8x8 2009 Annual Report Download - page 57

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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 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 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, 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 the Company’ s stock price, expected stock price volatility and contractual term.
The amount the Company records as a liability under EITF 00-19 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 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
SOP No. 98-1, during fiscal 2009, 2008 and 2007, the Company capitalized $0, $0 and $81,000, 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 non-
exclusive, 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 $7,297,000, $6,989,000 and $5,614,000 for the years ended March 31,
2009, 2008 and 2007, 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.
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