8x8 2010 Annual Report Download - page 25

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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;