8x8 2008 Annual Report Download - page 33

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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."
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,
2008, the accounts receivable balance was $1.8 million, net of an allowance for doubtful accounts of $61,000, including a
reserve for disputed credits, and an estimated returns reserve of $53,000. 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 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,
EITF 00-19 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 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.
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
$72.1 million as of March 31, 2008, 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.