8x8 2010 Annual Report Download - page 31

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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.
We launched the retail channel in fiscal 2005 and began using it for our 8x8 Virtual Office service in 2006 with product
offerings through Office Depot and subsequently Office Max. Our retail channels and online retailers have unlimited return
rights for this equipment. The Company records shipments to distributors, retailers, and resellers, where the right of return
exists, as deferred revenue. Consequently, we defer recognition of revenue on sales to distributors, retailers, and resellers
where the right of return exists until products are resold to the end user.
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,
2010, the accounts receivable balance was $670,000, net of an allowance for doubtful accounts of $36,000, including a reserve
for disputed credits, and an estimated returns reserve of $80,000. 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.
Acquired Product Rights
On April 29, 2009, we resolved a patent litigation matter with Web Telephony by entering into a license and settlement
agreement that resolved all legal claims by Web Telephony. As part of the settlement, we agreed to pay eight quarterly
payments totaling $800,000 over the next two years between April 2009 and December 2010. Under the transaction, we
expensed $339,000 of the patent settlement costs during the year ended March 31, 2009 that were related to benefits received
by us in and during the periods prior to fiscal year 2009. We recorded the remaining license fee of $432,000 as other long term
assets as of March 31, 2009 and we are amortizing this amount to cost of service revenues in the Consolidated Statements of
Operations over the remaining life of the primary patent, which expires in September 2017.
Warrant Liability
We account for our warrants in accordance with 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”) 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, ASC 480-10 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 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.