIP and Video Telephone Service
We introduced our 8x8 residential VoIP telephone service in November 2002. To obtain the service, the customer must enter
into a service agreement with us and select a calling plan based on the anticipated use of the service. Service plans provide
alternatives for minutes of usage, up to an unlimited amount, at varying rates for calls in the United States and Canada that are
made to non-8x8 customers. Subscribers are charged at a per-minute rate for international calls to non-8x8 customers and,
depending on the level of plan selected, may be charged for calls to the PSTN if they exceed the minutes allowed under the
chosen plan. All of our plans allow for unlimited calling between 8x8 customers, regardless of their location. Each subscriber
is assigned a telephone number in any of the area codes and underlying rate centers currently offered by the service. We
currently offer area codes in 48 contiguous U.S. states along with free number porting from the customer’s previous service
provider to 8x8. All 8x8 customers receive access to a variety of telephone features, including voice mail, caller ID, call
forwarding, call waiting, 3-way calling, online account management and billing, international call blocking and caller ID
blocking. We currently offer enhanced 9-1-1, or E-911, service on all 8x8 calling plans with a United States service address.
An 8x8 E-911 call is routed as 9-1-1 emergency traffic and is accompanied by caller information. Subscribers may also have
toll-free numbers (e.g., 800 numbers) or virtual numbers. A virtual number is an additional phone number which will ring
through to an existing subscriber line. We offer virtual numbers in all of our U.S. rate centers, as well as in certain international
countries. We also offer video over IP service using the 8x8 Tango videophone product, which includes all of the voice service
plans and features described above plus unlimited video calls to any other 8x8 videophone subscriber anywhere in the world.
8x8 Virtual Office Business Telephone Service
Our 8x8 Virtual Office business telephone service was launched in March 2004 and is targeted at the small and medium-sized
business market. 8x8 Virtual Office is an affordable, easy-to-use alternative to traditional PBX systems or Centrex class
services from legacy telecommunications providers that offers features and services neither provide. 8x8 Virtual Office allows
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users with a high-speed Internet connection anywhere in the world to be part of a virtual PBX that includes automated
attendants to assist callers, conference bridges, extension-to-extension dialing and ring groups, in addition to a rich variety of
other business class PBX features normally found on dedicated PBX equipment. 8x8 Virtual Office extensions do not require a
dedicated communications infrastructure. The service is received through an office’s existing Internet connection, thus
eliminating the need for additional phone lines or digital subscriber lines for extensions, in contrast to traditional Centrex or
PBX products. The service is provided by 8x8 software that runs on computing platforms located in our data centers.
8x8 Virtual Office subscribers have the ability to choose any phone number available to 8x8 subscribers regardless of a user's
geographic location. Subscribers also can port numbers, including toll-free numbers, from other service providers at no
additional cost. Each extension in the virtual PBX can be located anywhere in the world with high-speed Internet access. 8x8
Virtual Office extension-to-extension calls and transfers are accomplished over the Internet, anywhere in the world, free of
extra charges to third party telecommunications carriers. 8x8 Virtual Office offers the following essential services for small and
medium-sized businesses:
• Auto-attendant providing dial by extension, name or group;
• Unlimited calling to the US, Canada, 17 additional countries and other 8x8 subscribers, as well as low
international rates;
• Unlimited 8x8 extension-to-extension dialing anywhere in the world;
• Direct Inward Dial (DID) phone number with any desired area code for each extension;
• Conference bridge, 3-way calling, music on hold, call park/pick-up, call transfer, hunt groups, and do not disturb;
• Business-class voice mail including email alerts and direct transfer to mailbox;
• Call waiting / Caller-ID;
• Distinctive tone ringing, and
• Optional receptionist console application offering:
o Multiple call viewing and handling;
o Direct transfer to extension's voicemail;
o Supervised transfers, and
o View of extension status
As of March 31, 2010, each 8x8 Virtual Office customer subscribed to an average of between seven and eight of our business
services.
8x8 Complete Contact Center
The 8x8 Complete Contact Center, introduced in July 2007, is a fully integrated hosted call center solution that works with any
broadband Internet service and provides enterprise class contact center functionality combined with Virtual Office hosted PBX
calling features. The 8x8 Complete Contact Center lets companies quickly deploy and operate multi-channel contact centers
within 8x8’s hosted PBX infrastructure without the time and expense of purchasing, installing and maintaining costly,
specialized equipment. Delivered entirely as a hosted service, the 8x8 Complete Contact Center requires no specialized
hardware or software, no telecom equipment and no up-front capital expenditures, making it an ideal solution for blending in-
house and offsite or multi-site agents. Agents require nothing more than a web browser and a directly addressable voice
terminal.
5
The 8x8 Complete Contact Center service offers features such as skill-based routing, multi-media management, real time
monitoring and reporting, voice recording and logging, historical reporting, Interactive Voice Response, CRM integration with
Salesforce.com and NetSuite and contact and case management tools.
8x8 Trunking Services
In June 2008, we launched the 8x8 Trunking service. The 8x8 Trunking service provides companies that have already made a
substantial or recent investment in premise-based PBX phone system hardware with an opportunity to reduce recurring
monthly service and toll charges by delivering digital quality dial tone service to their phone system hardware over their
broadband connection rather than a separate voice circuit from an incumbent or local exchange carrier. The customer's existing
phone system equipment continues to provide the user feature set while the 8x8 Trunking services provide dial tone together
with local, long distance and international call routing services to that equipment from the 8x8 network.
8x8 Hosted Key System Services
In July 2008, we launched the 8x8 Hosted Key System service. The 8x8 Hosted Key System service is designed to replace
traditional premise-based telephone "key systems" typically used by companies whose size or structure dictates the sharing of
multiple, common phone lines among employees, regardless of where the employees are located. The 8x8 Hosted Key System
expands our addressable market to include businesses that require shared line appearance services rather than the PBX
functionality offered with our 8x8 Virtual Office hosted PBX solution.
8x8 IP Telephones
In the second quarter of fiscal 2009, we launched the 8x8 675xi series of IP phones that incorporate 8x8's advanced NAT
traversal technologies to facilitate the network-independent operational advantages of the 8x8 service. These advantages
include the ability to simply plug the phone into any public or private Internet connection and immediately make or receive
calls without performing any network configuration or firewall manipulation. The 8x8 675xi IP phones also deliver enhanced
equipment and service features including high definition HD audio, corporate directory display and lookup, intercom paging,
shared line appearance and Power over Ethernet capability.
We use third-party manufacturers to make the videophones, IP business telephones and cordless handsets that we sell to our
customers. We do not have long-term purchase agreements with any of our contract manufacturers. While we believe that we
could replace our suppliers if necessary, our ability to provide service to our subscribers would be impacted during this
timeframe, and this could have an adverse effect on our business, financial condition and results of operations.
8x8 Virtual Meeting
The 8x8 Virtual Meeting video web conferencing service, introduced in September 2009, is an online collaboration tool
accessible instantly (no software download required) from any web browser and any computing platform. Available as an add-
on service for existing 8x8 customers, a standalone offering for new subscribers or as part of the Virtual Office Pro unified
communications bundle, 8x8 Virtual Meeting lets users conduct centralized online meetings, complete with integrated voice
conferencing (to and from any telephone or web browser platform), presentation slide sharing, desktop and application sharing,
instant messaging, chair control, conference control and call recording. 8x8 Virtual Meeting offers unlimited conferencing,
giving users the flexibility to conduct regular meetings with employees, associates, customers and prospects in remote
locations worldwide.
8x8 Virtual Office Pro Unified Communications
Introduced in January 2010, 8x8 Virtual Office Pro is a powerful unified communications service that allows subscribers to
manage essential, advanced business communications functions online through a centralized portal. Integrated with the 8x8
Virtual Office VoIP (Voice over Internet Protocol) hosted PBX phone service, Virtual Office Pro enhances business
productivity by providing users with a complete, instantly accessible suite of communication tools used in everyday business
interactions. 8x8 Virtual Office Pro delivers these tools through an easy-to-use online dashboard which provides:
(cid:131) A visual overview and online control of 8x8 Virtual Office business calling activity including point-and-click access
to inbound and outbound calls and call management features such as call transfer, do not disturb (DND) and call
forwarding
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(cid:131) Microsoft Outlook Contacts and Corporate Directory integration
(cid:131) Virtual Meeting - allows you to create, join and invite participants to web, audio and video meetings.
(cid:131)
iPhone Virtual Office Mobile extension – place and receive (VoIP) calls and access common Virtual Office services
and functions from an iPhone/iPod Touch/iPad mobile handset
(cid:131) Fax - enables users to send and receive unlimited faxes using either a separate phone number for fax or the same
number as your 8x8 extension
(cid:131) Call recording - enables any inbound or outbound call to be recorded and later reviewed, downloaded or deleted
(cid:131) Presence management - tells other co-workers whether you are logged in, logged off, on the phone, off the phone or
currently unavailable
(cid:131) My Inbox overview - gives a comprehensive view of all voicemails, recordings, FAX messages, calls, and chat history
8x8 Managed Hosting and Cloud-Based Computing Solutions
In May 2010, we introduced 8x8 managed hosting and cloud-based computing solutions enable business customers to reduce
costs and gain performance and reliability advantages by eliminating in-house ownership of server equipment and costly
information technology systems management staff.
Sales, Marketing and Promotional Activities
We currently sell and market our 8x8 services to end users through our direct sales force, website, retail channels, and third
party resellers. Our inside sales force primarily takes inbound telephone calls and website leads which are generated from third
party lead generation sources and direct web advertising such as Google and Yahoo. Our sales force decreased slightly from 63
sales representatives at the end of fiscal 2009 to 61 sales representatives at the end of fiscal 2010. These sales representatives
are paid a base salary and monthly commission for selling our products and services. The commission is based on new sales
made by the sales representative.
We launched the retail channel in fiscal 2005 and refocused this channel on our 8x8 Virtual Office service in 2006 with Office
Depot and subsequently Office Max. Retail channels, online channels and third party resellers generated less than 5% of our
subscriber additions in fiscal 2010.
Competition
We face strong competition from incumbent telephone companies, cable companies and alternative voice and video
communication providers. Because most of our target customers are already purchasing communications services from one or
more of these providers, our success is dependent upon our ability to attract these customers away from their existing
providers. This will potentially become more difficult as the early adopter market for VoIP services becomes saturated and
mainstream customers make up more of our target market. We believe that the principal competitive factors affecting our
ability to attract and retain customers are price, call quality, reliability, customer service, and enhanced services and features.
For more information regarding the risks associated with such strong competition, please refer to Item 1A, Risk Factors
“Intense competition in the markets in which we compete could prevent us from increasing or sustaining our revenue
and increasing or maintaining profitability.”
Incumbent telephone companies
The incumbent telephone companies are our primary competitors and have historically dominated their regional markets. These
competitors include AT&T, Qwest Communications and Verizon Communications as well as rural incumbents, such as
CenturyTel and Windstream. These competitors are substantially larger and better capitalized than we are and have the
advantage of a large existing customer base, and larger marketing budgets than we have. Moreover, they also provide the
broadband services that are required to use our service, which is a significant competitive advantage.
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Vendors of private branch exchange (“PBX”) systems and alternative voice communications providers
Competitors for the 8x8 business service include traditional PBX and key system manufacturers and their resellers, including
Cisco, Avaya, Nortel, Mitel and Toshiba, Centrex services offered by incumbent telephone companies, and VoIP services
offered by XO Communications, Cbeyond, M5 and other companies.
Operations
We have a centrally managed platform consisting of data management, monitoring, control and billing systems that support all
of our products and services. We have invested substantial resources to develop and implement our real-time call management
information system. Key elements of this system include a prospective customer quotation portal, customer provisioning,
customer access, fraud control, network security, call routing, call monitoring, media processing and normalization, call
reliability, and detailed call records. Our platform monitors our process of digitizing and compressing voice and video into
packets and transmitting these packets over data networks around the world. We maintain a call switching platform in software
that manages call admission, call control, call rating and routes calls to an appropriate destination or customer premise
equipment. Unless the recipient is using an Internet telephony device, the packets (representing a voice and/or video call
initiated by an 8x8 subscriber) are sent to a gateway belonging to one of our partner telecommunications carriers, where they
are reassembled and the call is transferred to the PSTN and directed to a regular telephone anywhere in the world. Our billing
and back office systems manage and enroll customers and bill calls as they originate and terminate on the service.
Network Operations Center
We maintain a network operations center at our headquarters in Sunnyvale, California and employ a staff of 23 individuals
with experience in voice and data operations to provide 24-hour operations support, 7 days per week. We use various tools to
monitor and manage all elements of our network and our partners’ networks in real-time. We also monitor the network
elements of some of our larger business customers. Additionally, our network operations center provides technical support to
troubleshoot equipment and network problems. We also rely upon the network operations centers and resources of our
telecommunications carrier partners to augment our monitoring and response efforts.
Customer and Technical Support
We maintain a call center at our headquarters in Sunnyvale, California and have a staff of 79 employees and contractors that
provide customer service and technical support to customers. In addition, we have outsourced certain customer support
activities to third parties. Customers who access our services directly through our web site receive customer service and
technical support through multilingual telephone communication, web-based and “chat” sessions and e-mail support.
Interconnection Agreements
We are a party to telecommunications interconnect and service agreements with VoIP providers and PSTN telecommunications
carriers, such as Global Crossing, Level(3) Communications, Qwest Communications and Neutral Tandem. Pursuant to these
agreements, VoIP calls originating on our network can be terminated on other VoIP networks or the PSTN. Correspondingly,
calls originating on other VoIP networks and the PSTN can be terminated on our network. While we believe that relations with
these providers and carriers are good, we have no assurance that these partners will be able or willing to supply services to us
in the future.
Research and Development
The VoIP market is characterized by rapid technological changes and advancements. Accordingly, we make substantial
investments in the design and development of new products and services, as well as the development of enhancements and
features to our existing 8x8 products and services. Future development also will focus on the use and interoperability of our
products and services with emerging audio and video telephony standards and protocols, quality and performance
enhancements to multimedia compression algorithms, support of new customer premise equipment, new unified
communication service offerings, and wireless and mobile applications. We believe that the development of new products and
services and the enhancement of existing products and services are essential to our success.
8
We currently employ 29 individuals in research, development and engineering activities in our facilities in Sunnyvale,
California. Research and development expenses in each of the fiscal years ended March 31, 2010, 2009 and 2008 were $5.0
million, $5.2 million and $4.3 million, respectively.
Regulatory
Although several regulatory proceedings are underway or are being contemplated by federal and state authorities, including the
FCC and state regulatory agencies, VoIP communication services, like ours, are unregulated at the state level and are subject to
less regulation at the federal level than traditional telecommunications services. Providers of traditional telecommunications
services are subject to the highest degree of regulation, while providers of information services are largely exempt from most
federal and state regulations governing traditional common carriers. The FCC has subjected VoIP service providers to a smaller
subset of regulations that apply to traditional telecommunications service providers and have not yet classified VoIP services as
either telecommunications or information. The FCC is currently examining the status of VoIP service providers and the
services they provide. The FCC initiated a notice of proposed rule-making (NPRM) in early 2004 to gather public comment on
the appropriate regulatory environment for IP telephony. In November 2004, the FCC ruled that the VoIP service of a
competitor and "similar" services are jurisdictionally interstate and not subject to state certification, tariffing and most other
state telecommunications regulations. The FCC ruling was appealed by several states and on March 21, 2007, the United
States Court of Appeals for the Eighth Circuit affirmed the FCC ruling. Recently, the FCC has stated that it is considering
reclassifying the transmission component of broadband Internet access services as a telecommunications service but would
only subject the service to specific regulations applicable to traditional telecommunications services.
The effect of any future laws, regulations and the orders on our operations, including, but not limited to, the 8x8 service, cannot
be determined. But as a general matter, increased regulation and the imposition of additional funding obligations increases
service costs that may or may not be recoverable from our customers, which could result in 1) making our services less
competitive with traditional telecommunications services if we increase our retail prices or 2) decrease our profit margins if we
attempt to absorb such costs.
Regulation of the Internet
In addition to regulations addressing Internet telephony and broadband services, other regulatory issues relating to the Internet,
in general could affect our ability to provide our services. Congress has adopted legislation that regulates certain aspects of the
Internet, including online content, user privacy, taxation, liability for third-party activities and jurisdiction. In addition, a
number of initiatives pending in Congress and state legislatures would prohibit or restrict advertising or sale of certain products
and services on the Internet, which may have the effect of raising the cost of doing business on the Internet generally.
Federal, state, local and foreign governmental organizations are considering other legislative and regulatory proposals that
would regulate and/or tax applications running over the Internet. We cannot predict whether new taxes will be imposed on our
services, and depending on the type of taxes imposed, whether and how our services would be affected thereafter. Increased
regulation of the Internet may decrease its growth and hinder technological development, which may negatively impact the cost
of doing business via the Internet or otherwise materially adversely affect our business, financial condition and results of
operations.
Intellectual Property and Proprietary Rights
Our ability to compete depends, in part, on our ability to obtain and enforce intellectual property protection for our technology
in the United States and internationally. We currently rely primarily on a combination of trade secrets, patents, copyrights,
trademarks and licenses to protect our intellectually property. As of March 31, 2010, we had been issued 76 United States
patents and additional United States and foreign patent applications pending. Our patents expire on dates ranging from 2012 to
2027. We cannot predict whether our pending patent applications will result in issued patents.
To protect our trade secrets and other proprietary information, we require our employees to sign agreements providing for the
maintenance of confidentiality and also the assignment of rights to inventions made by them while in our employ. There can
be no assurance that our means of protecting our proprietary rights in the United States or abroad will be adequate or that
competition will not independently develop technologies that are similar or superior to our technology, duplicate our
technology or design around any of our patents. In addition, the laws of foreign countries in which our products are or may be
sold do not protect our intellectual property rights to the same extent as do the laws of the United States. Our failure to protect
our proprietary information could cause our business and operating results to suffer.
9
We are also subject to the risks of adverse claims and litigation alleging infringement of the intellectual property rights of
others. Such claims and litigation could require us to expend substantial resources and distract key employees from their
normal duties, which could have a material adverse effect on our operating results, cash flows and financial condition. The
communications and software industries are subject to frequent litigation regarding patent and other intellectual property rights.
Moreover, the VoIP service provider community has historically been a target of patent holders. There is a risk that we will be
a target of assertions of patent rights and that we may be required to expend significant resources to investigate and defend
against such assertions of patent rights. For example, on April 22, 2009, we were named as a defendant, along with Comcast,
Microsoft, Avaya, Embarq, and Qwest, in a complaint filed by Web Telephony, LLC in the Eastern District of Texas. On
April 29, 2009, we entered into a settlement agreement with Web Telephony, which filed a motion to dismiss the lawsuit on
May 8, 2009. Also, on May 2, 2008, we received a letter from AT&T Intellectual Property, L.L.C. (“AT&T IP”) expressing
the belief that we must license a specified patent for use in our 8x8 broadband telephone service, as well as suggesting that we
obtain a license to its portfolio of MPEG-4 patents for use with our video telephone products and services. At the same time,
we began an evaluation of whether AT&T IP’s affiliated entities may need to license any of our patents or other intellectual
property. We have continued to engage in discussions with AT&T IP to explore a mutually agreeable resolution of the parties’
respective assertions regarding these intellectual property issues. We are unable at this time to state whether we will enter into
any license or cross-license agreements with AT&T IP or whether we ultimately anticipate any material effects on our
operating results or financial condition as a consequence of these matters.
We rely upon certain technology, including hardware and software, licensed from third parties. There can be no assurance that
the technology licensed by us will continue to provide competitive features and functionality or that licenses for technology
currently utilized by us or other technology which we may seek to license in the future will be available to us on commercially
reasonable terms or at all. The loss of, or inability to maintain, existing licenses could result in shipment delays or reductions
until equivalent technology or suitable alternative products could be developed, identified, licensed and integrated, and could
harm our business. These licenses are on standard commercial terms made generally available by the companies providing the
licenses. To date, the cost and terms of these licenses individually has not been material to our business.
Information about Segments and Geographic Areas
We have only one reportable segment. Financial information relating to our product lines and information on revenues
generated in different geographic areas are set forth in Note 6 to our consolidated financial statements contained in Part II, Item
8 of this Report.
Employees
As of March 31, 2010, our workforce consisted of 242 employees. None of our employees are represented by a labor union or
are subject to a collective bargaining arrangement.
Executive Officers of the Registrant
Our executive officers as of the date of this report are listed below.
Bryan R. Martin, Chairman and Chief Executive Officer. Bryan R. Martin, age 42, has served as our Chairman
since December 2003. Mr. Martin has served as Chief Executive Officer and as a director of the Company since February
2002. From March 2007 to November 2008, he served as President of the Company. From February 2001 to February 2002,
he served as President and Chief Operating Officer and a director of the Company. He served as Senior Vice President,
Engineering Operations from July 2000 to February 2001 and as the Company’s Chief Technical Officer from August 1995 to
August 2000. He also served as a director of the Company from January 1998 through July 1999. In addition, Mr. Martin
served in various technical roles for the Company from April 1990 to August 1995. He received a B.S. and an M.S. in
Electrical Engineering from Stanford University.
Dan Weirich, President and Chief Financial Officer. Dan Weirich, age 36, has served as our President since
November 2008 and as our Chief Financial Officer since July 2006. From June 2006 to July 2006, Mr. Weirich served as our
Acting Chief Financial Officer. Mr. Weirich served as Vice President of Operations of the Company from April 2006 to June
2006 and Director of Strategic Sales from March 2004 to April 2006. From September 2001 to March 2004, Mr. Weirich
served as independent consultant in Asia and the United States. From August 1996 to September 2001, Mr. Weirich served in
various roles for iAsiaworks, Qwest Communications and Phoenix Network. He received a B.S. in International Business from
the University of Colorado at Boulder.
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Huw Rees, Vice President of Business Development. Huw Rees, age 49, has served as Vice President, Business
Development since November 2008. From January 2001 to November 2008, Mr. Rees served as our Vice President, Sales and
Marketing. He served as the Chairman and Chief Executive Officer of the Company’s wholly owned subsidiary, Centile, Inc.,
from July 2001 until September 2003. Additionally, he served as Vice President, Sales and Business Development of Centile
from March 2001 to July 2001. He served as Vice President, Sales of the Solutions Group of the Company from August 2000
until February 2001 and as Director, North American Sales of the Company from April 1999 to August 2000. He previously
worked at Mitel Corporation as Sales Manager of the Western Region and also in sales management roles at GEC Plessey Inc.
and Marconi PLC. He received a B.Sc. (Hons) from the University of Manchester, Institute of Science and Technology in
Electrical and Electronic Engineering and a M.B.A. from the University of LaVerne.
Debbie Jo Severin, Chief Marketing Officer and Vice President of Marketing. Debbie Jo Severin, age 50, has
served as Chief Marketing Officer and Vice President of Marketing since March 2009. From 2003 to March 2009, Ms. Severin
served as Vice President of Marketing for Covad Communications. From 1998 to 2003, Ms. Severin was Vice President of
Marketing for PrimeOne Tele-TV, Northpoint Communications and Valiant Networks. Between 1986 and 1998, Ms. Severin
served in various marketing roles for BellSouth Telecommunications and Pacific Bell. She received a Masters Degree in
Mathematics and a Bachelor of Science from the University of Alabama, Birmingham.
Ramprakash Narayanaswamy, Chief Technology Officer and Vice President of Engineering. Ramprakash
Narayanaswamy, age 45, was appointed Chief Technology Officer in April 2010 and is responsible for our research,
development and engineering operations. From February 2005 to April 2010, Mr. Narayanaswamy held multiple numerous
engineering roles including Vice President of Engineering. Between 1992 and 2005, Mr. Narayanaswamy served in various
engineering roles for Nextance Inc., Bluelight.com and Sun Microsystems, Inc. He received his Masters degree in Computer
Applications from National Institute of Technology, Tiruchirapalli, India.
ITEM 1A. RISK FACTORS
If any of the following risks actually occur, our business, results of operations and financial condition could suffer
significantly.
The impact of the current economic climate and tight financing markets may impact customer demand for our
products and services.
Many of our existing and target customers are in the small and medium business sector. Although we believe our products and
services are less costly than traditional telephone services, these businesses may be more likely to be significantly affected by
economic downturns than larger, more established businesses. Additionally, these customers often have limited discretionary
funds, which they may choose to spend on items other than our products and services. If small and medium businesses
experience economic hardship, it could negatively affect the overall demand for our products and services, could cause delay
and lengthen sales cycles and could cause our revenue to decline.
Although the majority of our billing arrangements with customers are prepaid, we regularly monitor the percentage of
customers who cease to pay for our services due to closing or downsizing their business. Even though our customer churn
rates improved in fiscal 2010, a larger percentage of our total customer churn was due to these economic issues and we cannot
guarantee that we will continue to experience the same improvement in churn rates given current economic conditions.
Additionally, the combination of our sales cycle coupled with challenging economic conditions could have a negative impact
on the results of our operations.
The success of our Company is dependent on the growth and public acceptance of 8x8 Services.
Our future success as a Company depends on our ability to significantly increase revenues generated from our 8x8 services. In
turn, the success of our 8x8 voice and video communications services depends, among other things, upon future demand for
VoIP telephony systems and services. Because the use of our service requires that the user be a subscriber to an existing
broadband Internet service, usually provided through a cable or digital subscriber line, or DSL, connection, slow or limited
adoption of broadband Internet service could adversely affect the growth in our subscriber base and revenues. Although the
number of broadband subscribers worldwide has grown significantly over the last five years, VoIP service has not yet been
adopted by a majority of consumers. To increase the deployment of broadband Internet services from broadband Internet
service providers, telephone companies and cable companies must continue to invest in the deployment of high speed
broadband networks to residential and business customers, over which we have no control. In addition, VoIP networks must
11
improve quality of service for real-time communications, managing effects such as packet jitter, packet loss, and unreliable
bandwidth, so that toll-quality service can be consistently provided. VoIP telephony equipment and services must achieve a
similar level of reliability that users of the PSTN have come to expect from their telephone service, and the cost and feature
benefits of VoIP must be sufficient to cause customers to switch away from traditional telephony service providers. We must
devote substantial resources to educate customers and end users about the benefits of VoIP telephony solutions, in general, and
our services in particular. Substantial, ongoing interaction with our customers in order to train and assist them with the
deployment and use of our services over these networks is sometimes required. If any or all of these factors fail to occur, our
business may be affected adversely.
We have a history of losses and are uncertain of our future profitability.
We recorded operating income of approximately $4 million for the fiscal year ended March 31, 2010 and ended the period with
an accumulated deficit of $199 million. In addition, we recorded an operating loss of approximately $3 million and $4 million
for the fiscal years ended March 31, 2009 and 2008, respectively. Although we achieved operating income of $4 million during
the current fiscal year, we may incur operating losses for the foreseeable future, and such losses may be substantial. We will
need to increase revenues in order to generate sustainable operating profit. Given our history of fluctuating revenues and
operating losses, we cannot be certain that we will be able to achieve operating profitability on an annual basis or maintain
operating profitability on a quarterly basis in the future.
Our business depends on continued and unimpeded access to the Internet by us and our users. Internet access providers
and Internet backbone providers may be able to block, degrade or charge for access to certain of our products and
services, which could lead to additional expenses and the loss of users.
Our products and services depend on the ability of our users to access the Internet, and certain of our products require
significant bandwidth to work effectively. Currently, this access is provided by companies that have significant and increasing
market power in the broadband and Internet access marketplace, including incumbent telephone companies, cable companies
and mobile communications companies. Some of these providers have stated that they may take measures that could degrade,
disrupt or increase the cost of user access to certain of our products by restricting or prohibiting the use of their infrastructure to
support or facilitate our offerings, or by charging increased fees to us or our users to provide our offerings, while others,
including some of the largest providers of broadband Internet access services, have committed to not engaging in such
behavior. The ability of the FCC to regulate broadband Internet access services has been called into question by a recent ruling
of the United States Court of Appeals for the D.C. Circuit. While interference with access to our products and services seems
unlikely, broadband Internet access provider interference has occurred, in very limited circumstances in the U.S., and could
result in a loss of existing users and increased costs, and could impair our ability to attract new users, thereby harming our
revenue and growth.
The VoIP telephony market is subject to rapid technological change, and we depend on new product and service
introductions in order to maintain and grow our business.
VoIP telephony is an emerging market that is characterized by rapid changes in customer requirements, frequent introductions
of new and enhanced products, and continuing and rapid technological advancement. To compete successfully in this emerging
market, we must continue to design, develop, manufacture, and sell new and enhanced VoIP telephony software products and
services that provide increasingly higher levels of performance and reliability at lower cost.
Decreasing telecommunications rates and increasing regulatory charges may diminish or eliminate our competitive
pricing advantage.
Decreasing telecommunications rates may diminish or eliminate the competitive pricing advantage of our services, while
increased regulation and the imposition of additional regulatory funding obligations at the federal, state and local level could
require us to either increase the retail price for our services, thus making us less competitive, or absorb such costs, thus
decreasing our profit margins. International and domestic telecommunications rates have decreased significantly over the last
few years in most of the markets in which we operate, and we anticipate these rates will continue to decline in all of the
markets in which we do business or expect to do business. Users who select our services to take advantage of the current
pricing differential between traditional telecommunications rates and our rates may switch to traditional telecommunications
carriers if such pricing differentials diminish or disappear, however, and we will be unable to use such pricing differentials to
attract new customers in the future. Continued rate decreases would require us to lower our rates to remain competitive and
would reduce or possibly eliminate any gross profit from our services. In addition, we may lose subscribers for our services.
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On the other hand, the FCC is seeking to reform the federal universal service fund that is applicable to us. The way we
calculate our contribution may change if the FCC engages in such reform. While we cannot predict how or if the FCC will
reform the contribution mechanism for the universal service fund, nor can we determine the impact on our business at this time,
should the FCC adopt a new federal universal service fund contribution mechanism that increases our contribution obligation,
we will either need to raise the amount we currently collect from our customers to cover this obligation or reduce our profit
margins. Furthermore, certain states continue to attempt to apply state universal service fund obligations on our service though
we do not believe that the current state of the law requires us to make such contributions. Recently, two states, Kansas and
Nebraska, filed a petition with the FCC seeking the authority to impose state universal service fund contribution obligations on
our service and also sought retroactive application of such authority. We cannot predict the outcome of this proceeding, nor
can we determine the impact on our business at this time. Should the FCC allow states to impose state universal service fund
obligations on our nomadic interconnected VoIP service, we would pass any increased cost of state universal service fund
contributions through to our customers. Our services may become less competitive with other providers should we raise the
price customers ultimately pay for the services we offer to cover these additional regulatory costs.
We may become subject to state regulation for certain service offerings.
Certain states take the position that offerings by VoIP companies, like us, are intrastate and therefore subject to state regulation.
These states argue that if the beginning and end points of communications are known, and if some of these communications
occur entirely within the boundaries of a state, the state can regulate that offering. We believe that the FCC has pre-empted
states from regulating VoIP offerings. We cannot predict how this issue will be resolved or its impact on our business at this
time.
We rely on third party network service providers to originate and terminate substantially all of our public switched
telephone network calls.
We leverage the infrastructure of third party network service providers to provide telephone numbers, PSTN call termination
and origination services, and local number portability for our customers rather than deploying our own network throughout the
United States. This decision has resulted in lower capital and operating costs for our business in the short term but has reduced
our operating flexibility and ability to make timely service changes. If any of these network service providers cease operations
or otherwise terminate the services that we depend on, the delay in switching our technology to another network service
provider, if available, and qualifying this new service could have a material adverse effect on our business, financial condition
or operating results.
While we believe that relations with our current service providers are good and we have contracts in place, there can be no
assurance that these service providers will be able or willing to supply cost-effective services to us in the future or that we will
be successful in signing up alternative or additional providers. While we believe that we could replace our current providers, if
necessary, our ability to provide service to our subscribers could be impacted during this timeframe, and this could have an
adverse effect on our business, financial condition or results of operations. The loss of access to, or requirement to change, the
telephone numbers we provide to our customers also could have a material adverse effect on our business, financial condition
or operating results.
Due to our reliance on these service providers, when problems occur in a network, it may be difficult to identify the source of
the problem. The occurrence of hardware and software errors, whether caused by our 8x8 service or another vendor’s
products, may result in the delay or loss of market acceptance of our products and any necessary revisions may force us to
incur significant expenses. The occurrence of some of these types of problems may seriously harm our business, financial
condition or operating results.
Intense competition in the markets in which we compete could prevent us from increasing or sustaining our revenue
and increasing or maintaining profitability.
The telecommunications industry is highly competitive. We face intense competition from traditional telephone companies,
wireless companies, cable companies, competitive local exchange carriers, alternative voice communication providers and
independent VoIP providers.
Most of our current and potential competitors have longer operating histories, significantly greater resources and name
recognition, and a larger base of customers than we have. As a result, these competitors may have greater credibility with our
existing and potential customers. They also may be able to adopt more aggressive pricing policies and devote greater resources
to the development, promotion and sale of their products than we can to ours. Our competitors may also offer bundled service
13
arrangements offering a more complete product despite the technical merits or advantages of our products. Competition could
decrease our prices, reduce our sales, lower our gross profits or decrease our market share.
We also compete against established alternative voice communication providers and face competition from other large, well-
capitalized Internet companies that have recently launched or plan to launch VoIP-enabled services. In addition, we compete
with independent VoIP service providers. Some of these service providers may choose to sacrifice revenue in order to gain
market share by offering their services at lower prices or free. In order to compete with such service providers, we may have to
significantly reduce our prices, which would affect our profitability.
We also are subject to the risk that new technologies may be developed that are able to deliver competing voice services at
lower prices, better or more conveniently. Future competition from new technologies could have a material adverse effect on
our growth and operating results.
Given the significant price competition in the markets for our products, we are at a significant disadvantage compared to many
of our competitors, especially those with substantially greater resources, and therefore may be better able to withstand an
extended period of downward pricing pressure. The adverse impact of a shortfall in our revenues may be magnified by our
inability to adjust spending to compensate for such shortfall. Announcements of new products and technologies by our
competitors or us could cause customers to defer purchases of our existing products, which also could have a material adverse
effect on our business, financial condition or operating results.
We depend on contract manufacturers to manufacture substantially all of our products, and any delay or interruption
in manufacturing by these contract manufacturers would result in delayed or reduced shipments to our customers and
may harm our business.
We do not have long-term purchase agreements with our contract manufacturers and we depend on a concentrated group of
contract manufacturers for a substantial portion of manufacturing our products. There can be no assurance that our contract
manufacturers will be able or willing to reliably manufacture our products, in volumes, on a cost-effective basis or in a timely
manner. If we cannot compete effectively for the business of these contract manufacturers, or if any of the contract
manufacturers experience financial or other difficulties in their businesses, our revenue and our business could be adversely
affected. In particular, if one of our contract manufacturers becomes subject to bankruptcy proceedings, we may not be able to
obtain any of our products held by the contract manufacturer.
We also rely on third party component suppliers to provide semiconductor circuit packages for our products. In some
instances, these components are provided by a single supplier. Our reliance on these suppliers involves a number of risks,
including reduced control over delivery schedules, quality assurance and costs. We currently do not have long-term supply
contracts with any of these component vendors. As a result, most of these third party vendors are not obligated to provide
products or perform services to us for any specific period, in any specific quantities or at any specific price, except as may be
provided in a particular purchase order. The inability of these third party vendors to deliver components of acceptable quality
and in a timely manner, particularly the sole source vendors, could adversely affect our operating results or cause them to
fluctuate more than anticipated. Additionally, some of our products may require specialized or high-performance component
parts that may not be available in quantities or in time frames that meet our requirements.
Our infringement of a third party’s proprietary technology would disrupt our business.
There has been substantial litigation in the communications, VoIP services, semiconductor, electronics, and related industries
regarding intellectual property rights and, from time to time, third parties may claim infringement by us of their intellectual
property rights. Our broad range of current and former technology, including IP telephony systems, digital and analog circuits,
software, and semiconductors, increases the likelihood that third parties may claim infringement by us of their intellectual
property rights. For example, on May 2, 2008, we received a letter from AT&T Intellectual Property, L.L.C. (“AT&T IP”)
expressing the belief that we must license a specified patent for use in our 8x8 broadband telephone service, as well as
suggesting that we obtain a license to its portfolio of MPEG-4 patents for use with our video telephone products and services.
At the same time, we began an evaluation of whether AT&T IP’s affiliated entities may need to license any of our patents or
other intellectual property. We have continued to engage in discussions with AT&T IP to explore a mutually agreeable
resolution of the parties’ respective assertions regarding these intellectual property issues. We are unable at this time to state
whether we will enter into any license or cross-license agreements with AT&T IP or whether we ultimately anticipate any
material effects on our operating results or financial condition as a consequence of these matters. If we were found to be
infringing on the intellectual property rights of any third party, we could be subject to liabilities for such infringement, which
could be material. We could also be required to refrain from using, manufacturing or selling certain products or using certain
14
processes, either of which could have a material adverse effect on our business and operating results. From time to time, we
have received, and may continue to receive in the future, notices of claims of infringement, misappropriation or misuse of other
parties' proprietary rights. There can be no assurance that we will prevail in these discussions and actions or that other actions
alleging infringement by us of third party patents will not be asserted or prosecuted against us.
Certain technology necessary for us to provide our services may, in fact, be patented by other parties either now or in the
future. If such technology were held under patent by another person, we would have to negotiate a license for the use of that
certain technology. We may not be able to negotiate such a license at a price that is acceptable. The existence of such a patent,
or our inability to negotiate a license for any such technology on acceptable terms, could force us to cease using such
technology and offering products and services incorporating such technology. For example, on April 22, 2009, we were named
as a defendant, along with Comcast, Microsoft, Avaya, Embarq, and Qwest, in a complaint filed by Web Telephony, LLC in
the Eastern District of Texas. On April 29, 2009, we entered into a settlement agreement with Web Telephony, which filed a
motion to dismiss the lawsuit on May 8, 2009, under which we have made significant payments as described in Part II, Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Acquired Product Rights.”
We license technology from third parties that we do not control and cannot be assured of retaining.
We rely upon certain technology, including hardware and software, licensed from third parties. There can be no assurance that
the technology licensed by us will continue to provide competitive features and functionality or that licenses for technology
currently utilized by us or other technology which we may seek to license in the future, will be available to us on commercially
reasonable terms or at all. The loss of, or inability to maintain, existing licenses could result in shipment delays or reductions
until equivalent technology or suitable alternative products could be developed, identified, licensed and integrated, and could
harm our business. These licenses are on standard commercial terms made generally available by the companies providing the
licenses. The cost and terms of these licenses individually are not material to our business.
Inability to protect our proprietary technology would disrupt our business.
We rely, in part, on trademark, copyright, and trade secret law to protect our intellectual property in the United States and
abroad. We seek to protect our software, documentation, and other written materials under trade secret and copyright law,
which afford only limited protection. We also rely, in part, on patent law to protect our intellectual property in the United
States and internationally. As of March 31, 2010, we had been awarded 76 United States patents and have additional United
States and foreign patent applications pending. We cannot predict whether such pending patent applications will result in
issued patents that effectively protect our intellectual property. We may not be able to protect our proprietary rights in the
United States or internationally (where effective intellectual property protection may be unavailable or limited), and
competitors may independently develop technologies that are similar or superior to our technology, duplicate our technology or
design around any patent of ours. We have, in the past, licensed and, in the future, expect to continue licensing our technology
to others, many of whom are located or may be located abroad. There are no assurances that such licensees will protect our
technology from misappropriation. Moreover, litigation may be necessary in the future to enforce our intellectual property
rights, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of management time and resources and could have a
material adverse effect on our business, financial condition, and operating results. Any settlement or adverse determination in
such litigation would also subject us to significant liability.
Our products must comply with industry standards, FCC regulations, state, local, country-specific and international
regulations, and changes may require us to modify existing products and/or services.
In addition to reliability and quality standards, the market acceptance of telephony over broadband IP networks is dependent
upon the adoption of industry standards so that products from multiple manufacturers are able to communicate with each other.
Our VoIP telephony products rely heavily on communication standards such as SIP, MGCP and network standards such as
TCP/IP and UDP to interoperate with other vendors' equipment. There is currently a lack of agreement among industry leaders
about which standard should be used for a particular application, and about the definition of the standards themselves. These
standards, as well as audio and video compression standards, continue to evolve. We also must comply with certain rules and
regulations of the FCC regarding electromagnetic radiation and safety standards established by Underwriters Laboratories, as
well as similar regulations and standards applicable in other countries. Standards are continuously being modified and replaced.
As standards evolve, we may be required to modify our existing products or develop and support new versions of our products.
We must comply with certain federal, state and local requirements regarding how we interact with our customers, including
marketing practices, consumer protection, privacy, and billing issues, the provision of 9-1-1 emergency service and the quality
of service we provide to our customers. The failure of our products and services to comply, or delays in compliance, with
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various existing and evolving standards could delay or interrupt volume production of our VoIP telephony products, subject us
to fines or other imposed penalties, or harm the perception and adoption rates of our service, any of which would have a
material adverse effect on our business, financial condition or operating results.
Our ability to offer services outside the U.S. is subject to different local regulatory environments, which may be
unknown, complicated and uncertain.
Regulatory treatment of VoIP telephony outside the United States varies from country to country and often the laws are
unclear. We currently distribute our products and services directly to consumers and through resellers that may be subject to
telecommunications regulations in their home countries. The failure by us or our customers and resellers to comply with these
laws and regulations could reduce our revenue and profitability. Because of our relationship with the resellers, some countries
may assert that we are required to register as a telecommunications provider in that country. In such case, our failure to do so
could subject us to fines or penalties. In addition, some countries are considering subjecting VoIP services to the regulations
applied to traditional telephone companies. Regulatory developments such as these could have a material adverse effect on the
use of our services in international locations.
Future legislation or regulation of the Internet and/or voice and video over IP services could restrict our business,
prevent us from offering service or increase our cost of doing business.
There are an increasing number of regulations and rulings that specifically address access to commerce and communications
services on the Internet, including IP telephony. We are unable to predict the impact, if any, that future legislation, legal
decisions or regulations concerning the Internet may have on our business, financial condition, and results of operations.
Regulation may be targeted towards, among other things, assessing access or settlement charges, imposing taxes related to
Internet communications and imposing tariffs or regulations based on encryption concerns or the characteristics and quality of
products and services, any of which could restrict our business or increase our cost of doing business. The increasing growth of
the broadband IP telephony market and popularity of broadband IP telephony products and services heighten the risk that
governments or other legislative bodies will seek to regulate broadband IP telephony and the Internet. In addition, large,
established telecommunication companies may devote substantial lobbying efforts to influence the regulation of the broadband
IP telephony market, which may be contrary to our interests.
Many regulatory actions are underway or are being contemplated by federal and state authorities, including the FCC and other
state and local regulatory agencies. On February 12, 2004, the FCC initiated a notice of public rule-making to update FCC
policy and consider the appropriate regulatory classification for VoIP and other IP enabled services. On November 9, 2004, the
FCC ruled that Vonage DigitalVoice and similar services are jurisdictionally interstate and not subject to state certification,
tariffing and other common carrier regulations. This ruling was subsequently appealed by several states. On March 21, 2007,
the United States Court of Appeals for the Eighth Circuit affirmed the FCC’s declaratory ruling.
There is risk that a regulatory agency will require us to conform to rules that are unsuitable for IP communications technologies
or rules that cannot be complied with due to the nature and efficiencies of IP routing, or are unnecessary or unreasonable in
light of the manner in which 8x8 offers service to its customers. It is not possible to separate the Internet, or any service offered
over it, into intrastate and interstate components as we currently have no means to automatically identify the physical location
of one of our subscribers on the Internet. While suitable alternatives may be developed in the future, the current IP network
does not enable us to identify the geographic nature of the traffic traversing the Internet, or dynamically pinpoint or update the
location of our customers’ telephony devices. In the United States, the FCC as well as our competitors have made statements
in the past suggesting that we should be required to automatically determine the physical location of our customers’ equipment
as a precondition for offering telecommunications services to them.
Internet service providers might restrict our ability to provide VoIP telephony services in the future.
It is not clear whether suppliers of broadband Internet access have a legal obligation to allow their customers to access and use
our service without interference. As a result of recent decisions by the U.S. Supreme Court and the FCC, providers of
broadband services are subject to relatively light regulation by the FCC. Consequently, federal and state regulators might not
prohibit broadband providers from limiting their customers’ access to VoIP applications and services, or otherwise
discriminating against VoIP providers. Conceivably, some providers of broadband access may take measures that affect their
customers’ ability to use our service, such as degrading the quality of the data packets we transmit over their lines, giving those
packets lower priority, giving other packets higher priority than ours, interfering with or blocking our packets entirely or
attempting to charge their customers more for also using our services. Interference with our service or higher charges for also
using our service could cause us to lose existing customers, impair our ability to attract new customers and harm our revenue
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and growth. These problems have occurred to us in the past in the United States and in certain international markets.
Increased taxes on our service will increase our customers' cost of using our service and/or reduce our profit margins
(to the extent the costs are not passed through to our customers) and we may be subject to liabilities for past sales and
additional taxes, surcharges and fees.
Until 2007, we did not collect or remit state or municipal taxes, such as sales, excise, and ad valorem taxes, fees or surcharges
on the charges to our customers for our services, except that we have historically complied with the collection of California
sales tax and financial contributions to the 9-1-1 system and the federal Universal Service Fund. We have received inquiries or
demands from a number of state and municipal taxing agencies seeking payment of taxes, fees or surcharges that are applied to
or collected from customers of providers of traditional public switched telephone network services. Although we have
consistently maintained that these taxes, fees or surcharges do not apply to our service for a variety of reasons depending on the
statute or rule that establishes such obligations, a number of states have changed their statutes as part of streamlined sales tax
initiatives and we are now collecting and remitting sales taxes in those states. The collection of these taxes, fees or surcharges
will have the effect of decreasing any price advantage we may have over other providers who have historically paid these taxes
and fees. Our compliance with these tax initiatives will also make us less competitive with those competitors who choose not to
comply with these tax initiatives. Three states currently are conducting sales tax audits of our records. In October 2009, we
received notices of proposed assessment as a result of one of the sales tax audits amounting to approximately $1.6 million,
which we consider to be unsubstantiated and have accrued a tax liability of $0.1 million as of March 31, 2010 to account for
our estimated liability for past sales tax obligations related to these audits. If our ultimate liability exceeds that amount, it could
result in significant charges to our earnings.
Our emergency and E-911 calling services are different from those offered by traditional wireline telephone companies
and may expose us to significant liability. There may be risks associated with limitations associated with E-911
emergency dialing with the 8x8 service.
Both our emergency calling service and our E-911 calling service are different, in significant respects, from the emergency
calling services offered by traditional wireline telephone companies. In each case, the differences may cause significant delays,
or even failures, in callers' receipt of the emergency assistance they need.
Traditional wireline telephone companies route emergency calls over a dedicated infrastructure directly to an emergency
services dispatcher at the Public Safety Answering Point, or PSAP, in the caller's area. Generally, the dispatcher automatically
receives the caller's phone number and actual location information. While the E-911 service we have deployed in the United
States is designed to route calls in a fashion similar to traditional wireline services, our E-911 capabilities are not yet available
from all locations. In addition, the only location information that our E-911 service can transmit to a dispatcher at a PSAP is
the information that our customers have registered with us prior to the 9-1-1 call. A customer's registered location may be
different from the customer's actual location at the time of the call because customers can use the 8x8 service from any
broadband connection anywhere in the world.
We are currently deploying E-911 service that is similar to the emergency calling services provided to customers of traditional
wireline telephone companies in the same area. For those customers located in an E-911 area, emergency calls are routed,
subject to the limitations discussed below, directly to an emergency services dispatcher at the PSAP in the area of the
customer's registered location. The dispatcher will have automatic access to the customer's telephone number and registered
location information. If a customer moves their 8x8 service to a new location, the customer's registered location information
must be updated and verified by the customer. Until that takes place, the customer will have to verbally advise the emergency
dispatcher of his or her actual location at the time of an emergency 9-1-1 call. This can lead to delays in the delivery of
emergency services.
The emergency calls of customers located in areas where we are currently unable to provide E-911 service as described above
are supported by a national call center that is run by a third-party provider and operates 24 hours per day, seven days per week.
These operators still receive the customer's registered service location and phone number automatically, and coordinate
connecting the caller to the appropriate PSAP or emergency services provider and providing the customer's registered service
location and phone number to those local authorities, which can also delay the delivery of emergency services. In the event that
a customer experiences a broadband or power outage, or if a network failure were to occur, the customer will not be able to
reach an emergency services provider using our services.
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Delays our customers may encounter when making emergency services calls and any inability of the answering point to
automatically recognize the caller's location or telephone number can result in life threatening consequences. Customers may,
in the future, attempt to hold us responsible for any loss, damage, personal injury or death suffered as a result of any failure of
our E-911 services. In late July 2008, the President signed into law the "New and Emerging Technologies 911 Improvement
Act of 2008." The law provides public safety, interconnected VoIP providers and others involved in handling 911 calls the
same liability protections when handling 911 calls from interconnected VoIP users as from mobile or wired telephone service
users. The applicability of the liability protections to our national call center solution is unclear at the present time. Also, we
may be exposed to liability for 911 calls made prior to the adoption of this new law although we are unaware of any such
liability.
In May 2005, the FCC unanimously adopted an order and Notice of Proposed Rulemaking, or NPRM, which required VoIP
providers that interconnect with the PSTN, or interconnected VoIP providers, to provide enhanced 9-1-1, or E-911, service.
On November 7, 2005, the Enforcement Bureau of the FCC issued a notice to interconnected VoIP providers detailing the
information required to be submitted to the FCC in E-911 compliance letters due by November 28, 2005. In this notice, the
Enforcement Bureau stated that, although it would not require providers that had not achieved full E-911 compliance by
November 28, 2005, to discontinue the provision of interconnected VoIP services to any existing customers, it did expect that
such providers would discontinue marketing VoIP services, and accepting new customers for their services, in all areas where
they are not transmitting 9-1-1 calls to the appropriate PSAP in full compliance with the FCC rules. On November 28, 2005,
we began offering nomadic E-911 service to all of our customers with United States service addresses, and began charging
those customers an additional $1.99 per month plus any applicable local 9-1-1 taxes and surcharges effective January 1, 2006.
On November 28, 2005, we also modified the 8x8 account signup procedures to require service addresses to be entered and
validated, at the time an order for service is placed, to ascertain whether 8x8's nomadic E-911 service is available at that
address. On November 28, 2005, we also filed our E-911 compliance report which is available on the FCC's website, at
http://www.fcc.gov, under Wireline Competition Docket Number 05-196. On March 19, 2007, we received a letter from the
Enforcement Bureau of the FCC requesting that we file an updated E-911 Status Report no later than April 11, 2007. On April
11, 2007, we responded to the FCC stating that 91% of our customers are either in compliance with the VoIP 9-1-1 order or
were signed up prior to November 28, 2005. We provide a nomadic emergency calling service to 100% of our customers who
have a service location, as registered by the customer, within the United States.
The FCC may determine that our nomadic emergency calling solution does not satisfy the requirements of its VoIP E-911
order because, in some instances, our nomadic emergency calling solution requires that we route an emergency call to a
national emergency call center instead of connecting our customers directly to a local PSAP through a dedicated connection
and through the appropriate selective router. The FCC may issue further guidance on compliance requirements in the future
that might require us to disconnect those customers not receiving access to emergency services in a manner consistent with the
VoIP E-911 order. The effect of such disconnections, monetary penalties, cease and desist orders or other enforcement actions
initiated by the FCC or other agency or task force against us could have a material adverse effect on our business, financial
condition or operating results.
On June 1, 2007, the FCC released a Notice of Proposed Rulemaking in which it tentatively concluded that all interconnected
VoIP service providers that allow customers to use their service in more than one location (nomadic VoIP service providers
such as us) must utilize an automatic location technology that meets the same accuracy standards which apply to providers of
commercial mobile radio services (mobile phone service providers). The outcome of this proceeding cannot be determined at
this time and we may or may not be able to comply with any such obligations that may be adopted. At present, we currently
have no means to automatically identify the physical location of one of our customers on the Internet. The FCC's VoIP E-911
order has increased our cost of doing business and may adversely affect our ability to deliver the 8x8 service to new and
existing customers in all geographic regions or to nomadic customers who move to a location where emergency calling
services compliant with the FCC's mandates are unavailable. Our compliance with and increased costs due to the FCC's VoIP
E-911 order put us at a competitive disadvantage to those VoIP service providers who have chosen not to comply with the
FCC's mandates. We cannot guarantee that emergency calling service consistent with the VoIP E-911 order will be available to
all of our customers, especially those accessing our services from outside of the United States. The FCC's current VoIP E-911
order or follow-on orders or clarifications or their impact on our customers due to service price increases or other factors could
have a material adverse effect on our business, financial condition or operating results.
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There may be risks associated with our ability to comply with the requirements of federal law enforcement agencies.
On August 5, 2005, the FCC unanimously adopted an order responsive to a joint petition filed by the Department of Justice, the
Federal Bureau of Investigation, and the Drug Enforcement Administration asking the FCC to declare that broadband Internet
access services and VoIP services be covered by the Communications Assistance for Law Enforcement Act, or CALEA.
The FCC, in a subsequent order released on May 12, 2006, required all interconnected VoIP providers to become fully CALEA
compliant by May 14, 2007. The FCC allowed VoIP providers to comply with CALEA through the use of a solution provided
by a trusted third party with the ability to extract call content and call-identifying information from a VoIP provider’s network.
While the FCC permits carriers to use the services provided these third parties to become CALEA compliant by the deadline,
the carrier remains ultimately responsible for ensuring the timely delivery of call content and call-identifying information to
law enforcement, and for protecting subscriber privacy, as required by CALEA.
We selected a partner to work with us to develop a solution for CALEA compliant lawful interception of communications and,
as of May 14, 2007, we had installed this solution in our network operations and data centers, but had not yet completed
certification testing of all required intercept capabilities of this equipment. We completed formal CALEA compliance testing
with this partner in March 2009 and currently, our tested CALEA solution is fully deployed in our network. However, we
could be subject to an enforcement action by the FCC or law enforcement agencies for any delays related to meeting, or if we
fail to comply with, any current or future CALEA obligations.
There may be risks associated with our ability to comply with requirements of the Telecommunications Relay Service.
On June 15, 2007, the FCC extended the disability access requirements of Sections 225 and 255 of the Communications Act,
which applied to traditional phone services, to providers of interconnected VoIP services and to manufacturers of specially
designed equipment used to provide those services. In addition, the FCC determined that interconnected VoIP providers were
subject to the requirements of Section 225, including contributing to the Telecommunications Relay Services, or TRS, fund and
that they must offer 7-1-1 abbreviated dialing for access to relay services. While the rules became effective October 5, 2007,
the FCC granted a limited waiver to interconnected VoIP providers concerning the 7-1-1 call routing requirement until March
31, 2009. Interconnected VoIP providers do not have to route such calls to the "appropriate relay center," meaning the relay
center(s) serving the state in which the caller is geographically located or the relay center(s) associated with the caller's last
registered address until the waiver period expires. As of April 5, 2008, we have implemented a 7-1-1 system which routes such
calls to the appropriate relay center based upon the customer’s assigned telephone number. We may be subject to enforcement
actions including, but not limited to, fines, cease and desist orders, or other penalties if the FCC believes we are not compliant
with these new disability requirements.
There may be risks associated with our ability to comply with the requirements of federal and other regulations related
to Customer Proprietary Network Information (CPNI).
On April 2, 2007, the FCC released an order extending the application of the customer proprietary network information, or
CPNI, rules to interconnected VoIP providers. VoIP providers have six months from the effective date of the order to
implement all the CPNI rules. CPNI includes information such as the phone numbers called by a consumer, the frequency,
duration, and timing of such calls, and any services/features purchased by the consumer, such as call waiting, call forwarding,
and caller ID, in addition to other information that may appear on a consumer’s bill.
Under the FCC’s existing rules, carriers may not use CPNI without customer approval except in narrow circumstances related
to the provision of existing services, and must comply with detailed customer approval processes when using CPNI outside of
these narrow circumstances. The new CPNI requirements are also aimed at establishing more stringent security measures for
access to a customer’s CPNI data in the form of required passwords for on-line access and call-in access to account information
as well as customer notification of account or password changes.
At the present time, we do not utilize our customer’s CPNI in a manner which would require us to obtain consent from our
customers but, in the event that we do in the future, we will be required to adhere to specific CPNI rules aimed at marketing
such services. Before December 8, 2007, we implemented internal processes in order to be in compliance with all of the FCC’s
CPNI rules. Our failure to achieve compliance with any future CPNI orders, rules, filings or standards, or any enforcement
action initiated by the FCC or other agency, state or task force against us could have a material adverse effect on our business,
financial condition or operating results.
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There may be risks associated with our ability to comply with funding requirements of the Universal Service Fund, or
USF, Telecommunications Relay Service, or TRS, fund, federal regulatory recovery fees and similar state or federal
funds, or that our customers will cancel service due to the impact of these price increases to their services.
On June 21, 2006, the FCC expanded the base of Universal Service Fund, or USF, contributions to interconnected VoIP
providers. The FCC established a safe harbor percentage of interstate revenue of 64.9% of total VoIP service revenue. We were
allowed to calculate our contribution based on the safe harbor or by preparing a traffic study. We began contributing to the
federal USF on October 1, 2006. For a period of at least two quarters beginning October 1, 2006, we were required to
contribute to the USF for all subscribers' retail revenues as well as through its underlying carriers' wholesale charges. The FCC
order applying USF contributions to interconnected VoIP providers was appealed and on June 1, 2007, the U.S. Court of
Appeals for the District of Columbia ruled that the FCC was within its authority when it required interconnected VoIP service
providers to contribute to the Universal Service Fund, though it struck down the provision of the order which required pre-
approval of traffic studies by the FCC and the provision that required double contributions to the fund for two quarters from
our underlying carriers’ wholesale charges. There is also a risk that state Universal Service Funds may attempt to impose state
USF contribution obligations and other state and local charges. At this time, at least three states, including Kansas and
Nebraska, contend that providers of interconnected VoIP services, like us, should contribute to its USF fund. On March 3,
2008, the U.S. District Court for Nebraska issued a preliminary injunction and found that Nebraska’s state Public Service
Commission does not have jurisdiction to require Universal Service contributions from VoIP providers. On May 1, 2009, a
panel of the U.S. Circuit Court of Appeals for the Eighth Circuit affirmed the U.S. District court ruling. Subsequently, the
Kansas and Nebraska state commissions filed a joint petition with the FCC seeking the ability to assess state USF contribution
obligations on VoIP providers, like us, retroactively. We cannot predict the outcome of this proceeding at this time nor its
impact on our business. As of March 31, 2009, we were collecting or remitting state USF in one state. Effective June 1, 2009,
we ceased collecting and remitting state USF.
We charge our subscribers a USF fee equal to the USF contribution amounts we must contribute based upon our subscribers'
retail revenues. The impact of this price increase on our customers or our inability to recoup our costs or liabilities in remitting
USF contributions or other factors could have a material adverse effect on our financial position, results of operations and cash
flows.
The FCC and various state commissions are considering the imposition of additional fees on interconnected VoIP providers,
like us. Several states are either considering extending or have imposed state USF, state TRS fees, and other taxes and fees on
interconnected VoIP providers like us. If we pass through the taxes, fees and surcharges that may be applied to our service, the
impact of this price increase on our customers or our inability to recoup our costs or liabilities in remitting such taxes, fees and
surcharges could have a material adverse effect on our financial position, results of operations and cash flows. We may also be
at a competitive disadvantage to other providers who choose not to comply with these payment obligations.
If we are unable to improve our process for local number portability provisioning, our growth may be negatively
affected.
We support local number portability, or LNP, which allows our customers to retain their existing telephone numbers when
subscribing to our services. Transferring numbers is a manual process that, in the past, has taken us 20 business days or longer,
although we have taken steps to automate this process to reduce the delay. A new customer of our services must maintain both
the new 8x8 service and the customer’s existing telephone service during the number transfer process. By comparison,
transferring wireless telephone numbers among wireless service providers generally takes several hours, and transferring
wireline telephone numbers among traditional wireline service providers generally takes a few days. The additional delay that
we experience is due to our reliance on third party carriers to transfer the numbers, as well as the delay the existing telephone
service provider may contribute to the process. Local number portability is considered an important feature by many potential
customers, especially our business customers, and if we fail to reduce related delays, we may experience increased difficulty in
acquiring new customers or retaining existing customers. Moreover, the FCC now requires interconnected VoIP providers,
like us, to comply with industry standard timeframes and a new order shortens the timeframe for certain types of ports
considerably, although compliance with the new timeframes will not be required until August 2, 2010. If we are unable to
process ports within the requisite timeframes, we could be subject to fines and/or penalties. Additionally, both customers and
carriers may seek relief from the relevant state public utility commission, the FCC, and/or in state or federal court. During
fiscal 2008, the FCC required interconnected VoIP providers to remit regulatory and local number portability fees.
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The rates we pay to underlying telecommunications carriers may increase which may reduce our profitability and
increase the retail price of our service.
The FCC has several open proceedings considering new rules that may impact charges that regulated telecommunications
carriers assess each other for originating and terminating traffic. It is possible that the FCC will adopt new rules that subjects
interconnected VoIP traffic to increased charges. Should this occur, the rates that we pay to our underlying carriers may
increase which may reduce our profitability and may also increase the retail price of our service making our service less
competitive with other providers of similar calling services. We cannot predict either the timing or the outcome of these
proceedings.
We may be subject to new rules or legislation that could either increase the retail price of our service or reduce our net
profit margins due to the FCC's National Broadband Plan.
In March 2010, the FCC presented its national broadband plan to the U.S. Congress. Details on the plan are available at
http://www.broadband.gov/. It is unclear what specific proposals the FCC will make but there is a chance the FCC will attempt
to revise rules or request new legislation pertaining to the regulatory classification and treatment of broadband access and
Internet services, intercarrier compensation, universal service funding obligations and open Internet access obligations. We
could be negatively impacted by any changes that cause our underlying service providers to incur greater cost either through a
new rate structure, a new contribution metric, or paired down protections related to open Internet access. Of course, any
litigation that may result from the new rules could also increase our costs. We cannot predict how the FCC's national
broadband plan will impact us at this time.
Our success also depends on our ability to handle a large number of simultaneous calls, which our network may not be
able to accommodate.
We expect the volume of simultaneous calls to increase significantly as the 8x8 subscriber base grows. Our network hardware
and software may not be able to accommodate this additional volume. If we fail to maintain an appropriate level of operating
performance, or if our service is disrupted, our reputation could be hurt and we could lose customers, all of which could have a
material adverse effect on our business, financial condition or operating results.
We could be liable for breaches of security on our web site, fraudulent activities of our users, or the failure of third-
party vendors to deliver credit card transaction processing services.
A fundamental requirement for operating an Internet-based, worldwide voice and video communications service and
electronically billing our 8x8 customers is the secure transmission of confidential information and media over public networks.
Although we have developed systems and processes that are designed to protect consumer information and prevent fraudulent
credit card transactions and other security breaches, failure to mitigate such fraud or breaches may adversely affect our
operating results. The law relating to the liability of providers of online payment services is currently unsettled and states may
enact their own rules with which we may not comply. We rely on third party providers to process and guarantee payments
made by 8x8 subscribers up to certain limits, and we may be unable to prevent our customers from fraudulently receiving
goods and services. Our liability risk will increase if a larger fraction of our 8x8 transactions involve fraudulent or disputed
credit card transactions. Any costs we incur as a result of fraudulent or disputed transactions could harm our business. In
addition, the functionality of our current billing system relies on certain third-party vendors delivering services. If these
vendors are unable or unwilling to provide services, we will not be able to charge for our 8x8 services in a timely or scalable
fashion, which could significantly decrease our revenue and have a material adverse effect on our business, financial condition
and operating results.
We have experienced losses due to subscriber fraud and theft of service.
Subscribers have, in the past, obtained access to the 8x8 service without paying for monthly service and international toll calls
by unlawfully using our authorization codes or by submitting fraudulent credit card information. To date, such losses from
unauthorized credit card transactions and theft of service have not been significant. We have implemented anti-fraud
procedures in order to control losses relating to these practices, but these procedures may not be adequate to effectively limit
all of our exposure in the future from fraud. If our procedures are not effective, consumer fraud and theft of service could
significantly decrease our revenue and have a material adverse effect on our business, financial condition and operating results.
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A higher rate of customer terminations would negatively affect our business by reducing our revenue or requiring us to
spend more money to grow our customer base.
Our rate of customer terminations, or average monthly customer churn, was 3.5% for the fiscal year ended March 31, 2010.
Our churn rate could increase in the future if customers are not satisfied with our service. Other factors, including increased
competition from other VoIP providers, alternative technologies, and adverse business conditions also influence our churn rate.
Because of churn, we have to acquire new customers on an ongoing basis just to maintain our existing level of customers and
revenues. As a result, marketing expenditures are an ongoing requirement of our business. If our churn rate increases, we will
have to acquire even more new customers in order to maintain our existing revenues. We incur significant costs to acquire new
customers, and those costs are an important factor in determining our net profitability. Therefore, if we are unsuccessful in
retaining customers or are required to spend significant amounts to acquire new customers beyond those budgeted, our revenue
could decrease and our net income could decrease.
Our future operating results may vary substantially from period to period and may be difficult to predict.
Our historical operating results have fluctuated significantly and will likely continue to fluctuate in the future, and a decline in
our operating results could cause our stock price to fall. On an annual and a quarterly basis, there are a number of factors that
may affect our operating results, many of which are outside our control. These include, but are not limited to:
•
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changes in market demand;
the timing of customer orders;
customer cancellations;
competitive market conditions;
lengthy sales cycles and/or regulatory approval cycles;
new product introductions by us or our competitors;
• market acceptance of new or existing products;
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the cost and availability of components;
the mix of our customer base and sales channels;
the mix of products sold;
the management of inventory;
continued compliance with industry standards and regulatory requirements; and
general economic conditions.
Due to these and other factors, we believe that period-to-period comparisons of our results of operations are not meaningful
and should not be relied upon as indicators of our future performance. It is possible that in some future periods our results of
operations may be below the expectations of public market analysts and investors. If this were to occur, the price of our
common stock would likely decline significantly.
We need to retain key personnel to support our products and ongoing operations.
The development and marketing of our VoIP services will continue to place a significant strain on our limited personnel,
management, and other resources. Our future success depends upon the continued services of our executive officers and other
key employees who have critical industry experience and relationships that we rely on to implement our business plan. None of
our officers or key employees are bound by employment agreements for any specific term. The loss of the services of any of
our officers or key employees could delay the development and introduction of, and negatively impact our ability to sell our
services which could adversely affect our financial results and impair our growth. We currently do not maintain key person life
insurance policies on any of our employees.
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We may not be able to manage our inventory levels effectively, which may lead to inventory obsolescence that would
force us to incur inventory write-downs.
Our products have lead times of up to several months and are built to forecasts that are necessarily imprecise. Because of our
practice of building our products to necessarily imprecise forecasts, it is likely that from time to time we will have either excess
or insufficient product inventory. In addition, because we rely on third party vendors for the supply of components and contract
manufacturers to assemble our products, our inventory levels are subject to the conditions regarding the timing of purchase
orders and delivery dates that are not within our control. Excess inventory levels would subject us to the risk of inventory
obsolescence, while insufficient levels of inventory may negatively affect relations with customers. For instance, our customers
rely upon our ability to meet committed delivery dates, and any disruption in the supply of our products could result in legal
action from our customers, loss of customers or harm to our ability to attract new customers. Any of these factors could have a
material adverse effect on our business, financial condition or operating results.
The fair value of certain warrant liabilities may increase or decrease, and as a result, we may be required, pursuant to
ASC 480-10, to reflect a corresponding increase or decrease in our net income or net loss, as the case may be, and the
amount of our recorded liability for the warrants for the applicable quarter also may fluctuate materially.
Pursuant to ASC 480-10 (formerly Emerging Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in a Company’s Own Stock”), warrants issued to two investors in an equity
financing we consummated in fiscal 2006 are classified as liabilities because of the possibility, however likely or unlikely, that
the Company would be unable to deliver registered shares upon a future exercise of these warrants means that the warrants are
deemed to include a "net cash settlement" provision within the meaning of ASC 480-10. The required accounting for a warrant
with a "net cash settlement" provision under ASC 480-10 is to estimate the fair value on the date of issuance and to record a
liability equal to that value to reflect the required assumption that the Company will breach its obligation to deliver registered
shares in the future (which we refer to as a "presumed breach"). The warrants will continue to be recorded as liabilities until
such time as the warrants are exercised, expire or we and the warrant holders amend the applicable warrant agreement in a
manner that renders this accounting treatment unnecessary. In the event that at the end of any fiscal quarter the fair value of
these warrants increases or decreases, we will be required to re-value the warrants and reflect such change for the applicable
fiscal quarter in our financial statements in accordance with ASC 480-10. If the fair value at the end of any fiscal quarter
increases, we will recognize a corresponding increase in expense for such fiscal quarter, as well as reflect a corresponding
increase in our liabilities for such fiscal quarter, in accordance with ASC 480-10, resulting in a reduction of our stockholders’
equity on our balance sheet for such fiscal quarter and a decrease in net income on our income statement for such fiscal quarter.
If the fair value at the end of any fiscal quarter decreases, we will recognize a corresponding decrease in expense for such fiscal
quarter, as well as reflect a corresponding decrease in our liabilities for such fiscal quarter, in accordance with ASC 480-10,
resulting in an increase of our stockholders’ equity on our balance sheet for such fiscal quarter and increase in net income on
our income statement for such fiscal quarter. The amount we record as a liability under ASC 480-10 is not, nor do we intend
for it to be, an admission or stipulation of the amount that we would owe or be obligated to pay the warrant holder in the event
of an actual breach by us of the warrant terms. In fact, we have made no determination of the amount of liability, if any, that
we would owe to the warrant holder in the event of such a breach.
We may need to raise additional capital to support our future operations.
As of March 31, 2010, we had cash and cash equivalents and investments of approximately $18.1 million. While we believe
these funds are sufficient to meet our current and anticipated liquidity requirements, we may need to raise additional capital.
We may not be able to obtain such additional financing as needed on acceptable terms, or at all, which may require us to
reduce our operating costs and other expenditures, including reductions of personnel and capital expenditures. If we issue
additional equity or convertible debt securities to raise funds, the ownership percentage of our existing stockholders would be
reduced and they may experience significant dilution. New investors may demand rights, preferences or privileges senior to
those of existing holders of our common stock. If we are not successful in these actions, we may be forced to cease operations.
Our stock price has been highly volatile.
The market price of the shares of our common stock has been and is likely to continue to be highly volatile. It may be
significantly affected by factors such as:
•
•
actual or anticipated fluctuations in our operating results;
announcements of technical innovations;
23
•
•
•
•
•
•
future legislation or regulation of the Internet and/or VoIP;
loss of key personnel;
new entrants into the VOIP service marketplace, including cable and incumbent telephone companies and other well-
capitalized competitors;
new products or new contracts by us, our competitors or their customers;
the perceived or real impact of events that negatively affect our direct competitors; and
developments with respect to patents or proprietary rights, general market conditions, changes in financial estimates
by securities analysts, and other factors which could be unrelated to, or outside of, our control.
The stock market has from time to time experienced significant price and volume fluctuations that have particularly affected
the market prices for the common stocks of technology companies and that have often been unrelated to the operating
performance of particular companies. These broad market fluctuations may adversely affect the market price of our common
stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation
has often been initiated against the issuing company. If our stock price is volatile, we may also be subject to such litigation.
Such litigation could result in substantial costs and a diversion of management's attention and resources, which would disrupt
business and could cause a decline in our operating results. Any settlement or adverse determination in such litigation would
also subject us to significant liability.
We may not be able to maintain our listing on the NASDAQ Capital Market.
Our common stock trades on the NASDAQ Capital Market, which has certain compliance requirements for continued listing of
common stock. We have, in the past, been subject to delisting procedures due to a drop in the price of our common stock. If our
minimum closing bid price per share falls below $1.00 for a period of 30 consecutive trading days in the future, we may again
be subject to delisting procedures. As of the close of business on May 24, 2010, our common stock had a closing bid price of
approximately $1.17 per share. We must also meet additional continued listing requirements contained in NASDAQ
Marketplace Rule 5550(b), which requires that we have either (1) a minimum of $2,500,000 in stockholders' equity, (2)
$35,000,000 market value of listed securities held by non-affiliates or (3) $500,000 of net income from continuing operations
for the most recently completed fiscal year (or two of the three most recently completed fiscal years). As of May 24, 2010,
based on our closing price as of that day, the market value of our securities held by non-affiliates approximated $73,106,000
and we were in compliance with NASDAQ Marketplace Rule 5550(b). There can be no assurance that we will continue to
meet the continued listing requirements.
Delisting could reduce the ability of our shareholders to purchase or sell shares as quickly and as inexpensively as they have
done historically. For instance, failure to obtain listing on another market or exchange may make it more difficult for traders to
sell our securities. Broker-dealers may be less willing or able to sell or make a market in our common stock. Not maintaining
our NASDAQ Capital Market listing may (among other effects):
result in a decrease in the trading price of our common stock;
lessen interest by institutions and individuals in investing in our common stock;
•
•
• make it more difficult to obtain analyst coverage; and
• make it more difficult for us to raise capital in the future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
24
ITEM 2. PROPERTIES
Our principal operations are located in Sunnyvale, CA in a facility that is approximately 52,000 square feet and is leased
through August 2012. We believe our Sunnyvale facility will adequately meet our current and foreseeable future needs. For
additional information regarding our obligations under leases see Note 3 to the consolidated financial statements contained in
Part II, Item 8 of this Report.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we become involved in various legal claims and litigation that arise in the normal course of our operations.
While the results of such claims and litigation cannot be predicted with certainty, we are not currently aware of any such
matters that we believe would have a material adverse effect on our financial position, results of operations or cash flows.
On January 27, 2010, we were named a defendant in a lawsuit, Nikki Meierdiercks et al. v. 8x8, Inc., filed by three former
employees in Santa Clara County Superior Court as a putative class action seeking damages and various penalties under the
California Labor Code for alleged unpaid overtime, meal breaks, rest breaks and alleged late wage payments and unreimbursed
business expenses. The Plaintiffs’ filed a First Amended Complaint on April 29, 2010 and we filed our Answer to the First
Amended Complaint on May 26, 2010. We have factual and legal defenses to these claims and are presenting a vigorous
defense. Plaintiffs have not made a specific monetary demand and we cannot estimate potential liability in this case at this
early stage of litigation.
ITEM 4. (REMOVED AND RESERVED)
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
We completed our initial public offering on July 2, 1997 under the name 8x8, Inc. From that date through April 3, 2000, our
common stock was traded on what was then known as the NASDAQ National Market (the NASDAQ) under the symbol
"EGHT." From April 4, 2000 through July 18, 2001, our common stock was traded on the NASDAQ under the symbol
"NTRG." Since July 19, 2001 our common stock has traded under the symbol "EGHT." In July 2002, our listing was
transferred to the NASDAQ Capital Market of the NASDAQ Stock Market LLC.
We have never paid cash dividends on our common stock and have no plans to do so in the foreseeable future. We did not
repurchase any of our equity securities during the fourth quarter of fiscal 2010. As of May 24, 2010, there were 272 holders of
record of our common stock.
The following table sets forth the range of high and low close prices for each period indicated:
Period
Fiscal 2010:
First quarter
Second quarter
Third quarter
Fourth quarter
Fiscal 2009:
First quarter
Second quarter
Third quarter
Fourth quarter
High
Low
$ 0.85
$ 1.05
$ 1.50
$ 1.63
$ 1.27
$ 1.14
$ 0.90
$ 0.65
$ 0.58
$ 0.60
$ 0.89
$ 1.20
$ 0.97
$ 0.87
$ 0.42
$ 0.45
25
See Item 12 of Part III of this Report regarding information about securities authorized for issuance under our equity
compensation plans.
The graph below shows the cumulative total stockholder return over a five year period assuming the investment of $100 on
March 31, 2005 in each of 8x8’s common stock, the NASDAQ Composite Index and the NASDAQ Telecommunications
Index. The graph is furnished, not filed, and the historical return cannot be indicative of future performance.
Sales of Unregistered Securities.
On May 1, 2010, we entered into an agreement with Central Host, Inc. and Andrew Schwabecher pursuant to which we
acquired this provider of managed hosting services from its sole shareholder, Schwabecher. Under the terms of the Agreement,
we closed the acquisition on May 1, 2010, and paid $1,000,000 in cash and issued 432,276 shares of common stock, at an
average price of $1.388 per share and calculated based on the trailing 5-day average closing price of 8x8 common stock on the
NASDAQ Exchange as of the Effective Date of the transaction, to Schwabecher in exchange for 100% of the outstanding
shares of capital stock of Central Host, Inc. The shares of our common stock were not registered for sale and were issued
pursuant to an exemption from the registration requirements under section 5 of the Securities Act of 1933, as amended,
provided by section 4(2) thereof.
26
ITEM 6. SELECTED FINANCIAL DATA
Total revenues
Net income (loss)
Net income (loss) per share:
Basic
Diluted
Total assets
Fair value of warrant liability
Accumulated deficit
Total stockholders' equity
$
$
$
$
$
$
$
$
2010
63,396
3,879
$
$
2009
Years Ended March 31,
2008
(in thousands, except per share amounts)
53,130
61,646
(9,930)
30
64,674
(2,500)
2007
$
$
$
$
2006
$
$
31,892
(23,253)
0.06
0.06
23,712
167
(198,840)
(0.04)
$
(0.04)
$
21,856
$
$
21
$ (202,719)
0.00
$
0.00
$
21,551
$
$
335
$ (200,219)
(0.16)
$
(0.16)
$
19,958
$
$
3,387
$ (200,249)
(0.42)
$
(0.42)
$
31,120
$
$
7,123
$ (190,319)
13,300
$
9,030
$
7,849
$
5,377
$
12,970
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
We were founded in 1987 and completed an initial public offering of common stock in 1997. We develop and market
telecommunications services for Internet protocol, or IP, telephony and video applications as well as web-based conferencing
and unified communications services. We offer the 8x8 VoIP (Voice over Internet Protocol) voice and video digital phone
service, 8x8 Virtual Office hosted PBX service, 8x8 Complete Contact Center service, 8x8 Trunking service, 8x8 Hosted Key
System service, 8x8 MobileTalk service, 8x8 Virtual Meeting web conferencing service, the 8x8 Virtual Office Pro unified
communications solution and 8x8 Managed Hosting and Cloud-Based Computing solutions. As of March 31, 2010, we had
more than 20,000 business customers. Each business customer subscribes to a number of various lines and services (e.g.
physical phone extensions, virtual extensions, fax lines, toll free numbers, receptionist software, unified communications
services, etc.) Since fiscal 2004, substantially all of our revenues have been generated from the sale, license and provision of
VoIP products, services and technology. Prior to fiscal 2003, our focus was on our VoIP semiconductor business.
CRITICAL ACCOUNTING POLICIES & ESTIMATES
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United
States of America. Note 1 to the consolidated financial statements in Part II, Item 8 of this Report describes the significant
accounting policies and methods used in the preparation of our consolidated financial statements.
We have identified the policies below as some of the more critical to our business and the understanding of our results of
operations. These policies may involve a higher degree of judgment and complexity in their application and represent the
critical accounting policies used in the preparation of our financial statements. Although we believe our judgments and
estimates are appropriate, actual future results may differ from our estimates. If different assumptions or conditions were to
prevail, the results could be materially different from our reported results. The impact and any associated risks related to these
policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and expected financial results.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and
equity and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including, but not limited
to, those related to bad debts, valuation of inventories, and litigation and other contingencies. We base our estimates on
historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent
27
from other sources. Actual results could differ from those estimates under different assumptions or conditions. We base our
estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying value of assets, liabilities and equity that are not
readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.
Additional information regarding risk factors that may impact our estimates is included above under Item 1A, "Risk Factors."
Revenue Recognition
Our revenue recognition policies are described in Note 1 to the consolidated financial statements in Part II, Item 8 of this
Report. As described below, significant management judgments and estimates must be made and used in connection with the
revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any
period if our management made different judgments or utilized different estimates.
Under the terms of our typical subscription agreement, new customers can terminate their service within 30 days of order
placement and receive a full refund of fees previously paid. We have determined that we have sufficient history of subscriber
conduct to make a reasonable estimate of cancellations within the 30-day trial period. Therefore, we recognize new subscriber
revenue in the month in which the new order was shipped, net of an allowance for expected cancellations.
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-25 (formerly Emerging
Issues Task Force consensus No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”) requires that
revenue arrangements with multiple deliverables be divided into separate units of accounting if the deliverables in the
arrangement meet specific criteria. In addition, arrangement consideration must be allocated among the separate units of
accounting based on their relative fair values, with certain limitations. The provisioning of the 8x8 service with the
accompanying 8x8 IP Telephone constitutes a revenue arrangement with multiple deliverables. In accordance with the
guidance of ASC 605-25, we allocate 8x8 revenues, including activation fees, among the 8x8 IP telephones and subscriber
services. Revenues allocated to these devices are recognized as product revenues during the period of the sale less the
allowance for estimated returns during the 30-day trial period. All other revenues are recognized when the related services are
provided. We record revenue net of any sales-related taxes that are billed to our customers. We believe this approach results in
financial statements that are more easily understood by investors. The cost of the products sold is recognized
contemporaneously with the recognition of revenue.
At the time of each revenue transaction, we assess whether the revenue amount is fixed and determinable and whether
collection is reasonably assured. We assess whether the fee is fixed and determinable based on the payment terms associated
with the transaction. If a significant portion of a fee is due after our normal payment terms, which are 30-90 days from invoice
date, we account for the fee as not being fixed and determinable. In these cases, we recognize revenue as the fees become due.
We assess collection based on a number of factors, including past transaction history with the customer and the
creditworthiness of the customer. We generally do not request collateral from our customers. If we determine that collection of
a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured,
which is generally upon receipt of payment. We defer recognition of revenue on product sales to retailers where the right of
return exists until products are resold to the end user and the trial period has expired.
During fiscal 2010, 2009 and 2008, revenue from software licensing and related arrangements were limited. For arrangements
with multiple obligations (for example, undelivered maintenance and support), we have allocated revenue to each component
of the arrangement using the residual value method based on the fair value of the undelivered elements, which is specific to us.
This means that we defer revenue from the arranged fee that is equivalent to the fair value of the undelivered elements. Fair
values for the ongoing maintenance and support obligations for our technology licenses are based upon separate sales of
renewals to other customers or upon renewal rates quoted in the contracts. We base the fair value of services, such as training
or consulting, on separate sales of these services to other customers. We recognize revenue for maintenance services ratably
over the contract term. Our training and consulting services are billed based on hourly rates, and we generally recognize
revenue as these services are performed.
Under our revenue recognition accounting principles, if a software license arrangement includes acceptance criteria, we do not
recognize revenue until we can demonstrate objectively that the software or service can meet the acceptance criteria or that the
customer has signed formal acceptance documentation. If a software license arrangement obligates us to deliver unspecified
future products, we recognize revenue on a subscription basis, ratably over the term of the contract.
28
For all sales, except those completed via the Internet, we use either a binding purchase order or other signed agreement as
evidence of an arrangement. For sales over the Internet, we use a credit card authorization as evidence of an arrangement, and
recognize revenue upon settlement of the transaction, if there are no customer acceptance conditions. We do not settle credit
card transactions until equipment related to the transaction, if any, is shipped to a customer.
We launched the retail channel in fiscal 2005 and began using it for our 8x8 Virtual Office service in 2006 with product
offerings through Office Depot and subsequently Office Max. Our retail channels and online retailers have unlimited return
rights for this equipment. The Company records shipments to distributors, retailers, and resellers, where the right of return
exists, as deferred revenue. Consequently, we defer recognition of revenue on sales to distributors, retailers, and resellers
where the right of return exists until products are resold to the end user.
Our ability to enter into revenue generating transactions and recognize revenue in the future is subject to a number of business
and economic risks discussed above under Item 1A,"Risk Factors."
Collectability of Accounts Receivable
We must make estimates of the collectability of our accounts receivable. Management specifically analyzes accounts
receivable, including historical bad debts, customer concentrations, customer creditworthiness, current economic trends and
changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. As of March 31,
2010, the accounts receivable balance was $670,000, net of an allowance for doubtful accounts of $36,000, including a reserve
for disputed credits, and an estimated returns reserve of $80,000. If the financial condition of our customers deteriorates, our
actual losses may exceed our estimates, and additional allowances would be required.
Valuation of Inventories
We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future demand, market conditions and replacement
costs. If actual future demand or market conditions are less favorable than those projected by us, additional inventory write-
downs may be required.
Acquired Product Rights
On April 29, 2009, we resolved a patent litigation matter with Web Telephony by entering into a license and settlement
agreement that resolved all legal claims by Web Telephony. As part of the settlement, we agreed to pay eight quarterly
payments totaling $800,000 over the next two years between April 2009 and December 2010. Under the transaction, we
expensed $339,000 of the patent settlement costs during the year ended March 31, 2009 that were related to benefits received
by us in and during the periods prior to fiscal year 2009. We recorded the remaining license fee of $432,000 as other long term
assets as of March 31, 2009 and we are amortizing this amount to cost of service revenues in the Consolidated Statements of
Operations over the remaining life of the primary patent, which expires in September 2017.
Warrant Liability
We account for our warrants in accordance with ASC 480-10 (formerly Emerging Issues Task Force Issue No. 00-19,
“Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock”) which
requires warrants to be classified as permanent equity, temporary equity or as assets or liabilities. In general, warrants that
either require net-cash settlement or are presumed to require net-cash settlement are recorded as assets and liabilities at fair
value and warrants that require settlement in shares are recorded as equity instruments. Certain of our warrants require
settlement in shares and are accounted for as permanent equity. We also have two investor warrants that are classified as
liabilities because they include a provision that specifies that we must deliver freely tradable shares upon exercise by the
warrant holder. Because there are circumstances, irrespective of likelihood, which may not be within our control that could
prevent delivery of registered shares, ASC 480-10 requires the warrants be recorded as a liability at fair value, with subsequent
changes in fair value recorded as income (loss) in change in fair value of warrant liability. The fair value of the warrant is
determined using a Black-Scholes option pricing model, and is affected by changes in inputs to that model including our stock
price, expected stock price volatility and contractual term.
The amount we record as a liability under ASC 480-10 is not, nor do we intend for it to be an admission or stipulation of the
amount that we would owe or be obligated to pay the warrant holder in the event of an actual breach by us of the warrant terms.
In fact, we have made no determination of the amount of liability, if any, that we would owe to the warrant holder in the event
of such a breach.
29
Income and Other Taxes
As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process requires us to estimate our actual current tax expense and to assess
temporary differences resulting from book-tax accounting differences for items such as deferred revenue. These differences
result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery
is not likely, we must establish a valuation allowance. In the event that we determine that we would be able to realize deferred
tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in
the period such determination was made.
Significant management judgment is required to determine the valuation allowance recorded against our net deferred tax assets,
which consist of net operating loss and tax credit carry forwards. We have recorded a valuation allowance of approximately
$68.7 million as of March 31, 2010, due to uncertainties related to our ability to utilize most of our deferred tax assets before
they expire. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the
period over which our deferred tax assets will be recoverable.
We have received inquiries, demands or audit requests from several states and municipal taxing and 9-1-1 agencies seeking
payment of taxes that are applied to or collected from the customers of providers of traditional public switched telephone
network services. We have recorded an expense of $0, $72,000 and $375,000 for the years ended March 31, 2010, 2009 and
2008, respectively, as our estimate of the increase in probable tax exposure for such assessments. Our cumulative estimate for
probable assessments is $0.1 million as of March 31, 2010, which is recorded in the accrued taxes line item in the consolidated
balance sheets.
Stock-Based Compensation
We account for our employee stock options and stock purchase rights granted under the 1996 Stock Plan, 1996 Director Option
Plan, 1999 Nonstatutory Stock Option Plan and the 2006 Stock Plan and stock purchase rights under the 1996 Employee Stock
Purchase Plan (“Purchase Plan”) under the provisions of ASC 718 – Stock Compensation (formerly Statement of Financial
Accounting Standards No. 123(R), “Share-Based Payment”). Under the provisions of ASC 718, share-based compensation cost
is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense over the
employee’s requisite service period (generally the vesting period of the equity grant), net of estimated forfeitures. We have
adopted the modified prospective transition method as provided by ASC 718 and, accordingly, financial statement amounts for
the prior periods have not been restated to reflect the fair value method of expensing share-based compensation.
Stock-based compensation expense recognized in the Consolidated Statements of Operations for fiscal 2010 and 2009 included
both the unvested portion of stock-based awards granted prior to April 1, 2006 and stock-based awards granted subsequent to
April 1, 2006. Stock options granted in periods prior to fiscal 2007 were measured based on ASC 718 (formerly SFAS
No. 123) criteria, whereas stock options granted subsequent to April 1, 2006 were measured based on ASC 718 (formerly
SFAS No. 123(R)) criteria. In conjunction with the adoption of SFAS No. 123(R), we changed our method of attributing the
value of stock-based compensation to expense from the accelerated multiple-option approach to the straight-line single option
method. Compensation expense for all share-based payment awards granted subsequent to April 1, 2006 has been recognized
using the straight-line single-option method. Stock-based compensation expense included in fiscal 2010 included the impact of
estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.
To value option grants and stock purchase rights under the Purchase Plan for actual and pro forma stock-based compensation
we used the Black-Scholes option valuation model. Fair value determined using the Black-Scholes option valuation model
varies based on assumptions used for the expected stock prices volatility, expected life, risk free interest rates and future
dividend payments. For fiscal years 2010, 2009 and 2008, we used the historical volatility of our stock over a period equal to
the expected life of the options to their fair value. The expected life assumptions represent the weighted-average period stock-
based awards are expecting to remain outstanding. These expected life assumptions were established through the review of
historical exercise behavior of stock-based award grants with similar vesting periods. The risk free interest was based on the
closing market bid yields on actively traded U.S. treasury securities in the over-the-counter market for the expected term equal
to the expected term of the option. The dividend yield assumption was based on our history and expectation of future dividend
payout.
30
ASC 718 requires us to calculate the additional paid in capital pool (“APIC Pool”) available to absorb tax deficiencies
recognized subsequent to adopting ASC 718, as if we had adopted ASC 718 at its effective date of January 1, 1995. There are
two allowable methods to calculate our APIC Pool: (1) the long form method as set forth in ASC 718 or (2) the short form
method as set forth in ASC 718 (formerly FASB Staff Position No. 123(R)-3). We have elected to use the long form method
under which we track each award grant on an employee-by-employee basis and grant-by-grant basis to determine if there is a
tax benefit or tax deficiency for such award. We then compared the fair value expense to the tax deduction received for each
grant and aggregated the benefits and deficiencies to establish the APIC Pool.
Due to the adoption of ASC 718, some exercises result in tax deductions in excess of previously recorded benefits based on the
option value at the time of grant, or windfalls. We recognize windfall tax benefits associated with the exercise of stock options
directly to stockholders’ equity only when realized. Accordingly, we are not recognizing deferred tax assets for net operating
loss carryforwards resulting from windfall tax benefits occurring from April 1, 2006 onward. A windfall tax benefit occurs
when the actual tax benefit realized by the company upon an employee’s disposition of a share-based award exceeds the
deferred tax asset, if any, associated with the award that the company had recorded. We use the “with and without” approach as
described in ASC 740 (formerly Emerging Issues Task Force (“EITF”) Topic No. D-32), in determining the order in which our
tax attributes are utilized. The “with and without” approach results in the recognition of the windfall stock option tax benefits
only after all other tax attributes of ours have been considered in the annual tax accrual computation. Also, we have elected to
ignore the indirect tax effects of share-based compensation deductions in computing our research and development tax and as
such, we recognize the full effect of these deductions in the income statement in the period in which the taxable event occurs.
On January 27, 2009, when our stock price closed at $0.55 per share our board of directors approved the acceleration of
unvested stock options to purchase 3,902,186 shares of common stock. 1,737,509 of these shares are subject to options held by
our executive officers and directors. These options of our executive officers and directors, taken as a whole, have a weighted
average exercise price of $1.06 per share and range from $0.63 to $1.79 per share, and a weighted average remaining vesting
term of 2.85 years. Approximately $1.1 million of the $2.4 million stock-based compensation charge in the fourth quarter of
2009 applies to the options held by our executive officers and directors.
SELECTED OPERATING STATISTICS
We periodically review certain key business metrics, within the context of our articulated performance goals, in order to
evaluate the effectiveness of our operational strategies, allocate resources and maximize the financial performance of our
business. The selected operating statistics include the following:
31
Gross business customer additions (1)
Gross business customer cancellations (less
cancellations within 30 days of sign-up)
Business customer churn (less cancellations
within 30 days of sign-up) (2)
Total business customers (3)
Business customer average monthly service
revenue per customer (4)
Selected Operating Statistics
March 31,
2010
2,875
Dec. 31,
2009
2,785
Sept. 30,
2009
2,609
June 30,
2009
2,907
1,616
1,331
1,416
1,371
March 31,
2009
2,792
1,245
Dec. 31,
2008
2,437
Sept. 30,
2008
3,324
June 30,
2008
2,398
1,224
1,187
1,098
2.7%
20,428
2.4%
19,407
2.7%
18,199
2.7%
17,266
2.7%
16,013
2.9%
14,706
3.1%
13,744
3.2%
11,898
$
204
$
204
$
201
$
196
$
202
$
208
$
220
$
237
Service revenue from business customers (in '000s)
Product revenue from business customers (in '000s)
Total revenue from business customers (in '000s)
$
$
$
12,182
1,266
13,448
Revenue from business customers (in '000s)
Revenue from residential customers (in '000s)
Revenue from technology licensing (in '000s)
Total Revenue
$
$
$
$
13,448
2,396
23
15,867
$
$
$
11,494
1,156
12,650
$
$
$
$
12,650
3,278
16
15,944
$
$
$
10,714
1,128
11,842
$
$
$
$
11,842
4,168
17
16,027
$
$
$
9,787
935
10,722
$
$
$
$
10,722
4,811
25
15,558
$
$
$
9,293
1,435
10,728
$
$
$
8,883
1,731
10,614
$
$
$
8,466
1,360
9,826
$
$
$
$
10,728
5,236
(199)
15,765
$
$
$
$
10,614
5,572
17
16,203
$
$
$
$
9,826
6,356
243
16,425
Percentage of revenue from business customers
Percentage of revenue from residential customers
Percentage of revenue from technology licensing
Total Revenue
Overall service margin
Overall product margin
Overall gross margin
84.8%
15.1%
0.1%
100.0%
77%
-43%
68%
79.3%
20.6%
0.1%
100.0%
78%
-59%
68%
73.9%
26.0%
0.1%
100.0%
76%
-42%
67%
68.9%
30.9%
0.2%
100.0%
76%
-75%
66%
68.1%
33.2%
-1.3%
100.0%
71%
-50%
59%
65.5%
34.4%
0.1%
100.0%
74%
9%
67%
59.8%
38.7%
1.5%
100.0%
73%
-10%
65%
$
$
$
8,073
1,004
9,077
$
$
$
$
9,077
7,192
12
16,281
55.8%
44.1%
0.1%
100.0%
75%
-13%
68%
Total (business, residential and video) subscriber
acquisition cost per service (5)
Business subscriber acquisition cost per service (6)
Average number of services subscribed to per
business customer
Business customer subscriber acquisition cost (7)
$
$
97
97
$
$
102
102
$
$
88
90
$
$
108
93
$
$
119
118
$
$
135
141
$
$
163
171
$
$
162
171
7.5
723
$
7.3
749
$
7.1
638
$
6.9
638
$
6.6
785
6.6
933
$
6.9
1,174
$
7.1
1,217
$
$
(1) Includes 1,154 "Find me, Follow me" and 40 8x8 Virtual Office customers acquired in the second quarter of fiscal 2009
from Avtex Solutions, LLC ("Avtex").
(2) Business customer churn is calculated by dividing the number of business customers that terminated (after the expiration of
the 30-day trial) during that period by the simple average number of business customers during the period and dividing the
result by the number of months in the period. The simple average number of business customers during the period is the
number of business customers on the first day of the period plus the number of business customers on the last day of the period
divided by two.
(3) Business customers are defined as customers paying for service. Customers that have prepaid for their first month of
service and are currently in the 30-day trial period are considered to be customers that are paying for service.
(4) Business customer average monthly service revenue per customer is service revenue from business customers in the period
divided by the number of months in the period divided by the simple average number of business customers during the period.
(5) Total (business, residential and video) subscriber acquisition cost per service is defined as the combined costs of
advertising, marketing, promotions, commissions and equipment subsidies during the period divided by the number of gross
services added during the period.
(6) Business subscriber acquisition cost per service is defined as the combined costs of advertising, marketing, promotions,
commissions and equipment subsidies for business services sold during the period divided by the number of gross business
services added during the period. The addition of 1,154 Avtex customers that migrated to 8x8 in the second fiscal quarter of
2009 but subscribed to “Find me, Follow me” services rather than 8x8 Virtual Office service, and the $79,230 in expense
related to the acquisition of these 1,154 customers, is excluded from this calculation.
32
(7) Business customer subscriber acquisition cost is business subscriber acquisition cost per service times the average number
of services subscribed to per business customer.
We believe it is useful to monitor these metrics together and not individually, as we do not make business decisions based upon
any single metric.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated Financial Statements and related notes included
elsewhere in this Report.
REVENUES
Service revenues
Percentage of total revenues
Years Ended March 31,
Year-over-Year Change
2010
2009
2008
2009 to 2010
2008 to 2009
(dollar amounts in thousands)
58,486
90.4%
$
$
56,177
91.1%
$ 58,683
92.6%
$
197
0.3% $
2,309
4.1%
Service revenues consist primarily of revenues attributable to the provision of our 8x8 services and royalties earned under our
VoIP technology licenses. We expect that 8x8 service revenues will continue to comprise nearly all of our service revenues for
the foreseeable future.
The increase in fiscal year 2010, compared with fiscal year 2009, was primarily attributable to a $9.5 million increase in 8x8
service revenues resulting from the growth of our business service subscriber base. Our business service subscriber base grew
from approximately 16,000 customers at the end of fiscal 2009 to approximately 20,000 customers on March 31, 2010. The
increase was offset by a decrease of $9.3 million attributable to residential services. The decrease in service revenues from
residential customers resulted from a reduction in the number of residential lines in service. These changes are consistent with
the redirection of most of our marketing efforts toward our business customer service and we expect the trends to continue in
future periods.
The increase in fiscal year 2009, compared with fiscal year 2008, was primarily attributable to a $9.3 million increase in 8x8
service revenues resulting from the growth of our business service subscriber base. Our business service subscriber base grew
from approximately 11,000 customers at the end of fiscal 2008 to approximately 16,000 customers on March 31, 2009. The
increase was offset by a decrease of $5.7 million attributable to residential and videophone services and a $0.7 million decrease
in revenue attributable to royalties earned. The decrease in service revenues from residential and video customers resulted from
a reduction in the number of residential and video lines in service from approximately 107,000 in fiscal 2008 to approximately
82,000 in fiscal 2009. Also, compared with fiscal 2008, there was a $0.6 million reduction in the one time recognition of
revenue due to a ruling by the U.S. Court of Appeals for the District of Columbia in June 2007 that interconnected VoIP
providers are not required to obtain pre-approval of traffic studies. As a result of the ruling, in the first quarter of fiscal 2008
we retroactively applied our traffic study contribution rate to our historical subscriber retail revenues which resulted in the
recognition of revenue of $0.6 million from the reduction of the related accrued liability in the first fiscal quarter of 2008.
Years Ended March 31,
Year-over-Year Change
2010
2009
2008
2009 to 2010
2008 to 2009
Product revenues
Percentage of total revenues
$
(dollar amounts in thousands)
6,188
9.6%
4,713
7.4%
$
$
5,469
8.9%
$
(1,475)
-23.8% $
719
13.1%
Product revenues consist primarily of revenues from sales of IP telephones, primarily attributable to our 8x8 service.
The decrease in product revenues in fiscal year 2010 from fiscal year 2009 resulted from a selling price reduction as we elected
to increase the subsidy on IP telephone sales to business service customers and a decline in product revenue attributable to
residential and videophone service customers.
33
The increase in fiscal year 2009 from fiscal year 2008 resulted from a $2.2 million increase in product revenue attributable to
growth in our business customer subscriber base. However, product revenue attributable to residential and video service
customers declined by $1.5 million.
No single customer represented more than 10% of our total revenues during fiscal 2010, 2009 or 2008.
The following table illustrates our net revenues by geographic area. Revenues are attributed to countries based on the
destination of shipment (in thousands):
United States
Other locations
COST OF REVENUES
Cost of service revenues
Percentage of service revenues
Years Ended March 31,
2010
2009
2008
$
$
63,272
124
63,396
$
$
64,633
41
64,674
$
$
61,052
594
61,646
Years Ended March 31,
Year-over-Year Change
2010
2009
2008
2009 to 2010
2008 to 2009
(dollar amounts in thousands)
15,714
26.9%
$
$
16,671
29.7%
$ 13,599
23.2%
$
(2,115)
-13.5% $
(957)
-5.7%
Cost of service revenues primarily consists of costs associated with network operations and related personnel, telephony
origination and termination services provided by third party carriers and technology license and royalty expenses.
Cost of service revenues for fiscal 2010 compared with fiscal 2009 decreased $2.1 primarily due to a reduction in the prices
we pay to third party network service vendors, as well as our use of multiple third party network provider vendors, which
allows us to route call traffic to the third party network provider vendor with the most favorable pricing. The reduction in
pricing by third party network service vendors was partially offset by an increase in personnel and licenses fee costs compared
with the prior fiscal year.
Cost of service revenues for fiscal 2009 compared with fiscal 2008 decreased $1.0 primarily due to a reduction in the prices we
pay to third party network service vendors, as well as our use of multiple third party network service vendors, which allows us
to route call traffic to the third party network service vendor with the most favorable pricing. The reduction in the prices we
pay to third party network service vendors was partially offset by an increase in personnel and licenses fee costs compared with
the prior fiscal year.
Years Ended March 31,
Year-over-Year Change
2010
2009
2008
2009 to 2010
2008 to 2009
Cost of product revenues
Percentage of product revenues
$
(dollar amounts in thousands)
7,135
115.3%
7,257
154.0%
$
$
6,762
123.6%
$
122
1.7% $
373
5.5%
The cost of product revenues consist of costs associated with systems, components, system manufacturing, assembly and
testing performed by third party vendors, estimated warranty obligations and direct and indirect costs associated with product
purchasing, scheduling, quality assurance, shipping and handling. We allocate a portion of service revenues to product
revenues but these revenues are less than the cost of the product.
The increase in the cost of product revenues for fiscal 2010 from fiscal 2009 was primarily due to a $0.6 million increase in the
shipment of equipment to our business customers. The increase in cost of product revenues was partially offset by a $0.3
million decrease in shipments of equipment to residential customers, a $0.1 million reduction in payroll and related expenses,
and a $0.1 million reduction in freight costs. The cost of product revenues as a percentage of product revenues increased due
to an increase in discounting of product sales by our sales force in fiscal 2010.
34
The increase in the cost of product revenues for fiscal 2009 from fiscal 2008 was primarily due to a $2.0 million increase in the
shipment of equipment to our business customers. The increase in cost of product revenues was partially offset by a $1.7
million decrease in shipments of equipment to residential subscribers and a $0.4 million reduction in freight costs. The cost of
product revenues as a percentage of product revenues decreased in part due to a reduction in discounting of product sales by
our sales force in fiscal 2009.
RESEARCH AND DEVELOPMENT EXPENSES
Years Ended March 31,
Year-over-Year Change
2010
2009
2008
2009 to 2010
2008 to 2009
Research and development
Percentage of total revenues
$
(dollar amounts in thousands)
5,212
8.1%
5,049
8.0%
$
$
4,335
7.0%
$
(163)
-3.1% $
877
20.2%
Historically, our research and development expenses have consisted primarily of personnel, system prototype design, and
equipment costs necessary for us to conduct our development and engineering efforts. We expense research and development
costs, including software development costs, as they are incurred.
The decrease in research and development expenses for fiscal 2010 from fiscal 2009 was primarily attributable to a decrease in
overall expenses offset by an increase in personnel and contractor headcount expenses.
The increase in research and development expenses for fiscal 2009 from fiscal 2008 was primarily attributable to an increase in
personnel and contractor headcount expenses, including a $0.3 million increase in SFAS 123(R) stock-based compensation
expense.
In April 2010, we sold our French research and development subsidiary and expect our research and development expense to
decline in fiscal 2011 compared with fiscal 2010.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Years Ended March 31,
Year-over-Year Change
2010
2009
2008
2009 to 2010
2008 to 2009
Selling, general and administrative $ 33,516
52.9%
Percentage of total revenues
(dollar amounts in thousands)
39,680
61.4%
$
$
37,596
61.0%
$
(6,164)
-15.5% $
2,084
5.5%
Selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing,
customer support, finance, human resources and general management. Such costs also include outsourced customer service call
center operations, sales commissions, as well as trade show, advertising and other marketing and promotional expenses.
The decrease in selling, general and administrative expenses for fiscal 2010 from fiscal 2009 was due to a $2.3 million
decrease in employee and temporary personnel costs, primarily due to a decrease in ASC 718 stock-based compensation
expense as a result of accelerating the vesting period of stock options in fiscal 2009, $1.9 million decrease in advertising,
public relations and other marketing and promotional expenses, a $1.7 million decrease in sales agent and retailer commissions,
a $0.2 million decrease in credit card processing fees, $0.1 million decrease in travel and meal expenses, a $0.1 million
decrease in telephone expenses. This decrease was partially offset by a $0.1 million increase in facility expenses.
The increase in selling, general and administrative expenses for fiscal 2009 from fiscal 2008 was primarily due to a $4.1
million increase in employee and temporary personnel costs, including a $1.5 million increase in SFAS 123(R) stock-based
compensation expense, $0.5 million increase in advertising, public relations and other marketing and promotional expenses, a
$0.2 million increase in travel and meal expenses, a $0.1 million increase in printing expenses, and a $0.1 million increase in
expensed equipment and software. This increase was partially offset by a $1.5 million decrease in sales agent and retailer
commissions, a $0.9 million decrease in sales and use tax expenses as we began to collect and remit taxes in states outside of
California, a $0.3 million decrease in accounting and tax fees, and a $0.2 million decrease in credit card processing fees.
35
INTEREST INCOME AND OTHER, NET
Years Ended March 31,
Year-over-Year Change
2010
2009
2008
2009 to 2010
2008 to 2009
Interest income and other, net
Percentage of total revenues
$
(dollar amounts in thousands)
53
0.1%
298
0.5%
$
$
1,606
2.6%
$
(245)
-82.2% $
(1,308)
-81.4%
Our interest income and other, net, primarily consists of interest and investment income earned on our cash, cash equivalents
and investment balances. This item primarily consisted of interest income in fiscal 2010 and 2009. Other income in fiscal 2008
included $1.2 million from the sale of two patents.
The decrease in other income for fiscal 2010 from fiscal 2009 consists primarily of a reduction in interest and investment
income earned on our cash, cash equivalents and investment balances due to lower interest rates.
INCOME ON CHANGE IN FAIR VALUE OF WARRANT LIABILITY
Years Ended March 31,
Year-over-Year Change
2010
2009
2008
2009 to 2010
2008 to 2009
(dollar amounts in thousands)
Income (loss) on change in fair
value of warrant liability
Percentage of total revenues
$
$
(146)
-0.2%
$
314
0.5%
2,142
3.5%
$
(460)
-146.5% $
(1,828)
-85.3%
In connection with the sale of shares of our common stock in fiscal 2005 and 2006, we issued warrants in three different equity
financings. The warrants included a provision that we must deliver freely tradable shares upon exercise of the warrant.
Because there are circumstances that may not be within our control that could prevent delivery of registered shares, ASC 480-
10 requires the warrants be recorded as a liability at fair value with subsequent changes in fair value recorded as a gain or loss.
The fair value of the warrant is determined using a Black-Scholes option pricing model, and is affected by changes in inputs to
that model including our stock price, expected stock price volatility and contractual term. To the extent that the fair value of
the warrant liability increases or decreases, we record a loss or income in our statement of operations. The amount we record
as a liability under ASC 480-10 is not, nor do we intend for it to be, an admission or stipulation of the amount that we would
owe or be obligated to pay the warrant holder in the event of an actual breach by us of the warrant terms. In fact, we have
made no determination of the amount of liability, if any, that we would owe to the warrant holder in the event of such a breach.
The decrease in the income from change in fair value of warrants in fiscal 2010 from fiscal 2009 occurred because the fair
value of warrants and warrant liability increased due to an increase in our stock price and the expected stock price volatility,
offset by a reduction in the risk free interest rate and contractual life of the warrants, which are the primary assumptions
applied to the Black-Scholes model which we have used to calculate the fair value of the warrants.
The decrease in the income from change in fair value of warrants in fiscal 2009 from fiscal 2008 occurred because the fair
value of warrants and warrant liability declined due to a reduction in our stock price, expected stock price volatility, risk free
interest rate and contractual life of the warrants which are the primary assumptions applied to the Black-Scholes model which
we have used to calculate the fair value of the warrants.
Investor warrants for 1,785,714 shares of common stock issued on December 19, 2005 will be accounted for as liabilities until
they are exercised or they expire in December 2010. Therefore, there will not be any additional income or loss for these
warrants after the third quarter of fiscal 2011.
36
PROVISION FOR INCOME TAXES
Provision for income taxes
Percentage of total revenues
$
Years Ended March 31,
Year-over-Year Change
2010
2009
2008
2009 to 2010
2008 to 2009
(dollar amounts in thousands)
3
0.0%
45
0.1%
$
$
$
(42)
-93.3% $
45
100.0%
-
0.0%
We had a $3,000 provision for income taxes for the fiscal year ended March 31, 2010 for state tax in several states and foreign
tax, offset by federal refund in lieu of bonus depreciation (in accordance with the Economic Stimulus Act of 2010). We had a
$45,000 provision for income taxes in the fiscal years ended March 31, 2009. We had no provision for income taxes in the
fiscal year ended March 31, 2008.
At March 31, 2010, we had net operating loss carryforwards for federal and state income tax purposes of approximately $154.0
million and $90.3 million, respectively, that expire at various dates beginning in 2011 and continuing through 2030. In
addition, at March 31, 2010, we had research and development credit carryforwards for federal and state tax reporting purposes
of approximately $1.7 million and $2.9 million, respectively. The federal credit carryforwards will begin expiring in 2011
continuing through 2030, while the California credit will carry forward indefinitely. Under the ownership change limitations of
the Internal Revenue Code of 1986, as amended, the amount and benefit from the net operating losses and credit carryforwards
may be impaired or limited in certain circumstances.
At March 31, 2010 and 2009, we had gross deferred tax assets of approximately $68.7 million and $71.4 million, respectively.
Because of uncertainties regarding the realization of deferred tax assets, we have applied a full valuation allowance as of
March 31, 2010 and 2009.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2010, we had $18.1 million of cash and cash equivalents. By comparison, at March 31, 2009, we had $16.4
million in cash and cash equivalents. We currently have no borrowing arrangements.
2009 to 2010
Net cash provided by operating activities for fiscal 2010 was $2.5 million, compared with $2.3 million provided by operating
activities for fiscal 2009. The increase in cash flow was primarily due to a decline in third party network service expenses and a
decline in stock-based compensation expense, offset partially by discounting of equipment sold to business service customers
during fiscal 2010. Cash used in or provided by operating activities has historically been affected by: the amount of net
income, sales of subscriptions, changes in working capital accounts, particularly in deferred revenue due to timing of annual
plan renewals, add-backs of non-cash expense items such as depreciation and amortization, and the expense associated with
stock-based awards.
Net cash used in investing activities was $0.9 million in fiscal 2010, compared with $2.6 million provided by investing
activities in fiscal 2009. The decrease in cash flow from investing activities during fiscal 2010 is primarily related to the
investment of operating cash balances.
Our financing activities for fiscal 2010 provided cash of $0.4 million from the issuance of common stock under our stock
option and employee stock purchase plans which was offset by $0.2 million used to repurchase shares of common stock under
our share repurchase plan. Our financing activities for fiscal 2009 provided cash of $0.4 million from the issuance of common
stock under the employee stock purchase plan.
2008 to 2009
Net cash provided by operating activities for fiscal 2009 was $2.3 million, compared with $3.0 million provided by operating
activities for fiscal 2008. The decrease in cash flow was primarily due to an increase in stock-based compensation, which
includes $2.4 million due to the acceleration of unvested employee stock options in January 2009, a $0.6 million provision for
inventory primarily due to $0.5 million of excess inventory related to our business services analog phone, a $0.4 million
provision for doubtful accounts primarily related to royalty revenue, and a $0.2 million write off of our legacy billing system,
37
offset partially by a $1.3 million increase in other current and noncurrent liabilities primarily due to a license and settlement
agreement.
Net cash provided by investing activities was $2.6 million in fiscal 2009, compared with $1.2 million provided by investing
activities in fiscal 2008. The increase in cash flow from investing activities during fiscal 2009 is primarily related to maturity
of short-term investment.
Our financing activities for fiscal 2009 provided cash of $0.4 million from the issuance of common stock under our employee
stock purchase plans. Our financing activities for fiscal 2008 provided cash of $0.2 million from the issuance of common stock
under the employee stock purchase plan.
Although we have achieved positive cash flows from operations in the fiscal year ended March 31, 2010 and 2009, historical
net losses and negative cash flows have been funded primarily through the issuance of equity securities and borrowings. Based
on our current expectations, we believe that our current cash and cash equivalents and short-term investments, together with
cash expected to be generated from future operations, will be sufficient to satisfy our expected working capital and capital
expenditure requirements for the next 12 months. Nevertheless, our future capital requirements will depend on many factors,
including the amount of revenue we generate, the timing and extent of spending to support product development efforts, the
expansion of sales and marketing activities, the timing of introductions of new services or products, the costs to ensure access
to our telecommunications services, the continuing market acceptance of our service and products and the extent to which we
use our cash to acquire other businesses. However, if we do not meet our plan, we could be required, or might elect, to seek
additional funding through public or private equity or debt financing and additional funds may not be available on terms
acceptable to us at all. We also might decide to raise additional capital at such times and upon such terms as management
considers favorable and in our interests, but we cannot be assured that our capital-raising efforts will be successful.
Contractual Obligations
Future operating lease payments, capital lease payments and purchase obligations at March 31, 2010 for the next five years
were as follows (in thousands):
Capital leases
Office leases
License fee
Purchase obligations
Third party customer support provider
Open purchase orders
2011
41
594
250
2,158
1,955
4,998
$
$
$
$
Year Ending March 31,
2013
7
284
-
2012
40
657
-
$
$
2014
-
-
697
$
-
-
291
$
2015
Total
88
1,535
250
2,158
1,955
5,986
-
-
-
-
-
-
$
$
-
-
-
-
-
-
$
$
In March 2007 and August 2009, we entered into a series of noncancelable capital lease agreements for office equipment
bearing interest at various rates. Assets under capital lease at March 31, 2010 totaled $156,000 with accumulated amortization
of $77,000.
On May 1, 2009, we entered into a three-year lease for a new primary facility in Sunnyvale, California that expires in fiscal
2013. The facility leases include rent escalation clauses and require us to pay utilities and normal maintenance costs. Rent
expense is reflected in our consolidated financial statements on a straight-line basis over the term of the leases.
In the third quarter of 2010, we amended our contract with one of our third party customer support vendors containing a
minimum monthly commitment of approximately $430,000. The agreement requires a 150-day notice to terminate. At March
31, 2010, the total remaining obligation under the contract was $2.2 million.
At March 31, 2010 we had open purchase orders of $2.0 million, primarily related to inventory purchases from our contract
manufacturers. These purchase commitments are reflected in our consolidated financial statements once goods or services
have been received or at such time when we are obligated to make payments related to these goods or services.
At March 31, 2010, we had a $167,000 liability related to warrants issued to two investors in an equity financing transaction in
fiscal 2006. The warrants expire in December 2010. We account for these warrants as liabilities because of the possibility,
however likely or unlikely, that we would be unable to deliver registered shares upon a future exercise of these warrants. The
38
required accounting for a warrant with an assumed "net cash settlement" provision under ASC 480 is to estimate the fair value
on the date of issuance and to record a liability equal to that value with subsequent changes in the fair value recorded as income
or expense at the end of each reporting period. The amount we record as a liability under ASC 480-10 is not, nor do we intend
for it to be, an admission or stipulation of the amount that we would owe or be obligated to pay the warrant holder in the event
that we are unable to deliver registered shares to the warrant holder. In fact, we have made no determination of the amount of
liability, if any, that we would owe to the warrant holder in the event of such a breach.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2009, the FASB issued an amendment to ASC 855 - Subsequent Events (formerly SFAS No. 165, "Subsequent
Events"). The statement is to establish general standards of accounting for and disclosure of events that occur after the balance
sheet date but before financial statements are issued. ASC 855 was effective for interim and annual periods ending after
June 15, 2009. The adoption of ASC 855 did not have a material impact on our consolidated results of operation and financial
condition.
In July 2009, the FASB issued Accounting Standards Update ("ASU") No. 2009-1, "Topic 105 - Generally Accepted
Accounting Principles," ("ASU 2009-1") which amended ASC 105, "Generally Accepted Accounting Principles," to establish
the Codification as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities.
Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date, the Codification superseded all then-existing non-SEC accounting and reporting
standards. All previous references to the superseded standards in our consolidated financial statements have been replaced by
references to the applicable sections of the Codification. The adoption of ASU 2009-1 did not have a material impact on our
consolidated results of operation and financial condition.
In October 2009, the FASB issued ASU No. 2009-13, "Multiple-Deliverable Revenue Arrangements-a consensus of the FASB
Emerging Issues Task Force" (“ASU 2009-13”). ASU 2009-13 updates the existing multiple-element revenue arrangements
guidance currently included under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables" (“EITF 00-21”). The revised guidance primarily provides two significant
changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a
delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement
consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will
be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided
that the revised guidance is retroactively applied to the beginning of the year of adoption. We are currently assessing the future
impact of this new accounting update to our consolidated financial statements.
In October 2009, the FASB issued ASU No. 2009-14, "Certain Revenue Arrangements that Include Software Elements-a
consensus of the FASB Emerging Issues Task Force" ("ASU 2009-14"). ASU 2009-14 amends the scope of pre-existing
software revenue guidance by removing from the guidance non-software components of tangible products and certain software
components of tangible products. ASU 2009-14 will be effective for the first annual reporting period beginning on or after June
15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year
of adoption. We are currently assessing the future impact of this new accounting update to our consolidated financial
statements.
In January 2010, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2010-2 (“ASU 2010-
2”), “Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification. ASU 2010-2 addresses
implementation issues related to the changes in ownership provisions in the Consolidation—Overall Subtopic (Subtopic 810-
10) of the FASB ASC, originally issued as SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements”.
Subtopic 810-10 establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership
interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling
financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction
and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with
the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the
subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in ownership interest of a subsidiary
that does not result in a change of control of the subsidiary as an equity transaction. The adoption of ASU 2010-2 did not have
a material effect on our consolidated results of operation and financial condition.
In January 2010, FASB issued ASU 2010-6, “Improving Disclosures about Fair Measurements". ASU 2010-6 provides
amendments to subtopic 820-10 of the FASB Accounting Standards Codification, originally issued as FASB Statement No.
39
157, “Fair Value Measurements” that require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair
value measurements and the presentation of separate information regarding purchases, sales, issuances and settlements for
Level 3 fair value measurements. Additionally, ASU 2010-6 provides amendments to subtopic 820-10 that clarify existing
disclosures about the level of disaggregation and inputs and valuation techniques. ASU 2010-6 is effective for financial
statements issued for interim and annual periods ending after December 15, 2010. We will adopt this pronouncement in the
third quarter of fiscal 2011 and do not expect the adoption of ASU 2010-06 will have a material impact on our consolidated
results of operation and financial condition.
In February 2010, FASB issued ASU 2010-9 Subsequent Events (Topic 855) Amendments to Certain Recognition and
Disclosure Requirements.” ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer
is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential
conflicts between Subtopic 855-10 and the SEC's requirements. The adoption of ASU 2010-09 did not have a material impact
on our consolidated results of operation and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal while maximizing income without significantly
increasing risk. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we may maintain our
portfolio of cash equivalents and investments in a variety of securities, including commercial paper, money market funds, debt
securities and certificates of deposit. The risk associated with fluctuating interest rates is limited to our investment portfolio
and we do not believe that a 10% change in interest rates would have a significant impact on our interest income.
During the years ended March 31, 2010 and 2009, we did not have any outstanding debt instruments other than equipment
under capital leases and, therefore, we were not exposed to market risk relating to interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at March 31, 2010 and 2009
Consolidated Statements of Operations for each of the three years in the period ended March 31, 2010
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended March
31, 2010
Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2010
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts
Schedules other than the one listed above have been omitted because they are inapplicable, because the
required information has been included in the financial statements or notes thereto, or the amounts are
immaterial.
Consolidated Quarterly Financial Data
40
Page
41
42
43
44
45
46
47
67
68
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
8x8, Inc.
We have audited the accompanying consolidated balance sheets of 8x8, Inc. (the Company) as of March 31, 2010 and 2009
and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. Our audit
also included the financial statement Schedule II- Valuation and Qualifying Accounts. We also have audited the Company’s
internal control over financial reporting as of March 31, 2010, based on criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. The Company's
management is responsible for these financial statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included in management’s report on
internal control over financial reporting appearing under Item 9A. Our responsibility is to express an opinion on these financial
statements and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also include performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of 8x8, Inc. and consolidated subsidiaries, as of March, 31, 2010 and 2009, and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement Schedule II, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Also in our
opinion, 8x8, Inc., maintained, in all material respects, effective internal control over financial reporting as of March 31, 2010,
based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control - Integrated Framework.
San Francisco, California
May 26, 2010
/s/ Moss Adams LLP
41
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of 8x8, Inc:
In our opinion, the consolidated statements of operations, stockholders’ equity and cash flows for the year ended March 31,
2008 present fairly, in all material respects, the results of operations and cash flows of 8x8, Inc. and its subsidiaries for the year
ended March 31, 2008, in conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule for the year ended March 31, 2008 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our
audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
May 23, 2008
42
8X8, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance of $36 and $302
Inventory
Deferred cost of goods sold
Other current assets
Total current assets
Property and equipment, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued compensation
Accrued warranty
Accrued taxes
Deferred revenue
Other accrued liabilities
Total current liabilities
Non-current liabilities
Fair value of warrant liability
Total liabilities
$
$
$
March 31,
2010
2009
$
$
$
18,056
554
2,174
107
558
21,449
1,871
392
23,712
3,780
1,444
331
1,804
1,310
1,465
10,134
111
167
16,376
414
2,297
193
648
19,928
1,485
443
21,856
4,810
1,264
328
1,777
2,254
2,081
12,514
291
21
10,412
12,826
Commitments and contingencies (Note 3)
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized: 5,000,000 shares;
Issued and outstanding: no shares at March 31, 2010
and at March 31, 2009
Common stock, $0.001 par value:
Authorized: 100,000,000 shares at March 31, 2010 and March 31, 2009;
Issued and outstanding: 63,172,536 shares
at March 31, 2010 and 62,686,039 shares at March 31, 2009
Additional paid-in capital
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
$
-
-
63
212,077
(198,840)
13,300
23,712
$
63
211,686
(202,719)
9,030
21,856
The accompanying notes are an integral part of these consolidated financial statements.
43
8X8, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Service revenues
Product revenues
Total revenues
Operating expenses:
Cost of service revenues
Cost of product revenues
Research and development
Selling, general and administrative
Total operating expenses
Incone (loss) from operations
Other income, net
(Loss) income on change in fair value of warrant liability
Income (loss) before provision for income taxes
Provision for income taxes
Net income (loss)
Net income (loss) per share:
Basic
Diluted
Weighted average number of shares:
Basic
Diluted
Years Ended March 31,
2010
2009
2008
$
$
58,683
4,713
63,396
$
58,486
6,188
64,674
13,599
7,257
5,049
33,516
59,421
3,975
53
(146)
3,882
3
15,714
7,135
5,212
39,680
67,741
(3,067)
298
314
(2,455)
45
$
3,879
$
(2,500)
$
$
$
0.06
0.06
$
$
(0.04)
(0.04)
$
$
62,861
63,262
62,317
62,317
56,177
5,469
61,646
16,671
6,762
4,335
37,596
65,364
(3,718)
1,606
2,142
30
-
30
0.00
0.00
61,897
62,112
The accompanying notes are an integral part of these consolidated financial statements.
44
8X8, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
Common Stock
Amount
Additional
Paid-in
Capital
Accumulated
other
Comprehensive
Income (Loss)
$
62
$
205,567
$
(3)
$
Accumulated
Deficit
(200,249)
Total
$
5,377
Balance at March 31, 2007
Issuance of common stock under
stock plans
Stock compensation charge
Conversion of warrant liability to equity
Unrealized investment loss
Net Income
Total comprehensive loss
Balance at March 31, 2008
Issuance of common stock under
stock plans
Issuance of common stock on
exercise of warrant
Stock compensation charge
Unrealized investment loss
Net loss
Total comprehensive loss
Balance at March 31, 2009
Issuance of common stock under
stock plans
Repurchase of common stock
Stock compensation charge
Net income
Total comprehensive income
Balance at March 31, 2010
Shares
61,771,832
295,437
-
-
-
-
-
62,067,269
513,770
105,000
-
-
-
-
62,686,039
768,873
(282,376)
-
-
-
63,172,536
$
-
-
-
-
-
-
62
1
-
-
-
-
-
63
-
-
-
-
-
63
$
252
1,272
910
-
-
-
208,001
317
73
3,295
-
-
-
211,686
399
(212)
204
-
-
212,077
$
-
-
-
8
-
-
5
-
-
-
(5)
-
-
-
-
-
-
-
-
-
$
-
-
-
-
30
-
(200,219)
-
-
-
-
(2,500)
-
(202,719)
-
-
-
3,879
-
(198,840)
252
1,272
910
38
7,849
318
73
3,295
(2,505)
9,030
399
(212)
204
3,879
13,300
$
The accompanying notes are an integral part of these consolidated financial statements.
45
8X8, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization
Stock compensation expense
Loss (Income) on change in fair value of warrant liability
Amortization of discount and premium on marketable securities
Change in inventory reserve
Change in doubtful accounts receivable
Loss on disposal of fixed assets
Realized loss on disposal of investment
Changes in assets and liabilities:
Accounts receivable, net
Inventory
Other current and noncurrent assets
Deferred cost of goods sold
Accounts payable
Accrued compensation
Accrued warranty
Accrued taxes
Deferred revenue
Other current and noncurrent liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Acquisitions of property and equipment
Proceeds from the sale of property and equipment
Restricted cash decrease
Purchase of investments
Sale of short-term investments
Maturities of short-term investments
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock under employee stock plans
Repurchase of common stock
Capital lease payments
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental and non-cash disclosures:
Conversion of warrant liability to equity
Assets acquired under capital lease
Interest paid
Years Ended March 31,
2009
2010
2008
$
3,879
$
(2,500)
$
30
998
204
146
-
(422)
113
3
-
(253)
545
41
86
(1,323)
180
3
27
(944)
(792)
2,491
(1,052)
4
100
-
-
-
(948)
399
(212)
(50)
137
1,680
16,376
18,056
-
46
29
$
$
$
$
1,269
3,295
(314)
(8)
598
361
159
-
1,032
(1,356)
(406)
750
(177)
216
14
(1,119)
(885)
1,325
2,254
(801)
-
-
-
-
3,385
2,584
391
-
(38)
353
5,191
11,185
16,376
-
-
9
$
$
$
$
1,529
1,272
(2,142)
(55)
96
131
(17)
180
(1,202)
994
(97)
121
(54)
223
(9)
818
1,651
(438)
3,031
(699)
37
-
(5,323)
3,520
3,650
1,185
272
-
(38)
234
4,450
6,735
11,185
910
-
8
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
46
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
8x8, Inc. (“8x8” or the “Company”) develops and markets telecommunications services for Internet protocol, or IP, telephony
and video applications as well as web-based conferencing and unified communications services .The Company was
incorporated in California in February 1987 and was reincorporated in Delaware in December 1996.
The Company offers the 8x8 VoIP (Voice over Internet Protocol) voice and video digital phone service, 8x8 Virtual Office
hosted PBX service, 8x8 Complete Contact Center service, 8x8 Trunking service, 8x8 Hosted Key System service, 8x8
MobileTalk service, 8x8 Virtual Meeting web conferencing service, 8x8 Virtual Office Pro unified communications solution
and 8x8 Managed Hosting and Cloud-Based Computing solutions. Between November 2002 and April 2009, the Company
marketed its services under the Packet8 brand. In May 2009, the Company began marketing our services under the 8x8 brand.
As of March 31, 2010, the Company had more than 20,000 business customers. Each business customer subscribes to a
number of various lines and services (e.g. physical phone extensions, virtual extensions, fax lines, toll free numbers,
receptionist software, unified communications services, etc.).
The 8x8 voice and video broadband phone service enables broadband Internet users to add digital voice and video
communications services to their high-speed Internet connections. Customers can choose a regular direct-dial phone number
from any of the rate centers offered by the service and then use an existing telephone to make and receive calls over a standard
broadband Internet connection.
The 8x8 Virtual Office suite of business phone services offers small and medium sized businesses feature-rich, HD (high
definition) audio-enhanced communications services that eliminate the need for traditional telecommunications services and
business phone systems. The 8x8 Virtual Office solution essentially replaces an on-premise PBX (private branch exchange),
telephone system with a hosted, Internet-based business phone service that is delivered over a managed or unmanaged Internet
connection. We sell pre-programmed IP telephones with speakerphones and a display screen, in conjunction with our Virtual
Office service plans, which enable our business customers to access additional Virtual Office features through on-screen phone
menus. The 8x8 Virtual Office Pro unified communications solution, introduced in January 2010, bundles the 8x8 Virtual
Office hosted PBX phone service with essential businesses communications services such as web conferencing, call recording
and archiving, Internet fax, chat, voicemail and presence management and a mobile iPhone extension in a competitively priced
offering. 8x8 Virtual Office Pro takes the functionality of an already powerful hosted PBX phone service to a new level with
high fidelity HD voice, remote accessibility via any web browser or smart phone and integration with vital collaboration tools.
The 8x8 Managed Hosting and Cloud-Based Computing solutions enable business customers to reduce costs and gain
performance and reliability advantages by eliminating in-house ownership of server equipment and costly information
technology (IT) systems management staff.
The Company’s fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in these notes to the
consolidated financial statements refers to the fiscal year ending March 31 of the calendar year indicated (for example, fiscal
2010 refers to the fiscal year ending March 31, 2010).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of 8x8 and its subsidiaries. All material intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and
equity and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including, but not limited to,
those related to bad debts, returns reserve for expected cancellations, valuation of inventories, income and sales tax, and
47
litigation and other contingencies. The Company bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those
estimates under different assumptions or conditions.
REVENUE RECOGNITION
VoIP service and product revenue
The Company’s VoIP service and product revenue is derived from the sale of IP business telephones and VoIP service.
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-25 (formerly Emerging
Issues Task Force (EITF) consensus No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”) requires
that revenue arrangements with multiple deliverables be divided into separate units of accounting if the deliverables in the
arrangement meet specific criteria. In addition, arrangement consideration must be allocated among the separate units of
accounting based on their relative fair values, with certain limitations. The provisioning of the 8x8 service with the
accompanying 8x8 IP telephone constitutes a revenue arrangement with multiple deliverables. In accordance with the
guidance of ASC 605-25, the Company allocates 8x8 revenues, including activation fees, among the 8x8 IP telephones and
subscriber services. Revenues allocated to these devices are recognized as product revenues during the period of the sale less
the allowance for estimated returns during the 30-day trial period. All other revenues are recognized as license and service
revenues when the related services are provided. The Company records revenue net of any sales-related taxes that are billed to
its customers. The Company believes this approach results in financial statements that are more easily understood by investors.
Under the terms of the Company’s typical subscription agreement, new customers can terminate their service within 30 days of
order placement and receive a full refund of fees previously paid. The Company has determined that it has sufficient history of
subscriber conduct to make a reasonable estimate of cancellations within the 30-day trial period. Therefore, the Company
recognizes new subscriber revenue in the month in which the new order was shipped, net of an allowance for expected
cancellations.
Deferred cost of goods sold represents the cost of products sold for which the end customer or distributor has a right of return.
The cost of the products sold is recognized contemporaneously with the recognition of revenue, when the subscriber has
accepted the service.
Product revenue
The Company recognizes revenue from product sales for which there are no related services to be rendered upon shipment to
partners and end users provided that persuasive evidence of an arrangement exists, the price is fixed, title has transferred,
collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no
remaining significant obligations. Gross outbound shipping and handling charges are recorded as revenue, and the related
costs are included in cost of goods sold. Reserves for returns and allowances for partner and end user sales are recorded at the
time of shipment. In accordance with the ASC 985-605, the Company records shipments to distributors, retailers, and resellers,
where the right of return exists, as deferred revenue. The Company defers recognition of revenue on sales to distributors,
retailers, and resellers until products are resold to the end user.
License and other revenue
During fiscal 2010, 2009 and 2008, revenues from software and technology licensing and related arrangements were limited.
The Company recognizes revenue from license contracts when a non-cancelable, non-contingent license agreement has been
signed, the software product has been delivered, no uncertainties surrounding product acceptance exist, fees from the
agreement are fixed or determinable, and collection is probable. The Company uses the residual method to recognize revenue
when a license agreement includes one or more elements to be delivered at a future date if evidence of the fair value of all
undelivered elements exists. If evidence of the fair value of the undelivered elements does not exist, revenue is deferred and
recognized when delivery occurs. When the Company enters into a license agreement requiring that the Company provide
significant customization of the software products, the license and consulting revenue is recognized using contract accounting.
Revenue from maintenance agreements is recognized ratably over the term of the maintenance agreement, which in most
instances is one year. The Company recognizes royalties upon notification of sale by its licensees. Revenue from consulting,
training, and development services is recognized as the services are performed.
48
CASH, CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Management determines the appropriate categorization of its investments at the time of purchase and reevaluates the
classification at each reporting date. The cost of the Company's investments is determined based upon specific identification.
The Company’s investments are comprised of money market funds. At March 31, 2010 and 2009, all investments were
classified as available-for-sale and reported at fair value, based upon quoted market prices, with unrealized gains and losses,
net of related tax, if any, included in other comprehensive loss and disclosed as a separate component of stockholders’ equity.
Realized gains and losses on sales of all such investments are reported within the caption of other income, net in the statements
of operations and computed using the specific identification method. The Company’s investments in marketable securities are
monitored on a periodic basis for impairment. In the event that the carrying value of an investment exceeds its fair value and
the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the
investment is established.
Available-for-sale investments were (in thousands):
As of March 31, 2010
Money market funds
Total available-for-sale investments
Reported as (in thousands):
Cash and cash equivalents
Total
As of March 31, 2009
Money market funds
Total available-for-sale investments
Reported as (in thousands):
Cash and cash equivalents
Total
Gross
Amortized
Unrealized
Costs
Loss
$
$
16,733
16,733
$
$
-
-
Gross
Amortized
Unrealized
Costs
Loss
$
$
15,466
15,466
$
$
-
-
Estimated
Fair Value
16,733
16,733
16,733
16,733
Estimated
Fair Value
15,466
15,466
15,466
15,466
$
$
$
$
$
$
$
$
ACCOUNTS RECEIVABLE ALLOWANCE
The Company estimates the amount of uncollectible accounts receivable at the end of each reporting period based on the aging
of the receivable balance, current and historical customer trends, and communications with its customers. Amounts are written
off only after considerable collection efforts have been made and the amounts are determined to be uncollectible.
49
INVENTORY
Inventory is stated at the lower of standard cost, which approximates actual cost using the first-in, first-out method, or market.
Inventory reserves are established when conditions indicate that the current replacement cost or market is below the carrying
value due to obsolescence, changes in price levels, or other causes. Reserves are established for excess inventory generally
based on inventory levels in excess of demand, as determined by management, for each specific product. Inventory at March
31, 2010 and 2009 was comprised of the following:
Work-in-process
Finished goods
PROPERTY AND EQUIPMENT
March 31,
2010
2009
(in thousands)
$
1,701
473
2,174
$
1,695
602
2,297
$
$
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method. Estimated useful lives of three years are used for equipment and software and five
years for furniture and fixtures. Amortization of leasehold improvements is computed using the shorter of the remaining
facility lease term or the estimated useful life of the improvements. Property and equipment at March 31, 2010 and 2009 was
comprised of the following:
Machinery and computer equipment
Furniture and fixtures
Licensed software
Leasehold improvements
Less: accumulated depreciation and amortization
March 31,
2010
2009
$
(in thousands)
$
4,619
261
1,935
253
7,068
(5,197)
$
1,871
$
4,413
167
1,628
300
6,508
(5,023)
1,485
Maintenance, repairs and ordinary replacements are charged to expense. Expenditures for improvements that extend the
physical or economic life of the property are capitalized. Gains or losses on the disposition of property and equipment are
recorded in the loss from operations.
IMPAIRMENT OF LONG-LIVED ASSETS
8x8 reviews the recoverability of its long-lived assets, such as plant and equipment, when events or changes in circumstances
occur that indicate that the carrying value of the asset or asset group may not be recoverable. The assessment of possible
impairment is based on the Company’s ability to recover the carrying value of the asset or asset group from the expected future
pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the
carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying
value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived
assets.
ACQUIRED PRODUCT RIGHTS
On April 29, 2009, the Company resolved a patent litigation matter with Web Telephony by entering into a license and
settlement agreement that resolved all legal claims between the companies. As part of the settlement, the Company agreed to
pay eight quarterly payments totaling $800,000 over the next two years between April 2009 and December 2010. Under the
transaction, the Company expensed $339,000 of the patent settlement costs during the year ended March 31, 2009 that were
related to benefits received by the Company in and during the periods prior to fiscal year 2009. The remaining license amount
was recorded as other long term assets as of March 31, 2009 and is being amortized to cost of service revenues in the
Consolidated Statements of Operations over the remaining life of the primary patent, which expires in September 2017. See
also Note 3, Commitments and Contingencies, Legal Proceedings.
50
WARRANTY EXPENSE
The Company accrues for estimated product warranty cost upon revenue recognition. Accruals for product warranties are
calculated based on the Company’s historical warranty experience adjusted for any specific requirements.
WARRANT LIABILITY
The Company accounts for its warrants in accordance with ASC 480-10 (formerly Emerging Issues Task Force Issue No. 00-
19, “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock”), which
requires warrants to be classified as permanent equity, temporary equity or as assets or liabilities. In general, warrants that
either require net-cash settlement or are presumed to require net-cash settlement are recorded as assets and liabilities at fair
value and warrants that require settlement in shares are recorded as equity instruments. Certain of the Company’s warrants
require settlement in shares and are accounted for as permanent equity. The Company has two investor warrants that are
classified as liabilities because they include a provision that specifies that the Company must deliver freely tradable shares
upon exercise by the warrant holder. Because there are circumstances, irrespective of likelihood, which may not be within the
control of the Company that could prevent delivery of registered shares, ASC 480-10 requires the warrants be recorded as a
liability at fair value, with subsequent changes in fair value recorded as income (loss) in change in fair value of warrant
liability. The fair value of the warrant is determined using a Black-Scholes option pricing model, and is affected by changes in
inputs to that model including the Company’s stock price, expected stock price volatility and contractual term.
The amount the Company records as a liability under ASC 480-10 is not, nor does the Company intend for it to be an
admission or stipulation of the amount that the Company would owe or be obligated to pay the warrant holder in the event of
an actual breach by the Company of the warrant terms. In fact, the Company has made no determination of the amount of
liability, if any, that the Company would owe to the warrant holder in the event of such a breach.
RESEARCH, DEVELOPMENT AND SOFTWARE COSTS
Research and development costs are charged to operations as incurred. Software development costs for software to be sold or
otherwise marketed incurred prior to the establishment of technological feasibility are included in research and development
and are expensed as incurred. The Company defines establishment of technological feasibility as the completion of a working
model. Software development costs incurred subsequent to the establishment of technological feasibility through the period of
general market availability of the product are capitalized, if material. To date, all software development costs for software to be
sold or otherwise marketed have been expensed as incurred. In accordance with ASC 350-40 (formerly American Institute of
Certified Public Accountants Statement of Position (SOP) No. 98-1, “Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use”), the Company capitalizes purchase and implementation costs of internal use
software. In accordance with ASC 350-40, during fiscal 2010, 2009 and 2008, the Company capitalized $0, $0, and $0,
respectively.
SALE OF PATENTS
In the third quarter of fiscal 2008, the Company completed the sale of two of its patents for $1.2 million. The proceeds from the
sale of the two patents are included in other income, net. The Company has retained a worldwide, royalty-free nonexclusive,
non-sublicensable, non-transferable right and license to use the technology covered by these patents for all of its current and
future products. The Company has no ongoing obligations associated with this transaction.
ADVERTISING COSTS
Advertising costs are expensed as incurred and were $5,022,000, $7,297,000 and $6,989,000 for the years ended March 31,
2010, 2009 and 2008, respectively.
SUBSCRIBER ACQUISITION COSTS
Subscriber acquisition costs are expensed as incurred and include the advertising, marketing, promotions, commissions, rebates
and equipment subsidy costs associated with the Company’s efforts to acquire new subscribers.
51
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiaries are translated from their respective functional currencies at
exchange rates in effect at the balance sheet date, and revenues and expenses are translated at average exchange rates
prevailing during the year. If the functional currency is the local currency, resulting translation adjustments are reflected as a
separate component of stockholders' equity. If the functional currency is the U.S. dollar, resulting conversion adjustments are
included in the results of operations. Foreign currency transaction gains and losses, which have been immaterial, are also
included in results of operations. Total assets of the Company's foreign subsidiaries were $69,000, $150,000 and $44,000 as of
March 31, 2010, 2009 and 2008, respectively. At March 31, 2010, the U.S. dollar was the functional currency for all foreign
subsidiaries. The Company does not undertake any foreign currency hedging activities.
INCOME TAXES
Income taxes are accounted for using the asset and liability approach. Under the asset and liability approach, a current tax
liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year. A deferred tax
liability or asset is recognized for the estimated future tax effects attributed to temporary differences and carryforwards. If
necessary, the deferred tax assets are reduced by the amount of benefits that, based on available evidence, it is more likely than
not expected to be realized.
CONCENTRATIONS
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of
cash and cash equivalents, investments and trade accounts receivable. The Company has cash equivalents and investment
policies that limit the amount of credit exposure to any one financial institution and restricts placement of these funds to
financial institutions evaluated as highly credit-worthy. The Company has not experienced any material losses relating to its
investment instruments. However, in February 2008, two auction rate securities held by the Company failed to auction due to
sell orders exceeding buy orders. In March 2008, the Company sold its remaining two auction rate securities for less than par
value, which resulted in a loss of $180,000.
The Company sells its products to consumers and distributors and OEMs. The Company performs ongoing credit evaluations
of its customers' financial condition and generally does not require collateral from its customers. For the year ended March 31,
2010, the Company wrote-off one customer for approximately $0.3 million of which $0.3 million was fully reserved as of
March 31, 2009. For year ended March 31, 2009 and 2008, the Company experienced minimal write-offs for bad debts and
doubtful accounts. At March 31, 2010, one customer accounted for 12% of accounts receivable. At March 31, 2009, one
customer accounted for 32% of accounts receivable.
The Company outsources the manufacturing of its hardware products to independent contract manufacturers. The inability of
any contract manufacturer to fulfill supply requirements of the Company could materially impact future operating results,
financial position or cash flows. If any of these contract manufacturers fail to perform on their obligations to the Company,
such failure to fulfill supply requirements of the Company could materially impact future operating results, financial position
and cash flows.
The Company also relies primarily on two third party network service providers to provide telephone numbers and public
switched telephone network (PSTN) call termination and origination services for its customers. If these service providers
failed to perform their obligations to the Company, such failure could materially impact future operating results, financial
position and cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments is determined by the Company using available market information and
valuation methodologies considered to be appropriate. The carrying amounts of the Company's cash and cash equivalents,
accounts receivable and accounts payable approximate their fair values due to their short maturities. The Company’s
investments are carried at fair values.
52
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its employee stock options and stock purchase rights granted under the 1996 Stock Plan, 1996
Director Option Plan, 1999 Nonstatutory Stock Option Plan and the 2006 Stock Plan and stock purchase rights under the 1996
Employee Stock Purchase Plan (“Purchase Plan”) under the provisions of ASC 718 – Stock Compensation (formerly Statement
of Financial Accounting Standards No. 123(R), “Share-Based Payment”). Under the provisions of ASC 718, share-based
compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an
expense over the employee’s requisite service period (generally the vesting period of the equity grant), net of estimated
forfeitures. The Company has elected to adopt the modified prospective transition method as provided by ASC 718 and,
accordingly, financial statement amounts for the prior periods have not been restated to reflect the fair value method of
expensing share-based compensation.
To value option grants and stock purchase rights under the Purchase Plan for actual and pro forma stock-based compensation
the Company used the Black-Scholes option valuation model. Fair value determined using the Black-Scholes option valuation
model varies based on assumptions used for the expected stock prices volatility, expected life, risk free interest rates and future
dividend payments. For fiscal years 2010, 2009 and 2008, the Company used the historical volatility of the Company’s stock
over a period equal to the expected life of the options to their fair value. The expected life assumptions represent the weighted-
average period stock-based awards are expecting to remain outstanding. These expected life assumptions are established
through the review of historical exercise behavior of stock-based award grants with similar vesting periods. The risk free
interest is based on the closing market bid yields on actively traded U.S. treasury securities in the over-the-counter market for
the expected term equal to the expected term of the option. The dividend yield assumption is based on the Company’s history
and expectation of future dividend payout.
Stock-based compensation expense recognized in the Consolidated Statements of Operations for fiscal 2010, 2009 and 2008
included both the unvested portion of stock-based awards granted prior to April 1, 2006 and stock-based awards granted
subsequent to April 1, 2006. Stock options granted in periods prior to fiscal 2007 were measured based on ASC 718 (formerly
SFAS No. 123) criteria, whereas stock options granted subsequent to April 1, 2006 were measured based on ASC 718
(formerly SFAS No. 123(R)) criteria. In conjunction with the adoption of ASC 718 (formerly SFAS No. 123(R)), the Company
changed its method of attributing the value of stock-based compensation to expense from the accelerated multiple-option
approach to the straight-line single option method. Compensation expense for all share-based payment awards granted
subsequent to April 1, 2006 is recognized using the straight-line single-option method. Stock-based compensation expense
included in fiscal 2010, 2009 and 2008 includes the impact of estimated forfeitures. ASC 718 requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
On January 27, 2009, when the share price of the Company’s stock closed at $0.55 per share, the Company’s board of directors
approved the acceleration of unvested stock options to purchase 3,902,186 shares of common stock. 1,737,509 of these shares
are subject to options held by the Company’s executive officers and directors. These options of the Company’s executive
officers and directors, taken as a whole, have a weighted average exercise price of $1.06 per share and range from $0.63 to
$1.79 per share, and a weighted average remaining vesting term of 2.85 years. Approximately $1.1 million of the $2.4 million
stock-based compensation charge in the fourth quarter of 2009 applies to the options held by the Company’s executive officers
and directors.
53
The following table summarizes the distribution of stock-based compensation expense related to employee stock options and
employee stock purchases under ASC 718 among the Company's operating functions for the years ended March 31, 2010, 2009
and 2008 that was recorded as follows (in thousands):
Cost of service revenues
Cost of product revenues
Research and development
Selling, general and administrative
Total stock-based compensation expense
related to employee stock options
and employee stock purchases, pre-tax
Tax benefit
Stock based compensation expense related to
employee stock options and employee
stock purchases, net of tax
$
2010
Years Ended March 31,
2009
2008
$
20
-
63
121
204
-
$
216
47
542
2,490
3,295
-
33
18
255
966
1,272
-
$
204
$
3,295
$
1,272
ASC 718 requires the Company to calculate the additional paid in capital pool (“APIC Pool”) available to absorb tax
deficiencies recognized subsequent to adopting ASC 718, as if the Company had adopted ASC 718 at its effective date of
January 1, 1995. There are two allowable methods to calculate the Company’s APIC Pool: (1) the long form method as set
forth in ASC 718 (formerly SFAS No. 123(R)) and (2) the short form method as set forth in ASC 718 (formerly FASB Staff
Position No. 123(R)-3). The Company has elected to use the long form method under which the Company tracks each award
grant on an employee-by-employee basis and grant-by-grant basis to determine if there is a tax benefit or tax deficiency for
such award. The Company then compares the fair value expense to the tax deduction received for each grant and aggregated
the benefits and deficiencies to establish the APIC Pool.
Due to the adoption of ASC 718, some exercises result in tax deductions in excess of previously recorded benefits based on the
option value at the time of grant, or windfalls. The Company recognizes windfall tax benefits associated with the exercise of
stock options directly to stockholders’ equity only when realized. Accordingly, deferred tax assets are not recognized for net
operating loss carryforwards resulting from windfall tax benefits occurring from April 1, 2006 onward. A windfall tax benefit
occurs when the actual tax benefit realized by the company upon an employee’s disposition of a share-based award exceeds the
deferred tax asset, if any, associated with the award that the company had recorded. The Company uses the “with and without”
approach as described in ASC 718 (formerly Emerging Issue Task Force (“EITF”) Topic No. D-32), in determining the order
in which its tax attributes are utilized. The “with and without” approach results in the recognition of the windfall stock option
tax benefits only after all other tax attributes of the Company have been considered in the annual tax accrual computation.
Also, the Company has elected to ignore the indirect tax effects of share-based compensation deductions in computing the
Company’s research and development tax and as such, the Company recognizes the full effect of these deductions in the
income statement in the period in which the taxable event occurs.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2009, the FASB issued an amendment to ASC 855 - Subsequent Events (formerly SFAS No. 165, "Subsequent
Events"). The statement is to establish general standards of accounting for and disclosure of events that occur after the balance
sheet date but before financial statements are issued. ASC 855 was effective for interim and annual periods ending after
June 15, 2009. The adoption of ASC 855 did not have a material impact on the Company’s consolidated results of operation
and financial condition.
In July 2009, the FASB issued Accounting Standards Update ("ASU") No. 2009-1, "Topic 105 - Generally Accepted
Accounting Principles," ("ASU 2009-1") which amended ASC 105, "Generally Accepted Accounting Principles," to establish
the Codification as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities.
Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date, the Codification superseded all then-existing non-SEC accounting and reporting
standards. All previous references to the superseded standards in our consolidated financial statements have been replaced by
references to the applicable sections of the Codification. The adoption of ASU 2009-1 did not have a material impact on the
Company’s consolidated results of operation and financial condition.
54
In October 2009, the FASB issued ASU No. 2009-13, "Multiple-Deliverable Revenue Arrangements-a consensus of the FASB
Emerging Issues Task Force" (“ASU 2009-13”). ASU 2009-13 updates the existing multiple-element revenue arrangements
guidance currently included under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables" (“EITF 00-21”). The revised guidance primarily provides two significant
changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a
delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement
consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will
be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided
that the revised guidance is retroactively applied to the beginning of the year of adoption. We are currently assessing the future
impact of this new accounting update to our consolidated financial statements.
In October 2009, the FASB issued ASU No. 2009-14, "Certain Revenue Arrangements that Include Software Elements-a
consensus of the FASB Emerging Issues Task Force" ("ASU 2009-14"). ASU 2009-14 amends the scope of pre-existing
software revenue guidance by removing from the guidance non-software components of tangible products and certain software
components of tangible products. ASU 2009-14 will be effective for the first annual reporting period beginning on or after June
15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year
of adoption. We are currently assessing the future impact of this new accounting update to our consolidated financial
statements.
In January 2010, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2010-2 (“ASU 2010-
2”), “Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification. ASU 2010-2 addresses
implementation issues related to the changes in ownership provisions in the Consolidation—Overall Subtopic (Subtopic 810-
10) of the FASB ASC, originally issued as SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements”.
Subtopic 810-10 establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership
interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling
financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction
and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with
the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the
subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in ownership interest of a subsidiary
that does not result in a change of control of the subsidiary as an equity transaction. The adoption of ASU 2010-2 did not have
a material effect on the Company’s consolidated results of operation and financial condition.
In January 2010, FASB issued ASU 2010-6, “Improving Disclosures about Fair Measurements". ASU 2010-6 provides
amendments to subtopic 820-10 of the FASB Accounting Standards Codification, originally issued as FASB Statement No.
157, “Fair Value Measurements” that require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair
value measurements and the presentation of separate information regarding purchases, sales, issuances and settlements for
Level 3 fair value measurements. Additionally, ASU 2010-6 provides amendments to subtopic 820-10 that clarify existing
disclosures about the level of disaggregation and inputs and valuation techniques. ASU 2010-6 is effective for financial
statements issued for interim and annual periods ending after December 15, 2010. The Company will adopt this
pronouncement in the third quarter of fiscal 2011 and do not expect the adoption of ASU 2010-06 will have a material impact
on the Company’s consolidated results of operation and financial condition.
In February 2010, FASB issued ASU 2010-9 Subsequent Events (Topic 855) Amendments to Certain Recognition and
Disclosure Requirements.” ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer
is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential
conflicts between Subtopic 855-10 and the SEC's requirements. The adoption of ASU 2010-09 did not have a material impact
on the Company’s consolidated results of operation and financial condition.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), as defined, includes all changes in equity (net assets) during a period from non-owner sources.
The difference between net income (loss) and comprehensive income (loss) is due to unrealized gains or losses on investments
classified as available-for-sale. Comprehensive income (loss) is reflected in the consolidated statements of stockholders' equity.
55
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders (numerator) by
the weighted average number of vested, unrestricted common shares outstanding during the period (denominator). Diluted net
income per share is computed on the basis of the weighted average number of shares of common stock plus the effect of
dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common
shares include outstanding stock options, shares to be issued under the employee stock purchase plan and warrants.
2010
Years Ended March 31,
2009
(in thousands, except per share amounts)
2008
Numerator:
Net income (loss) available to common stockholders
$
3,879
$
(2,500)
$
30
Denominator:
Common shares
Denominator for basic calculation
Employee stock options
Employee stock purchase plan
Employee restricted purchase rights
Warrants
62,861
62,861
318
-
83
-
62,317
62,317
-
-
-
-
61,897
61,897
133
36
-
46
Denominator for diluted calculation
63,262
62,317
62,112
Net income (loss) per share
Basic
Diluted
$
$
0.06
0.06
$
$
(0.04)
(0.04)
$
$
0.00
0.00
The following shares attributable to outstanding stock options and warrants were excluded from the calculation of diluted
earnings per share because their inclusion would have been anti dilutive (in thousands):
Common stock options
Stock purchase rights
Warrants
2. INCOME TAXES
2010
Years Ended March 31,
2009
2008
8,403
1
1,786
10,190
10,736
100
5,445
16,281
9,038
-
7,838
16,876
For the year ended March 31, 2010 and 2009, the Company recorded a provision for income taxes of $3,000 and $45,000,
respectively, which was attributable to state tax in several states and foreign tax, offset by federal refund in lieu of bonus
depreciation (in accordance with the Economic Stimulus Act of 2010). There was no income tax provision for the year ended
March 31, 2008.The components of the consolidated provision for income taxes for fiscal 2010 and 2009 consisted of the
following (in thousands):
Current:
Federal
State
Foreign
2010
March 31,
2009
2008
(77)
70
10
3
$
$
$
(72)
64
53
45
$
-
-
-
-
$
$
56
The Company's income (loss) before income taxes included $38,000, $38,000 and $29,000 of foreign subsidiary income for the
fiscal years ended March 31, 2010, 2009 and 2008, respectively.
Deferred tax assets were comprised of the following (in thousands):
Research and development credit carryforwards
Net operating loss carryforwards
Inventory valuation
Reserves and allowances
Fixed assets and intangibles
Valuation allowance
Total
March 31,
2010
2009
$
$
2,517
57,714
95
1,817
6,548
68,691
(68,691)
$
-
$
3,510
57,568
298
2,194
7,783
71,353
(71,353)
-
Because of uncertainties regarding the realization of deferred tax assets, management has applied a full valuation allowance as
of March 31, 2010 and 2009.
At March 31, 2010, the Company had net operating loss carryforwards for federal and state income tax purposes of
approximately $154.0 million and $90.3 million, respectively, which expire at various dates beginning in 2011 and continuing
through 2030. The net operating loss carryforwards include approximately $10.0 million resulting from employee exercises of
non-qualified stock options or disqualifying dispositions, the tax benefits of which, when realized, will be accounted for as an
addition to additional paid-in capital rather than as a reduction of the provision for income taxes. In addition, at March 31,
2010, the Company had research and development credit carryforwards for federal and state tax reporting purposes of
approximately $1.7 million and $2.9 million, respectively. The federal credit carryforwards will expire at various dates
beginning in 2011 and continuing through 2030, while the California credits will carry forward indefinitely. Under applicable
tax laws, the amount of and benefits from net operating losses and credits that can be carried forward may be impaired or
limited in certain circumstances. Events which may cause limitations in the amount of net operating loss carryforwards that the
Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a
three year period.
A reconciliation of the tax provision (benefit) to the amounts computed using the statutory U.S. federal income tax rate of 34%
is as follows (in thousands):
Tax provision (benefit) at statutory rate
State income taxes (benefit) before valuation
allowance, net of federal effect
Research and development credits
Change in valuation allowance
Income from change in fair value of warrant liability
Compensation/option differences
Non-deductible compensation
Other
2010
Years Ended March 31,
2009
2008
$
1,320
$
(835)
$
298
(112)
(1,536)
50
(20)
51
(48)
20
(100)
395
(107)
(5)
674
3
$
3
$
45
$
12
(67)
(52)
519
(728)
(9)
307
18
-
57
Effective April 1, 2007, the Company adopted the provisions of ASC 740 (formerly Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes: an Interpretation of FASB Statement No. 109”), which
clarifies the accounting and disclosure for uncertainty in income taxes recognized in an enterprise’s financial statements. As a
result of the implementation of ASC 740, the Company recognized no material adjustment to the April 1, 2007 balance of
retained earnings. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in
thousands):
Balance at beginning of year
Gross increases - tax position in prior period
Gross decreases - tax position in prior period
Gross increases - tax positions related to the current year
Settlements
Lapse of statue of limitations
Balance at end of year
Unrecognized Tax Benefits
2010
2009
$
2,206
$
2,122
2008
2,044
-
(586)
123
-
-
1,743
$
-
(27)
111
-
-
2,206
$
-
-
78
-
-
2,122
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $1.7 million, but any
affect would have been fully offset by the application of the valuation allowance. To the extent that the unrecognized tax
benefits are ultimately recognized, they may have an impact on the effective tax rate in future periods; however, such impact
on the effective tax rate would only occur if the recognition of such unrecognized tax benefits occurs in a future period when
the Company has already determined that its deferred tax assets are more likely than not realizable. The Company does not
expect the unrecognized tax benefits to change significantly over the next 12 months.
The Company files U.S. federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The
Company has not been under examination by income tax authorities in federal, state or other foreign jurisdictions. The 1995
through fiscal 2010 tax years generally remain subject to examination by federal and most state tax authorities. In significant
foreign jurisdictions, the fiscal year 2007 through 2010 tax years remain subject to examination by their respective tax
authorities.
The Company's policy for recording interest and penalties associated with audits is to record such items as a component of
operating expense income before taxes. During the fiscal year ended March 31, 2010 and 2009, the Company did not recognize
any interest or penalties related to unrecognized tax benefits.
Undistributed earnings of the Company’s foreign subsidiaries are indefinitely reinvested in foreign operations. No provision
has been made for taxes that might be payable upon remittance of such earnings, nor is it practicable to determine the amount
of this liability.
3. COMMITMENTS AND CONTINGENCIES
Guarantees
Indemnifications
In the normal course of business, the Company may agree to indemnify other parties, including customers, lessors and parties
to other transactions with the Company, with respect to certain matters such as breaches of representations or covenants or
intellectual property infringement or other claims made by third parties. These agreements may limit the time within which an
indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification
agreements with its officers and directors.
It is not possible to determine the maximum potential amount of the Company’s exposure under these indemnification
agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each
particular agreement. Historically, payments made by the Company under these agreements have not had a material impact on
the Company’s operating results, financial position or cash flows. Under some of these agreements, however, the Company’s
potential indemnification liability might not have a contractual limit.
58
Product Warranties
The Company accrues for the estimated costs that may be incurred under its product warranties upon revenue recognition.
Changes in the Company’s product warranty liability, which is included in cost of product revenues in the consolidated
statements of operations, during the years ended March 31, 2010, 2009 and 2008 were as follows (in thousands):
Balance at beginning of year
Accruals for warranties
Payments
Changes in estimates
Balance at end of year
Standby letter of credit
2010
Years Ended March 31,
2009
2008
$
$
328
446
(404)
(39)
$
314
366
(352)
-
$
331
$
328
$
323
297
(306)
-
314
At March 31, 2009, the Company had certain restricted deposits totaling $100,000 which were recorded in the other assets line
item on the consolidated balance sheets. This deposit was made in order to obtain a standby letter of credit in accordance with
certain contractual obligations, and is collateralized by a cash deposit at the Company’s bank.
Leases
The Company leases its primary facility in Sunnyvale, California under an operating lease agreement that expires in August
2012. The facility leases include rent escalation clauses, and require the Company to pay utilities and normal maintenance
costs. At March 31, 2010, future minimum annual lease payments under non-cancelable operating leases, net of sublease
income, were as follows (in thousands):
Year Ending March 31,
2011
2012
2013
Total minimum payments
$
$
594
657
284
1,535
Rent expense for the years ended March 31, 2010, 2009 and 2008 was $632,000, $494,000 and $486,000, respectively.
Capital Leases
In March 2007 and August 2009, the Company entered into a series of non-cancelable capital lease agreements for office
equipment bearing interest at various rates. At March 31, 2010, future minimum annual lease payments under noncancelable
capital leases were as follows (in thousands):
Year ending March 31:
2011
2012
2013
Total minimum payments
Less: Amount representing interest
Less: Short-term portion of capital lease obligations
Long-term portion of capital lease obligations
$
$
41
40
7
88
(6)
82
(38)
44
Capital leases included in office equipment were $156,000 at March 31, 2010. Total accumulated amortization was $77,000 at
March 31, 2010. Amortization expense for assets recorded under capital leases is included in depreciation expense.
59
Minimum Third Party Customer Support Commitments
In the third quarter of 2010, the Company amended its contract with one of its third party customer support vendors containing
a minimum monthly commitment of approximately $430,000 effective April 1, 2010. The agreement requires a 150-day notice
to terminate. At March 31, 2010, the total remaining obligation under the contract was $2.2 million.
Legal Proceedings
The Company, from time to time, is involved in various legal claims or litigation, including patent infringement claims that can
arise in the normal course of the Company’s operations. Pending or future litigation could be costly, could cause the diversion
of management’s attention and could upon resolution, have a material adverse effect on the Company’s business, results of
operations, financial condition and cash flows.
On January 27, 2010, the Company was named a defendant in a lawsuit, Nikki Meierdiercks et al. v. 8x8, Inc., filed by three
former employees in Santa Clara County Superior Court as a putative class action seeking damages and various penalties under
the California Labor Code for alleged unpaid overtime, meal breaks, rest breaks and alleged late wage payments and
unreimbursed business expenses. The Plaintiffs’ filed a First Amended Complaint on April 29, 2010 and the Company filed its
Answer to the First Amended Complaint on May 26, 2010. The Company has factual and legal defenses to these claims and is
presenting a vigorous defense. Plaintiffs have not made a specific monetary demand and the Company cannot estimate
potential liability in this case at this early stage of litigation.
In April 2009, the Company entered into a license and settlement agreement with a patent holder. The agreement requires the
Company to pay eight quarterly payments over the next two years. At March 31, 2010, future minimum annual payments
under the license and settlement agreement were as follows (in thousands):
Year ending March 31:
2011
Total minimum payments
Less: Amount representing interest
Less: Short-term portion of license fee
Long-term portion of license fee obligation
State and Municipal Taxes
$
$
250
250
(5)
245
(245)
-
For a period of time, the Company did not collect or remit state or municipal taxes (such as sales, excise, and ad valorem
taxes), fees or surcharges ("Taxes") on the charges to the Company's customers for its services, although the Company
historically complied with the California sales tax and financial contributions to the 9-1-1 system and Universal Service Fund.
The Company has received inquiries or demands from a number of state and municipal taxing agencies seeking payment of
Taxes that are applied to or collected from customers of providers of traditional public switched telephone network services.
Although the Company has consistently maintained that these Taxes do not apply to its service for a variety of reasons
depending on the statute or rule that establishes such obligations, a number of states have changed their statutes as part of
streamlined sales tax initiatives and, in response to these statutory changes, the Company has begun collecting and remitting
Taxes in those states. Some of these Taxes could apply to the Company retroactively, and three states currently are conducting
Tax audits of the Company's records. The Company has accrued a tax liability of $0.1 million at March 31, 2010 as its current
estimate of the potential tax exposure for any retroactive Tax assessment by numerous states and municipalities.
Regulatory
VoIP communication services, like ours are subject to less regulation at the federal level than traditional telecommunication
services and states are preempted from regulating such services. Many regulatory actions are underway or are being
contemplated by federal and state authorities, including the FCC, and state regulatory agencies. The FCC initiated a notice of
public rule-making in early 2004 to gather public comment on the appropriate regulatory environment for IP telephony which
would include the services we offer. In November 2004, the FCC ruled that the VoIP service of a competitor and "similar"
services are jurisdictionally interstate and not subject to state certification, tariffing and other legacy telecommunication carrier
regulations.
60
The effect of any future laws, regulations and the orders on the Company’s operations, including, but not limited to, the 8x8
service, cannot be determined. But as a general matter, increased regulation and the imposition of additional funding
obligations increases the Company’s costs of providing service that may or may not be recoverable from the Company’s
customers which could result in making the Company’s services less competitive with traditional telecommunications services
if the Company increases its retail prices or decreases the Company’s profit margins if it attempts to absorb such costs.
4. STOCKHOLDERS' EQUITY
1996 Stock Plan
In June 1996, the Board adopted the 1996 Stock Plan (the 1996 Plan) and reserved 1,000,000 shares of the Company's common
stock for issuance under this plan. The Company's stockholders subsequently authorized increases in the number of shares of
the Company's common stock reserved for issuance under the 1996 Plan of 500,000 shares in June 1997 and 2,000,000 shares
in August 2000. The 1996 Plan also provides for an annual increase in the number of shares reserved for issuance under the
1996 Plan on the first day of the Company's fiscal year in an amount equal to 5% of the Company's common stock issued and
outstanding at the end of the immediately preceding fiscal year, subject to a maximum annual increase of 1,000,000 shares.
The annual increase was 1,000,000 shares in each of fiscal 2007, 2006 and 2005. To date, this provision has resulted in
increases in shares reserved for issuance under the 1996 Plan totaling 8,535,967. The 1996 Plan provides for granting incentive
stock options to employees and nonstatutory stock options to employees, directors or consultants. The stock option price of
incentive stock options granted may not be less than the determined fair market value at the date of grant. Options generally
vest over four years and expire ten years after grant. The 1996 Plan expired in June 2006.
1996 Director Option Plan
The Company's 1996 Director Option Plan (the Director Plan) was adopted in June 1996 and became effective in July 1997. A
total of 150,000 shares of common stock were initially reserved for issuance under the Director Plan. The Company's
stockholders subsequently authorized an increase in the number of shares of common stock reserved for issuance under the
Director Plan to 500,000 shares in August 2000, and 1,000,000 in July 2002. The Director Plan provides for both discretionary
and periodic grants of nonstatutory stock options to non-employee directors of the Company (the Outside Directors). The
exercise price per share of all options granted under the Director Plan will be equal to the fair market value of a share of the
Company's common stock on the date of grant. Options generally vest over a period of four years. Options granted to Outside
Directors under the Director Plan have a ten year term, or shorter upon termination of an Outside Director's status as a director.
The Director Plan expired in June 2006.
1999 Nonstatutory Stock Option Plan
In fiscal 2000, the Board approved the 1999 Nonstatutory Stock Option Plan (the 1999 Plan) with 600,000 shares initially
reserved for issuance thereunder. In fiscal 2001, the number of shares reserved for issuance was increased to 3,600,000 shares
by the Board. Under the terms of the 1999 Plan, options may not be issued to either officers or directors of the Company
provided, however, that options may be granted to an officer in connection with the officer's initial employment by the
Company. Options generally vest over four years and expire ten years after grant. The 1999 Plan has not been approved by the
stockholders of the Company. In May 2006, the Board cancelled the 1999 Plan, and no new grants may be made from the
1999 Plan.
2006 Stock Plan
In May 2006, the Board approved the 2006 Stock Plan (the “2006 Plan”). The Company’s stockholders subsequently adopted
the 2006 Plan at the 2006 Annual Meeting of Stockholders held September 18, 2006, and the 2006 Plan became effective in
October 2006. The Company reserved 7,000,000 shares of the Company’s common stock for issuance under this plan. The
2006 Plan provides for granting incentive stock options to employees and nonstatutory stock options to employees, directors or
consultants. The stock option price of incentive stock options granted may not be less than the fair market value on the
effective date of the grant. Other types of options and awards under the 2006 Plan may be granted at any price approved by the
administrator, which generally will be the compensation committee of the board of directors. Options generally vest over four
years and expire ten years after grant. In 2009, the 2006 Plan was amended to provide for the granting of stock purchase rights.
The 2006 Plan expires in May 2016.
61
Option and Stock Purchase Right Activity
Stock Purchase Right Activity since March 31, 2009 is summarized as follows:
Balance at March 31, 2008
Granted
Vested
Forfeited
Balance at March 31, 2009
Granted
Vested
Forfeited
Balance at March 31, 2010
Weighted
Average
Weighted
Average
Grant-Date
Remaining
Number of
Fair Market
Contractual
Shares
Value
Term (in Years)
-
$
100,000
-
-
100,000
331,464
(77,744)
-
353,720
$
-
0.57
-
-
0.57
0.74
0.68
-
0.71
3.26
Option activity under the Company's stock option plans since March 31, 2007, is summarized as follows:
Balance at March 31, 2007
Granted - Options
Exercised
Canceled/Forfeited
Termination of plans
Balance at March 31, 2008
Granted - Options
Stock purchase rights
Exercised
Canceled/Forfeited
Termination of plans
Balance at March 31, 2009
Stock purchase rights
Exercised
Canceled/Forfeited
Termination of plans
Balance at March 31, 2010
Shares
Available
for Grant
5,926,459
(2,299,000)
-
905,706
(598,040)
3,935,125
(1,855,500)
(100,000)
-
1,330,985
(894,735)
2,415,875
(331,464)
-
1,273,376
(488,376)
2,869,411
62
Shares
Subject to
Options
Outstanding
8,929,978
2,299,000
(22,208)
(905,706)
-
10,301,064
1,855,500
-
(89,300)
(1,330,985)
-
10,736,279
-
(195,500)
(1,273,376)
-
9,267,403
$
Weighted
Average
Exercise
Price
Per Share
2.17
1.26
0.90
1.80
$
2.00
0.84
0.57
0.37
1.72
1.85
0.74
0.73
1.68
1.90
Significant option groups outstanding at March 31, 2010 and related weighted average exercise price and contractual life
information for 8x8, Inc.'s stock option plans are as follows:
Options Outstanding
Weighted
Average
Exercise
Price
Per Share
Weighted
Average
Remaining
Contractual
Life (Years)
0.91
1.27
1.58
1.89
5.03
6.8
6.9
5.1
2.7
2.0
Options Exercisable
Weighted
Average
Exercise
Price
Per Share
Aggregate
Intrinsic
Value
0.91
$
1,094
1.27
1.58
1.89
5.03
383
12
-
-
$
$
$
$
$
Aggregate
Intrinsic
Value
Shares
$
1,094
2,041,762
383
12
-
-
2,116,500
1,866,710
1,987,431
1,255,000
$
1,489
9,267,403
$
1,489
Shares
2,041,762
2,116,500
1,866,710
1,987,431
1,255,000
9,267,403
$
$
$
$
$
$ 0.55 to $ 1.18
$ 1.19 to $ 1.32
$ 1.33 to $ 1.72
$ 1.73 to $2.31
$2.32 to $14.94
The Company recognized stock compensation expense in fiscal 2010, 2009 and 2008 of $204,000, $3,295,000 and $1,272,000,
respectively.
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the
closing stock price of the Company’s common stock on March 31, 2010 and the exercise price for in-the-money options) that
would have been received by the option holders if all in-the-money options had been exercised on March 31, 2010.
The total intrinsic value of options exercised in the years ended March 31, 2010, 2009 and 2008 were $70,000, $49,000 and
$9,000, respectively. As of March 31, 2010, there was $249,000 of unamortized stock-based compensation expense related to
unvested stock awards which is expected to be recognized over a weighted average period of 3.26 years.
Cash received from option exercises and purchases of shares under the Purchase Plan for the years ended March 31, 2010,
2009 and 2008 were $0.4 million, $0.3 million and $0.3 million, respectively. The total tax benefit attributable to stock options
exercised in the year ended March 31, 2010 was $0.
The Company did not recognize and does not expect to recognize in the near future any tax benefit related to employee stock-
based compensation cost as a result of the full valuation allowance on its net deferred tax assets and because of its net operating
loss carryforwards.
1996 Employee Stock Purchase Plan
The Company's 1996 Stock Purchase Plan (the Purchase Plan) was adopted in June 1996 and became effective upon the
closing of the Company's initial public offering in July 1997. The Company suspended the Purchase Plan in 2003 and
reactivated the Plan in fiscal 2005. Under the Purchase Plan, 500,000 shares of common stock were initially reserved for
issuance. At the start of each fiscal year, the number of shares of common stock subject to the Purchase Plan increases so that
500,000 shares remain available for issuance. During fiscal 2010, 2009 and 2008, 499,969, 424,470 and 273,229 shares,
respectively, were issued under the Purchase Plan. In May 2006, the Board approved a ten-year extension of the Purchase Plan
so that it would be effective until 2017. Stockholders approved a ten-year extension of the Purchase Plan at the 2006 Annual
Meeting of Stockholders held September 18, 2006. The Purchase Plan is effective until 2017.
The Purchase Plan permits eligible employees to purchase common stock through payroll deductions at a price equal to 85% of
the fair market value of the common stock at the beginning of each two year offering period or the end of a six month purchase
period, whichever is lower. When the Purchase Plan was reinstated in fiscal 2005, the offering period was reduced from two
years to one year. The contribution amount may not exceed ten percent of an employee's base compensation, including
commissions, but not including bonuses and overtime. In the event of a merger of the Company with or into another
corporation or the sale of all or substantially all of the assets of the Company, the Purchase Plan provides that a new exercise
date will be set for each option under the plan which exercise date will occur before the date of the merger or asset sale.
63
Assumptions Used to Calculate Stock-Based Compensation Expense
The fair value of each of the Company's option grants has been estimated on the date of grant using the Black-Scholes pricing
model with the following assumptions:
Expected volatility
Expected dividend yield
Risk-free interest rate
Weighted average expected option term
Weighted average fair value of options granted
$
Years Ended March 31,
2010
2009
2008
-
-
-
-
-
79%
-
79%
-
1.4% to 3.2%
2.2% to 4.8%
4.6 years
3.4 years
$
0.52
$
0.71
The estimated fair value of stock purchase rights granted under the Purchase Plan were estimated using the Black-Scholes
pricing model with the following weighted-average assumptions:
Expected volatility
Expected dividend yield
Risk-free interest rate
Years Ended March 31,
2010
2009
2008
84%
-
0.30%
68%
-
0.87%
54%
-
3.83%
Weighted average expected rights term
0.79 years
0.81 years
0.75 years
Weighted average fair value of rights granted
$
0.40
$
0.28
$
0.44
STOCK REPURCHASES
In July 2009, the Company’s board of directors authorized the Company to purchase up to $2.0 million of its common
stock from time to time until July 28, 2010 (the “Repurchase Plan”). Share repurchases, if any, will be funded with
available cash. Repurchases under the Repurchase Plan may be made through open market purchases at prevailing
market prices or in privately negotiated transactions. The timing, volume and nature of share repurchases are subject to
market prices and conditions, applicable securities laws and other factors, and are at the discretion of the Company’s
management. Share repurchases under the Repurchase Plan may be commenced, suspended or discontinued at any time.
The remaining authorized repurchase amount at March 31, 2010 is $1.8 million. The activity under the Repurchase Plan for the
fiscal year ended March 31, 2010 is summarized as follows:
Repurchase of common stock
Balance at March 31, 2010
Weighted
Average
Price
Shares
Amount
Repurchased
Per Share
Repurchased
282,376
282,376
$
$
0.75
0.75
$
$
211,741
211,741
The total purchase prices of the common stock repurchased and retired were reflected as a reduction to stockholders’ equity
during the period of repurchase.
64
5. EMPLOYEE BENEFIT PLAN
401(k) Savings Plan
In April 1991, the Company adopted a 401(k) savings plan (the Savings Plan) covering substantially all of its U.S. employees.
Eligible employees may contribute to the Savings Plan from their compensation up to the maximum allowed by the Internal
Revenue Service. No matching contribution was made in fiscal 2006. On January 1, 2007, the Company reactivated the
employer matching contribution. The employee matching contribution is 100% of each employee’s contributions in each year,
not to exceed $1,500 per annum. The employee matching expense in 2010, 2009 and 2008 was $0.2 million, $0.2 million and
$0.1 million, respectively. The Savings Plan does not allow employee contributions to be invested in the Company’s common
stock.
6. SEGMENT REPORTING
ASC 280 “Segment Reporting (formerly SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information”) establishes annual and interim reporting standards for an enterprise’s business segments and related disclosures
about its products, services, geographic areas and major customers. Under ASC 280, the method for determining what
information to report is based upon the way management organizes the operating segments within the Company for making
operating decisions and assessing financial performance. The Company has only one reportable segment.
The following table presents net revenues by groupings of similar products (in thousands).
8x8 service, equipment and other
Technology licensing and related software
Total revenues
Years Ended March 31,
2010
2009
2008
$
$
63,315
81
63,396
$
$
64,601
73
64,674
$
$
60,891
755
61,646
Revenue from customers outside the United States was not material for the fiscal years ended March 31, 2010, 2009 and 2008.
The majority of the Company's property and equipment was located in the United States. The following table illustrates
property and equipment by country (in thousands):
United States
France
March 31,
2010
2009
1,861
10
1,871
$
$
1,482
3
1,485
$
$
No customer represented more than 10% of the Company’s total revenues in fiscal 2010, 2009 or 2008.
7. SUBSEQUENT EVENTS
In April 2010, the Company sold its wholly-owned French research and development subsidiary, 8x8 Europe, SARL, to
Stonyfish, a privately-held company in Los Altos, California. 8x8 also invested $250,000 cash in the new venture and granted a
non-exclusive license to certain 8x8 technology. 8x8 will own 17% of Stonyfish following its initial round of external
fundraising.
On May 1, 2010, the Company, entered into an agreement with Central Host, Inc. and Andrew Schwabecher pursuant to which
the Company acquired this provider of managed hosting services from its sole shareholder, Schwabecher. Under the terms of
the Agreement, the Company closed the acquisition on May 1, 2010 and paid $1,000,000 in cash and issued 432,276 shares of
65
its common stock, at an average price of $1.388 per share and calculated based on the trailing 5-day average closing price of
8x8 common stock on the NASDAQ Exchange as of the Effective Date of the transaction, to Schwabecher in exchange for
100% of the outstanding shares of capital stock of Central Host, Inc. The shares of the Company's common stock were not
registered for sale and were issued pursuant to an exemption from the registration requirements under section 5 of the
Securities Act of 1933, as amended, provided by section 4(2) thereof.
The shares are subject to a lock-up restriction that prohibits any sale or transfer before May 1, 2011, after which Schwabecher
may sell up to 50% of the shares. If Schwabecher remains continuously employed by the Company until May 1, 2012, he may
sell the remaining 50% of the shares thereafter, or, if his employment with the Company ceases before then, he may sell the
remaining shares after May 1, 2013.
66
8X8, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Description
Year ended March 31, 2008:
Allowance for doubtful accounts
Valuation allowance for deferred tax assets
Year ended March 31, 2009:
Allowance for doubtful accounts
Valuation allowance for deferred tax assets
Year ended March 31, 2010:
Allowance for doubtful accounts
Valuation allowance for deferred tax assets
Balance
at
Beginning
of Year
Additions
Charged to
Costs,
Expenses
and Other
$
54
73,173
$
61
72,086
302
71,353
142
-
338
-
-
-
Deductions
$
$
135
1,087
97
733
266
2,662
Balance
at End
of Year
61
72,086
302
71,353
36
68,691
67
8X8, INC.
CONSOLIDATED QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
March 31,
Dec. 31,
Sept. 30,
June 30,
March 31,
Dec. 31,
Sept. 30,
June 30,
2010
2009
2009
2009
2009
2008
2008
2008
$
14,588
$
14,737
$
14,838
$
14,520
$
14,198
$
14,366
$
14,903
$
15,019
QUARTER ENDED
Service revenues
Product revenues
Total revenues
Operating expenses:
Cost of service revenues
Cost of product revenues
Research and development
Selling, general, and
administrative
Total operating expenses
Income (loss) from operations
Other income (loss), net
Income (loss) on change in fair
value of warrant liability
Income (loss) before provision
for income taxes
Provision (benefit) for
income taxes
Net income (loss)
Net income (loss) per share:
Basic
Diluted
1,279
15,867
3,309
1,825
1,308
8,536
14,978
889
3
216
1,207
15,944
3,254
1,925
1,239
8,251
14,669
1,275
7
1,189
16,027
3,535
1,686
1,265
8,156
14,642
1,385
31
1,038
15,558
3,501
1,821
1,237
8,573
15,132
426
12
1,567
15,765
4,179
2,349
1,538
11,700
19,766
(4,001)
32
(265)
(90)
(7)
(11)
1,108
1,017
1,326
1,837
16,203
3,699
1,681
1,183
9,562
16,125
78
74
66
218
38
180
1,522
16,425
4,022
1,673
1,299
9,667
16,661
(236)
107
190
61
17
44
0.00
0.00
1,262
16,281
3,814
1,432
1,192
8,751
15,189
1,092
85
69
1,246
58
1,188
0.02
0.02
$
$
$
$
$
$
(7)
$
1,115
$
$
0.02
0.02
3
1,014
0.02
0.02
$
$
$
$
$
$
$
$
$
(10)
1,336
0.02
0.02
62,774
62,873
Shares used in per share calculations:
Basic
Diluted
63,064
63,992
62,852
63,393
431
17
414
(3,980)
(68)
$
(3,912)
$
0.01
0.01
$
$
(0.06)
(0.06)
$
$
0.00
0.00
62,688
62,766
62,568
62,568
62,332
62,394
62,278
62,361
62,096
62,192
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control over financial reporting, as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") during the most
recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
68
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the Company's disclosure controls and procedures, as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act, as of March 31, 2010. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of March 31, 2010, the Company's disclosure controls and
procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act. Under the supervision and with the participation of
our management, including our principal executive officer and principal financial officer, the Company conducted an
assessment of the effectiveness of its internal control over financial reporting based on criteria established in the framework in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, our management concluded that its internal control over financial reporting was effective as of
March 31, 2010.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Moss Adams LLP, the independent registered public accounting firm that audited the financial statements included in this
Annual Report on Form 10-K has issued an attestation report on our internal control over financial reporting which appears in
Item 8 of this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
None.
PART III
Certain information required by Part III is omitted from this Report on Form 10-K in that the Registrant will file its definitive
Proxy Statement for its Annual Meeting of Stockholders (the 2010 Proxy Statement) pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, not later than 120 days after the end of the fiscal year covered by this Report,
and certain information included in the 2010 Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding our directors and corporate governance will be presented in our definitive proxy statement for our 2010
Annual Meeting of Stockholders to be held on or about August 31, 2010, which information is incorporated into this report by
reference. However, certain information regarding current executive officers found under the heading “Executive Officers” in
Item 1 of Part I hereof is also incorporated by reference in response to this Item 10.
We have adopted a Code of Conduct and Ethics that applies to our principal executive officer, principal financial officer and all
other employees at 8x8, Inc. This Code of Conduct and Ethics is posted in the corporate governance section of our website at
http://investors.8x8.com. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment
to, or waiver from, a provision of this Code of Conduct and Ethics by posting such information in the corporate governance
section on its website at http://investors.8x8.com.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation will be presented in our definitive proxy statement for our 2010 Annual
Meeting of Stockholders to be held on or about August 31, 2010, which information is incorporated into this report by
reference.
69
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information relating to securities authorized for issuance under equity compensation plans and other information required to be
provided in response to this item will be presented in our definitive proxy statement for our 2010 Annual Meeting of
Stockholders to be held on or about August 31, 2010, which information is incorporated into this report by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required to be provided in response to this item will be presented in our definitive proxy statement for our 2010
Annual Meeting of Stockholders to be held on or about August 31, 2010, which information is incorporated into this report by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required to be provided in response to this item will be presented in our definitive proxy statement for our 2010
Annual Meeting of Stockholders to be held on or about August 31, 2010, which information is incorporated into this report by
reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements. The information required by this item is included in Item 8.
(a)(2) Financial Statement Schedules. The information required by this item is included in Item 8.
(a)(3) Exhibits. The documents listed on the Exhibit Index appearing in this Report are filed herewith or hereby incorporated
by reference. Copies of the exhibits listed in the Exhibit Index will be furnished, upon request, to holders or beneficial owners
of the Company's common stock.
70
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, 8x8, Inc., a
Delaware corporation, has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Sunnyvale, State of California, on May 26, 2010.
SIGNATURES
8X8, INC.
By: /s/ BRYAN R. MARTIN
Bryan R. Martin,
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints
Bryan R. Martin and Daniel Weirich, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report on Form 10-K has been signed by the
following persons in the capacities and on the date indicated:
Signature
Title
/s/ BRYAN R. MARTIN
Bryan R. Martin
Chairman and Chief Executive Officer (Principal
Executive Officer)
Date
May 26, 2010
/s/ DANIEL WEIRICH
Daniel Weirich
/s/ GUY L. HECKER
Guy L. Hecker, Jr.
/s/ JOE PARKINSON
Joe Parkinson
/s/ DONN WILSON
Donn Wilson
Chief Financial Officer, President and Secretary
(Principal Financial and Accounting Officer)
May 26, 2010
Director
Director
Director
May 26, 2010
May 26, 2010
May 26, 2010
71
Exhibit
Number
8X8, INC.
EXHIBIT INDEX
Exhibit Title
3.1 (a)
Form of Restated Certificate of Incorporation of Registrant.
3.1.1(b)
Certificate of Amendment of Restated Certificate of Incorporation of Registrant, dated August 15,
2000.
3.1.1(c)
Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Registrant,
dated July 16, 2001
3.2 (d)
Bylaws of Registrant.
4.1 (e)
4.2 (e)
4.3 (f)
4.4 (f)
Form of Common Stock Warrant issued in connection with the sale of the Registrant's common
stock and warrants under its shelf registration statement (File No. 333-114133), as amended, and
as supplemented by a prospectus supplement dated June 21, 2004.
Form of Common Stock Warrant issued to the placement agents in connection with the sale of the
Registrant's common stock and warrants under its shelf registration statement (File No. 333-
114133), as amended, and as supplemented by a prospectus supplement dated June 21, 2004.
Form of Common Stock Warrant issued in connection with the sale of the Registrant's common
stock and warrants under its shelf registration statement (File No. 333-114133), as amended, and
as supplemented by a prospectus supplement dated September 29, 2004.
Side Letter dated September 30, 2004, to amend the warrant dated June 23, 2004 in connection
with the sale of the Registrant's common stock and warrants under its shelf registration statement
(File No. 333-114133), as amended, and as supplemented by a prospectus supplement dated
September 29, 2004.
4.5 (f)
Form of Common Stock Warrant issued to the placement agents in connection with the sale of the
Registrant's common stock and warrants under its shelf registration statement (File No. 333-
114133), as amended, and as supplemented by a prospectus supplement dated September 29, 2004.
4.12 (g)
Form of Common Stock Warrant issued in connection with a private placement of equity securities
by the Registrant completed on July 29, 2003.
4.13 (h)
4.14 (i)
Common Stock Purchase Warrant issued to AGE Investments, Inc., dated March 7, 2005, in
connection with the sale of the Registrant's common stock and warrants under its shelf registration
statement (File No. 333-114133), as amended, and as supplemented by a prospectus supplement
dated March 3, 2005.
Common Stock Purchase Warrant issued to Griffin Securities, Inc., dated March 7, 2005, in
connection with the sale of the Registrant's common stock and warrants under its shelf registration
statement (File No. 333-114133), as amended, and as supplemented by a prospectus supplement
dated March 3, 2005.
4.15 (j)
Form of Common Stock Warrant issued in connection with the sale of the Registrant's common
stock and warrants under its shelf registration statement (File No. 333-126350), as amended, and
as supplemented by a prospectus supplement dated December 15, 2005.
72
4.16 (k)
Form of Common Stock Warrant issued to the placement agents in connection with the sale of the
Registrant's common stock and warrants under its shelf registration statement (File No. 333-
126350), as amended, and as supplemented by a prospectus supplement dated December 15, 2005.
4.17 (l)
Amendment to June 21, 2004, Common Stock Purchase Warrant dated August 29, 2007.
4.18 (m)
Amendment to September 30, 2004, Common Stock Purchase Warrant dated August 29, 2007.
10.1 (a)
Form of Indemnification Agreement between the Registrant and each of its directors and officers.
10.2 (a)*
1992 Stock Option Plan, as amended, and form of Stock Option Agreement.
10.3 (n)*
1996 Stock Plan, as amended, and form of Stock Option Agreement.
10.4 (o)* Amended and Restated 1996 Employee Stock Purchase Plan, as amended, and form of
Subscription Agreement.
10.5 (p)*
1996 Director Option Plan, as amended. and Form of Director Option Agreement.
10.5.1 (q)* Form of Director Option Agreement for 1996 Director Option Plan.
10.6 (r)*
1999 Nonstatutory Stock Option Plan, as amended, and form of Stock Option Agreement.
10.7 (s)*
2006 Stock Plan, as amended.
10.8 (t)
Sublease dated September 29, 2004, between the Registrant and SafeNet, Inc.
10.9 (u)*
Form of 2006 Stock Option Agreement under the 2006 Stock Plan.
10.10 (v)*
Form of Notice of Award of Stock Purchase Right and Stock Purchase Agreement under the 2006
Stock Plan.
10.11 (w)
Lease dated May 1, 2009, between the Registrant and SILICON VALLEY CA-I, LLC.
10.12
Acquisition Agreement between 8x8, Inc., Central Host, Inc. and Andrew Schwabecher
21.1
Subsidiaries of Registrant.
23.1
Consent of Independent Registered Public Accounting Firm.
23.2
Consent of Independent Registered Public Accounting Firm.
24.1
Power of Attorney (included on page 71).
31.1
31.2
32.1
32.2
Certification of Chief Executive Officer of the Registrant pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer of the Registrant pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer of the Registrant pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer of the Registrant pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
__________
73
* Indicates management contract or compensatory plan or arrangement.
(a) Incorporated by reference to the same numbered exhibits to the Registrant's Registration Statement on Form S-1
(Commission File No. 333-15627), as amended, declared effective July 1, 1997.
(b) Incorporated by reference to exhibit 3.3 to the Registrant’s Form 10-K filed May 24, 2001 (File No. 000-21783).
(c) Incorporated by reference to exhibit 3.1 to the Registrant’s Form 10-Q filed October 25, 2001 (File No. 000-21783).
(d) Incorporated by reference to exhibit 3.2 to the Registrant’s Report on Form 8-K filed December 19, 2007 (File No. 000-
21783).
(e) Incorporated by reference to the same numbered exhibits to the Registrant's Report on Form 8-K filed June 22, 2004 (File
No. 000-21783).
(f) Incorporated by reference to the same numbered exhibits to the Registrant's Report on Form 8-K filed October 1, 2004 (File
No. 000-21783).
(g) Incorporated by reference to the same numbered exhibit to the Registrant's Report on Form 8-K filed July 31, 2003 (File
No. 000-21783).
(h) Incorporated by reference to exhibit 4.3 to the Registrant's Report on Form 8-K/A filed March 8, 2005 (File No. 000-
21783).
(i) Incorporated by reference to exhibit 4.4 to the Registrant's Report on Form 8-K/A filed March 8, 2005 (File No. 000-
21783).
(j) Incorporated by reference to exhibit 4.3 to the Registrant's Report on Form 8-K/A filed December 20, 2005 (File No. 000-
21783).
(k) Incorporated by reference to exhibit 4.5 to the Registrant's Report on Form 8-K/A filed December 20, 2005 (File No. 000-
21783).
(l) Incorporated by reference to exhibit 4.1.1 to the Registrant's Report on Form 8-K filed August 31, 2007 (File No. 000-
21783).
(m) Incorporated by reference to exhibit 4.3.1 to the Registrant's Report on Form 8-K filed on August 31, 2007 (File No. 000-
21783).
(n) Incorporated by reference to exhibit 4.1 to the Registrant's Form S-8 filed November 7, 2000 (File No. 333-49410).
(o) Incorporated by reference to exhibit 10.5 to the Registrant's Form S-8 filed September 26, 2006 (File No. 333-137-599).
(p) Incorporated by reference to exhibit 10.3 to the Registrant's Form S-8 filed August 28, 2003 (File No. 333-108290).
(q) Incorporated by reference to exhibit 4.2 to the Registrant's Form S-8 filed November 7, 2000 (File No. 333-49410).
(r) Incorporated by reference to exhibit 4.1 to the Registrant's Form S-8 filed July 17, 2000 (File No. 333-41594).
(s) Incorporated by reference to exhibit 10.7 to the Registrant’s Form 10-K filed May 26, 2009 (File No. 000-21783).
(t) Incorporated by reference to exhibit 10.1 to the Registrant's Report on Form 8-K filed October 5, 2004 (File No. 000-
21783).
(u) Incorporated by reference to exhibit 10.1 to the Registrant's Form 10-Q filed February 7, 2007 (File No. 000-21783).
(v) Incorporated by reference to exhibit 10.10 to the Registrant’s Form 10-K filed May 26, 2009 (File No. 000-21783).
(w) Incorporated by reference to exhibit 10.11 to the Registrant’s Form 10-K filed May 26, 2009 (File No. 000-21783).
74
AGREEMENT BETWEEN
8X8, INC.
CENTRAL HOST, INC.
AND
ANDREW SCHWABECHER
ACQUISITION AGREEMENT
This Acquisition Agreement (the “Agreement”) is made and entered into as of May 1, 2010, by and among
8X8, INC., a Delaware corporation (“8x8” or the “Company”), CENTRAL HOST, INC., a California corporation
(“Central Host”) and ANDREW SCHWABECHER, Central Host’s sole stockholder (“Stockholder”) (each a
“Party” and collectively, the “Parties”) to be effective as of the date that first appears in the Agreement.
A. Central Host is a company that provides managed hosting services.
RECITALS
B. Stockholder is the owner of 4,000 shares of common stock of Central Host (the “Shares”), which
Shares represent 100% of the issued and outstanding shares of capital stock of Central Host.
C. 8x8 is a company that provides various types of Voice over Internet Protocol (“VoIP”) and
communications services.
D. 8x8 desires to purchase all of the issued and outstanding shares of common stock in the capital of
Central Host (the “Shares”) on the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises, and mutual covenants and agreements
hereinafter set forth, the Parties to this Agreement hereby agree as follows:
1. Definitions. As used in this Agreement, terms defined in the preamble and recitals hereto shall have the
respective meanings specified therein and the following terms shall have the meanings set forth below:
a. “Acquisition Shares” shall have the meaning provided in Section 3 of the Agreement.
b. “Balance Sheet Date” shall have the meaning provided in Section 5.4 of the Agreement.
c. “Closing” shall have the meaning provided in Section 4.1 of the Agreement.
d. “Closing Date” shall mean the date of the Closing.
e. “Effective Date” shall mean the date that first appears in the Agreement.
f.
“Employment Agreement” shall have the meaning provided in Section 4.2(b) of the Agreement.
g. “Hazardous Material” shall have the meaning provided in Section 5.14 of the Agreement.
h. “Intellectual Property” shall have the meaning provided in Section 5.13 of the Agreement.
i.
“Material Adverse Effect” means, with respect to Party, an effect which is materially adverse to the
business, properties, assets, revenues, operations, financial condition, results of operations or prospects
of such Party.
Page 1
j.
“Person” means an individual, corporation, partnership, limited liability company, joint venture,
association, trust, unincorporated organization or other entity, including a government or political
subdivision or an agency or instrumentality thereof.
k. “Securities Act” means the Securities Act of 1933, as amended.
l.
“Subsidiary” of a corporation means any corporation of which equity securities possessing a majority
of the ordinary voting power in electing the board of directors are, at the time as of which such
determination is being made, owned by such corporation either directly or indirectly or through one or
more Subsidiaries.
2. Acquisition of Shares. 8x8 agrees to acquire, and Stockholder agrees to sell, all the Shares in exchange for cash
and shares of 8x8 common stock as described in Section 3 of the Agreement. Stockholder represents and
warrants to 8x8 that Stockholder owns the Shares free and clear of any liens, claims or adverse rights.
3. Consideration; Restrictions on Acquisition Shares.
3.1 At the Closing, 8x8 will purchase the Shares for $1,600,000. Payment for the Shares by 8x8 will be in
the form of $1,000,000 cash and $600,000 of unregistered 8x8 common stock (the “Acquisition
Shares”), the share count of which is based on the trailing 5-day average closing price of 8x8 common
stock on the NASDAQ Exchange as of the Effective Date.
3.2 Stockholder agrees that the Acquisition Shares are being acquired for investment and not with an intent
to resell, will contain a Securities Act restrictive legend, and will only be resold pursuant to an
exemption from registration. In addition, Stockholder agrees that subject to all applicable federal and
state securities laws, Stockholder will not, during the period commencing on the Effective Date and
ending on the date which is three years after the Effective Date, directly or indirectly, sell, offer to sell,
pledge, encumber, or otherwise transfer or dispose of (collectively, “Transfer”) any of the Acquisition
Shares, provided that: (i) Stockholder may Transfer up to 50% of the Acquisition Shares after the date
which is one year after the Effective Date and (ii) either (A) Stockholder may Transfer the remaining
50% of the Acquisition Shares after the date which is two years after the Effective Date, if Stockholder
has been continuously employed by 8x8 for said two-year period or (B) Stockholder may Transfer the
remaining 50% of the Acquisition Shares after the date which is three years after the Effective Date, if
Stockholder has not been continuously employed by 8x8 for said two-year period.
4. Closing.
4.1 Time and Place. The transactions which are the subject of this Agreement shall be closed concurrently
with the execution hereof or as soon thereafter as the Parties mutually agree (the “Closing”). The
Closing shall take place at the offices of 8x8, Inc., 810 W. Maude Avenue, Sunnyvale, California
94085.
4.2 Stockholder Deliverables. At the Closing, Stockholder shall deliver, or cause to be delivered to 8x8
the following:
a.
the Agreement, duly executed by Central Host and Stockholder;
b.
the Employment Offer and Non-Competition Agreement (“Employment Agreement”), duly
executed by Stockholder;
c. copies of resolutions of the Board of Directors of Central Host authorizing the execution and
delivery by Central Host of this Agreement, duly certified by the Secretary of Central Host;
d.
the share certificate(s) representing the Shares, together with the Assignment Separate from
Stock Certificate in the form attached hereto as Exhibit A duly executed by Stockholder;
e.
the Resignation in the form attached hereto as Exhibit B duly executed by Stockholder; and
Page 2
f.
all corporate books and records, including, without limitation, the corporate minute book,
accounting records and tax records.
4.3. 8x8 Deliverables. At the Closing, 8x8 shall deliver, or cause to be delivered, to Stockholder, the
following:
a. $1,000,000 by wire transfer to such bank account as designed by Stockholder in writing prior
the Closing.
b. The Acquisition Shares, delivered in the name of Stockholder.
5. Representations and Warranties of Central Host and the Stockholder. Except as disclosed in the disclosure
schedules delivered to 8x8 by Central Host and Stockholder prior to the execution and delivery of this
Agreement, Central Host and the Stockholder jointly and severally represent, warrant, covenant, and agree as
follows:
5.1. Organization and Standing; Articles and By-Laws. Central Host is a corporation duly organized,
validly existing and in good standing under the laws of the State of California. Central Host is
qualified, licensed or domesticated as a foreign corporation and is in good standing in all jurisdictions
where the character of its properties owned or held under lease or the nature of its activities make such
qualification necessary. Central Host has all requisite power and authority and all requisite licenses
permits and franchises necessary to own, lease and operate its properties, and to carry on its business in
the manner and in the locations as presently conducted. Copies of the Articles of Incorporation (as
certified by the California Secretary of State) and By-Laws of Central Host have been delivered to 8x8
and are accurate and complete as of the Effective Date.
5.2. Authorization. Central Host has the requisite corporate power and authority, and Stockholder has all
requisite power and authority, to enter into and carry out the terms and conditions of this Agreement
and all the transactions contemplated hereunder. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized by Central Host's
Board of Directors and, all corporate proceedings have been done and no other corporate proceedings
on the part of Central Host are necessary to authorize the execution, delivery and performance by
Central Host of this Agreement. This Agreement has been duly executed and delivered by Central Host
and constitutes the valid and binding obligations of Central Host, enforceable in accordance with its
terms.
5.3. Capitalization; Subsidiaries.
(a) The Shares represent all of the issued and outstanding shares of capital stock of Central Host and
are held of record and beneficially owned by Stockholder free and clear of any and all liens.
Stockholder is not a party to any voting trust, proxy or other agreement or understanding with
respect to the Shares. All of the Shares have been duly authorized, are validly issued, fully paid,
and nonassessable and were issued in conformity with all applicable legal requirements.
(b) There are no (i) outstanding options, rights (preemptive or otherwise), warrants, calls, convertible
equity interests, stock appreciation, phantom interests, profit participation or similar rights or
commitments, or (ii) other arrangements to which Central Host or Stockholder is a party requiring
or restricting the issuance, sale or transfer of the shares of stock of such legal entities.
(c) Central Host has no Subsidiaries.
5.4. Absence of Certain Changes or Events. Except as heretofore disclosed in writing to 8x8 or as otherwise
contemplated by this Agreement, since Balance Sheet Date (defined in Section 5.6(b)) Central Host
has conducted its business only in the ordinary and usual course consistent with past practice, and there
has not been:
(a) any material adverse change in the business, properties, assets, revenues, operations, financial
condition, results of operations or prospects of Central Host;
Page 3
(b) any change in accounting methods, principles and practices by Central Host materially affecting
its assets, liabilities or business;
(c) any damage, destruction or loss, whether covered by insurance or not, having a Material Adverse
Effect upon Central Host;
(d) any entry by Central Host into any commitment or transaction material to Central Host which is
not in the ordinary course of business consistent with past practice;
(e) any declaration, payment or setting aside for payment of any dividends; or
(f) any grant to any officer or director of any increase in compensation, or any loan to any officer or
director, or any adoption, amendment in any material respect or termination of any bonus, profit
sharing, stock option, employee stock ownership, pension, retirement, deferred compensation,
employment or consulting or other plan, agreement or arrangement for the benefit of employees of
Central Host.
5.5. Litigation and Product Liability Matters; Warranty Obligations.
(a) Except as set forth in Schedule 5.5, there are no claims, actions, suits or proceedings of any nature
pending or, to the knowledge of Stockholder, threatened against or by Central Host or any of its
properties, assets or business subject to any order, judgment, ruling, or decree of any competent
authority. Central Host has not received notice of violation of any applicable statute, regulation,
code, ordinance, rule, order, judgment, decree or requirement relating to its operation or its owned
or leased properties and to Central Host's knowledge, no such violation exists, in each case.
(b) Central Host has no known or anticipated warranty liability or obligations and/or refunds to
current or former Central Host customers for products or services previously provided or shipped
to customers prior to the Effective Date.
5.6 Financial Statements; Liabilities.
(a) Copies of the balance sheets for each month from January 2010 through March 2010, and
statements of profit and loss for each month from January 2007 through March 2010, of Central
Host have been provided to 8x8 (collectively, the “Financial Statements”). Except as set forth on
Schedule 5.6(a), each of the Financial Statements (including the footnotes thereto, if any) is in
accordance with the books and records of Central Host, has been prepared on a consistent basis
with the other Financial Statements, presents fairly and accurately the financial position, assets
and liabilities and results of operations and cash flows of Central Host and its business at the dates
and for the periods indicated, subject (only with respect to the Interim Financial Statements) to
normal and immaterial year-end adjustments and footnote disclosures. The Financial Statements
contain appropriate allowances and reserves for accounts receivable and other accruals.
(b) As of March 31, 2010 (the “Balance Sheet Date”), Central Host had not any indebtedness or other
liability (whether known or unknown, whether absolute or contingent, whether liquidated or
unliquidated and whether due or to become due) which was not disclosed in the Financial
Statements (including the footnotes thereto). Except as set forth on Schedule 5.6(b), Central Host
has incurred from and after the Balance Sheet Date any indebtedness or other liability (whether
known or unknown, whether absolute or contingent, whether liquidated or unliquidated and
whether due or to become due), other than current liabilities for trade or business obligations
incurred after the Balance Sheet Date in connection with the purchase of goods or performance of
services in the ordinary course of business and consistent with past practice.
Page 4
5.7. Tax Returns. Central Host has accurately prepared and duly and timely filed all federal and state and
all other material income, property, sales and use other applicable tax reports and returns required to be
filed (subject to any extensions applicable to any such filing), and has paid all taxes and other charges
required to be paid with respect to the periods covered by such returns. Central Host has not been and
is not delinquent in the payment of any tax, assessment or governmental charge or executed any waiver
of any statute of limitations on the assessment or collection of any tax. Central Host knows of no basis
for the assertion of any deficiencies for any period covered by such tax reports and returns-or
otherwise payable to any taxing authority.
5.8. Title to Assets, Encumbrances. Central Host has good title to all of the properties and assets (real,
personal and mixed, tangible and intangible) that are reflected on Schedule 5.8-A and the Balance
Sheet free and clear of all liens, except for the equipment lease agreements listed on Schedule 5.8-B.
The term "lien" as used in this Section shall include any mortgage, pledge, security, interest,
encumbrance, lien, claim or charge of any kind.
5.9. No Brokers. All negotiations relative to this Agreement and the transactions contemplated hereby have
been carried on without the intervention of any Person as the result of any act of Central Host in such
manner as to give rise to any claim against any of the parties hereto for a brokerage commission,
finder's fee, financial advisor fee or investment banking fee or other like payment except New
Commerce Communications, Inc., whose fees shall be the sole responsibility of Stockholder.
5.10. Employee Plans, Leases and Contracts. Except as otherwise set forth on Schedule 5.10, Central Host
is not a party to (i) any employee plan or contract that provides for bonuses, pensions, options, stock
purchases, deferred compensation, retirement payments or profit sharing, (ii) any collective bargaining
or other contract or agreement with any labor union, (iii) any real property lease, (iv) any employment,
management, severance or consulting contract or other contracts, agreements or arrangement with any
current or former officer, director, employee of consultant or with any entity in which any of the
foregoing is an owner, officer, director, employee or consultant, (v) any sales representation, agency
distribution agreement, or supply contract or arrangement, other than any such contract which may be
terminated upon 30 days notice or less, (vi) any agreement, contract or other arrangement whereby
Central Host has extended warranty protection on any of its products or services for a duration of more
than 12 months, (vii) any noncompetition agreement or contract which restricts Central Host from
doing business anywhere in the world, or (viii) any contract or agreement pursuant to which any
Person has the right to receive any participation or other payment which is based or measured in whole
or in part upon the gross or net receipts of Central Host, (ix) an agreement authorizing others to
distribute, license, or sell products of Central Host, (x) any written or oral agreement, granting to
others rights in Central Host's intellectual or technological property, or (xi) any other contract or
agreement that includes a purchase or other commitment that is substantially in excess of the normal
requirements of its business or was made at a price or on terms and conditions substantially more
onerous than is usual and customary in its business and which, either individually or in the aggregate,
constitute a material liability.
5.11. Minute Books. The minute books of Central Host, copies of which have been delivered to 8x8,
accurately record all actions taken by its stockholders and directors.
5.12. Compliance with Applicable Law. The business of Central Host is not being conducted in violation
of any applicable law, ordinance, regulation, decree or order of any governmental entity, except for
violations which either singly or in the aggregate do not and are not expected to have a Material
Adverse Effect on Central Host. Central Host is not a party to or subject to any judgment, decree, or
order entered in any suit or proceeding brought by any governmental agency or by any other Person,
enjoining Central Host with respect to any business practice, the acquisition of any property, or the
conduct of business in any area.
Page 5
5.13. Patents, Trade Names and Other Intellectual Property Rights.
(a) Central Host owns or is validly licensed or otherwise has the right to use, free and clear of all
liens, claims and restrictions of any kind or nature, any and all patents, trademarks, trade names,
service marks, copyrights, trade secrets, technology, know-how and processes (collectively,
“Intellectual Property”), including the trademarks "Central Host" and the domain
"centralhost.com", used in or necessary for the conduct of its business as now conducted or as
proposed to be conducted.
(b) The operations and products of Central Host do not infringe any Intellectual Property rights of any
other Person. Central Host has not received any communication alleging or stating that Central
Host or any employee has violated or infringed, or by conducting business as proposed, would
violate or infringe any Intellectual Property right of any other Person.
(c) Each contract, license, permit or other agreement or instrument which grants to Central Host the
right, or permits Central Host, to manufacture or distribute Central Host's products or services or
the products or services of others, or which is otherwise material (for the purposes of Regulation
S-K of the SEC) to the business or operations of Central Host as currently conducted or as
proposed to be conducted (a copy of each such contract, agreement or instrument has previously
been delivered to 8x8 by Central Host and is identified on Schedule 5.13) is in full force and effect
and valid and binding in accordance with its terms, and Central Host is not in default under any of
the material terms thereof, nor has Central Host relinquished, forfeited or waived any of its rights
or privileges thereunder which are material to its ongoing business operations or received a notice
of any such default, and, except as set forth on Schedule 5.13, there exists no event which with
notice or the passing of time or both would constitute such a default or grant to any other party
thereto the right to cancel or terminate the same or withhold or suspend its performance
thereunder.
5.14. Environmental Compliance Matters. Central Host has not received any notice of any claim,
proceeding or investigation under federal, state or local law or any law of any foreign jurisdiction
relating to air, soil, subsurface and water pollution, soil monitoring and the storage, treatment, disposal,
removal, remediation, release, discharge or emission of any Hazardous Material (as defined below)
with respect to the business activity of Central Host. To the best knowledge of Central Host, neither
Central Host, any Subsidiary nor any predecessor entity operating or controlling the business activity
of Central Host has ever owned, leased or operated or otherwise controlled any real property at which a
claim or proceeding is presently pending or threatened, nor is aware of the existence of any condition
on any such property which would give rise to any such claim or proceeding under federal, state or
local law or any law of any foreign jurisdiction relating to air, soil, subsurface, water pollution, soil
monitoring and the storage, treatment, disposal, removal, remediation, release, discharge or emission
of any Hazardous Material shall mean any flammables, asbestos, explosives, radioactive materials,
hazardous wastes, toxic substances or related materials, including without limitation, any substances
defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous
materials", "toxic substances" under any applicable federal, state, local or foreign laws, rules,
regulations or orders or which federal, state, local or foreign laws, rules, regulations or orders
designate as potentially dangerous to public health and/or safety when present in the environment.
5.15. Severance and Employment Agreements. Central Host is not a party to any agreements, and has no
policy of, providing for severance or termination payments to any officer, director consultant or
employee of Central Host.
5.16. No Change of Control Provision. Central Host is not a party or subject to any agreement, contract or
other obligation which would require the making of any payment, other than payments as
contemplated by this Agreement, to any employee, officer, director, or shareholder of Central Host or
to any other Person as a result of the consummation of the transactions contemplated herein.
Page 6
5.17. Insurance. Schedule 5.17 contains a complete and correct list of all policies of insurance of any kind
or nature covering the business or assets of Central Host, including, without limitation, policies of life,
fire, theft, professional services, employee fidelity, directors’ and officers’ and other casualty and
liability insurance, and such policies are in full force and effect.
5.18 . Board Approval. The Board of Directors of Central Host has duly approved this Agreement.
5.19. Information. All written information provided to 8x8, or its agents, by or on behalf of Central Host
and/or the Stockholder or any of its representatives (including, without limitation, each representation
and warranty of Central Host set forth in this Agreement) is, and Central Host and Stockholder
covenants that any such information provided hereafter shall be, true and correct in all material
respects and does not, or shall not, omit any material statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, that no representation or warranty is
made by Central Host as to any financial forecasts or projections previously furnished to 8x8 by
Central Host, except that such financial forecast or projection has been prepared in good faith based on
assumptions that are believed by Central Host to have been reasonable at the time or times made.
6. Representations and Warranties of 8x8. 8x8 represents, warrants, covenants, and agrees with Central Host as
follows:
6.1. Organization and Standing; Articles and By-Laws. 8x8 is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. 8x8 has all requisite power and
authority and all requisite licenses, permits and franchises necessary to own, lease and operate its
properties and assets and to carry on its business in the manner and in the locations as presently
conducted.
6.2. Authorization. 8x8 has the requisite corporate power and authority to enter into and carry out the terms
and conditions of this Agreement and all the transactions contemplated hereunder.
6.3. Enforceability. This Agreement has been fully executed and delivered by 8x8 and constitutes the legal,
valid and binding obligation of 8x8, enforceable against it in accordance with its respective terms.
6.4. Authorization of 8x8 Common Stock. The issuance of the Acquisition Shares at the Closing will have
been duly authorized by all necessary corporate action prior to the Closing Date and, when issued as
contemplated by this Agreement, all such shares of will be validly issued and fully paid, subject to the
terms of Section 3 of the Agreement.
6.5. SEC Reports. 8x8 heretofore has made available to Central Host and Stockholder its proxy statements
with respect to its 2007, 2008 and 2009 annual meetings of stockholders, Annual Reports on Form 10-
K for the years 2007, 2008 and 2009, all Current Reports, if any, on Form 8-K and its Quarterly
Reports on Form 10-Q for its fiscal quarters up to, and including the quarter ending December 31,
2009.
6.6. No Brokers. All negotiations relative to this Agreement and the transactions contemplated hereby have
been carried on without the intervention of any Person as the result of any act of 8x8 or any of its
Subsidiaries in such manner as to give rise to any claim against any of the parties hereto for a
brokerage commission finder's fee, financial advisor's fee or investment banking fee or other like
payment.
6.7. Board Approval. The Board of Directors of 8x8 has duly approved this Agreement.
7. Conditions to Closing. The respective obligations of each party to effect the transactions shall be subject to the
fulfillment at or prior to the Effective Date of the following conditions:
7.1. No Legal Action. No preliminary or permanent injunction or other order, decree or ruling issued by
any court of competent jurisdiction, or by any governmental, administrative or regulatory agency or
commission, in the United States preventing the consummation of the sale of assets shall be in effect.
Page 7
7.2. Employment Agreement. 8x8 shall have received a duly executed Employment Agreement from
Stockholder, in a form reasonably acceptable to 8x8.
8. Survival of Representations; Indemnification.
8.1. Survival of Representations. The respective representations and warranties of the Stockholder, Central
Host, and 8x8 contained in this Agreement or in any Exhibit attached hereto shall survive the Closing.
8.2. Indemnification.
(a) The Stockholder agrees to indemnify and hold 8x8 and its officers, directors, employees,
agents, customers, partners and vendors harmless from damages, losses or expenses
(including, without limitation, reasonable attorneys' fees and expenses) suffered or paid,
directly or indirectly, through application of Central Host's or 8x8's assets or otherwise, as a
result of or arising out of (i) the failure to be true and correct in all respects of any
representation or warranty, or the breach of any covenant, made by the Stockholder or Central
Host in this Agreement or in any schedule attached hereto as of the date of this Agreement
and as of the Closing Date. (ii) any payment obligation owing to XO Communications arising
from the matter described on Schedule 5.6(b).
(b) The obligations to indemnify and hold harmless pursuant to this Section 8.2 shall survive the
consummation of the transactions contemplated by this Agreement.
9. Non-Competition.
9.1. Stockholder agrees that from the Closing Date until the third anniversary following the Closing Date,
Stockholder will not, directly or indirectly, assist in, engage in, have any financial interest in, or
participate in any way in, as an owner, partner, employee, agent, board member or shareholder, any
business that involves, in whole or in part, activities similar to, related to or competitive with the
business heretofore or now carried on by Central Host.
9.2. Stockholder acknowledges that: (i) an essential part of the purchase by 8x8 is the goodwill of Central
Host contained in the Shares and that to protect and preserve such goodwill, the covenants set forth in
this Section 9 are not only reasonable and necessary but required as a condition to 8x8’s consummation
of the acquisition; (ii) the provisions of this Section 9 are the product of arm’s-length negotiation and
are reasonable and necessary to protect and preserve 8x8’s interests in and right to the ownership, use
and operation of the business of Central Host from and after the Closing Date; and (iii) 8x8 would be
damaged if Stockholder breached the covenants set forth in this Section 9.
9.3. The Parties recognize that damages in the event of a breach by Stockholder of any provision of this
Section 9 would be difficult, if not impossible, to ascertain, and it is therefore agreed that 8x8, in
addition to and without limiting any other remedy or right it may have, shall have the right to an
injunction or other equitable relief in any court of competent jurisdiction, enjoining any such breach.
The existence of this right shall not preclude any other rights or remedies at law or in equity which 8x8
may have relating to a breach of this Section 9.
9.4 Whenever possible, each provision and term of this Section 9 shall be interpreted in a manner to be
effective and valid, but if any provision or term of this Section 9 is held to be prohibited or invalid,
then such provision or term shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating or affecting in any manner whatsoever the remainder of such provision or term or
the remaining provisions or terms of this Section 9. If any of the covenants set forth in this Section 9
are held to be unreasonable, arbitrary or against public policy, such covenants shall be considered
divisible with respect to duration, geographic area and scope, and in such lesser duration, geographic
area and scope, shall be effective, binding and enforceable against Stockholder to the greatest extent
permissible.
Page 8
10. Miscellaneous Provisions.
10.1. Press Releases. Neither Stockholder nor his advisors, attorneys or agents, nor Central Host prior to
the Closing, shall make any press release or public announcement in connection with the transactions
contemplated by this Agreement without the prior written consent of 8x8.
10.2. Notices. All notices or other communications which are required or permitted hereunder shall be in
writing and sufficient if delivered personally or sent by nationally-recognized overnight courier,
specifying next-day delivery, or by registered or certified mail, postage prepaid, return receipt
requested, addressed as follows:
a.
if to 8x8 to:
8x8, Inc.
ATTN: Chief Executive Officer
810 West Maude Avenue
Sunnyvale, CA 94085
408-727-1885 (phone)
408-980-0432 (FAX)
bmartin@8x8.com
b.
if to Stockholder (or Central Host prior to the Closing) to:
Andrew Schwabecher
16035 Redwood Lodge Road
Los Gatos, CA 95033
or to such other address as the party to whom notice is to be given may have furnished to the other
party in writing in accordance herewith. All such notices or communications shall be deemed to be
received (i) in the case of personal delivery, on the date of such delivery, (ii) in the case of nationally-
recognized overnight courier, on the next business day after the date when sent, and (iii) in the case of
mailing, on the third business day following the date on which the piece of mail containing such
communication was posted.
10.3. Severability. Should any Section or any part of a Section within this Agreement be rendered void,
invalid or unenforceable by any court of law for any reason, such invalidity or unenforceability shall
not void or render invalid or unenforceable any other Section or part of a Section in this Agreement.
10.4. Exhibits and Schedules. Each Exhibit and Schedule delivered pursuant to the terms of this
Agreement, each document, instrument and certificate delivered by the parties in connection with the
transactions contemplated hereby constitutes an integral part of this Agreement and are hereby
incorporated by reference.
10.5. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED BOTH
AS TO VALIDITY AND PERFORMANCE AND ENFORCED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF CALIFORNIA AND THE PARTIES AGREE THAT THIS
AGREEMENT IS ENTERED INTO AND SHALL BE PERFORMED IN SANTA CLARA
COUNTY, CALIFORNIA, AND ANY LITIGATION RESULTING HENCEFORTH WILL TAKE
PLACE IN SANTA CLARA COUNTY, CALIFORNIA, TO THE EXTENT POSSIBLE.
10.6. No Adverse Construction. The rule that a contract is to be construed against the party drafting the
contract is hereby waived, and shall have no applicability in construing this Agreement or any
provisions hereto.
10.7. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be
deemed an original but all of which together shall constitute one and the same instrument.
Page 9
10.8. Costs and Attorneys' Fees. In the event that any action, suit, or other proceeding is instituted
concerning or arising out of this Agreement, the prevailing party shall recover all of such party's costs,
and reasonable attorneys' fees incurred in each and every such action, suit, or other proceeding,
including any and all appeals or petitions therefrom.
10.9. Successors and Assigns. All rights, covenants and agreements of the parties contained in this
Agreement shall, except as otherwise provided herein, be binding upon and inure to the benefit of their
respective successors and assigns.
10.10. Amendment. This Agreement may not be amended except by an instrument in writing signed by an
officer on behalf of each of the parties hereto, or an individual in the case of the Stockholder.
10.11. Entire Agreement. This Agreement, the attached schedules referred to in this Agreement, and the
Employment Agreement contain the entire understanding of the parties and there are no further or
other agreements or understandings, written or oral, in effect between the parties relating to the subject
matter hereof unless expressly referred to herein.
10.12. Further Assurances. From time to time after the Closing, each of the parties shall, for no additional
consideration and upon the reasonable request of another party, execute and deliver such other
instruments of conveyance, assignments, agreements and other documents as may be necessary or
appropriate to consummate the transaction contemplated by this Agreement.
[Signature page follow.]
Page 10
IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date
first above written.
8X8:
8X8, INC.
a Delaware corporation
By:
Bryan Martin, Chief Executive Officer
CENTRAL HOST:
CENTRAL HOST, INC.
a California corporation
By:
Andrew Schwabecher, President
STOCKHOLDER:
Andrew Schwabecher
Page 11
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
Name
Jurisdiction of Incorporation
8x8 Europe SARL
Netergy Microelectronics, Inc.
Visit, Inc.
France
California, USA
California, USA
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements on Form S-3 (Nos. 333-32930,
333-49414, 333-80379, 333-75402, 333-108289, 333-111120, 333-114133, 333-118643, 333-120457,
333-126330, 333-126350 and 333-131823) and Form S-8 (Nos. 333-30943, 333-15627, 333-50519, 333-
49410, 333-66296, 333-90172, 333-108290, 333-118642, 333-126337 and 333-137599) of our reports
dated May 26, 2010, relating to the financial statements, financial statement schedule II, and the
effectiveness of internal controls over financial reporting, appearing in this Annual Report on Form 10-K
of 8x8, Inc. for the year ended March 31, 2010.
/s/ Moss Adams LLP
San Francisco, California
May 26, 2010
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on
Form S-3 (Nos. 333-32930, 333-49414, 333-80379, 333-75402, 333-108289, 333-111120,
333-114133, 333-118643, 333-120457, 333-126330, 333-126350 and 333-131823) and
Form S-8 (Nos. 333-30943, 333-15627, 333-50519, 333-49410, 333-66296, 333-90172,
333-108290, 333-118642, 333-126337 and 333-137599) of 8x8, Inc. of our report dated
May 23, 2008 relating to the financial statements and financial statement schedule, which
appears in this Form 10-K.
/s/PricewaterhouseCoopers LLP
San Jose, California
May 26, 2010
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bryan R. Martin, certify that:
1.
I have reviewed this annual report on Form 10-K of 8x8, Inc.;
Exhibit 31.1
Based on my knowledge, this report does not contain any untrue statement of a material fact or
2.
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this
3.
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining
4.
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures as of
the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation
5.
of internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
May 26, 2010
/s/ BRYAN R. MARTIN
Bryan R. Martin
Chairman and Chief Executive Officer
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel Weirich, certify that:
1.
I have reviewed this annual report on Form 10-K of 8x8, Inc.;
Exhibit 31.2
Based on my knowledge, this report does not contain any untrue statement of a material fact or
2.
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this
3.
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining
4.
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures as of
the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation
5.
of internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
May 26, 2010
/s/ DANIEL WEIRICH
Daniel Weirich
Chief Financial Officer, President and Secretary
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of 8x8, Inc. (the "Company") for the year ended
March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I,
Bryan R. Martin, Chairman and Chief Executive Officer of the Company, hereby certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ BRYAN R. MARTIN
Bryan R. Martin
Chairman and Chief Executive Officer
May 26, 2010
This certification accompanies this Report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall
not, except to the extent required by the Sarbanes-Oxley Act of 2002, or otherwise required, be deemed
filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of 8x8, Inc. (the "Company") for the year ended
March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I,
Daniel Weirich, Chief Financial Officer, President and Secretary of the Company, hereby certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ DANIEL WEIRICH
Daniel Weirich
Chief Financial Officer, President and Secretary
May 26, 2010
This certification accompanies this Report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall
not, except to the extent required by the Sarbanes-Oxley Act of 2002, or otherwise required, be deemed
filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.