UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 000-21783
8X8, INC.
(Exact name of Registrant as Specified in its Charter)
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810 West Maude Avenue
Sunnyvale, CA 94085
(Address of Principal Executive Offices)
(408) 727-1885
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. x YES ¨ NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES
x NO ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ¨ |
Accelerated filer x |
Non-accelerated filer ¨
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Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨
NO x
The number of shares of the Registrant's Common Stock outstanding as of October 26, 2011 was 69,384,591.
FORM 10-Q PDF as a courtesy - 2 -
Part I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
8X8, Inc.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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8X8, Inc.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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8X8, Inc. 1. DESCRIPTION OF THE BUSINESS THE COMPANY 8x8, Inc. ("8x8" or the "Company") develops and markets telecommunications services for Internet protocol, or IP, telephony and
video applications as well as web-based conferencing, unified communications services, managed hosting and cloud-based computing
services. As of September 30, 2011, the Company had more than 26,700 business customers. The Company was incorporated in California in February 1987 and was reincorporated in Delaware in December 1996. The Company's
fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in these notes to the consolidated financial statements
refers to the fiscal year ending March 31 of the calendar year indicated (for example, fiscal 2012 refers to the fiscal year ending March 31,
2012). 2. BASIS OF PRESENTATION The accompanying interim condensed consolidated financial statements are unaudited and have been prepared on substantially the
same basis as our annual financial statements for the fiscal year ended March 31, 2011. In the opinion of the Company's management, these
financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of our
financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the
reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. The March 31, 2011 year-end condensed consolidated balance sheet data in this document were derived from audited consolidated
financial statements and do not include all of the disclosures required by U.S. generally accepted accounting principles. These financial
statements should be read in conjunction with the Company's audited consolidated financial statements as of and for the fiscal year ended
March 31, 2011 and notes thereto included in the Company's fiscal 2011 Annual Report on Form 10-K. The results of operations and cash flows for the interim periods included in these financial statements are not necessarily indicative of the
results to be expected for any future period or the entire fiscal year. Service Revenue The Company recognizes new subscriber revenue in the month in which the new order is shipped, net of an allowance for expected
cancellations. The allowance for expected cancellations is based on the Company's history of subscriber cancellations within the 30-day trial
period offered with new services. Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605-25 requires that revenue arrangements
with multiple deliverables be divided into separate units of accounting if the deliverables in the arrangement meet specific criteria. In addition,
arrangement consideration must be allocated among the separate units of accounting based on their relative fair values, with certain
limitations. The provisioning of the 8x8 service with the accompanying IP phone equipment constitutes a revenue arrangement with multiple
deliverables. In accordance with the guidance of ASC 605-25, the Company allocates revenue from new subscriptions, including activation
fees, between the IP phone equipment and subscriber services. Revenue allocated to the IP phone equipment is recognized as product
revenue during the period of the sale less the allowance for estimated returns during the 30-day trial period. All other revenue is recognized
when the related services are provided. 6
Product revenue The Company recognizes revenue from product sales for which there are no related services to be rendered upon shipment to
partners and end users provided that persuasive evidence of an arrangement exists, the price is fixed, title has transferred, collection of
resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant
obligations. Gross outbound shipping and handling charges are recorded as revenue, and the related costs are included in cost of goods
sold. Reserves for returns and allowances for partner and end user sales are recorded at the time of shipment. In accordance with the ASC
985-605, the Company records shipments to distributors, retailers, and resellers, where the right of return exists, as deferred revenue. The
Company defers recognition of revenue on sales to distributors, retailers, and resellers until products are resold to the end user. Deferred Cost of Goods Sold Deferred cost of goods sold represents the cost of products sold for which the customer has a right of return. The cost of the products
sold is recognized contemporaneously with the recognition of revenue. Goodwill and Other Intangible Assets Goodwill and intangible assets with indefinite useful lives are not amortized. Intangible assets with finite useful lives are amortized on
a straight-line basis over the periods benefited. The Company reviews the recoverability of its long-lived assets, such as plant and equipment,
when events or changes in circumstances occur that indicate that the carrying value of the asset or asset group may not be recoverable. The
assessment of possible impairment is based on the Company's ability to recover the carrying value of the asset or asset group from the
expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the
carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The
measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets. Amortization expense for the customer relationship intangible asset is included in selling, general and administrative expenses.
Amortization expense for technology is included in cost of service revenue. The carrying values of intangible assets as of September 30,
2011 and 2010 were as follows (in thousands): 7
Annual amortization of intangible assets, based upon our existing intangible assets and current useful lives, is estimated to be the
following as of September 30, 2011 (in thousands): Warrant Liability The Company previously had two outstanding warrants that were classified as liabilities, which expired on December 19, 2010. 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. Accounting for Stock-Based Compensation The Company accounts for stock-based compensation under ASC 718 - Stock Compensation which establishes standards for
the accounting for equity instruments exchanged for employee services. Under the provisions of ASC 718, share-based compensation cost is
measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense over the employee's requisite
service period (generally the vesting period of the equity grant), net of estimated forfeitures. Stock-based compensation expense recognized in the Company's condensed consolidated statements of income for the three and six
months ended September 30, 2011 included the unvested portion of stock-based awards granted. Stock-based awards were measured
based on ASC 718 criteria and the compensation expense for all share-based payment awards granted is recognized using the straight-line
single-option method. Stock-based compensation expense includes the impact of estimated forfeitures. ASC 718 requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based Compensation Plans The Company has several stock-based compensation plans that are described in Note 5 "Stockholders' Equity" of the Notes to
Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2011. The
Company, under its various equity plans, grants stock-based awards for shares of common stock to employees, non-employee directors and
consultants. As of September 30, 2011, the 1992 Stock Plan, 1996 Stock Plan and 1996 Director Option Plan had expired and the 1999 Nonstatutory
Stock Option Plan had been cancelled by the Board, but there were unexercised options granted under these plans. Options granted under
these plans generally vested over four years, were granted at fair market value on the date of the grant and expire ten years from that
date. 8
The Company has reserved a total of 7,000,000 shares of common stock for issuance under its 2006 Stock Plan (the "2006 Plan"). The
2006 Plan is the Company's only active plan for providing stock-based incentive compensation ("awards") to its eligible employees, non-employee
directors or consultants. Awards that may be granted under the 2006 Plan include incentive stock options, nonstatutory stock
options and stock purchase rights. The exercise price of incentive stock options granted and purchase price of stock purchase rights may not
be less than the fair market value on the effective date of the grant. Other types of options and awards under the 2006 Plan may be granted
at any price approved by the administrator, which generally will be the board of directors. Options and stock purchase rights generally vest
over four years and expire ten years after grant. The 2006 Plan expires in May 2016. In the second fiscal quarter of 2012, the Company assumed the Amended and Restated Contactual, Inc. 2003 Stock Option Plan (the
"2003 Contactual Plan") and registered an aggregate of 171,974 shares of the Company's common stock that may be issued
upon the exercise of stock options previously granted under the 2003 Contactual Plan. No new grants can be granted under 2003 Contactual
Plan. Option and Stock Purchase Right Activity Stock purchase right activity since March 31, 2011 is summarized as follows: Option activity since March 31, 2011 is summarized as follows: (1) The reduction to shares available for grant includes awards granted of 401,568. 9
The following table summarizes the stock options outstanding and exercisable at September 30, 2011: Stock-based Compensation Expense As of September 30, 2011, there was $3.2 million of unamortized stock-based compensation expense related to unvested stock awards
which is expected to be recognized over a weighted average period of 3.38 years. To value option grants and other awards for actual and pro forma stock-based compensation, the Company has used the Black-Scholes
option valuation model. When the measurement date is certain, the fair value of each option grant is estimated on the date of grant. Fair
value determined using Black-Scholes varies based on assumptions used for the expected stock price volatility, expected life, risk-free
interest rates and future dividend payments. During the three and six month periods ended September 30, 2011 and 2010, the Company
used historical volatility of the common stock over a period equal to the expected life of the options to estimate their fair value. The expected
life assumption represents the weighted-average period stock-based awards are expected to remain outstanding. These expected life
assumptions are established through the review of historical exercise behavior of stock-based award grants with similar vesting periods. The
risk-free interest rate is based on the closing market bid yields on actively traded U.S. treasury securities in the over-the-counter market for
the expected term equal to the expected term of the option. The dividend yield assumption is based on the Company's history and
expectation of future dividend payouts. The following table summarizes the weighted average assumptions used to compute reported stock-based
compensation to employees and directors for the three and six months ended September 30, 2011 and 2010: In accordance with ASC 718, the Company recorded $214,000 and $37,000 in compensation expense relative to stock-based awards for
the three months ended September 30, 2011 and 2010 and $400,000 and $56,000 for the six months ended September
30, 2011 and 2010, respectively. Employee Stock Purchase Plan Under the Company's Employee Stock Purchase Plan, eligible employees can participate and purchase common stock semi-annually
through payroll deductions at a price equal to 85% of the fair market value of the common stock at the beginning of each one year
offering period or the end of the applicable six month purchase period within that offering period, whichever is lower. The contribution amount
may not exceed 10% of an employee's base
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compensation, including commissions but not including bonuses and overtime. The Company
accounts for the Employee Stock Purchase Plan as a compensatory plan and recorded compensation expense of $115,000 and $19,000 for
the three months ended September 30, 2011 and 2010 and $195,000 and $73,000 for the six months ended September 30, 2011 and 2010,
respectively, in accordance with ASC 718. The estimated fair value of stock purchase rights granted under the Employee Stock Purchase Plan was estimated at the date of grant
using the Black-Scholes pricing model with the following weighted-average assumptions: As of September 30, 2011, there was $225,000 of total unrecognized compensation cost related to employee stock purchases. These
costs are expected to be recognized over a weighted average period of 0.6 years. ASC 718 requires the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow,
rather than as an operating cash flow. The future realization of tax benefits related to stock compensation is dependent upon the timing of
employee exercises and future taxable income, among other factors. The Company did not realize any tax benefit from the stock
compensation charge incurred during the three and six months ended September 30, 2011 and 2010 as the Company believes that it is more
likely than not that it will not realize the benefit from tax deductions related to such equity compensation. The following table summarizes the distribution of stock-based compensation expense related to employee stock options and employee
stock purchases under ASC 718 among the Company's operating functions for the three and six months ended September 30, 2011 and
2010 which was recorded as follows (in thousands): Recent Accounting Pronouncements In December 2010, FASB issued ASU 2010-29, "Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma
Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force)." ASU 2010-29 provides amendments to
subtopic 805-10 of the FASB ASC, that requires a public entity to disclose pro forma information for business combinations that occurred in
the current reporting period. ASU 2010-29 is effective
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prospectively for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. The adoption of ASU
2010-29 did not have a material impact on the Company's consolidated results of operation and financial condition. In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRSs")." Under ASU 2011-04,
the guidance amends certain accounting and disclosure requirements related to fair value measurements to ensure that fair value has the
same meaning in U.S. GAAP and in IFRSs and that their respective fair value measurement and disclosure requirements are the same. ASU
2011-03 is effective for public entities during interim and annual periods beginning after December 15, 2011. Early adoption by public entities
is not permitted. The Company does not believe that the adoption of ASU 2011-04 will have a material impact on the Company's consolidated
results of operation and financial condition. In June 2011, the FASB issued ASU No. 2011-05, "Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income,"
("ASU 2011-05") which amends current comprehensive income guidance. This accounting update eliminates the option to present the
components of other comprehensive income as part of the statement of shareholders' equity. Instead, we must report comprehensive income
in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income,
or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies during the interim and annual periods
beginning after Dec. 15, 2011 with early adoption permitted. The Company does not believe that the adoption of ASU 2011-05 will have a
material impact on the Company's consolidated results of operation and financial condition. In September 2011, the FASB issued ASU No. 2011-08, "Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for
Impairment," ("ASU 2011-08") which simplifies how entities test goodwill for impairment. This accounting update permits an entity to first
assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount
as a basis for determining whether it is necessary to perform the two-step good will impairment test described in Topic 350. The
more-likely-than-not threshold is defined as having a likelyhood of more than 50 percent. ASU 2011-08 will be effective for annual and interim goodwill
impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. We do not
believe that the adoption of ASU 2011-08 will have a material impact on the Company's consolidated results of operation and financial
condition. 3. FAIR VALUE MEASUREMENT Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or
permitted to be recorded at fair value, the Company considers the principal market or the most advantageous market in which it would
transact. The accounting guidance for fair value measurement requires the Company to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. Observable inputs are inputs that reflect the assumptions market participants would
use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company's assumptions about the factors that market participants would use in valuing the
asset or liability developed based on the best information available in the circumstances. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to
measure fair value by requiring that the most observable inputs be used when available. A financial instrument's categorization within the fair
value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as
follows: 12
The following table presents the Company's fair value hierarchy for assets and liabilities measured at fair value on a recurring basis at
September 30, 2011 (in thousands): (1) The fair value of mutual funds is determined based on published net asset values. The Company uses such pricing data as the
primary input to make its assessments and determinations as to the ultimate valuation of its investment portfolio. 4. BALANCE SHEET DETAIL 13
5. NET INCOME PER SHARE Basic net income per share is computed by dividing net income available to common stockholders (numerator) by the weighted
average number of vested, unrestricted common shares outstanding during the period (denominator). Diluted net income per share is
computed on the basis of the weighted average number of shares of common stock outstanding plus the effect of dilutive potential common
shares outstanding during the period using the treasury stock method. Dilutive potential common shares include shares issuable upon
exercise of outstanding stock options and warrants and under the employee stock purchase plan. The following shares attributable to outstanding stock options and warrants were excluded from the calculation of diluted
earnings per share because their inclusion would have been anti-dilutive (in thousands): 14
6. COMPREHENSIVE INCOME Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. The
difference between the Company's net income and comprehensive income is due primarily to an unrealized loss on investments classified as
available-for-sale. Comprehensive income for the three and six months ended September 30, 2011 and 2010 were as follows (in
thousands): 7. SEGMENT REPORTING ASC 280 - Segment Reporting establishes annual and interim reporting standards for an enterprise's business segments and
related disclosures about its products, services, geographic areas and major customers. The method for determining what information to
report is based upon the way management organizes the operating segments within the Company for making operating decisions and
assessing financial performance. The Company has determined that it has only one reportable segment. Revenue for this segment is
presented by groupings of similar products and services (in thousands) in the following table: No customer represented greater than 10% of the Company's total revenue for the three and six months ended September 30,
2011 or 2010. Revenue from customers outside the United States was not material for either the three or six months ended September 30,
2011 or 2010. 8. INCOME TAXES Income taxes are accounted for using the asset and liability approach. Under the asset and liability approach, a current tax liability or
asset is recognized for the estimated taxes payable or refundable on tax returns for the current year. A deferred tax liability or asset is
recognized for the estimated future tax effects attributed to temporary differences and carryforwards. If necessary, the deferred tax assets are
reduced by a valuation allowance that takes into account the amount of benefits that the Company determines, based on available evidence,
is more likely than not to be realized. Other than accruals for state gross receipt and franchise taxes and the foreign subsidiary taxes, the
Company made no provision for income taxes in any periods presented in the accompanying condensed consolidated financial statements
because of net losses incurred, or because it expects to utilize net operating loss carryforwards for which there is a valuation allowance. The Company accounts for the uncertainty in income taxes under the provisions of ASC 740 - Income Taxes which clarifies the
accounting and disclosure for uncertainty in income taxes recognized in an enterprise's financial statements. This interpretation requires that
the Company recognize in its financial statements the impact of a tax position if that position is more likely than not to be sustained on audit,
based on the technical merits of the position.
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The Company believes that any income tax filing positions and deductions not sustained on
audit will not result in a material change to its financial position or results of operations. At March 31, 2011, the total amount of unrecognized tax benefits that, if recognized, would have affected the effective tax rate was $1.7
million, but any such effect would have been fully offset by the application of the valuation allowance. The Company does not believe that
there has been any change in the unrecognized tax benefits in the three and six month periods ended September 30, 2011 and does not
believe it is reasonably possible that the unrecognized tax benefit will materially change in the next 12 months. To the extent that the
unrecognized tax benefits are ultimately recognized they may have an impact on the effective tax rate in future periods; however, such impact
on the effective tax rate would only occur if the recognition of such unrecognized tax benefits occurs in a future period when the Company
has already determined it is more likely than not that its deferred tax assets are realizable. The Company is subject to taxation in the U.S., California and various other states and foreign jurisdictions in which it has or had a
subsidiary or branch operations or it is collecting sales tax. All tax returns from fiscal 1995 to fiscal 2011 may be subject to examination by the
Internal Revenue Service, California and various other states. The Company extended the filing date of the 2011 federal tax return and all
state income tax returns. As of October 26, 2011, there were no active federal or state income tax audits. Returns filed in foreign jurisdictions
may be subject to examination for the fiscal years 2007 to 2011. The Company's policy for recording interest and penalties associated with audits is to record such items as a component of operating
expense income before taxes. During the three and six months ended September 30, 2011 and 2010, the Company did not recognize any
interest or penalties related to unrecognized tax benefits. 9. COMMITMENTS AND CONTINGENCIES Guarantees Indemnifications In the normal course of business, the Company or its subsidiaries have agreed or otherwise obligated to indemnify other parties,
including customers, lessors and parties to other transactions with the Company, with respect to certain matters. Under these arrangements,
the Company typically agrees to hold the other party harmless against losses arising from a breach of representations or covenants,
intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an
indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with
its officers and directors. It is not possible to determine the maximum potential amount of the Company's exposure under these indemnification agreements due to
the limited history of indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically,
payments made by the Company under these agreements have not had a material impact on the Company's operating results, financial
position or cash flows. Under some of these agreements, however, the Company's potential indemnification liability might not have a
contractual limit. 16
Product Warranties The Company accrues for the estimated costs that may be incurred under its product warranties upon revenue recognition. Changes
in the Company's product warranty liability, which is included in cost of product revenue in the condensed consolidated statements of income,
during the three and six months ended September 30, 2011 and 2010 were as follows (in thousands): Leases In May 2009, the Company entered into a three-year lease for its primary facility in Sunnyvale, California that expires in fiscal 2013.
The Company has the option to accelerate the termination date of the lease to the 12th, 18th,
24th, or 30th full calendar month of the lease term by providing six months advance notice. In the event the
Company exercises this early termination option, the Company will be required to pay a fee to the landlord equal to the unamortized portion
of any leasing commission and the unamortized portion of the initial alteration expenses incurred by the landlord as summarized in a current
report on Form 8-K filed by the Company with the SEC on May 7, 2009. In September 2011, the Company assumed a lease for Contactual's headquarters facility in Redwood City, California that expires in fiscal
2013. At September 30, 2011, future minimum annual lease payments under current operating leases were as follows (in thousands): In each of March 2007 and August 2009, the Company entered into a series of noncancelable capital lease agreements for
office equipment bearing interest at various rates and in September 2011, the Company assumed noncancelable capital lease agreements
for equipment and software bearing interest at various rates with the acquisition of Contactual. At September 30, 2011, future minimum
annual lease payments under noncancelable capital leases were as follows (in thousands): 17
Capital leases included in computer equipment, office equipment and software were $525,000 at September 30, 2011. Total
accumulated depreciation was $280,000 at September 30, 2011. Amortization expense for assets recorded under capital leases is included in
depreciation expense. Minimum Third Party Customer Support Commitments In the third quarter of fiscal 2010, the Company amended a contract with one of its third party customer support vendors containing a
minimum monthly commitment of approximately $430,000. The agreement requires a 150-day notice to terminate. The total remaining
obligation under the amended contract is $2.2 million. Minimum Third Party Network Service Provider Commitments The Company entered into contracts with multiple vendors for third party network services that expire on various dates through fiscal
2015. At September 30, 2011, future minimum annual payments under these third party network service contracts were $593,000 in 2012,
$538,000 in 2013, $70,000 in 2014 and $7,000 in 2015. Legal Proceedings From time to time, the Company may become involved in various legal claims and litigation that arise in the normal course of its
operations. While the results of such claims and litigation cannot be predicted with certainty, the Company is not currently aware of any such
matters that it believes would have a material adverse effect on its financial position, results of operations or cash flows. On March 15, 2011, the Company was named a defendant in a lawsuit, Bear Creek Technologies, Inc. v. 8x8, Inc. et al., along with more
than 20 other defendants. On August 17, 2011, the Company was dismissed without prejudice from this lawsuit under Rule 21 of the Federal
Rules of Civil Procedure. On August 17, 2011, the Company was sued again by Bear Creek Technologies, Inc. in the United States District
Court for the District of Delaware.
The Company believes it has factual and legal defenses to these claims and is presenting a
vigorous defense. The plaintiff has not made a specific monetary demand, and the Company cannot estimate potential liability in this case at
this early stage of litigation. On October 25, 2011, the Company was named a defendant in a lawsuit, Klausner Technologies, Inc. v. Oracle Corporation et al., along
with 30 other defendants. The Company believes it has factual and legal defenses to these claims and is presenting a vigorous defense. The
plaintiff has not made a specific monetary demand and the Company cannot estimate potential liability in this case at this early stage of
litigation. Non-Income Based State and Municipal Taxes From time to time, the Company has received inquiries from a number of state and municipal taxing agencies with respect to the
remittance of non-income based taxes. The Company collects or has accrued for taxes that it believes are required to be remitted. The
amounts that have been remitted have historically been within the accruals established by the Company. 18
10. STOCK REPURCHASES On October 19, 2010, the Company's board of directors authorized the Company to create a new stock
repurchase plan to purchase up to $10.0 million of its common stock from time to time until October 19, 2011. The stock repurchase plan
expired on October 19, 2011. The remaining authorized repurchase amount at September 30, 2011 under the $10.0 million repurchase plan
was $4.1 million. The stock repurchase activity for the six months ended September 30, 2011 is summarized as follows: The total purchase prices of the common stock repurchased and retired were reflected as a reduction to stockholders' equity
during the period of repurchase. 11. ACQUISITIONS Zerigo, Inc. On June 16, 2011, the Company entered into an agreement with Zerigo, Inc. ("Zerigo"), a provider of cloud services pursuant
to which the Company acquired 100% of the outstanding stock of Zerigo from its sole shareholder. Under the terms of the agreement, the
Company paid the selling shareholder $750,000 in cash and issued 207,756 shares of its common stock. In addition, the Company agreed to
pay the selling shareholder an earn-out of up to $500,000 cash upon the achievement of specified software development milestones by
December 31, 2011. The fair value of the consideration transferred consisted of the following (in thousands): The Company recorded the acquired tangible and identifiable intangible assets and liabilities assumed based on their estimated fair
values. The excess of the consideration transferred over the aggregate fair values of the assets acquired and liabilities assumed is recorded
as goodwill. The amount of goodwill recognized is primarily attributable to the operating synergies expected to be realized through the
acquisition of Zerigo and the workforce of the acquired business. The fair value assigned to identifiable intangible assets acquired was based
on estimates and assumptions made by management. Intangible assets will be amortized on a straight-line basis. 19
The estimated fair values of the assets acquired and liabilities assumed are as follows (in thousands): Contactual, Inc. On September 15, 2011, the Company entered into an agreement with Contactual, Inc. ("Contactual"), a provider of cloud-based
call center and customer interaction management solutions
pursuant to which the Company acquired 100% of the outstanding
shares of capital stock of Contactual from its shareholders. Under the terms of the agreement, the Company issued 6,700,000 shares of
common stock. The share amount was reduced at closing by 215,100 shares of common stock in exchange for 8x8's agreement to pay
statutory tax withholding on behalf of five former executives of Contactual. The preliminary estimated fair
value of the consideration transferred consisted of the following (in thousands): The Company recorded the acquisition of tangible and identifiable intangible assets and liabilities assumed based on their estimated fair
values. The excess of the consideration transferred over the aggregate fair values of the assets acquired and liabilities assumed is recorded
as goodwill. The amount of goodwill recognized is primarily attributable to the operating synergies expected to be realized through the
acquisition of Contactual and the workforce of the acquired business. The fair value assigned to identifiable intangible assets acquired was
based on estimates and assumptions made by management. Intangible assets will be amortized on a straight-line basis. 20
The preliminary estimated fair values of the assets acquired and liabilities assumed are as follows: The above estimated fair values of consideration transferred and assets acquired and liabilities assumed are provisional and are based
on the information that was available as of the acquisition date. Measurement period adjustments reflect new information obtained about facts
and circumstances that existed as of the acquisition date. The Company
believes that information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the
Company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set
forth above are subject to change. Such changes could be significant. The Company expects to finalize the valuation as soon as practicable
but no later than one-year from the acquisition date. Unaudited Pro Forma Financial Information The unaudited pro forma financial information in the table below summarizes the combined results of
operations for the Company and Contactual as if the merger occurred at the beginning of each of the reporting periods presented. The pro
forma financial information for all periods presented also includes the business combination accounting effects resulting from this acquisition
including the acquisition costs of $0.5 million and amortization charges from acquired intangible assets. The pro forma financial information as presented
below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had
taken place at the beginning of each reporting period presented. The unaudited pro forma financial information for the three and six months ended September 30, 2011
combined the historical results of the Company for the three and six months ended September 30, 2011, the historical results of Contactual
for the three and six months ended June 30, 2011, and the effects of the pro forma adjustments described above. The unaudited pro forma financial information for the three and six months ended September 30, 2010
combined the historical results of the Company for the three and six months ended September 30, 2010, the historical results of
Contactual for the three and six months ended June 30, 2010 and the effects of the pro forma adjustments described
above. 21
There is no impact to the Company's tax provision for the three and six months ended September 30, 2011 and 2010
from the pro forma adjustments since the Contactual had tax losses and the Company had a 100% valuation allowance on deferred tax
assets in those periods. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This Management Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements. For example, words such as "may," "will," "should,"
"estimates," "predicts," "potential," "continue," "strategy," "believes," "anticipates," "plans," "expects," "intends," and similar expressions are
intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Actual results and
trends may differ materially from historical results or those projected in any such forward-looking statements depending on a variety of
factors. These factors include, but are not limited to, customer acceptance and demand for our voice over Internet protocol, or VoIP,
telephony products and services, the reliability of our services, the prices for our services, customer renewal rates, customer acquisition
costs, actions by our competitors, including price reductions for their telephone services, potential federal and state regulatory actions,
compliance costs, potential warranty claims and product defects, our needs for and the availability of adequate working capital, our ability to
innovate technologically, the timely supply of products by our contract manufacturers, potential future intellectual property infringement claims
that could adversely affect our business and operating results, and our ability to retain our listing on the NASDAQ Capital Market. All
forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update
any such forward-looking statements. In addition to those factors discussed elsewhere in this Form 10-Q, see the Risk Factors discussion in
Item 1A of our 2011 Form 10-K and Part II, Item 1A of this Form 10-Q. The forward-looking statements included in this Form 10-Q are made
only as of the date of this report, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or
circumstances. BUSINESS OVERVIEW We develop and market telecommunications services for Internet protocol, or IP, telephony and video applications as well as
web-based conferencing, unified communications services, managed hosting, and cloud-based computing services. As of September 30,
2011, we had more than 26,700 business customers. Since fiscal 2004, substantially all of our revenue has been generated from the sale,
license and provision of VoIP products, services and technology. Prior to fiscal 2003, our focus was on our VoIP semiconductor
business. Our fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in this report refers to the fiscal year ending
March 31 of the calendar year indicated (for example, fiscal 2012 refers to the fiscal year ending March 31, 2012). 22
CRITICAL ACCOUNTING POLICIES & ESTIMATES The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of
these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates.
We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and
estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011. As of September 30, 2011, there had
been no material changes to our critical accounting policies and estimates. RECENT ACCOUNTING PRONOUNCEMENTS See Item 1 of Part I, "Financial Statements - Note 2 - Basis of Presentation - Recent Accounting Pronouncements." SELECTED OPERATING STATISTICS We periodically review certain key business metrics, within the context of our articulated performance goals, in
order to evaluate the effectiveness of our operational strategies, allocate resources and maximize the financial performance of our business.
The selected operating statistics include the following: (1) Includes 49 and 250 customers acquired directly from our
acquisitions in the first quarter of fiscal 2011 and second quarter of fiscal 2012 from Central Host, Inc. ("Central Host") and Contactual, Inc.
("Contactual"), respectively, and does not include customers of Virtual Office Solo or Zerigo, Inc.
("Zerigo"). (2) Business customer churn is calculated by dividing the number of
business customers that terminated (after the expiration of the 30-day trial) during that period by the simple average number of business
customers during the period and dividing the result by the number of months in the period. The simple average number of business
customers during the period is the number of business customers on the first day of the period plus the number of business customers on the
last day of the period divided by two. (3) Business customers are defined as customers paying for service.
Customers that are currently in the 30- day trial period are considered to be customers that are paying for service. Customers subscribing to
Virtual Office Solo or Zerigo services are not included as business customers. (4) Business customer average monthly service revenue per customer
is service revenue from business customers in the period divided by the number of months in the period divided by the simple average
number of business customers during the period. 23
(5) Business subscriber acquisition cost per service is defined as the
combined costs of advertising, marketing, promotions, sales commissions and equipment subsidies for business services sold during the
period divided by the number of gross business services added during the period. (6) Business customer subscriber acquisition cost is business
subscriber acquisition cost per service times the average number of services subscribed to per business customer. RESULTS OF OPERATIONS The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes
thereto. Service revenue consists primarily of revenue attributable to the provision of our service and royalties earned under our
VoIP technology licenses. We expect that service revenue will continue to comprise nearly all of our revenue for the foreseeable future.
Service revenue increased in the second quarter of fiscal 2012 primarily due to the increase in our business customer subscriber base, which
grew from approximately 22,200 business customers on September 30, 2010, to 26,727 on September 30, 2011 and the acquisition of
Contactual in September 2011. The increase for the first six months of fiscal 2012 was primarily
attributable to the increase in our business customer base from approximately 24,000 businesses on April 1, 2011 to 26,727 on September
30, 2011 and the acquisition of Contactual in September 2011. Product revenue consists primarily of revenue from sales of IP telephones attributable to our service. Product revenue increased
for the three and six months ended September 30, 2011 primarily because of an increase in equipment sales to business customers. No
customer represented greater than 10% of our total revenue for the three and six months ended September 30, 2011 and 2010. Revenue
from customers outside the United States was not material for the three and six months ended September 30, 2011 or 2010. 24
The cost of service revenue primarily consists of costs associated with network operations and related personnel, telephony origination
and termination services provided by third party carriers and technology license and royalty expenses. Cost of service revenue for the three
months ended September 30, 2011 increased over the comparable period in the prior fiscal year primarily due to a $0.2 million increase in
payroll and related costs, a $0.1 million increase in consulting and outside service expenses, a $0.1 million increase in license and fee
expenses, and a $0.1 million increase in depreciation expense. Cost of service revenue for the six months ended September 30, 2011 increased from the comparable period in the prior fiscal year
primarily due to a $0.4 million increase in payroll and related costs, a $0.2 million increase in depreciation expense, a $0.1 million increase in
third party network service fees, a $0.1 million increase in consulting and outside service expenses and a $0.1 million increase in expensed
computer equipment and furniture and fixtures. The cost of product revenue consists of costs associated with systems, components, system manufacturing, assembly and testing
performed by third-party vendors, estimated warranty obligations and direct and indirect costs associated with product purchasing,
scheduling, quality assurance, shipping and handling. We allocate a portion of service revenue to product revenue but this revenue is less
than the cost of the IP phone equipment. The cost of product revenue for the three months ended September 30, 2011 increased over the
comparable period in the prior fiscal year primarily due to an increase in the shipment of equipment to customers. The cost of product revenue for the six months ended September 30, 2011 increased over the comparable period in the prior fiscal year
due to an increase in the shipment of equipment to customers. The increase in cost of product revenue was partially offset by a $0.1 million
decrease in payroll and related costs. Historically, our research and development expenses have consisted primarily of personnel, system prototype
design, and equipment costs necessary for us to conduct our engineering and development efforts. We expense research and development
costs, including software development costs, as they are incurred. The research and development expenses for the three months ended
September 30, 2011 increased over the comparable period in the prior fiscal year primarily due to a $0.2 million increase in payroll and
related costs and a $0.1 million increase consulting and outside service expenses. The research and development expenses for the six months ended September 30, 2011 increased over the comparable period in the
prior fiscal year due to a $0.2 million increase in payroll and related costs and a $0.2 million increase in consulting and outside service
expenses. 25
Selling, general and administrative expenses consist primarily of personnel and related overhead costs for
sales, marketing, customer support, finance, human resources and general management. Such costs also include outsourced customer
service call center operations, sales commissions, as well as trade show, advertising and other marketing and promotional expenses. Selling,
general and administrative expenses for the three months ended September 2011 increased over the comparable period in the prior fiscal
year primarily because of a $0.9 million increase in payroll and related costs, a $0.5 million increase in advertising expenses, a $0.4 million
increase in legal fees primarily due to the acquisition of Contactual in September 2011, a $0.2 million increase in sales promotion expenses,
a $0.1 million increase in tradeshow expenses and a $0.1 million increase in other misc. expenses. Selling, general and administrative expenses for the first six months of fiscal 2012 increased over the same period in the prior fiscal year
primarily because of a $1.4 million increase in payroll and related costs, a $0.4 million increase in legal fees primarily due to the acquisition of
Contactual in September 2011, a $0.4 million increase in sales promotion expenses, a $0.1 million increase in tradeshow expenses, a $0.1
million increase in credit card discount fees and a $0.1 million increase in other misc. expenses. The increase in expenses was partially
offset by a $0.1 million reduction in advertising expenses and a $0.1 million reduction in third party rep commissions. In the three and six months ended September 30, 2011 and 2010, other income (expense), net consisted of
interest expense, distribution of capital gains on investments and interest income earned on our cash, cash equivalents and investments.
Other income (expense), net decreased for the three and six months ended September 30, 2011 primarily because of the buyout, including
interest expense, of capital leases acquired with the acquisition of Contactual in September 2011. In connection with the sale of shares of our common stock in fiscal 2005 and 2006, we issued warrants in three
different equity financings. The change in income on change in fair value of the warrant liability for the three and six months ended
September 30, 2011 is due to the partial exercise and expiration of the warrants in the third quarter of fiscal 2011. These warrants expired in
December 2010. 26
The increase in income tax expense for the three months ended September 30, 2011 compared with the same
period in the prior fiscal year was primarily due to an increase in the state gross receipt and franchise taxes in several states compared to the
comparable period in the prior year. The income tax benefit for the six months ended September 30, 2011 was primarily due a $0.3 million release of the valuation allowance
against the deferred tax asset as the Company has deemed it is more likely than not it will be used to offset a deferred tax liability of $0.3
million recorded in connection with the acquisition of Zerigo in June 2011. Liquidity and Capital Resources As of September 30, 2011, we had approximately $19.1 million in cash, cash equivalents and short-term investments. Net cash provided by operating activities for the six months ended September 30, 2011 was approximately $3.2 million, compared with
$4.3 million for the six months ended September 30, 2010. The decrease in cash flow was primarily due to an increase in operating expenses
in the first six months of fiscal 2012, including legal fees incurred for the purchase of Contactual ($0.4 million) and liabilities assumed with
purchase of Contactual in September 2011, including broker fees of $0.7 million and legal fees of $0.2 million, partially offset by a $0.3 million
release of the valuation allowance against the deferred tax asset as the Company has deemed it is more likely than not it will be used to
offset the $0.3 million deferred tax liability recorded in connection with the acquisition of Zerigo. Cash provided by operating activities has
historically been affected by the amount of net income, sales of subscriptions, changes in working capital accounts particularly in deferred
revenue due to timing of annual plan renewals, add-backs of non-cash expense items such as depreciation and amortization, the expense
associated with stock-based awards and the change in fair value of warrant liability. Net cash used in investing activities was $1.9 million during the six months ended September 30, 2011, compared with $2.4 million used
in investing activities for the six months ended September 30, 2010. The decrease in cash used in investing activities during the six months
ended September 30, 2011 is primarily related to a reduction in the acquisition of strategic investments ($0.3 million) and a decrease in
acquisition of business ($0.3 million). The decrease in investing activities was partially offset by an increase in the purchase of additional
equipment ($0.1 million). Our financing activities for the six months ended September 30, 2011 consisted primarily of cash used to repurchase shares of our
common stock ($1.0 million), payment of capital leases, including buyout of capital leases acquired with purchase of Contactual in September
2011 ($0.2 million) which was partially offset by the issuance of shares due to exercise of employee stock options and purchase of shares
under the employee stock purchase plan ($0.7 million). ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency Our financial market risk consists primarily of risks associated with international operations and related foreign currencies. We derive
a portion of our revenue from customers in Europe and Asia. In order to reduce the risk from fluctuation in foreign exchange rates, the vast
majority of our sales are denominated in U.S. dollars. In addition, almost all of our arrangements with our contract manufacturers are
denominated in U.S. dollars. We have not
27
entered into any currency hedging activities. To date, our exposure to exchange rate volatility has
not been significant; however, there can be no assurance that there will not be a material impact in the future. Investments We maintain an investment portfolio of various holdings, types and maturities. These marketable securities and investments are
generally classified as available for sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses
reported as a separate component of accumulated other comprehensive loss. Part of this portfolio includes investments in mutual funds. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Effectiveness of Disclosure Controls and Procedures We maintain disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
("Disclosure Controls") that are designed to ensure that information we are required to disclose in reports filed or submitted under the
Securities and Exchange Act of 1934 is accumulated and communicated to management, including our principal executive and principal
financial officers, as appropriate, to allow timely decisions regarding required disclosure, and that such information is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. As of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision of our Chief Executive Officer and our
Chief Financial Officer, we evaluated the effectiveness of our Disclosure Controls. Based on this evaluation our Chief Executive Officer and
our Chief Financial Officer have concluded that our Disclosure Controls were effective as of September 30, 2011. Limitations on the Effectiveness of Controls Our management, including the Chief Executive Officer and Chief Financial Officer, do not expect that our Disclosure Controls or
internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of
fraud, if any, have been detected. Changes in Internal Control over Financial Reporting. During the second quarter of fiscal 2012, there were no changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II -- OTHER INFORMATION Descriptions of our legal proceedings are contained in Part I, Item 1, Financial Statements - Notes to Condensed Consolidated
Financial Statements - "Note 9". We face many significant risks in our business, some of which are unknown to us and not presently foreseen. These risks could
have a material adverse impact on our business, financial condition and results of operations in the future. We have disclosed a number of
material risks under Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended March 31, 2011, which we filed with the
Securities and Exchange Commission on May 23, 2011 in addition to the following updated risk factor disclosures. 28
The FCC is poised to adopt an order reforming the system of payments between regulated carriers that we partner with to interface
with the public switch telephone network. The rates we pay for the services performed by these carriers may increase as a result of the
FCC's reform order. As a result, we may increase rates for service, making our offerings less competitive with others in the marketplace, or
reduce our profitability. On October 27, 2011, the FCC will hold an open meeting where it will consider a Report and Order and Further Notice of Proposed
Rulemaking to comprehensively reform the intercarrier compensation system. If the FCC adopts this item during its open meeting, the text
and implementing rules may not occur until a later date. It is expected that the item will address the compensation arrangements between
carriers that handle traffic like ours. It is likely that rates we pay carriers to handle our traffic will increase as a result of this Order. In the
event that this does occur we will either raise the retail price of our service offerings or our profit margins will be reduced. Our business depends on continued and unimpeded access to the Internet by us and our users.
Internet access providers and Internet backbone providers may be able to block, degrade or charge for access to certain of our products and
services, which could lead to additional expenses and the loss of users. Our products and services depend on the ability of our users to access the Internet, and certain of our products
require significant bandwidth to work effectively. Currently, this access is provided by companies that have significant and increasing market
power in the broadband and Internet access marketplace, including incumbent telephone companies, cable companies and mobile
communications companies. Some of these providers offer products and services that directly compete with our own offerings, which gives
them a significant competitive advantage. Some of these providers have stated that they may take measures that could degrade, disrupt or
increase the cost of user access to certain of our products by restricting or prohibiting the use of their infrastructure to support or facilitate our
offerings, or by charging increased fees to us or our users to provide our offerings, while others, including some of the largest providers of
broadband Internet access services, have committed to not engaging in such behavior. The FCC recently adopted rules that would prohibit
providers of broadband Internet access services from blocking, degrading or engaging in other discriminatory actions. These rules are
scheduled to become effective on November 20, 2011. On October 6, 2011, appeals of the rules were filed by numerous parties and
consolidated before the U.S. Court of Appeals for the District of Columbia. We cannot predict the outcome of these appeals nor the impact of
these rules on our business at this time. While interference with access to our products and services seems unlikely, broadband Internet
access provider interference has occurred, in very limited circumstances in the U.S., and could result in a loss of existing users and increased
costs, and could impair our ability to attract new users, thereby negatively impacting our revenue and growth. The FCC may require us to deploy an E-911 service that automatically determines the location of our customers. The adoption of
such a requirement could increase our costs that could make our service more expensive, decrease our profit margins, or both. On June 1, 2007, the FCC released a Notice of Proposed Rulemaking in which it tentatively concluded that all interconnected VoIP
service providers that allow customers to use their service in more than one location (nomadic VoIP service providers such as us) must utilize
an automatic location technology that meets the same accuracy standards which apply to providers of commercial mobile radio services
(mobile phone service providers). In September 2010, the FCC released a Notice of Inquiry again requesting comment on what type of
automatic location standards should apply to providers of nomadic VoIP service providers, whether the FCC's rules concerning the delivery of
emergency services should be extended beyond providers of interconnected VoIP services, and whether such emergency service obligations
should apply to mobile VoIP applications used on smartphones, computers and other devices. In July 2011, the FCC released a Second
Further Notice of Proposed Rulemaking, seeking comment on a number of issues including (i) whether to apply the FCC's E-911 rules to
"outbound-only" interconnected VoIP services (i.e., services that support placing calls to the PSTN); (ii) whether to adopt
rules requiring all interconnected VoIP service to automatically provide location information for emergency calls; and (iii) whether to revise the
FCC's definition of interconnected VoIP service to require an "Internet connection" rather than a broadband connection, and to
"define connectivity in terms of the ability to connect calls to the United States E.164 telephone numbers rather than the PSTN."
Also, the FCC released a Notice of Proposed Rulemaking that sought comment on whether any amendment of the definition of
interconnected VoIP service should be limited to E-911 requirements, or should apply other regulatory requirements to these additional
services. In September 2011, the FCC released a Notice of Proposed Rulemaking soliciting comment on what the role the agency could play
in the fostering the development and implementation of newer 911 technologies including, but not limited to, prioritization of 911
29
traffic triggered by an event such as a natural disaster, long-term implementation of IP-based alternatives for delivering different kinds of media to
emergency call takers like video, photographs, and other forms of data, and text-to-911 solutions. The outcome of these proceedings cannot be determined at this time and we may or may not be able to comply with any such
obligations that may be adopted. At present, we currently have no means to automatically identify the physical location of one of our
customers on the Internet. The FCC's VoIP E-911 order has increased our cost of doing business and may adversely affect our ability to
deliver the 8x8 service to new and existing customers in all geographic regions or to nomadic customers who move to a location where
emergency calling services compliant with the FCC's mandates are unavailable. Our compliance with and increased costs due to the FCC's
VoIP E-911 order put us at a competitive disadvantage to those VoIP service providers who are either not subject to the requirements or have
chosen not to comply with the FCC's mandates. We cannot guarantee that emergency calling service consistent with the VoIP E-911 order
will be available to all of our customers, especially those accessing our services from outside of the United States. The FCC's current VoIP E-
911 order or follow-on orders or clarifications or their impact on our customers due to service price increases or other factors could have a
material adverse effect on our business, financial condition or operating results. A recent petition filed by tw telecom inc. with the FCC seeks an Order that its provision of facilities-based interconnected VoIP
services should be classified as "telecommunications services," "telephone exchange services," and/or
"exchange access" under relevant federal law. We cannot predict the outcome of this proceeding nor its impact on our business
at this time. In July 2011, the FCC released a Public Notice concerning a Petition for Declaratory Ruling filed by tw telecom inc. The Petitioner
requests the FCC to clarify that incumbent providers of local telephone service, like AT&T and Verizon, allow for direct IP-to-IP
interconnection with incumbent local exchange carriers for certain IP-based services. Specifically, tw telecom seeks direct IP-to-IP
interconnection from incumbent local telephone companies for the transmission and routing of tw telecom's facilities-based VoIP services and
for voice services that originate and terminate in Time Division Multiplexing format but are converted to IP format for transport (referred to by
the industry as "IP-in-the-middle" voice services). Additionally, tw telecom is asking for the FCC to clarify that its facilities-based
VoIP services are "telecommunications services" as well as "telephone exchange services" and/or "exchange
access," as those terms are defined under the Communications Act of 1934, as amended by the Telecommunications Act of 1996. We
cannot predict the outcome of this proceeding nor its potential impact on our business at this time.
Depending on how the FCC rules on the tw telecom petition, we could be subject to greater regulation at the state level which would
increase our costs of doing business. It is also possible that an adverse ruling by the FCC in this proceeding could change the
intercarrier compensation rate that our carriers pay to handle our traffic which could also increase our costs. Increased costs to us
may require us to raise our prices, making our services less competitive, reduce our profit margins, or both. The FCC may require providers like us to comply with regulations related to how we present bills to customers. The adoption of such
obligations may require us to revise our bills and may increase our costs of providing service which could either result in price increases or
reduce our profitability. In July 2011, the FCC released a Notice of Proposed Rulemaking, requesting comment on proposed rules that are designed to aid
consumers in identifying and preventing the placement of unauthorized charges on their telephone bills, a practice referred to in the industry
as "cramming." Among other things, the FCC seeks comment on whether the proposed rules or similar obligations should apply
to providers of interconnected VoIP services, like us. Additionally, the FCC is seeking comment on whether its "Truth-in-Billing"
rules should apply to interconnected VoIP service providers. We cannot predict the outcome of this proceeding, nor can we predict its
potential impact on our business at this time. These events could increase our expenses, which would have an
adverse effect on our operating results. The FCC may expand disabilities access requirements to additional services we offer. In October, 2010, the "Twenty-First Century Communications and Video Accessibility Act" was signed into law. The
law requires the FCC to initiate a proceeding to determine what services should be required to offer access for people with disabilities and
what those accessibility requirements should entail. In October, 2011, the FCC adopted an order implementing the new accessibility
requirements as well as released a Notice of Proposed Rulemaking
30
concerning certain, additional, discrete issues. We cannot predict
whether we will be subject to additional accessibility requirements or whether any of our service offerings that are not currently subject to
disabilities access requirements will be subject to such obligations.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at
September 30, 2011 and March 31, 2011
Condensed Consolidated Statements of Income for the three
and six months ended September 30, 2011 and 2010
Condensed Consolidated Statements of Cash Flows for the six
months ended September 30, 2011 and 2010
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
Signature
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
September 30,
March 31,
2011
2011
ASSETS
Current assets:
Cash and cash equivalents
$
17,200
$
16,474
Restricted cash
28
-
Short-term investments
1,904
1,927
Accounts receivable, net
1,796
863
Inventory
654
2,105
Deferred cost of goods sold
137
123
Other current assets
1,058
584
Total current assets
22,777
22,076
Property and equipment, net
3,252
2,398
Intangible assets, net
12,336
214
Goodwill
22,642
1,210
Other assets
660
686
Total assets
$
61,667
$
26,584
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
4,719
$
4,551
Accrued compensation
2,611
1,722
Accrued warranty
391
362
Accrued taxes
1,701
1,828
Deferred revenue
1,323
835
Other accrued liabilities
2,372
1,386
Total current liabilities
13,117
10,684
Other liabilities
409
39
Total liabilities
13,526
10,723
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock
62
62
Additional paid-in capital
237,742
208,218
Accumulated other comprehensive loss
(96)
(73)
Accumulated deficit
(189,567)
(192,346)
Total stockholders' equity
48,141
15,861
Total liabilities and stockholders' equity
$
61,667
$
26,584
Three Months Ended
Six Months Ended
September 30,
September 30,
2011
2010
2011
2010
Service revenue
$
18,013
$
16,071
$
35,034
$
31,434
Product revenue
1,806
1,296
3,292
2,767
Total revenue
19,819
17,367
38,326
34,201
Operating expenses:
Cost of service revenue
4,059
3,589
7,874
6,971
Cost of product revenue
2,613
2,031
4,883
4,057
Research and development
1,540
1,271
2,947
2,497
Selling, general and administrative
10,742
8,525
20,151
17,883
Total operating expenses
18,954
15,416
35,855
31,408
Income from operations
865
1,951
2,471
2,793
Other income (expense), net
(11)
12
9
34
Income on change in fair value of warrant liability
-
9
-
167
Income before provision (benefit) for income taxes
854
1,972
2,480
2,994
Provision (benefit) for income taxes
22
3
(299)
7
Net income
$
832
$
1,969
$
2,779
$
2,987
Net income per share:
Basic
$
0.01
$
0.03
$
0.04
$
0.05
Diluted
$
0.01
$
0.03
$
0.04
$
0.05
Weighted average number of shares:
Basic
63,710
63,383
62,989
63,495
Diluted
67,759
64,847
66,833
64,807
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Six Months Ended
September 30,
2011
2010
Cash flows from operating activities:
Net income
$
2,779
$
2,987
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
790
599
Stock compensation
595
129
Change in fair value of warrant liability
-
(167)
Deferred income tax benefit
(336)
-
Other
37
34
Changes in assets and liabilities
Accounts receivable, net
(438)
(268)
Inventory
1,491
634
Other current and noncurrent assets
153
(134)
Deferred cost of goods sold
(14)
(2)
Accounts payable
(1,737)
782
Accrued compensation
(366)
197
Accrued warranty
29
49
Accrued taxes and fees
(127)
268
Deferred revenue
235
203
Other current and noncurrent liabilities
151
(1,017)
Net cash provided by operating activities
3,242
4,294
Cash flows from investing activities:
Purchases of property and equipment
(1,211)
(1,080)
Purchase of strategic investment
-
(315)
Acquisition of businesses, net of cash acquired
(713)
(998)
Sale of property and equipment
-
1
Net cash used in investing activities
(1,924)
(2,392)
Cash flows from financing activities:
Capital lease payments
(247)
(18)
Repurchase of common stock
(1,038)
(2,700)
Proceeds from issuance of common stock
-
278
Proceeds from issuance of common stock under employee stock plans
693
357
Net cash used in financing activities
(592)
(2,083)
Net increase in cash and cash equivalents
726
(181)
Cash and cash equivalents at the beginning of the period
16,474
18,056
Cash and cash equivalents at the end of the period
$
17,200
$
17,875
Supplemental cash flow information
Issuance of common stock in connection with acquisitions of businesses
$
29,125
$
600
Acquisition of property and equipment, net in connection with
acquisitions of businesses
372
80
Acquisition of capital lease in connection with acquisitions of businesses
297
-
Transfer of net assets in purchase of strategic investment
-
41
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2011
September 30, 2010
Gross
Gross
Carrying
Accumulated
Net Carrying
Carrying
Accumulated
Net Carrying
Amount
Amortization
Amount
Amount
Amortization
Amount
Technology
$
8,242
$
(20)
$
8,222
$
-
$
-
$
-
Customer relationships
3,305
(148)
3,157
308
(43)
265
Trade names/domains
957
-
957
-
-
-
Total acquired identifiable
intangible assets
$
12,504
$
(168)
$
12,336
$
308
$
(43)
$
265
Amount
Remaining 2012
$
714
2013
1,428
2014
1,334
2015
1,325
2016
1,325
Thereafter
5,253
Total
$
11,379
Weighted
Weighted
Average
Average
Grant-Date
Remaining
Number of
Fair Market
Contractual
Shares
Value
Term (in Years)
Balance at March 31, 2011
886,445
$
1.51
Granted
401,568
3.41
Released
(136,576)
1.24
Forfeited
-
-
Balance at September 30, 2011
1,151,437
$
2.20
2.91
Weighted
Shares
Average
Shares
Subject to
Exercise
Available
Options
Price
for Grant
Outstanding
Per Share
Balance at March 31, 2011
1,553,979
6,969,196
$
1.56
Granted (1)(2)
(567,568)
337,974
3.77
Exercised
-
(252,772)
1.38
Canceled/forfeited
10,000
(10,000)
2.58
Termination of plans
-
-
-
Balance at September 30, 2011
996,411
7,044,398
$
1.65
(2) The increase to shares subject to options outstanding includes 171,974 options assumed under the 2003 Contactual Plan.
Options Outstanding
Options Exercisable
Weighted
Weighted
Weighted
Average
Average
Average
Exercise
Remaining
Aggregate
Exercise
Aggregate
Price
Contractual
Intrinsic
Price
Intrinsic
Shares
Per Share
Life (Years)
Value
Shares
Per Share
Value
$0.01 - $1.15
1,438,641
$
0.87
6.38
$
4,584,830
1,438,641
$
0.87
$
4,584,830
$1.16 - $1.27
1,832,990
$
1.25
4.92
5,149,017
1,832,990
$
1.25
5,149,017
$1.28 - $1.72
1,409,098
$
1.50
3.99
3,605,214
1,409,098
$
1.50
3,605,214
$1.73 - $2.69
1,423,169
$
1.92
4.08
3,048,963
1,239,452
$
1.85
2,741,702
$2.70 - $4.95
940,500
$
3.43
6.62
756,375
399,500
$
3.62
251,355
7,044,398
$
17,144,399
6,319,681
$
16,332,118
Three Months Ended
Six Months Ended
September 30,
September 30,
2011
2010
2011
2010
Expected volatility
76%
-
76%
-
Expected dividend yield
-
-
-
-
Risk-free interest rate
0.31%
-
0.33%
-
Weighted average expected option term
3.00 years
-
3.00 years
-
Weighted average fair value of options granted
$
2.27
$
-
$
2.25
$
-
Three Months Ended
Six Months Ended
September 30,
September 30,
2011
2010
2011
2010
Expected volatility
68%
64%
68%
64%
Expected dividend yield
-
-
-
-
Risk-free interest rate
0.10%
0.24%
0.10%
0.24%
Weighted average expected option term
0.75 years
0.75 years
0.75 years
0.75 years
Weighted average fair value of options granted
$
1.49
$
0.53
$
1.49
$
0.53
Three Months Ended
Six Months Ended
September 30,
September 30,
2011
2010
2011
2010
Cost of service revenues
$
26
$
7
$
46
$
16
Cost of product revenues
-
-
-
-
Research and development
56
15
104
37
Selling, general and administrative
247
34
445
76
Total stock-based compensation expense
related to employee stock options and
employee stock purchases, pre-tax
329
56
595
129
Tax benefit
-
-
-
-
Stock based compensation expense related to
employee stock options and employee stock
purchases, net of tax
$
329
$
56
$
595
$
129
Quoted Prices
in Active
Markets
Other
Significant
for Identical
Observable
Unobservable
Assets
Inputs
Inputs
Balance at
(Level 1)
(Level 2)
(Level 3)
9/30/2011
Cash equivalents:
Money market funds
$
14,362
$
-
$
-
$
14,362
Short-term investments:
Mutual funds (1)
-
1,904
-
1,904
Total
$
14,362
$
1,904
$
-
$
16,266
September 30,
March 31,
2011
2011
Inventory (in thousands):
Work-in-process
$
142
$
1,510
Finished goods
512
595
$
654
$
2,105
Three Months Ended
Six Months Ended
September 30,
September 30,
2011
2010
2011
2010
(in thousands, except per share amounts)
Numerator:
Net income available to common stockholders
$
832
$
1,969
$
2,779
$
2,987
Denominator:
Common shares
63,710
63,383
62,989
63,495
Denominator for basic calculation
63,710
63,383
62,989
63,495
Employee stock options
3,622
1,331
3,443
1,184
Stock purchase rights
427
133
401
128
Employee stock purchase plan
-
-
-
-
Warrants
-
-
-
-
Denominator for diluted calculation
67,759
64,847
66,833
64,807
Net income per share
Basic
$
0.01
$
0.03
$
0.04
$
0.05
Diluted
$
0.01
$
0.03
$
0.04
$
0.05
Three Months Ended
Six Months Ended
September 30,
September 30,
2011
2010
2011
2010
Employee stock options
174
4,258
549
4,797
Warrants
-
1,786
-
1,786
174
6,044
549
6,583
Three Months Ended
Six Months Ended
September 30,
September 30,
2011
2010
2011
2010
Net income, as reported
$
832
$
1,969
$
2,779
$
2,987
Unrealized loss on investments in securities
(38)
-
(23)
-
Comprehensive income
$
794
$
1,969
$
2,756
$
2,987
Three Months Ended
Six Months Ended
September 30,
September 30,
2011
2010
2011
2010
8x8 service, equipment and other
$
19,818
$
17,290
$
38,324
$
34,118
Technology licensing and related software
1
77
2
83
Total revenues
$
19,819
$
17,367
$
38,326
$
34,201
Three Months Ended
Six Months Ended
September 30,
September 30,
2011
2010
2011
2010
Balance at beginning of period
$
378
$
356
$
362
$
331
Accruals for warranties
130
134
268
278
Settlements
(117)
(110)
(239)
(229)
Balance at end of period
$
391
$
380
$
391
$
380
Year ending March 31:
Remaining 2012
$
460
2013
403
Total minimum payments
$
863
Year ending March 31:
Remaining 2012
$
40
2013
48
2014
11
Total minimum payments
99
Less: Amount representing interest
(5)
94
Less: Short-term portion of capital lease obligations
(63)
Long-term portion of capital lease obligations
$
31
Weighted
Average
Shares
Price
Amount
Repurchased
Per Share
Repurchased
Balance at March 31, 2011
3,870,985
$
2.26
$
8,022,690
Repurchase of common stock
301,800
2.95
888,964
Balance at September 30, 2011
4,172,785
$
2.33
$
8,911,654
Cash
$
750
Contingent payments
441
Fair value of shares of stock issued
750
Total purchase price
$
1,941
Estimated
Fair Value
Assets acquired:
Cash
$
35
Property and equipment, net
25
Intangible assets
1,046
Total assets acquired
1,106
Liabilities assumed
Accounts payable
(8)
Deferred income tax liability, non-current
(413)
Total liabilities assumed
(421)
Net identifiable assets acquired
685
Goodwill
1,256
Total purchase price
$
1,941
Cash
$
892
Fair value of shares of stock issued
28,375
Total purchase price
$
29,267
Estimated
Fair Value
Assets acquired:
Cash
$
894
Restricted cash
28
Accounts receivable, net
572
Prepaids and other assets
265
Property and equipment, net
347
Intangible assets
11,150
Total assets acquired
13,256
Liabilities assumed
Accounts payable
(2,059)
Accrued compensation
(1,255)
Deferred revenue
(253)
Other accrued liabilities
(166)
Total current liabilities
(3,733)
Deferred income tax liability, non-current
(301)
Accrued liabilities, non-current
(131)
Total liabilities assumed
(4,165)
Net identifiable assets acquired
9,091
Goodwill
20,176
Total purchase price
$
29,267
Three Months Ended
Six Months Ended
September 30,
September 30,
2011
2010
2011
2010
(In thousands, except per share data)
Pro forma net revenue
$
21,664
$
19,196
$
42,216
$
37,736
Pro forma net income
$
695
$
1,364
$
2,007
$
1,495
Pro forma net income per share (basic)
$
0.01
$
0.02
$
0.03
$
0.02
Pro forma net income per share (diluted)
$
0.01
$
0.02
$
0.03
$
0.02
Selected Operating Statistics
Sept. 30,
June 30,
March 31,
Dec 31,
Sept. 30,
June 30,
March 31,
Dec 31,
2011
2011
2011
2010
2010
2010
2010
2009
Gross business customer additions (1)
3,176
2,897
3,009
2,798
2,450
2,756
2,875
2,785
Gross business customer
cancellations (less cancellations
within 30 days of sign-up)
1,620
1,593
1,645
1,524
1,459
1,592
1,616
1,331
Business customer churn (less
cancellations within 30 days
of sign-up) (2)
2.1%
2.1%
2.3%
2.2%
2.2%
2.5%
2.7%
2.4%
Total business customers (3)
26,727
25,455
24,385
23,251
22,167
21,362
20,428
19,407
Business customer average monthly
service revenue per customer (4)
$ 207
$ 200
$ 204
$ 209
$ 209
$ 208
$ 204
$ 204
Overall service margin
77%
78%
78%
77%
78%
78%
77%
78%
Overall product margin
-45%
-53%
-73%
-65%
-57%
-38%
-43%
-59%
Overall gross margin
66%
67%
67%
68%
68%
68%
68%
68%
Business subscriber acquisition cost
per service (5)
$ 101
$ 89
$ 91
$ 99
$ 108
$ 109
$ 97
$ 102
Average number of services subscribed
to per business customer
9.0
8.4
8.0
7.8
7.7
7.5
7.5
7.3
Business customer subscriber
acquisition cost (6)
$ 906
$ 743
$ 725
$ 768
$ 826
$ 818
$ 723
$ 749
September 30,
Dollar
Percent
Service revenue
2011
2010
Change
Change
(dollar amounts in thousands)
Three months ended
$
18,013
$
16,071
$
1,942
12.1%
Percentage of total revenue
90.9%
92.5%
Six months ended
$
35,034
$
31,434
$
3,600
11.5%
Percentage of total revenue
91.4%
91.9%
September 30,
Dollar
Percent
Product revenue
2011
2010
Change
Change
(dollar amounts in thousands)
Three months ended
$
1,806
$
1,296
$
510
39.4%
Percentage of total revenue
9.1%
7.5%
Six months ended
$
3,292
$
2,767
$
525
19.0%
Percentage of total revenue
8.6%
8.1%
September 30,
Dollar
Percent
Cost of service revenue
2011
2010
Change
Change
(dollar amounts in thousands)
Three months ended
$
4,059
$
3,589
$
470
13.1%
Percentage of service revenue
22.5%
22.3%
Six months ended
$
7,874
$
6,971
$
903
13.0%
Percentage of service revenue
22.5%
22.2%
September 30,
Dollar
Percent
Cost of product revenue
2011
2010
Change
Change
(dollar amounts in thousands)
Three months ended
$
2,613
$
2,031
$
582
28.7%
Percentage of product revenue
144.7%
156.7%
Six months ended
$
4,883
$
4,057
$
826
20.4%
Percentage of product revenue
148.3%
146.6%
September 30,
Dollar
Percent
Research and development
2011
2010
Change
Change
(dollar amounts in thousands)
Three months ended
$
1,540
$
1,271
$
269
21.2%
Percentage of total revenue
7.8%
7.3%
Six months ended
$
2,947
$
2,497
$
450
18.0%
Percentage of total revenue
7.7%
7.3%
September 30,
Dollar
Percent
Selling, general and administrative
2011
2010
Change
Change
(dollar amounts in thousands)
Three months ended
$
10,742
$
8,525
$
2,217
26.0%
Percentage of total revenue
54.2%
49.1%
Six months ended
$
20,151
$
17,883
$
2,268
12.7%
Percentage of total revenue
52.6%
52.3%
September 30,
Dollar
Percent
Other income (expense), net
2011
2010
Change
Change
(dollar amounts in thousands)
Three months ended
$
(11)
$
12
$
(23)
-191.7%
Percentage of total revenue
-0.1%
0.1%
Six months ended
$
9
$
34
$
(25)
-73.5%
Percentage of total revenue
0.0%
0.1%
Income on change in fair value
September 30,
Dollar
Percent
of warrant liability
2011
2010
Change
Change
(dollar amounts in thousands)
Three months ended
$
-
$
9
$
(9)
-100.0%
Percentage of total revenue
0.0%
0.1%
Six months ended
$
-
$
167
$
(167)
-100.0%
Percentage of total revenue
0.0%
0.5%
September 30,
Dollar
Percent
Provision (benefit) for income tax
2011
2010
Change
Change
(dollar amounts in thousands)
Three months ended
$
22
$
3
$
19
633.3%
Percentage of total revenue
0.1%
0.0%
Six months ended
$
(299)
$
7
$
(306)
-4371.4%
Percentage of total revenue
-0.8%
0.0%
Risks Relating to the Merger and 8x8 Common Stock
The integration of 8x8 and Contactual may not be completed successfully, cost-effectively or on a timely basis.
After completing the acquisition of Contactual, we have more assets and employees to manage than we did prior to the acquisition. The integration process will require us to expand the scope of our existing operations and financial systems. Our management will be required to devote time and attention to the process of integrating the operations of Contactual with ours. There is a significant degree of difficulty and management involvement inherent in that process. These difficulties include, among others:
- the diversion of management's attention from the day-to-day operations of the combined company;
- the management of a larger company than before completion of the acquisition;
- the assimilation of Contactual employees and the integration of two business cultures;
- challenges in attracting and retaining key personnel;
- the integration of information, network, accounting, finance, sales, billing, payroll and regulatory compliance systems;
- challenges in keeping existing customers and obtaining new customers; and
- challenges in combining product offerings and sales and marketing activities.
There is no assurance that we will successfully or cost-effectively integrate Contactual's operations with our own. For example, the costs of achieving systems integration may substantially exceed its current estimates. As a non-public company, Contactual has not had to comply with the requirements of the Sarbanes-Oxley Act of 2002 for internal control and other procedures. Bringing its systems into compliance with those requirements may cause us to incur substantial additional expense. In addition, the integration process may cause an interruption of, or loss of momentum in, our business activities after completion of the acquisition. If we are not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer and its results of operations and financial condition may be harmed.
We may not be able to realize the anticipated synergies and other benefits it expects to achieve from the acquisition of Contactual within the timeframe that is currently expected, or at all.
Strategic transactions like our acquisition of Contactual create numerous uncertainties and risks. As a result, the combined company may not be able to realize the expected revenue growth and other benefits and synergies that we seek to achieve from the acquisition. For example, we may not be successful in our goal to sell our services to larger business that have historically been the primary subscribers of the Contactual call center services which could prevent us from achieving the increased revenues it expects from the acquisition of Contactual. Even if we are successful in continuing to sell Contactual products to larger customers, these customers may not subscribe to the Contactual contact center services at the levels anticipated by us based on its past experience.
We believe that the businesses conducted by us and Contactual are complementary in a number of respects and that the combined company can take advantage of synergies, economies of scale and other benefits in the following areas, among others:
- market expansion;
- increased sales to existing customers;
- product and technology synergies;
- operational and manufacturing synergies;
- research and development synergies;
- expansion of intellectual property and patent portfolio;
- geographic synergies; and
- cultural synergies.
31
However, these anticipated benefits and synergies are based on projections and assumptions, not actual experience, and actual results may deviate from our expectations for a variety of reasons, including the following:
- integration of the operations of Contactual with ours may be more difficult, time-consuming or costly than expected and may not be as successful as the parties anticipate;
- revenues of the combined business following the transaction may be lower than expected;
- operating costs, customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers) of the combined business may be greater than expected following the transaction;
- the ability to retain key employees of Contactual subsequent to the completion of the transaction;
- the parties might not be able to meet expectations regarding the timing, completion and effects of the transaction;
- the businesses of Contactual and us are subject to intense competition;
- our failure protect the Contactual intellectual property rights may weaken the competitive position of the combined company; and
- in the future third parties may assert claims, including, without limitation, intellectual property infringement claims, that could materially adversely affect the operating results of the combined company.
As shares of 8x8 common stock issued in the acquisition of Contactual become eligible for resale, the sale of those shares could adversely impact 8x8's stock price.
All of the shares of our common stock issued as merger consideration on or around the closing date will be subject to restrictions under federal securities laws that prohibit any resale of such shares for a period of at least six months from the closing date of September 15, 2011. The total number of shares of our common stock issued on the closing date was approximately 5.5 million shares (exclusive of shares retained in escrow), which represented approximately 9% of the number of shares of our common stock outstanding immediately prior to the completion of the acquisition. Accordingly, a substantial number of shares of our common stock may become eligible for resale six months after the closing date. Our stock price may suffer a significant decline as a result of the sudden increase in the number of shares sold in the public market or market perception that the increased number of shares available for sale will exceed the demand for our common stock.
32
33
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 31, 2011
|
8X8, INC. |
|
(Registrant) |
|
By: /s/ DANIEL WEIRICH |
|
Daniel Weirich |
|
Chief Financial Officer |
34