8x8 2007 Annual Report Download - page 31

sale less the allowance for estimated returns during the 30-day trial period. All other revenues are recognized when the related
services are provided. 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 2007 and 2006, revenues 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.
If a software license arrangement includes acceptance criteria, revenue is not recognized 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, revenue is recognized on a subscription
basis, ratably over the term of the contract.
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.
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."
Collectibility of Accounts Receivable
We must make estimates of the collectibility 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,
2007, the accounts receivable balance was $854,000, net of an allowance for doubtful accounts of $54,000, including a reserve
for disputed credits, and an estimated returns reserve of $64,000. 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.
Warrant Liability
We account for our warrants in accordance with Emerging Issues Task Force Issue No. 00-19, “Accounting for Derivative
Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock” (“EITF 00-19”) 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 three investor warrants that are classified as liabilities because they
29