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, 2010
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)
|
|
|
|
|
|
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
¨ 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):
|
Large accelerated filer ¨ |
Accelerated filer x |
Non-accelerated filer ¨
|
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 20, 2010 was 62,530,250.
FORM 10-Q PDF - 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.
- 3 -
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
- 4 -
8X8, Inc.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
- 5 -
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. The Company was incorporated in California in February 1987 and was reincorporated in Delaware in
December 1996. The Company offers the 8x8 VoIP (Voice over Internet Protocol) voice and video digital phone service,
8x8 Virtual Office hosted PBX (private branch exchange) service, 8x8 Complete Contact Center service, 8x8 Trunking service, 8x8
Hosted Key System service, 8x8 MobileTalk service, 8x8 Virtual Meeting web conferencing service, 8x8 Virtual Office Pro unified
communications solution and 8x8 Managed Hosting and Cloud-Based Computing solutions. Between November 2002 and April 2009,
the Company marketed its services under the Packet8 brand. In May 2009, the Company began marketing its services under the 8x8
brand. As of September 30, 2010, the Company had more than 22,000 business customers. Each business customer subscribes to a
number of various lines and services (e.g. physical phone extensions, virtual extensions, fax lines, toll free numbers, receptionist
software, unified communications services, etc.). The 8x8 voice and video broadband phone service enables broadband Internet users to add digital voice and video
communications services to their high-speed Internet connections. Customers can choose a regular direct-dial phone number from any
of the rate centers offered by the service and then use an existing telephone to make and receive calls over a standard broadband
Internet connection. The 8x8 Virtual Office suite of business phone services offers small and medium-sized businesses feature-rich, HD (high definition)
audio-enhanced communications services that eliminate the need for traditional telecommunications services and business phone
systems. The 8x8 Virtual Office solution essentially replaces an on-premise PBX telephone system with a hosted, Internet-based
business phone service that is delivered over a managed or unmanaged Internet connection. The Company sells pre-programmed IP
telephones with speakerphones and a display screen, in conjunction with our Virtual Office service plans, which enable its business
customers to access additional Virtual Office features through on-screen phone menus. The 8x8 Virtual Office Pro unified
communications solution, introduced in January 2010, bundles the 8x8 Virtual Office hosted PBX phone service with essential
businesses communications services such as web conferencing, call recording and archiving, Internet fax, chat, voicemail and
presence management and a mobile iPhone extension in a competitively priced offering. 8x8 Virtual Office Pro takes the functionality of
an already powerful hosted PBX phone service to a superior feature set with high fidelity HD voice, remote accessibility via any web
browser or smart phone, and integration with vital phone management and collaboration tools. All of the
Company's services are sold on a subscription basis at price points that are disruptive to
legacy solutions because they are implemented in 8x8 software that is running on servers in leased data center space that are
monitored and managed by the Company. The 8x8 Managed Hosting and Cloud-Based Computing solutions enable business customers to reduce costs and gain
performance and reliability advantages by eliminating in-house ownership of server equipment and costly information technology (IT)
systems management staff. Subscribers to these services use 8x8 servers and other hardware that are monitored and managed by the
Company, just like the servers that host 8x8's communications software. 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 2011 refers to the fiscal year ending March 31, 2011). 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, 2010. 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
- 6 -
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, 2010 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, 2010 and notes thereto included in the Company's fiscal 2010 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 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. 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. 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. Warrant Liability The Company accounts for its warrants in accordance with ASC 480-10 which requires warrants to be classified as permanent
equity, temporary equity or as assets or liabilities. In general, warrants that either require net-cash settlement or are presumed to
require net-cash settlement are recorded as assets and liabilities at fair value and warrants that require settlement in shares are
recorded as equity instruments. The Company has two outstanding warrants that are classified as liabilities. Both warrants include a
provision that specifies that the Company must deliver freely tradable shares upon exercise by the warrant holder. Because there are
circumstances, irrespective of likelihood, that may not be within the control of the Company that could prevent delivery of registered
shares, ASC 480-10 requires the warrants be recorded as a liability at fair value, with subsequent changes in fair value recorded as
income (loss) in change in fair value of warrant liability. The fair value of the warrant is determined using a Black-Scholes option pricing
model, and is affected by changes in inputs to that model including our stock price, expected stock price volatility and contractual
term. - 7 -
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, 2010 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 4 "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, 2010.
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, 2010, 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 options granted under these four plans remained outstanding.
Options granted under these plans generally vest over four years, are granted at fair market value on the date of the grant and expire
ten years from that date. The Company has reserved a total of 7,000,000 shares of common stock for issuance under its 2006 Stock Plan (the "2006 Plan")
of which 6,558,172 shares remain available for issuance as of September 30, 2010. 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-based awards, 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. Option and Stock Purchase Right Activity Stock purchase right activity since March 31, 2010 is summarized as follows: - 8 -
Option activity since March 31, 2010 is summarized as follows: The following table summarizes the stock options outstanding and exercisable at September 30, 2010: Stock-based Compensation Expense
As of September 30, 2010, there was $1.0 million of unamortized stock-based compensation expense related to unvested stock
awards which is expected to be recognized over a weighted average period of 3.54 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, 2010 and 2009,
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.
In accordance with ASC 718, the Company recorded $37,000 and $14,000 in compensation expense relative to stock-based awards for
the three months ended September 30, 2010 and 2009 and $56,000 and $18,000 for the six months ended September 30, 2010 and
2009, 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 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 $19,000 and $55,000 for the three months
- 9 -
ended September 30, 2010 and 2009 and $73,000 and $94,000
for the six months ended September 30, 2010 and 2009, 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, 2010, there was $57,000 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 realizability 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, 2010 and 2009 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, 2010 and 2009 which was recorded as follows (in thousands): - 10 -
Recent Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update ("ASU") No. 2009-13, "Multiple-Deliverable Revenue Arrangements-a
consensus of the FASB Emerging Issues Task Force" ("ASU 2009-13"). ASU 2009-13 updates the existing multiple-element revenue
arrangements guidance currently included under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). The revised guidance primarily provides two significant changes: 1)
it eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be
treated as a separate unit of accounting, and 2) it eliminates the residual method to allocate the arrangement consideration. In addition,
the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual
reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively
applied to the beginning of the year of adoption. The adoption of ASU 2009-13 did not have a material impact on the
Company's consolidated results of operation and financial condition. In October 2009, the FASB issued ASU No. 2009-14, "Certain Revenue Arrangements that Include Software Elements-a
consensus of the FASB Emerging Issues Task Force" ("ASU 2009-14"). ASU 2009-14 amends the scope of pre-existing software
revenue guidance by removing from the guidance non-software components of tangible products and certain software components of
tangible products. ASU 2009-14 will be effective for the first annual reporting period beginning on or after June 15, 2010, with early
adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The adoption of
ASU 2009-14 did not have a material impact on the Company In January 2010, FASB issued ASU 2010-6, "Improving Disclosures about Fair Measurements." ASU 2010-6 provides amendments
to subtopic 820-10 of the FASB Accounting Standards Codification, originally issued as FASB Statement No. 157, "Fair Value
Measurements" that require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value
measurements and the presentation of separate information regarding purchases, sales, issuances and settlements for
Level 3 fair value measurements. Additionally, ASU 2010-6 provides amendments to subtopic 820-10 that clarify existing
disclosures about the level of disaggregation and inputs and valuation techniques. ASU 2010-6 is effective for financial statements
issued for interim and annual periods ending after December 15, 2010. The Company will adopt this pronouncement in the
third quarter of fiscal 2011 and does not expect the adoption of ASU 2010-06 to have a material impact on the Company's consolidated
results of operation and financial condition. 3. BALANCE SHEET DETAIL - 11 -
4. 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):
- 12 -
5. 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 revenues for the three and six months ended
September 30, 2010 or 2009. Revenues from customers outside the United States were not material for the three and six months
ended September 30, 2010 or 2009. 6. 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 the 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. 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, 2010, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1.7
million, but any 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 six-month period ended September 30, 2010 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 we have or had
a subsidiary or branch operations or we are collecting sales tax. All tax returns from fiscal 1995 to fiscal 2010 may be subject to
examination by the Internal Revenue Service, California and various other states. The Company extended the filing date of the 2010
federal tax return and all state income tax returns. As of October 20, 2010, these returns had not yet been filed. In addition, as of
September 30, 2010, there were no active federal, state or local income tax audits. Returns filed in foreign jurisdictions may be subject
to examination for the fiscal years 2005 to 2010. - 13 -
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, 2010 and 2009, the Company did not
recognize any interest or penalties related to unrecognized tax benefits. 7. COMMITMENTS AND CONTINGENCIES Guarantees Indemnifications In the normal course of business, the Company indemnifies 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. 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 revenues in the condensed
consolidated statements of income, during the three and six months ended September 30, 2010 were as follows (in thousands): - 14 -
Leases In May 2009, the Company entered into a three-year lease for a new 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. At September 30, 2010, future minimum annual
lease payments under current and new 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. At September 30, 2010, future minimum annual lease payments under noncancelable
capital leases were as follows (in thousands): Capital leases included in office equipment were $156,000 at September 30, 2010. Total accumulated depreciation was $96,000 at
September 30, 2010. 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 rolling 150-day notice to terminate.
The total remaining obligation under the amended contract is $2.2 million. 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 October 8, 2010, the Company was named a defendant in a lawsuit, Ceres Communications Technologies, LLC, v.
8x8, Inc. et al., filed by a patent holder. 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.
The Company disclosed all other legal proceedings under Part I, Item 3 of its annual report on Form 10-K for the fiscal year
ended March 31, 2010, which it filed with the Securities and Exchange Commission on May 27, 2010.
- 15 -
8. STOCK REPURCHASES In July 2009, the Company's board of directors authorized the Company to purchase up to $2.0 million of its common stock
from time to time until July 28, 2010 (the "Repurchase Plan"). On July 27, 2010, the Company's board of directors extended the stock
repurchase period from July 28, 2010 to July 27, 2011, on August 31, 2010, the Company's board of directors authorized an increase in
the Repurchase Plan from $2.0 million to $3.0 million, and on October 19, 2010 the Company's board of directors authorized the
Company to purchase up to $10 million of its common stock from time to time until October 19, 2011. Share repurchases, if any, will be
funded with available cash. Repurchases under the Repurchase Plan may be made through open market purchases at prevailing
market prices or in privately negotiated transactions. The timing, volume and nature of share repurchases are subject to market prices
and conditions, applicable securities laws and other factors, and are at the discretion of the Company's management. Share
repurchases under the Repurchase Plan may be commenced, suspended or discontinued at any time. The remaining authorized
repurchase amount at September 30, 2010 is less than $100. The activity under the Repurchase Plan for the six months ended
September 30, 2010 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. 9. ACQUISITION On May 1, 2010, the Company entered into an agreement with Central Host, Inc. pursuant to which the Company acquired this
provider of managed hosting services from its sole shareholder. Under the terms of the agreement, the Company paid $1,000,000 in
cash and issued 432,276 shares of 8x8 common stock, at an average price of $1.388 per share, to the sole shareholder in exchange
for 100% of the outstanding shares of capital stock of Central Host, Inc. The share price was based on the trailing five-day average
closing price of 8x8 common stock on the NASDAQ Capital Market as of the effective date of the transaction. The shares of the
Company's common stock were not registered for sale and were issued pursuant to an exemption from the registration requirements
under section 5 of the Securities Act of 1933, as amended, provided by section 4(2) thereof. The Company recorded a total acquisition price as follows (in thousands): The Company allocated the purchase price of the acquisition to tangible assets and identifiable intangible assets acquired, based
on their estimated fair values. The excess of purchase price over the aggregate fair values was recorded as goodwill. 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. The allocation of the acquisition price for net tangible and intangible assets was as follows (in thousands): - 16 -
Intangible assets of $1,518,000 consist of goodwill and customer relationship. Total accumulated amortization on customer
relationship intangible asset was $43,000 at September 30, 2010. Amortization expense for the customer relationship intangible asset
is included in selling, general and administrative expenses. 10. STRATEGIC INVESTMENT In April 2010, the Company invested $250,000 cash, transferred its wholly-owned French research and development
subsidiary, 8x8 Europe SARL, and granted a non-exclusive license to certain 8x8 technology, to Stonyfish, a privately-held company in
Los Altos, California in exchange for a 17% interest in Stonyfish following its initial round of external fundraising. The total investment in Stonyfish is as follows (in thousands): The strategic investment is included in other assets on the condensed consolidated balance sheet. - 17 -
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 2010 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. We offer the 8x8 VoIP (Voice over Internet Protocol) voice and video digital phone service, 8x8 Virtual Office hosted PBX
(private branch exchange) service, 8x8 Complete Contact Center service, 8x8 Trunking service, 8x8 Hosted Key System service, 8x8
MobileTalk service, 8x8 Virtual Meeting web conferencing service, the 8x8 Virtual Office Pro unified communications solution and 8x8
Managed Hosting and Cloud-Based Computing solutions. As of September 30, 2010, we had more than 22,000 business customers.
Each business customer subscribes to a number of various lines of service (e.g. physical phone extensions, virtual extensions,
fax lines, toll free numbers, receptionist software, unified communications services, etc.). Since fiscal 2004, substantially all of our
revenues have 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 2011 refers to the fiscal year ending March 31,
2011). 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, revenues 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, 2010. As of September 30, 2010, there had been no material changes to our critical accounting policies
and estimates. - 18 -
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 1,154 "Find me, Follow me" and 40 8x8 Virtual Office customers acquired in the second quarter of fiscal 2009
from Avtex Solutions, LLC ("Avtex") and 49 hosting customers acquired in the first quarter of fiscal 2011 from Central Host, Inc.
("Central Host"). (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. (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. (5) Business subscriber acquisition cost per service is defined as the combined costs of advertising, marketing, promotions,
commissions and equipment subsidies for business services sold during the period divided by the number of gross business services
added during the period. The addition of 1,154 Avtex customers that migrated to 8x8 in the second fiscal quarter of 2009 but subscribed
to "Find me, Follow me" services rather than 8x8 Virtual Office service, and the $79,230 in expense related to the acquisition of these
1,154 customers, is excluded from this calculation. (6) Business customer subscriber acquisition cost is business subscriber acquisition cost per service times the average
number of services subscribed to per business customer. - 19 -
RESULTS OF OPERATIONS The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes
thereto. Service revenues consist primarily of revenues attributable to the provision of our service and royalties earned under our
VoIP technology licenses. We expect that service revenues will continue to comprise nearly all of our revenues for the foreseeable
future. The increase for the second quarter of fiscal 2011 was primarily attributable to the increase in our business customer subscriber
base from approximately 18,200 business customers on September 30, 2009, to approximately 22,200 on September 30, 2010. The
increase for the first six months of fiscal 2011 was primarily attributable to the increase in our business customer base from
approximately 16,000 businesses on April 1, 2009 to approximately 22,200 on September 30, 2010. Product revenues consist primarily of revenues from sales of IP telephones, attributable to our service. Product revenue
for the three and six months ended September 30, 2010 increased primarily because of an increase of equipment sales to business
customers. No customer represented greater than 10% of our total revenues for the three and six months ended September 30, 2010
and 2009. Revenues from customers outside the United States were not material for the three and six months ended September 30,
2010 or 2009. The cost of service revenues 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 revenues for the three months ended September 30, 2010 increased slightly in absolute dollar amounts 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
expensed computer equipment and furniture and fixtures, and a $0.1 million increase in depreciation expense. The increase in
expenses was partially offset by a $0.3 million reduction in pricing by third party network service vendors and our use of multiple third
party network provider vendors, which allows us to route call traffic to the third party network provider with the most favorable
pricing. - 20 -
Cost of service revenues for the six months ended September 30, 2010 decreased slightly from the comparable
period in the prior fiscal year primarily due to $0.6 million reduction in pricing by third party network service vendors and our use of
multiple third party network provider vendors and a $0.1 million reduction in consulting and outside service expenses. The decrease in
expenses was partially offset by a $0.3 million increase in payroll and related costs, a $0.1 million increase in license and fee expenses,
a $0.1 million increase in expensed computer equipment and furniture and fixtures, and a $0.1 million increase in depreciation
expense. The cost of product revenues 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 revenues to product revenues but these
revenues are less than the cost of the IP phone equipment. The cost of product revenues for the three and six months ended
September 30, 2010 increased by $0.3 million and $0.6 million, respectively, over the comparable period in the prior fiscal year
primarily due to an increase in the shipment of equipment to customers. 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. 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 second quarter of fiscal 2011 increased over the same quarter in the prior fiscal year
primarily because of a $0.6 million increase in payroll and related costs and a $0.2 million increase in advertising, public relations and
other marketing and promotional expenses. The increase in expenses was partially offset by a $0.2 million reduction in consulting and
outside service expenses, a $0.1 million reduction in third party rep commission expenses and a $0.1 million reduction in sales
promotion expenses. - 21 -
Selling, general and administrative expenses for the first six months of fiscal 2011 increased over the same period in the prior fiscal
year primarily because of a $0.7 million increase in sales commissions and bonuses, a $0.5 million increase in payroll and fringe benefit
costs, a $0.9 million increase in advertising, public relations and other marketing and promotional expenses and a $0.1 million increase
in legal expenses. The increase in expenses was partially offset by a $0.4 million reduction in consulting and outside service expenses,
$0.2 million reduction in sales agent and retailer commissions, a $0.2 million reduction in sales promotion expenses, a $0.1 million
reduction in printing expenses and a $0.1 million reduction in trade show expenses. In the three and six months ended September 30, 2010, other income, net primarily consisted of interest income earned on our
cash and cash equivalents and other income. The decrease in other income, net for the three and six months ended September 30,
2010 was primarily due to lower average interest rates. 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 income on change in fair value of the warrant liability in the second fiscal quarter of 2011 is due to the expiration of the
warrants in December 2010. The income on change in fair value of the warrant liability for the six months ended September 30, 2010 is
primarily due to the change in current expected stock price, volatility, interest rates and contractual life of warrants which are the
primary assumptions used in the Black-Scholes model which we have used to calculate the fair value of the warrants and due to the
expiration of the warrants in December 2010. The income tax provision for the three and six months ended September 30, 2010 was primarily due to the federal alternative
minimum tax, state gross receipt and franchise taxes in several states compared to the federal alternative
minimum tax, state gross receipt and franchise taxes in several states and estimated foreign subsidiary taxes offset by the federal
research and development credits in lieu of bonus depreciation (Sec. 168(k)(4) election) in the three and six months ended September
30, 2009. - 22 -
Liquidity and Capital Resources As of September 30, 2010, we had approximately $17.9 million in cash and cash equivalents. Net cash provided by operating activities for the six months ended September 30, 2010 was $4.3 million, compared with $0.4
million for the six months ended September 30, 2009. The increase in cash flow was primarily due to an increase in service revenues
and an overall reduction in the discounting of equipment sold in the first six months of fiscal 2011. Cash used in or 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, and the expense associated with stock-based awards. Net cash used in investing activities was $2.4 million during the six months ended September 30, 2010, compared with $0.6 million
used in investing activities for the six months ended September 30, 2009. The increase in cash used in investing activities during the six
months ended September 30, 2010 primarily related to the acquisition of Central Host, Inc. in May 2010 ($1.0 million), the purchase of
additional equipment ($0.4 million), and the strategic investment in Stonyfish in April 2010 ($0.3 million). Our financing activities for the six months ended September 30, 2010 consisted primarily of cash used to
repurchase shares of common stock under our Repurchase Plan ($2.7 million) which was partially offset by the issuance of restricted
stock ($0.3 million). Contractual Obligations In March 2007 and August 2009, we entered into a series of noncancelable capital lease agreements for office equipment
bearing interest at various rates. Assets under capital lease at September 30, 2010 totaled $156,000 with accumulated amortization of
$96,000. On May 1, 2009, we entered into a three-year lease for a new primary facility in Sunnyvale, California that expires in fiscal 2013.
The facility lease includes rent escalation clauses and requires us to pay utilities and normal maintenance costs. Rent expense is
reflected in our consolidated financial statements on a straight-line basis over the term of the leases. In the third quarter of 2010, we amended our contract with one of our third party customer support vendors containing a minimum
monthly commitment of approximately $430,000. The agreement requires a rolling 150-day notice to terminate. At September 30, 2010,
the total remaining obligation under the contract was $2.2 million. At September 30, 2010 we had open purchase orders of $1.6 million, primarily related to inventory purchases from our contract
manufacturers. These purchase commitments are reflected in our consolidated financial statements once goods or services
have been received or at such time when we are obligated to make payments related to these goods or services. 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 revenues 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 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 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 money
market accounts. - 23 -
ITEM 4. CONTROLS AND PROCEDURES Evaluation of Effectiveness of Disclosure Controls and Procedures
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at
September 30, 2010 and March 31, 2010
Condensed Consolidated Statements of Income for the three and six
months ended September 30, 2010 and 2009
Condensed Consolidated Statements of Cash Flows for the six
months ended September 30, 2010 and 2009
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 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits
Signature
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
September 30,
March 31,
2010
2010
ASSETS
Current assets:
Cash and cash equivalents
$
17,875
$
18,056
Accounts receivable, net
804
554
Inventory
1,521
2,174
Deferred cost of goods sold
109
107
Other current assets
768
558
Total current assets
21,077
21,449
Property and equipment, net
2,493
1,871
Intangible assets, net
265
-
Goodwill
1,210
-
Other assets
711
392
Total assets
$
25,756
$
23,712
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
4,746
$
3,780
Accrued compensation
1,641
1,444
Accrued warranty
380
331
Accrued taxes
2,072
1,804
Deferred revenue
1,513
1,310
Other accrued liabilities
444
1,465
Total current liabilities
10,796
10,134
Other liabilities
97
111
Fair value of warrant liability
-
167
Total liabilities
10,893
10,412
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock
62
63
Additional paid-in capital
210,654
212,077
Accumulated deficit
(195,853)
(198,840)
Total stockholders' equity
14,863
13,300
Total liabilities and stockholders' equity
$
25,756
$
23,712
Three Months Ended
Six Months Ended
September 30,
September 30,
2010
2009
2010
2009
Service revenues
$
16,071
$
14,838
$
31,434
$
29,358
Product revenues
1,296
1,189
2,767
2,227
Total revenues
17,367
16,027
34,201
31,585
Operating expenses:
Cost of service revenues
3,589
3,535
6,971
7,036
Cost of product revenues
2,031
1,686
4,057
3,507
Research and development
1,271
1,265
2,497
2,502
Selling, general and administrative
8,525
8,156
17,883
16,729
Total operating expenses
15,416
14,642
31,408
29,774
Income from operations
1,951
1,385
2,793
1,811
Other income, net
12
31
34
43
Income (loss) on change in fair value of warrant liability
9
(90)
167
(97)
Income before provision (benefit) for income taxes
1,972
1,326
2,994
1,757
Provision (benefit) for income taxes
3
(10)
7
7
Net income
$
1,969
$
1,336
$
2,987
$
1,750
Net income per share:
Basic
$
0.03
$
0.02
$
0.05
$
0.03
Diluted
$
0.03
$
0.02
$
0.05
$
0.03
Weighted average number of shares:
Basic
63,383
62,774
63,495
62,728
Diluted
64,847
62,873
64,807
62,832
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Six Months Ended
September 30,
2010
2009
Cash flows from operating activities:
Net income
$
2,987
$
1,750
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
599
539
Stock-based compensation
129
112
Change in fair value of warrant liability
(167)
96
Other
34
(172)
Changes in assets and liabilities:
Accounts receivable, net
(268)
(78)
Inventory
634
(315)
Other current and noncurrent assets
(134)
(208)
Deferred cost of goods sold
(2)
104
Accounts payable
782
(817)
Accrued compensation
197
129
Accrued warranty
49
42
Accrued taxes and fees
268
46
Deferred revenue
203
(62)
Other current and noncurrent liabilities
(1,017)
(805)
Net cash provided by operating activities
4,294
361
Cash flows from investing activities:
Purchases of property and equipment
(1,080)
(660)
Restricted cash decrease
-
100
Purchase of strategic investment
(315)
-
Acquisition of Central Host, Inc., net of cash acquired
(998)
-
Sale of property and equipment
1
2
Net cash used in investing activities
(2,392)
(558)
Cash flows from financing activities:
Capital lease payments
(18)
(29)
Repurchase of common stock
(2,700)
(212)
Proceeds from issuance of common stock
278
-
Proceeds from issuance of common stock under employee stock plans
357
183
Net cash used in financing activities
(2,083)
(58)
Net decrease in cash and cash equivalents
(181)
(255)
Cash and cash equivalents at the beginning of the period
18,056
16,376
Cash and cash equivalents at the end of the period
$
17,875
$
16,121
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Weighted
Weighted
Average
Average
Grant-Date
Remaining
Number of
Fair Market
Contractual
Shares
Value
Term (in Years)
Balance at March 31, 2010
353,720
$
0.71
Awarded
616,432
1.37
Released
(57,959)
0.73
Forfeited
-
-
Balance at September 30, 2010
912,193
$
1.15
3.54
Weighted
Shares
Average
Shares
Subject to
Exercise
Available
Options
Price
for Grant
Outstanding
Per Share
Balance at March 31, 2010
2,869,411
9,267,403
$
1.90
Stock purchase right
(616,432)
-
Exercised
-
(120,000)
1.01
Canceled/forfeited
279,000
(279,000)
10.42
Termination of plans
(256,000)
-
-
Balance at September 30, 2010
2,275,979
8,868,403
$
1.64
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 - $1.18
1,988,262
$
0.92
6.29
$
2,444,090
1,988,262
$
0.92
$
2,444,090
$1.19 - $1.29
1,776,500
$
1.26
6.60
1,577,580
1,776,500
$
1.26
1,577,580
$1.30 - $1.72
2,117,210
$
1.55
4.58
1,268,350
2,117,210
$
1.55
1,268,350
$1.73 - $1.90
1,776,181
$
1.84
2.26
546,659
1,776,181
$
1.84
546,659
$1.91 - $5.75
1,210,250
$
3.24
1.89
2,900
1,210,250
$
3.24
2,900
8,868,403
$
5,839,579
8,868,403
$
5,839,579
Three Months Ended
Six Months Ended
September 30,
September 30,
2010
2009
2010
2009
Expected volatility
64%
90%
64%
90%
Expected dividend yield
-
-
-
-
Risk-free interest rate
0.24%
0.33%
0.24%
0.33%
Weighted average expected option term
0.75 years
0.83 years
0.75 years
0.83 years
Weighted average fair value of options granted
$
0.53
$
0.34
$
0.53
$
0.34
Three Months Ended
Six Months Ended
September 30,
September 30,
2010
2009
2010
2009
Cost of service revenues
$
7
$
6
$
16
$
11
Cost of product revenues
-
-
-
-
Research and development
15
23
37
37
Selling, general and administrative
34
40
76
64
Total stock-based compensation expense related to
employee stock options and employee stock purchases, pre-tax
56
69
129
112
Tax benefit
-
-
-
-
Stock based compensation expense related to employeee
stock options and employee stock purchases, net of tax
$
56
$
69
$
129
$
112
September 30,
March 31,
2010
2010
Inventory (in thousands):
Work-in-process
$
1,056
$
1,701
Finished goods
465
473
$
1,521
$
2,174
Three Months Ended
Six Months Ended
September 30,
September 30,
2010
2009
2010
2009
(in thousands, except per share amounts)
Numerator:
Net income available to common stockholders
$
1,969
$
1,336
$
2,987
$
1,750
Denominator:
Common shares
63,383
62,774
63,495
62,728
Denominator for basic calculation
63,383
62,774
63,495
62,728
Employee stock options
1,331
99
1,184
104
Stock purchase rights
133
-
128
-
Employee stock purchase plan
-
-
-
-
Warrants
-
-
-
-
Denominator for diluted calculation
64,847
62,873
64,807
62,832
Net income per share
Basic
$
0.03
$
0.02
$
0.05
$
0.03
Diluted
$
0.03
$
0.02
$
0.05
$
0.03
Three Months Ended
Six Months Ended
September 30,
September 30,
2010
2009
2010
2009
Common stock options
4,258
9,330
4,797
9,581
Warrants
1,786
1,786
1,786
1,786
6,044
11,116
6,583
11,367
Three Months Ended
Six Months Ended
September 30,
September 30,
2010
2009
2010
2009
8x8 service, equipment and other
$
17,290
$
16,010
$
34,118
$
31,543
Technology licensing and related software
77
17
83
42
Total revenues
$
17,367
$
16,027
$
34,201
$
31,585
Three Months Ended
Six Months Ended
September 30,
September 30,
2010
2009
2010
2009
Balance at beginning of period
$
356
$
373
$
331
$
328
Accruals for warranties
134
89
278
238
Settlements
(110)
(92)
(229)
(196)
Balance at end of period
$
380
$
370
$
380
$
370
Year ending March 31:
Remaining 2011
$
310
2012
657
2013
284
Total minimum payments
$
1,251
Year ending March 31:
Remaining 2011
$
21
2012
40
2013
7
Total minimum payments
68
Less: Amount representing interest
(4)
64
Less: Short-term portion of capital lease obligations
(39)
Long-term portion of capital lease obligations
$
25
Weighted
Average
Shares
Price
Amount
Repurchased
Per Share
Repurchased
Balance at March 31, 2010
282,376
$
0.75
$
211,741
Repurchase of common stock
1,663,413
1.72
2,788,243
Balance at September 30, 2010
1,945,789
$
1.65
$
2,999,984
Cash, net of cash acquired
$
998
Issuance of common stock in connection with acquisition
600
Liabilities assumed
96
Total acquisition costs
$
1,694
Net tangible assets
$
176
Intangible asset - customer relationship
308
Goodwill
1,210
Total acquisition costs
$
1,694
Cash - 8x8, Inc.
$
250
Cash - 8x8 Europe SARL
65
Net tangible assets - 8x8 Europe SARL
41
Total investment
$
356
Selected Operating Statistics
Sept. 30,
2010
June 30,
2010
March 31,
2010
Dec. 31,
2009
Sept. 30,
2009
June 30,
2009
March 31,
2009
Dec. 31,
2008
Sept. 30,
2008
Gross business customer additions (1)
2,450
2,756
2,875
2,785
2,609
2,907
2,792
2,437
3,324
Gross business customer cancellations (less
cancellations within 30 days of sign-up)
1,459
1,592
1,616
1,331
1,416
1,371
1,245
1,224
1,187
Business customer churn (less cancellations
within 30 days of sign-up) (2)
2.2%
2.5%
2.7%
2.4%
2.7%
2.7%
2.7%
2.9%
3.1%
Total business customers (3)
22,167
21,362
20,428
19,407
18,199
17,266
16,013
14,706
13,744
Business customer average monthly service
revenue per customer (4)
$ 209
$ 208
$ 204
$ 204
$ 201
$ 196
$ 202
$ 208
$ 220
Overall service margin
78%
78%
77%
78%
76%
76%
71%
74%
73%
Overall product margin
-57%
-38%
-43%
-59%
-42%
-75%
-50%
9%
-10%
Overall gross margin
68%
68%
68%
68%
67%
66%
59%
67%
65%
Business subscriber acquisition cost
per service (5)
$ 108
$ 109
$ 97
$ 102
$ 90
$ 93
$ 118
$ 141
$ 171
Average number of services subscribed to
per business customer
7.7
7.5
7.5
7.3
7.1
6.9
6.6
6.6
6.9
Business customer subscriber acquisition
cost (6)
$ 826
$ 818
$ 723
$ 749
$ 638
$ 638
$ 785
$ 933
$ 1,174
September 30,
Dollar
Percent
Service revenues
2010
2009
Change
Change
(dollar amounts in thousands)
Three months ended
$
16,071
$
14,838
$
1,233
8.3%
Percentage of total revenues
92.5%
92.6%
Six months ended
$
31,434
$
29,358
$
2,076
7.1%
Percentage of total revenues
91.9%
92.9%
September 30,
Dollar
Percent
Product revenues
2010
2009
Change
Change
(dollar amounts in thousands)
Three months ended
$
1,296
$
1,189
$
107
9.0%
Percentage of total revenues
7.5%
7.4%
Six months ended
$
2,767
$
2,227
$
540
24.2%
Percentage of total revenues
8.1%
7.1%
September 30,
Dollar
Percent
Cost of service revenues
2010
2009
Change
Change
(dollar amounts in thousands)
Three months ended
$
3,589
$
3,535
$
54
1.5%
Percentage of service revenues
22.3%
23.8%
Six months ended
$
6,971
$
7,036
$
(65)
-0.9%
Percentage of service revenues
22.2%
24.0%
September 30,
Dollar
Percent
Cost of product revenues
2010
2009
Change
Change
(dollar amounts in thousands)
Three months ended
$
2,031
$
1,686
$
345
20.5%
Percentage of product revenues
156.7%
141.8%
Six months ended
$
4,057
$
3,507
$
550
15.7%
Percentage of product revenues
146.6%
157.5%
September 30,
Dollar
Percent
Research and development
2010
2009
Change
Change
(dollar amounts in thousands)
Three months ended
$
1,271
$
1,265
$
6
0.5%
Percentage of total revenues
7.3%
7.9%
Six months ended
$
2,497
$
2,502
$
(5)
-0.2%
Percentage of total revenues
7.3%
7.9%
September 30,
Dollar
Percent
Selling, general and administrative
2010
2009
Change
Change
(dollar amounts in thousands)
Three months ended
$
8,525
$
8,156
$
369
4.5%
Percentage of total revenues
49.1%
50.9%
Six months ended
$
17,883
$
16,729
$
1,154
6.9%
Percentage of total revenues
52.3%
53.0%
September 30,
Dollar
Percent
Other income, net
2010
2009
Change
Change
(dollar amounts in thousands)
Three months ended
$
12
$
31
$
(19)
-61.3%
Percentage of total revenues
0.1%
0.2%
Six months ended
$
34
$
43
$
(9)
-20.9%
Percentage of total revenues
0.1%
0.1%
Income (loss) on change in fair
September 30,
Dollar
Percent
value of warrant liability
2010
2009
Change
Change
(dollar amounts in thousands)
Three months ended
$
9
$
(90)
$
99
-110.0%
Percentage of total revenues
0.1%
-0.6%
Six months ended
$
167
$
(97)
$
264
-272.2%
Percentage of total revenues
0.5%
-0.3%
September 30,
Dollar
Percent
Provision (benefit) for income tax
2010
2009
Change
Change
(dollar amounts in thousands)
Three months ended
$
3
$
(10)
$
13
-130.0%
Percentage of total revenues
0.0%
-0.1%
Six months ended
$
7
$
7
$
-
0.0%
Percentage of total revenues
0.0%
0.0%
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, 2010.
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 2011, 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.
- 24 -
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 8 - "Legal Proceedings."
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, 2010, which we filed with the Securities and Exchange Commission on May 27, 2010, in addition to the following updated risk factor disclosures.
Our infringement of a third party's proprietary technology would disrupt our business.
There has been substantial litigation in the communications, VoIP services, semiconductor, electronics, and related industries regarding intellectual property rights and, from time to time, third parties may claim infringement by us of their intellectual property rights. Our broad range of current and former technology, including IP telephony systems, digital and analog circuits, software, and semiconductors, increases the likelihood that third parties may claim infringement by us of their intellectual property rights. For example, on May 2, 2008, we received a letter from AT&T Intellectual Property, L.L.C. ("AT&T IP") expressing the belief that we must license a specified patent for use in our 8x8 broadband telephone service, as well as suggesting that we obtain a license to its portfolio of MPEG-4 patents for use with our video telephone products and services. At the same time, we began an evaluation of whether AT&T IP's affiliated entities may need to license any of our patents or other intellectual property. We have continued to engage in discussions with AT&T IP to explore a mutually agreeable resolution of the parties' respective assertions regarding these intellectual property issues. We are unable at this time to state whether we will enter into any license or cross-license agreements with AT&T IP or whether we ultimately anticipate any material effects on our operating results or financial condition as a consequence of these matters.
On October 8, 2010, we were named as one of eight companies sued for infringement of U.S. Patent No. 5,774,526 in the case of Ceres Communication Technologies LLC v. 8x8, Inc. et al., filed in U.S. District Court for the District of Delaware. We believe we have valid and meritorious defenses to this action and intend to contest it vigorously.
If we were found to be infringing on the intellectual property rights of any third party, we could be subject to liabilities for such infringement, which could be material. We could also be required to refrain from using, manufacturing or selling certain products or using certain
processes, either of which could have a material adverse effect on our business and operating results. From time to time, we have received, and may continue to receive in the future, notices of claims of infringement, misappropriation or misuse of other parties' proprietary rights. There can be no assurance that we will prevail in these discussions and actions or that other actions alleging infringement by us of third party patents will not be asserted or prosecuted against us.Certain technology necessary for us to provide our services may, in fact, be patented by other parties either now or in the future. If such technology were held under patent by another person, we would have to negotiate a license for the use of that certain technology. We may not be able to negotiate such a license at a price that is acceptable. The existence of such a patent, or our inability to negotiate a license for any such technology on acceptable terms, could force us to cease using such technology and offering products and services incorporating such technology. For example, on April 22, 2009, we were named as a defendant, along with Comcast, Microsoft, Avaya, Embarq, and Qwest, in a complaint filed by Web Telephony, LLC in the Eastern District of Texas. On April 29, 2009, we entered into a settlement agreement with Web Telephony, which filed a motion to dismiss the lawsuit on May 8, 2009, under which we have made significant payments as described in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Acquired Product Rights."
- 25 -
We may become subject to state regulation for certain service offerings.
Certain states take the position that offerings by VoIP companies, like us, are intrastate and therefore subject to state regulation. These states argue that if the beginning and end points of communications are known, and if some of these communications occur entirely within the boundaries of a state, the state can regulate that offering. We believe that the FCC has pre-empted states from regulating VoIP offerings. We cannot predict how this issue will be resolved or its impact on our business at this time. Moreover, there is a petition pending with the FCC regarding states' ability to require interconnected VoIP providers, like us, to contribute to state Universal Service Funds. A finding by the FCC allowing states to require interconnected VoIP providers like us to contribute to state USF may also result in states asserting jurisdiction over our services depending on the scope of the FCC's order. Such an occurrence could require us to comply with regulation at the state level increasing our costs. We cannot predict the outcome of this proceeding at this time.
Future legislation or regulation of the Internet and/or voice and video over IP services could restrict our business, prevent us from offering service or increase our cost of doing business.
There are an increasing number of regulations and rulings that specifically address access to commerce and communications services on the Internet, including IP telephony. We are unable to predict the impact, if any, that future legislation, legal decisions or regulations concerning the Internet may have on our business, financial condition, and results of operations. For example, a bill has been introduced to the U.S. House of Representatives that would revise the federal Universal Service Fund. Should new legislation pass concerning this issue, the FCC may obtain new authority to change the manner in which it calculates USF contribution obligations and may also expand the services subject to such contribution obligation.
Regarding regulation, the U.S. Congress, the FCC, state legislatures or state agencies may target, among other things, access or settlement charges, imposing taxes related to Internet communications, imposing tariffs or other regulations based on encryption concerns, or the characteristics and quality of products and services that we may offer. Any new laws or regulations concerning these or other areas of our business could restrict our growth or increase our cost of doing business. The increasing growth of the broadband IP telephony market and popularity of broadband IP telephony products and services heighten the risk that governments or other legislative bodies will seek to regulate broadband IP telephony and the Internet. In addition, large, established telecommunication companies may devote substantial lobbying efforts to influence the regulation of the broadband IP telephony market, which may be contrary to our interests.
Many regulatory actions are underway or are being contemplated by federal and state authorities, including the FCC and other state and local regulatory agencies. On February 12, 2004, the FCC initiated a notice of public rule-making to update FCC policy and consider the appropriate regulatory classification for VoIP and other IP enabled services. On November 9, 2004, the FCC ruled that Vonage DigitalVoice and similar services are jurisdictionally interstate and not subject to state certification, tariffing and other common carrier regulations. This ruling was subsequently appealed by several states. On March 21, 2007, the United States Court of Appeals for the Eighth Circuit affirmed the FCC's declaratory ruling.
There is risk that a regulatory agency will require us to conform to rules that are unsuitable for IP communications technologies or rules that cannot be complied with due to the nature and efficiencies of IP routing, or are unnecessary or unreasonable in light of the manner in which we offer services to our customers. It is not possible to separate the Internet, or any service offered over it, into intrastate and interstate components as we currently have no means to automatically identify the physical location of one of our subscribers on the Internet. While suitable alternatives may be developed in the future, the current IP network does not enable us to identify the geographic nature of the traffic traversing the Internet, or dynamically pinpoint or update the location of our customers' telephony devices. In the United States, the FCC as well as our competitors have made statements in the past suggesting that we should be required to automatically determine the physical location of our customers' equipment as a precondition for offering telecommunications services to them.
- 26 -
There may be risks associated with our ability to comply with funding requirements of the Universal Service Fund, or USF, Telecommunications Relay Service, or TRS, fund, federal regulatory recovery fees and similar state or federal funds, or that our customers will cancel service due to the impact of these price increases to their services.
On June 21, 2006, the FCC expanded the base of Universal Service Fund, or USF, contributions to interconnected VoIP providers. The FCC established a safe harbor percentage of interstate revenue of 64.9% of total VoIP service revenue. We were allowed to calculate our contribution based on the safe harbor or by preparing a traffic study. We began contributing to the federal USF on October 1, 2006. For a period of at least two quarters beginning October 1, 2006, we were required to contribute to the USF for all subscribers' retail revenues as well as through its underlying carriers' wholesale charges. The FCC order applying USF contributions to interconnected VoIP providers was appealed and on June 1, 2007, the U.S. Court of Appeals for the District of Columbia ruled that the FCC was within its authority when it required interconnected VoIP service providers to contribute to the Universal Service Fund, though it struck down the provision of the order which required pre-approval of traffic studies by the FCC and the provision that required double contributions to the fund for two quarters from our underlying carriers' wholesale charges. We pass through our federal USF fees to our customers like the large majority of interconnected VoIP providers and traditional providers of telecommunications services.
There is also a risk that state Universal Service Funds may attempt to impose state USF contribution obligations and other state and local charges. As of March 31, 2009, we were collecting or remitting state USF in one state. Effective June 1, 2009, we ceased collecting and remitting state USF. At this time, at least three states, Kansas, Nebraska and New Mexico, contend that providers of interconnected VoIP services, like us, should contribute to their USF fund. On March 3, 2008, the U.S. District Court for Nebraska issued a preliminary injunction and found that Nebraska's state Public Service Commission does not have jurisdiction to require Universal Service contributions from VoIP providers. On May 1, 2009, a panel of the U.S. Circuit Court of Appeals for the Eighth Circuit affirmed the U.S. District court ruling. Subsequently, the Kansas and Nebraska state commissions filed a joint petition with the FCC seeking the ability to assess state USF contribution obligations on VoIP providers, like us, retroactively. We cannot predict the outcome of this proceeding at this time nor its impact on our business at this time.
Similar to federal USF fees, we are allowed to pass state USF fees through to consumers. However, should the FCC rule that states can apply such fees on a retroactive basis, we would likely be unable to recoup such fees from our customers. Accordingly, any finding of retroactive liability would likely reduce our profits. Prospectively, should the FCC allow states to subject companies like us to state USF contribution obligations, we would likely pass through such fees to consumers potentially making our services less competitive with offerings available from traditional providers of telecommunications services. The impact of this price increase on our customers or our inability to recoup our costs or liabilities in remitting federal and state USF contributions, or other factors, could have a material adverse effect on our financial position, results of operations and cash flows.
The FCC and various state commissions are considering the imposition of additional fees on interconnected VoIP providers, like us. Several states are either considering extending or have imposed state USF, state TRS fees, and other taxes and fees on interconnected VoIP providers like us. If we pass through the taxes, fees and surcharges that may be applied to our service, the impact of this price increase on our customers or our inability to recoup our costs or liabilities in remitting such taxes, fees and surcharges could have a material adverse effect on our financial position, results of operations and cash flows. We may also be at a competitive disadvantage to other providers who choose not to comply with these payment obligations.
- 27 -
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The activity under the Repurchase Plan for the six months ended September 30, 2010 is summarized as follows:
| Total Number | Approximate Dollar | |||||||||
| Total Number | Average | of Shares Purchased | Value of Shares that | |||||||
| of Shares | Price Paid | as Part of Publicly | May Yet be Purchased | |||||||
|
Purchased
|
Per Share
|
Announced Program
|
Under the Program
|
|||||||
| July 1 - July 31, 2010 | - | $ | - | - | $ | 1,668,198 | ||||
| August 1 - August 31, 2010 | 492,970 | 1.42 | 492,970 | (1) | 1,969,842 | |||||
| September 1 - September 31, 2010 |
1,072,743
|
1.84 |
1,072,743
|
$ | 16 | |||||
| Total |
1,565,713
|
$ | 1.70 |
1,565,713
|
|
(1) |
On July 29, 2009, we publicly announced that our board of directors had authorized us to repurchase up to $2.0 million of our common stock from time to time until July 28, 2010 (the "Repurchase Plan"). On July 27, 2010, the Company's board of directors extended the stock repurchase period from July 28, 2010 to July 27, 2011. The repurchases were made through open market purchases at prevailing market prices and on August 31, 2010, the Company's board of directors increased the Repurchase Plan from $2.0 million to $3.0 million. The repurchases were made through open market purchases at prevailing market prices. |
- 28 -
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 25, 2010
|
8X8, INC. |
|
(Registrant) |
|
By: /s/ DANIEL WEIRICH |
|
Daniel Weirich |
|
Chief Financial Officer |
- 29 -