8x8 2008 Annual Report Download - page 27

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Pursuant to 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”), 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 EITF 00-19. The required accounting for a warrant with a "net
cash settlement" provision under EITF 00-19 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 EITF 00-19. 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 EITF 00-19, 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 EITF 00-19, 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 EITF 00-19 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, 2008, we had cash and cash equivalents and investments of approximately $14.6 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;
• 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