8x8 2011 Annual Report Download - page 49

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ACQUIRED PRODUCT RIGHTS
On April 29, 2009, the Company resolved a patent litigation matter with Web Telephony by entering into a license and
settlement agreement that resolved all legal claims between the companies. As part of the settlement, the Company agreed to
pay eight quarterly payments totaling $800,000 between April 2009 and December 2010. Under the transaction, the Company
expensed $339,000 of the patent settlement costs during the year ended March 31, 2009 that were related to benefits received
by the Company in and during the periods prior to fiscal year 2009. The remaining license amount was recorded as other long
term assets as of March 31, 2009 and is being amortized to cost of service revenues in the Consolidated Statements of
Operations over the remaining life of the primary patent, which expires in September 2017.
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 ASC 480-10 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. The Company previously had two outstanding warrants that were classified as liabilities.
Both warrants included a provision requiring the Company to deliver freely tradable shares upon exercise by the warrant
holder. Because there are circumstances, irrespective of likelihood, that may not be within the control of the Company 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. Both of these warrants expired on December 19, 2010.
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 ASC 350-40, the Company capitalizes
purchase and implementation costs of internal use software. In accordance with ASC 350-40, the Company capitalized $0 in
each of fiscal 2011, 2010 and 2009.
ADVERTISING COSTS
Advertising costs are expensed as incurred and were $5.9 million, $5.0 million and $7.3 million for the years ended March 31,
2011, 2010 and 2009, 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.