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 December 31, 2007
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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3151 Jay Street
Santa Clara, CA 95054
(Address of Principal Executive Offices including Zip Code)
(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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ YES x NO
The number of shares of the Registrant's Common Stock outstanding as of February 1, 2008 62,067,269.
8X8, INC.
FORM 10-Q PDF
TABLE OF CONTENTS
| PART I. FINANCIAL INFORMATION | Page No. |
| Item 1. Financial Statements: |
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| Condensed Consolidated Balance Sheets at December 31, 2007 and March 31, 2007 |
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Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2007 and 2006 |
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Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2007 and 2006 |
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| Notes to Unaudited Condensed Consolidated Financial Statements |
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| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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| Item 4. Controls and Procedures |
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| PART II. OTHER INFORMATION |
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| Item 1. Legal Proceedings |
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| Item 1A. Risk Factors |
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| Item 6. Exhibits |
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| Signature |
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- 2 -
Part I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
8X8, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
| December 31, | March 31, | |||||
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2007
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2007
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| ASSETS | ||||||
| Current assets: | ||||||
| Cash and cash equivalents | $ | 8,769 | $ | 6,735 | ||
| Short-term investments | 5,570 | 5,197 | ||||
| Accounts receivable, net | 614 | 736 | ||||
| Inventory | 1,896 | 2,629 | ||||
| Deferred cost of goods sold | 225 | 1,064 | ||||
| Other current assets |
652
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438
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| Total current assets | 17,726 | 16,799 | ||||
| Property and equipment, net | 2,184 | 2,840 | ||||
| Other assets |
144
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319
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| Total assets | $ |
20,054
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$ |
19,958
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| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
| Current liabilities: | ||||||
| Accounts payable | $ | 4,835 | $ | 4,919 | ||
| Accrued compensation | 1,169 | 825 | ||||
| Accrued warranty | 336 | 323 | ||||
| Accrued taxes and fees | 2,865 | 2,078 | ||||
| Deferred revenue | 3,044 | 1,488 | ||||
| Other accrued liabilities |
594
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1,308
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| Total current liabilities | 12,843 | 10,941 | ||||
| Other liabilities | 133 | 253 | ||||
| Fair value of warrant liability |
378
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3,387
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| Total liabilities |
13,354
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14,581
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| Commitments and contingencies (Note 8) | ||||||
| Stockholders' equity: | ||||||
| Common stock | 62 | 62 | ||||
| Additional paid-in capital | 207,545 | 205,567 | ||||
| Accumulated other comprehensive income (loss) | 3 | (3) | ||||
| Accumulated deficit |
(200,910)
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(200,249)
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| Total stockholders' equity |
6,700
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5,377
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| Total liabilities and stockholders' equity | $ |
20,054
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$ |
19,958
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
- 3 -
| Three Months Ended | Nine Months Ended | |||||||||||
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December 31,
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December 31,
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2007
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2006
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2007
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2006
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| Service revenues | $ | 14,426 | $ | 11,515 | $ | 41,109 | $ | 32,632 | ||||
| Product revenues |
1,378
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1,800
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4,205
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6,110
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| Total revenues |
15,804
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13,315
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45,314
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38,742
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| Operating expenses: | ||||||||||||
| Cost of service revenues | 4,364 | 4,555 | 12,780 | 14,332 | ||||||||
| Cost of product revenues | 1,175 | 1,818 | 5,210 | 6,100 | ||||||||
| Research and development | 1,081 | 1,094 | 3,164 | 3,672 | ||||||||
| Selling, general and administrative |
9,604
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8,833
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28,573
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26,536
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| Total operating expenses |
16,224
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16,300
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49,727
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50,640
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| Loss from operations | (420) | (2,985) | (4,413) | (11,898) | ||||||||
| Other income, net | 1,361 | 112 | 1,654 | 539 | ||||||||
| Income on change in fair value of warrant liability |
448
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40
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2,098
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4,338
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| Net income (loss) | $ |
1,389
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$ |
(2,833)
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$ |
(661)
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$ |
(7,021)
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| Net income (loss) per share: | ||||||||||||
| Basic | $ | 0.02 | $ | (0.05) | $ | (0.01) | $ | (0.11) | ||||
| Diluted | $ | 0.02 | $ | (0.05) | $ | (0.01) | $ | (0.11) | ||||
| Weighted average number of shares: | ||||||||||||
| Basic | 61,927 | 61,420 | 61,857 | 61,297 | ||||||||
| Diluted | 62,113 | 61,420 | 61,857 | 61,297 | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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8X8, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
| Nine Months Ended | ||||||
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December 31,
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2007
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2006
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| Cash flows from operating activities: | ||||||
| Net loss | $ | (661) | $ | (7,021) | ||
| Adjustments to reconcile net loss to net cash | ||||||
| provided by (used in) operating activities: | ||||||
| Depreciation and amortization | 1,187 | 1,028 | ||||
| Stock compensation | 958 | 1,538 | ||||
| Income on change in fair value of warrant liability | (2,098) | (4,338) | ||||
| Other | 109 | 212 | ||||
| Changes in assets and liabilities: | ||||||
| Accounts receivable, net | 46 | 52 | ||||
| Inventory | 656 | (1,207) | ||||
| Other current and noncurrent assets | (209) | 103 | ||||
| Deferred cost of goods sold | 839 | 426 | ||||
| Accounts payable | (112) | 48 | ||||
| Accrued compensation | 344 | (157) | ||||
| Accrued warranty | 13 | (31) | ||||
| Accrued taxes and fees | 787 | 944 | ||||
| Deferred revenue | 1,556 | (712) | ||||
| Other current and noncurrent liabilities |
(804)
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(314)
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| Net cash provided by (used in) operating activities |
2,611
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(9,429)
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| Cash flows from investing activities: | ||||||
| Purchases of property and equipment | (505) | (1,156) | ||||
| Purchase of investments | (3,323) | - | ||||
| Maturities of short-term investments | 2,150 | 10,450 | ||||
| Sale of short-term investments | 1,000 | - | ||||
| Sale of property and equipment |
1
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19
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| Net cash provided by (used in) investing activities |
(677)
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9,313
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| Cash flows from financing activities: | ||||||
| Bank overdraft | - | (153) | ||||
| Capital lease payments | (30) | (15) | ||||
| Proceeds from issuance of common stock under employee stock plans |
130
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207
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| Net cash provided by financing activities |
100
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39
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| Net increase (decrease) in cash and cash equivalents | 2,034 | (77) | ||||
| Cash and cash equivalents at the beginning of the period |
6,735
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6,259
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| Cash and cash equivalents at the end of the period | $ |
8,769
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$ |
6,182
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| Supplemental disclosure: | ||||||
| Assets acquired under capital lease | $ |
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$ |
10
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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 communication technology and services for Internet protocol, or IP,
telephony and video applications. The Company was incorporated in California in February 1987, and in December 1996 was reincorporated in
Delaware. The Company offers the Packet8 broadband voice over Internet protocol, or VoIP, and video communications service, Packet8 Virtual
Office service and videophone equipment and services. The Packet8 voice and video communications service ("Packet8") enables broadband
Internet users to add digital voice and video communications services to their high-speed Internet connection. Customers can choose a
direct-dial phone number from any of the rate centers offered by the service, and then use an 8x8-supplied terminal adapter to connect any
telephone to a broadband Internet connection and make or receive calls from a regular telephone number. All Packet8 telephone accounts
come with voice mail, caller ID, call waiting, call forwarding, hold, line-alternate, 3-way conferencing, web access to account controls, and
online billing. In addition, 8x8 offers a videophone for use with the Packet8 service, a business telephone for use with the Packet8 Virtual
Office service, and several home telephones and telephone adapter boxes for use with the residential service. 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 2008 refers to the fiscal year
ending March 31, 2008). LIQUIDITY Although the Company achieved positive cash flows from operations in the nine months ended December 31, 2007, historical net
losses and negative cash flows have been funded primarily through the issuance of equity securities and borrowings. Management believes
that current cash and cash equivalents and cash flows generated from operations will be sufficient to finance the Company's operations
through at least the next 12 months. However, the Company continually evaluates its cash needs and may seek additional equity or debt
financing in order to achieve the Company's overall business objectives. There can be no assurance that such financing will be available, or, if
available, at a price that is acceptable to the Company. Failure to generate sufficient revenues, raise additional capital or reduce certain
discretionary spending could have an adverse impact on the Company's ability to achieve its longer term business objectives. 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, 2007. In the opinion of 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 revenues and expenses during the reporting periods. Actual results could differ from these estimates. The March 31, 2007 year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements
and does 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 for the year ended March 31, 2007 and notes thereto
included in the Company's fiscal 2007 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. - 6 -
Investments The Company's investments are comprised of corporate debt, auction rate securities, commercial paper and certificates of deposit. All
short-term investments are classified as available-for-sale. Packet8 Service Revenue The Company recognizes new subscriber revenue in the month the new order was shipped, net of an allowance for expected
cancellations. The allowance for expected cancellations is based on the Company's history of subscriber conduct or cancellations within the
30-day trial period. Emerging Issues Task Force (EITF) consensus No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables"
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 Packet8 service with the accompanying desktop terminal or
videophone adapter constitutes a revenue arrangement with multiple deliverables. In accordance with the guidance of EITF No. 00-21, the
Company allocates Packet8 revenues, including activation fees, among the desktop terminal adapter or videophone and subscriber services.
Revenues allocated to the desktop terminal adapter or videophone are recognized as product revenues during the period of the sale less the
allowance for estimated returns during the 30 day trial period. All other revenues are recognized when the related services are provided.
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 Emerging Issues Task Force Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to and Potentially Settled in a Company's Own Stock" ("EITF 00-19") which requires warrants to be classified as
permanent equity, temporary equity or as assets or liabilities. In general, warrants that either require net-cash settlement or are presumed to
require net-cash settlement are recorded as assets and liabilities at fair value and warrants that require settlement in shares are recorded as
equity instruments. Certain of the Company's warrants require settlement in shares and are accounted for as permanent equity. The Company
has two investor warrants that are classified as liabilities because they 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, EITF 00-19 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 warrants
is determined using a Black-Scholes option pricing model, and is affected by changes in inputs to that model including stock price, expected
stock price volatility and contractual term. Accounting for Stock-Based Compensation Effective April 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based
Payment" ("SFAS 123(R)"), which establishes standards for the accounting for equity instruments exchanged for employee
services. SFAS 123(R) revised SFAS No. 123 "Accounting for Stock-Based Compensation" (SFAS 123) and superseded Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and related interpretations. Under the provisions of
SFAS No. 123(R), 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. The Company elected to adopt the modified prospective transition method as provided by SFAS No. 123(R).
Prior to April 1, 2006, the Company accounted for stock-based awards in accordance with APB 25, whereby the difference between the
exercise price and the fair market value on the date of grant, the intrinsic value, is recognized as compensation expense. Under the intrinsic
value method of accounting, no compensation expense was generally recognized in the Company's Condensed Consolidated Statements of
Operations since the exercise price of the Company's employee stock option grant generally equaled the fair market value of the underlying
common stock on the date of grant. However, to the extent awards were granted either below fair market value or were modified with a
resulting re-measurement of compensation costs, the Company recorded compensation expense. - 7 -
Stock-based compensation expense recognized in the Company's Condensed Consolidated Statements of Operations
for the third quarter of fiscal 2008 included both the unvested portion of stock-based awards granted prior to April 1, 2006 and
stock-based awards granted subsequent to April 1, 2006. Stock options granted in periods prior to fiscal 2007 were measured based on SFAS
No. 123 criteria, whereas stock options granted subsequent to April 1, 2006 were measured based on SFAS No. 123(R) criteria.
In conjunction with the adoption of SFAS No. 123(R), the Company changed its method of attributing the value of stock-based
compensation to expense from the accelerated multiple-option approach to the straight-line single option method. Compensation expense for
all share-based payment awards granted subsequent to April 1, 2006 is recognized using the straight-line single-option method.
Stock-based compensation expense included in fiscal 2007 and 2008 includes the impact of estimated forfeitures. SFAS No. 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The cumulative effect of changing from using the impact of estimated forfeitures to actual forfeitures was not material. For the periods prior to
fiscal 2007, the Company accounted for forfeitures as they occurred. Stock Option Plans
The Company has several stock-based compensation plans (the "Plans") that are described in Note 7 "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, 2007. The
Company, under its various equity plans, grants stock options for shares of common stock to employees, non-employees, directors and
consultants. As of December 31, 2007, the 1992 Stock Plan, 1996 Stock Plan and 1996 Director Option Plan had expired and the 1999 Nonstatutory Stock
Option Plan was cancelled by the Board, but there are still options outstanding under these plans. Options 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's 2006 Stock Plan (the "2006 Plan") has 7,000,000 shares of common stock reserved for
issuance. The 2006 Plan provides for granting incentive stock options to employees and nonstatutory stock options to employees,
directors or consultants. The stock option price of incentive stock options granted 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 compensation committee of the board of directors. Options generally vest over four years and expire ten years after
grant. The 2006 Plan expires in May 2016. Option Activity Option activity since March 31, 2007 is summarized below: - 8 -
The following table summarizes the stock options outstanding and exercisable at December 31, 2007: Stock-based Compensation Expense
As of December 31, 2007, there were $2.7 million of total unrecognized compensation costs related to stock options. These costs are
expected to be recognized over a weighted average period of 2.68 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 nine month periods ended December 31, 2007 and 2006, the Company used historical
volatility of our 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 assumptions used to compute reported and pro forma stock-based compensation to
employees and directors for the three and nine months ended December 31, 2007 and 2006: In accordance with SFAS 123(R), the Company recorded $287,000 and $874,000 in compensation expense relative to stock
options for the three and nine months ended December 31, 2007, 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 a six month purchase period, whichever is lower.
The contribution amount may not exceed ten percent 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
$37,000 and $84,000 for the three and nine months ended December 31, 2007, respectively, in accordance with SFAS 123(R). - 9 -
The adoption of SFAS No. 123(R) did not impact the Company's methodology to estimate the fair value of share-based
payment awards under the Company's Employee Stock Purchase Plan. The estimated fair value of stock purchase rights granted under the
Employee Stock Purchase Plan were estimated at the date of grant using the Black-Scholes pricing model with the following weighted-average
assumptions: As of December 31, 2007, there were $40,000 of total unrecognized compensation cost related to employee stock purchases.
These costs are expected to be recognized over a weighted average period of 0.2 years.
SFAS No. 123(R) 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 nine months ended December 31, 2007 and 2006 as the Company believes that it is more
likely than not that it will not realize the benefit from tax deductions related to equity compensation.
As prescribed in SFAS No. 123(R), the following table summarizes the distribution of stock-based compensation expense related to employee
stock options and employee stock purchases under SFAS No. 123(R) among the Company's operating functions for the three and nine months
ended December 31, 2007 and 2006 (in thousands): Recent Accounting Pronouncements In March 2006, the EITF reached a consensus on Issue No. 06-03 "How Taxes Collected from Customers and Remitted to
Government Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)" ("EITF No. 06-03"). EITF 06-03
provides that the presentation of taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions
(e.g. sales, use, and excise taxes) between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis
(excluded from revenues) is an accounting policy decision that should be disclosed. In addition, for any such taxes that are reported on a gross
basis, the amounts of those taxes should be disclosed in interim and annual financial statements for each period for which an income
statement is presented if those amounts are significant. EITF 06-03 was effective April 1, 2007. The Company currently reports revenue
net of taxes collected and remitted to governmental authorities. The adoption of EITF 06-03 did not have a material effect on the Company's
condensed consolidated results of operations and financial condition. - 10 -
In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS)
No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. SFAS No. 157
applies to other accounting pronouncements that require or permit fair value measurements, but does not require any new fair value
measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. The Company does not expect the adoption of SFAS No. 157 to have a material impact on its
consolidated results of operations and financial condition. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159")
which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to
be measured at fair value. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. The Company is currently evaluating the potential impact of this statement. In December 2007, the FASB issued SFAS No. 141(Revised 2007), "Business Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R)
significantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration,
acquired contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS No. 141(R),
changes in an acquired entity's deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense.
SFAS No. 141(R) applies prospectively to 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, 2008. Earlier adoption is prohibited. The Company will adopt this pronouncement in the
first quarter of fiscal 2010 and does not expect the adoption of SFAS No. 141(R) will have a material impact on its consolidated results of
operations and financial condition. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in Consolidated Financial Statements an Amendment of ARB
no. 51" ("SFAS No. 160"), which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary, changes in
a parent's ownership interest in a subsidiary and the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or
after December 15, 2008. Earlier adoption is prohibited. The Company will adopt this pronouncement in the first quarter of fiscal 2010 and
does not expect the adoption of SFAS No. 160 will have a material impact on its consolidated results of operations and financial condition. 3. BALANCE SHEET DETAIL 4. NET INCOME (LOSS) PER SHARE Basic net income (loss) per share is computed by dividing net income (loss) 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 plus the effect of dilutive potential common shares
outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, shares to
be issued under the employee stock purchase plan and warrants. - 11 -
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. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss), as defined, includes all changes in equity (net assets) during a period from non-owner sources. The
difference between the Company's net income (loss) and comprehensive income (loss) is due primarily to unrealized gains and losses on
investments classified as available-for-sale. Comprehensive income (loss) for the three and nine months ended December 31, 2007 and 2006
was as follows (in thousands): 6. SEGMENT REPORTING SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes annual and interim reporting
standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers.
Under SFAS No. 131, 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. The following net revenues for this segment are presented by groupings of similar products and services (in
thousands): No customer represented greater than 10% of the Company's total revenues for the three and nine months ended December 31, 2007 or
2006. The Company's revenue distribution by geographic region (based upon the destination of shipments) was as follows: 7. 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 the amount of benefits that, based on available evidence, it is more likely than not expected to be realized. The Company made no
provision for income taxes in any periods presented in the accompanying condensed consolidated financial statements because it incurred net
losses for the periods presented, or expects to incur net losses for the current year. - 13 -
Effective April 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes: an Interpretation of FASB Statement No. 109" ("FIN 48"), 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 of being 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. Therefore, adoption of FIN 48 did not have a material effect on the Company's
condensed consolidated results of operations and financial condition for the three and nine month periods ended December 31, 2007. The Company had unrecognized tax benefits of approximately $2.0 million as of April 1, 2007. The application of FIN 48 would have
resulted in a decrease in the accumulated deficit of $2.0 million, except that the decrease was fully offset by the application of a valuation
allowance. There was no change to the Company's unrecognized tax benefits for the three and nine month periods ended December 31, 2007.
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 to 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 states and foreign jurisdictions in which it has or had a subsidiary or
branch operations. All tax returns from fiscal 1995 to fiscal 2007 may be subject to examination by the Internal Revenue Service, California
and various states. The Company extended the filing date of the 2007 federal tax return and all state income tax returns. As of December 31,
2007, the federal return and one state return had been filed and two state returns had not yet been filed. In addition, as of December 31, 2007,
there were no active federal, state or local income tax audits. The foreign tax jurisdictions may be subject to examination for the fiscal years
2005 to 2007. 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. As of the date of adoption of FIN 48 and through the nine months ended December 31, 2007, the Company did
not have any accrued interest or penalties associated with any unrecognized tax benefits. Although timing of an audit is highly uncertain, the
Company does not believe it is reasonably possible that the unrecognized tax benefit would materially change in the next 12 months. 8. COMMITMENTS AND CONTINGENCIES Guarantees Indemnifications In the normal course of business, the Company enters into contracts under which the Company has agreed to hold harmless other
parties, including customers, lessors and parties to other transactions with the Company, with respect to certain matters such as
losses arising from a breach of representations or covenants or
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 prior 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. - 14 -
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 operations,
during the three and nine months ended December 31, 2007 and 2006 were as follows (in thousands): Standby letters of credit The Company has a standby letter of credit totaling $100,000, which was issued to guarantee certain contractual obligations and is
collateralized by cash deposits at the Company's primary bank. This letter of credit is recorded in the other assets line items in the condensed
consolidated balance sheets. Leases At December 31, 2007, future minimum annual lease payments under noncancelable operating leases were as follows (in thousands): - 15 -
In April 2005, June 2006 and March 2007, the Company entered into a series of noncancelable capital lease agreements,
respectively, for office equipment bearing interest at various rates. At December 31, 2007, future minimum annual lease payments were as
follows (in thousands): Capital leases included in office equipment were $182,000 at December 31, 2007. Total accumulated depreciation was
$56,000 at December 31, 2007. Minimum Third Party Network Service Provider Commitments In July 2006, the Company entered into a contract with one of its third party network service providers containing a minimum monthly
commitment of $400,000 effective June 1, 2006 for 24 months. At December 31, 2007, the total remaining obligation under the contract was
$2.0 million. Minimum Third Party Customer Support Commitments In January 2008, the Company entered into a contract with one of its third party customer support vendors containing a minimum
monthly commitment of approximately $436,000 effective January 1, 2008 through March 31, 2009. At January 1, 2008, the total remaining
obligation under the contract was $6.5 million. Legal Proceedings From time to time, the Company may be 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 currently believes that it is not a party to any
litigation the final outcome of which is likely to have a material adverse effect on the Company's financial position, results of operations or cash
flows. However, should the Company not prevail in any such litigation; it could have a material adverse impact on the Company's operating
results, cash flows or financial position. State and Municipal Taxes Historically, the Company did not collect or remit state or municipal taxes (such as sales and use, excise, utility user, and ad valorem
taxes), fees or surcharges ("Taxes") on the charges to the Company's customers for its services except in California, where the Company is
headquartered. Although the Company has consistently maintained that these Taxes do not apply to its service, in states other than California,
for a variety of reasons depending on the statute or rule that establishes such obligations, a number of states have changed their statutes as
part of the streamlined sales tax initiatives and the Company has begun collecting and remitting Taxes in certain states and will begin
collecting and remitting in additional states in the fourth fiscal quarter of 2008 and throughout fiscal 2009. The Company has received inquiries,
demands or audit requests from several states and municipal taxing and 911 agencies, and is currently under audit by one state, seeking
payment of Taxes that are applied to or collected from the customers of providers of traditional public switched telephone network services.
The Company had recorded an expense of $619,000 and $633,000 for the
nine months ended December 31, 2007 and 2006, respectively as its best estimate of the maximum reasonable tax exposure
- 16 -
for such assessments. The cumulative estimate for maximum assessments is $2,189,000 as of December 31, 2007, which is recorded in the
accrued taxes and fees line item in the condensed consolidated balance sheets. Regulatory Matters Like many interconnected VoIP providers, the Company relies on a third party to route emergency calls originated by our customers.
For certain customers, the third party solution provider may route 911 calls to a national emergency call center in the event of a system outage
or other circumstances. The emergency dispatchers in this national call center may utilize the location information provided by the customer to
route the call to the correct Public Safety Answering Point ("PSAP"), which is a local call center staffed by trained emergency operators, or first
responder. The FCC could determine that calls routed in this manner do not satisfy its requirements should we be unable to connect our
subscribers directly to a PSAP. The Company may be subject to enforcement actions including, but not limited to, fines, cease and desist
orders, or other penalties for those customers, whose 911 calls are routed to a national emergency call center and not directly to a PSAP. As
of December 31, 2007, the Company provided emergency calling services to 100% of its subscribers located in the United States. 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 64.9% of total VoIP service revenue to which federal USF contributions apply. The Company
was allowed to calculate its contribution based on the safe harbor or by submitting a traffic study that would subsequently be approved by the
FCC. For a period of at least two quarters beginning October 1, 2006, the Company was required to contribute to the USF for its subscribers'
retail revenues as well as through the Company's underlying carriers' wholesale charges. Beginning October 1, 2006, the Company began
charging its subscribers a USF surcharge fee equal to the USF contribution amounts the Company is required to contribute. 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. As a result of the ruling, the
Company retroactively applied its traffic study contribution rate to the historical subscriber retail revenues which resulted in the recognition of
revenue of $573,000 due to the reduction of the related accrued liability in the first fiscal quarter of 2008. As of July 1, 2007, the Company is
using the results of its traffic study to calculate the required contribution to the USF. Moreover, the FCC just released an Order clarifying how
providers that rely on traffic studies to calculate their USF contributions should assess certain revenues associated with minutes-of-use
charges. The Company is still evaluating the impact of this Order on its USF contribution but it may require the Company to increase its
contribution resulting in higher pass-through charges to its customers. In the meantime, the FCC continues to evaluate alternative methods for
assessing USF charges, including imposing an assessment on telephone numbers. The outcome of these proceedings cannot be determined
at this time nor can the Company determine the potential financial impact as the details of an alternative method of USF contribution have not
been determined at this time. There is also a risk that state USF funds may attempt to impose state USF contribution obligations and other
state and local charges. At this time, at least three states contend that providers of interconnected VoIP services, like us, should contribute to
its USF fund. On August 6, 2007, the FCC released a Report and Order concerning the collection of regulatory fees for Fiscal Year 2007 ("Regulatory
Fees Order"), which, for the first time, mandates the collection of such fees from interconnected VoIP service providers like us. The Regulatory
Fees Order requires that interconnected VoIP providers pay regulatory fees based on reported interstate and international revenues. The
Regulatory Fees Order became effective in November 2007. Regulatory fees for the FCC's Fiscal Year 2007 will be due in 2008 during a
separate filing window yet to be determined. Fiscal Year 2008 fees will also be paid in 2008 during the normal regulatory fee payment window.
The assessment of regulatory fees on the Company's service offering will increase its costs and reduce its profitability or cause the Company
to increase the retail price of the Company's service offerings. On November 8, 2007, the FCC released a Report and Order concerning Local Number Portability ("LNP Order"). The LNP Order imposes
local number portability and related obligations on interconnected VoIP Providers. The LNP Order is not yet effective and will not be effective
for at least 90 days. The obligations require interconnected VoIP providers to contribute to shared numbering administration costs on a
competitively neutral basis. The assessment of local number portability fees to our service will increase our costs and reduce our profitability or
cause us to increase the price of our retail service offerings. - 17 -
The effect of any future laws, regulations and the orders on our operations, including, but not limited to, the Packet8
service, cannot be determined. But as a general matter, increased regulation and the imposition of additional funding obligations, at both the
federal and state levels, increases our costs of providing service that may or may not be recoverable from our customers which could result in
making our services less competitive with traditional telecommunications services if we increase our retail prices or decrease our profit margins
if we attempt to absorb such costs. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This 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 VoIP 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. The forward-looking statements may also be impacted by the additional risks faced by us as
described in this Report, including those set forth under the section entitled "Factors that May Affect Future Results." 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 2007 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 telecommunication technology for Internet protocol, or IP, telephony and video applications.
We offer the Packet8 broadband voice over Internet protocol, or VoIP, and video communications service, Packet8 Virtual Office service and
videophone equipment and services (collectively, Packet8). We shipped our first VoIP product in 1998, launched our Packet8 service in
November 2002, and launched the Packet8 Virtual Office business service offering in March 2004. Substantially all of our revenues are
generated from the sale, license and provisioning of VoIP products, services and technologies. 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 2008 refers to the fiscal year ending March 31, 2008). 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, 2007. - 18 -
RECENT ACCOUNTING PRONOUNCEMENTS In December 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No.
141 (Revised 2007), "Business Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) significantly changes the accounting for business
combinations in a number of areas including the treatment of contingent consideration, acquired contingencies, transaction costs, in-process
research and development and restructuring costs. In addition, under SFAS No. 141(R), changes in an acquired entity's deferred tax assets
and uncertain tax positions after the measurement period will impact income tax expense. SFAS No. 141(R) applies prospectively to 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,
2008. Earlier adoption is prohibited. We will adopt this pronouncement in the first quarter of fiscal 2010 and do not expect the adoption of
SFAS No. 141(R) will have a material impact on our consolidated results of operations and financial condition. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in Consolidated Financial Statements an Amendment of ARB
no. 51" ("SFAS No. 160"), which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary, changes in
a parent's ownership interest in a subsidiary and the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or
after December 15, 2008. Earlier adoption is prohibited. We will adopt this pronouncement in the first quarter of fiscal 2010 and do not expect
the adoption of SFAS No. 160 will have a material impact on our consolidated results of operations and financial condition. KEY BUSINESS METRICS 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 key business
metrics include the following: Churn: Average monthly subscriber line churn for a particular period is calculated by dividing the number of lines that terminated
during that period by the simple average number of lines during the period and dividing the result by the number of months in the period. The
simple average number of lines during the period is the number of lines on the first day of the period, plus the number of lines on the last day
of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period
if termination occurred within the first 30 days after purchasing our service. Management reviews this metric to evaluate whether we are
retaining our existing subscribers in accordance with our business plans. Churn approximated 3.8% for the third fiscal quarter of 2008 and
3.7% for the same period of fiscal 2007. Churn increased slightly due to the cancellation of our service in the third quarter of fiscal 2008 by two
customers that subscribed to a large number of low revenue features. If we are unable to compete effectively against our existing competitors
as well as against potential new entrants into the VoIP telephone service business, in both retaining our existing subscribers and attracting
new subscribers, or if an increasing percentage of our customers decide to drop our VoIP services for other reasons such as cost, lack of use,
or our inability to meet their requirements for phone service, our churn will likely increase and our business will be adversely affected. Subscriber acquisition cost: Subscriber acquisition cost is defined as the combined costs for advertising, marketing, promotions,
commissions and equipment subsidies. Management reviews this metric to evaluate how effective our marketing programs are in acquiring
new subscribers on an economical basis in the context of estimated subscriber lifetime value. Subscriber acquisition costs for both residential
and business services approximated $129 for the third fiscal quarter of 2008 compared to $139 for the same period of fiscal 2007. Subscriber
acquisition cost declined due to a reduction in the subsidy for equipment provided to new subscribers. Management believes it is useful to monitor these metrics together and not individually as it does not make business decisions based upon
any single metric. - 19 -
RESULTS OF OPERATIONS The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto. Service Revenues Service revenues consist primarily of revenues attributable to the provision of our Packet8 service and royalties earned under our
VoIP technology licenses. We expect that Packet8 service revenues will continue to comprise nearly all of our service revenues for the
foreseeable future. Most of the revenue increase for the third quarter of fiscal 2008 consisted of a $3.0 million increase in revenues attributable to the growth
in the Virtual Office subscriber base and an increase in the price of our service instituted on March 1, 2007. In early fiscal 2007, we redirected
most of our marketing efforts from targeting residential customers to marketing our Packet8 Virtual Office services to small businesses. The
Packet8 Virtual Office subscriber base grew from serving approximately 6,000 businesses on December 31, 2006 to more than 10,000 on
December 31, 2007. The increase in service revenues during the third quarter of fiscal 2008 also included a $0.3 million increase in revenues
attributable to residential and videophone services and a net reduction of $0.3 million attributable to our wholesale service and royalty
revenue. The increase for the first nine months of fiscal 2008 compared to
the same period in the prior fiscal year resulted primarily from a $9.1 million increase in revenues attributable to the growth in the Virtual Office
subscriber base for Packet8 service and price increase that took effect on March 1, 2007. We also recognized a
$0.6 million one time increase in revenue due to a ruling by the U.S. Court of Appeals for the District of Columbia that eliminated a requirement
that we obtain pre-approval of traffic studies in determining the portion of revenues subject to federal universal service
contributions Product Revenues - 20 -
Product revenues consist of revenues from sales of VoIP terminal adapters, telephones and videophones, primarily
attributable to our Packet8 service. Product revenue for the third quarter and the first nine months of fiscal 2008 decreased primarily because
we agreed to waive the regular start-up costs, which include the equipment cost associated with residential service plans, as part of the
transition of a competitor's former customers to the Packet8 service. No customer represented greater than 10% of our total revenues for the three and nine months ended December 31, 2007 and 2006. Our
revenue distribution by geographic region (based upon the destination of shipments) was as follows: Cost of Service Revenues 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 and nine months ended December 31, 2007 decreased $0.2 million and $1.6 million, respectively, over the comparable period in the
prior fiscal year primarily due to a reduction in pricing by third party network service vendors and our switch to the use of multiple third party
network provider vendors throughout fiscal 2007 and 2008, which allows us to route call traffic to the third party network provider vendor with
the most favorable pricing. Cost of Product Revenues 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. The decrease in the cost of product revenues for the third quarter of fiscal 2008 compared to the
same period in the prior fiscal year was primarily due to a $0.5 million reduction in product reserves and a $0.3 million reduction in shipments
of residential and videophone equipment. We had a $0.1 million increase in costs in December 2007 from the write-off of equipment shipped to
a failed retailer. - 21 -
The decrease in cost of product revenues for the first nine months of fiscal 2008 compared to the same period in the prior fiscal year was
primarily due a $0.5 million reduction in product reserves as we eliminated a royalty expense accrual after determining that we were unlikely to
pay royalties in the future. The reduction in shipments of residential and videophone equipment led to a decline of $0.7 million in product costs
during the period. The decrease in cost of product revenues was offset by a $0.2 million increase in shipments of virtual office equipment and a
$0.1 million increase in costs from the write-off of equipment shipped to a failed retailer. Research and Development Expenses Research and development expenses consist primarily of personnel, system prototype, software and equipment costs necessary for us to
conduct our engineering and development efforts. Selling, General and Administrative Expenses 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 sales commissions, trade show, advertising and other
marketing and promotional expenses. Selling, general and administrative expenses for the third quarter of fiscal 2008 increased over the same
quarter in the prior fiscal year primarily because of a $0.9 million increase in personnel and temporary personnel costs and a $0.4 million
increase in advertising, public relations, and other marketing and promotional expenses. The increase in expenses was partially offset by a
$0.2 million decrease in sales agent and retailer commissions, a $0.1 million decrease in credit card processing fees, and a $0.1 million
decrease in sales and use tax expenses. Selling, general and administrative expenses for the first nine
months of fiscal 2008 increased over the same period in the prior fiscal year primarily because of a $2.0 million increase in personnel costs to
support the growth in our Packet8 service, especially for staffing customer service positions, a $0.8 million increase in advertising, public
relations, and other marketing and promotional expenses, and a $0.1 million increase in accounting and tax related expenses. The increase in
expenses was partially offset by a $0.5 million decrease in sales agent and retailer commission and a $0.1 million decrease in sales and use
tax expenses. - 22 -
Other Income, Net In the third fiscal quarter of 2008 and the first nine months of fiscal 2008, other income, net primarily consisted of $1.2 million from the sale
of two patents and interest and investment income earned on our cash, cash equivalents and investment balances. Income on change in Fair Value of Warrant Liability 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 warrants included a provision that we must deliver freely tradable shares upon exercise of the warrant.
Because there are circumstances that may not be within our control that could prevent delivery of registered shares, EITF 00-19 requires the
warrants be recorded as a liability at fair value with subsequent changes in fair value recorded as a gain or loss. 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. To the extent that the fair value of the warrant liability increases or decreases, we record a loss or
gain in our statement of operations. The increase in income from the change in fair value of the warrants for the third quarter of fiscal 2008
compared to the comparable period in the prior fiscal year is due to a reduction in the fair value of warrants resulting from a decline in our stock
price, expected price volatility and contractual life of the warrants which are the primary assumptions applied to the Black-Scholes model which
we have used to calculate the fair value of the warrants. The decrease in the income from change in fair value of warrants in the first nine months of fiscal 2008 compared to the same period in
fiscal 2007 occurred because the fair value of warrants and warrant liability declined due to a reduction in the expected stock price volatility
and contractual life of the warrants. Furthermore, on August 29, 2007, we and the warrant holders amended the terms of warrants for
3,659,624 shares of common stock that we had classified as liabilities. Consequently, the amended warrants were reclassified from liability to
equity. A total of $0.4 million of the income from the change in fair value of the warrants in the second quarter of fiscal 2008 was related to the
amended warrants and $0.9 million was reclassified from liability to equity. The remaining investor warrants for 1,785,714 shares of common
stock issued on December 19, 2005 have not been amended and will continue to be accounted for as liabilities until exercised or expiration in
December 2010. Provision for Income Taxes There were no income tax provisions recorded during the three and nine month periods ended December 31, 2007 and 2006, due
to year to date net losses incurred. No income tax provisions have been recorded for any period presented, and we believe that, based on the
history of our operating losses and other factors, the weight of available evidence indicates that it is more likely than not that we will not be able
to realize the benefit of our net operating losses. Accordingly, a full valuation reserve has been recorded against our net deferred tax assets.
- 23 -
Liquidity and Capital Resources Cash provided by operations of $2.6 million in the first nine months of fiscal 2008 compared to cash used of $9.4 million in the
same period of fiscal 2007, an improvement of $12.0 million. The increase in cash provided by operating activities was primarily due to a
reduction in the net loss of $6.4 million adjusted for an increase in non-cash items, including the change in the fair value of warrants of $2.2
million and stock-based compensation expense of $0.6 million. The increase in the source of cash of $1.9 million in 2008 from 2007 levels was primarily due to lower inventory levels of customer premise
equipment. Inventories represented a source of cash of $0.7 million in the third fiscal quarter of 2008 compared to a use of cash of $1.2 million
in the same period of fiscal 2007. Deferred cost of goods sold represented a $0.8 million source of cash in the first nine months of fiscal 2008 compared to a source of cash
of $0.4 million in the same period of fiscal 2007. The increase in cash of $0.4 million provided by deferred cost of goods sold was primarily due
to a reduction in deferred cost of goods sold related to retailers and the write-off of $0.1 million of equipment in inventory held by failed retailer
that we will be unable to recover. Accrued taxes and fees represented a source of cash of $0.8 million in the first nine months of fiscal 2008 compared to a source of cash of
$0.9 million in the same period in fiscal 2007. The decrease in cash provided by accrued taxes and fees of $0.1 million was primarily due to the
collection of sales and use tax in one state other than California. Deferred revenue represented a source of cash of $1.6 million in the first nine months of fiscal 2008 compared to a use of $0.7 million in
the same period of fiscal 2007. The increase in the source of cash of $2.3 million in 2008 from levels during the same period of fiscal 2007 was
primarily due to deferral of new annual plan subscriptions entered into during the first nine months of fiscal 2008. The increase in deferred
revenue was offset by a decrease in deferred revenue related to retailers due to sell through of units held by retailers to end consumers or
repurchase of consigned inventory. Other current and non-current liabilities represented a use of cash of $0.8 million in the first nine months of fiscal 2008 compared to a use
of cash of $0.3 million in the same period of fiscal 2007. The increase in the use of cash of $0.5 million in the first nine months of fiscal 2008
from the levels in the same period of 2007 was primarily due to a decrease in accrued royalty, outstanding debt related to capital leases, and
deferred rent. Cash used in investing activities of $0.7 million for the first nine months of fiscal 2008 was primarily attributable to purchases of
investments of $3.3 million and $0.5 million of purchases of fixed assets. The purchases of fixed assets were primarily attributable to
equipment required by the growth of the Packet8 Virtual Office subscriber base. The decrease in cash due to investing activities was offset by
the maturity or sale of $3.1 million of investments. Contractual Obligations Future operating lease payments, net of sublease income, capital lease payments and purchase obligations at December 31, 2007
were as follows (in thousands): - 24 -
Effective June 1, 2006, we entered into a 24 month
contract with one of our third party network service providers containing a minimum monthly commitment of $400,000. At December 31, 2007,
the total remaining obligation under the contract was $2,000,000. Effective January 1, 2008, we entered into a 15 month contract with one of our third party customer support
vendors containing a minimum monthly commitment of approximately $436,000 through March 31, 2009. The total remaining obligation under
the contract is $6.5 million. At December 31, 2007, we had open purchase orders of approximately $1.4 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 when we become obligated to make payments for them. Based upon our current expectations, we believe that our current cash and cash equivalents and short-term investments, together with
cash expected to be generated from future operations, will be sufficient to satisfy our expected working capital and capital expenditure
requirements for at least the next 12 months. Although we believe that our current cash and cash equivalents will satisfy our expected working capital and capital expenditure
requirements through at least the next 12 months, our business may change in ways we do not currently anticipate, which could require us to
raise additional funds to support our operations earlier than otherwise expected. Unless we achieve and maintain profitability, we may need to
raise additional capital to support our business. We may not be able to obtain additional financing as needed on acceptable terms, or at all,
which may require us to reduce our operating costs and other expenditures by making reductions in personnel and capital expenditures.
Alternatively, or in addition to such potential measures, we may elect to implement other cost reduction actions as we may determine are
necessary and in our best interests. Any such actions undertaken might limit our opportunities to realize plans for revenue growth, and we
might not be able to reduce our costs in amounts sufficient to achieve break-even or profitable operations. 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 a foreign subsidiary in France and are exposed to market risk from changes in exchange rates. 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 auction rate securities, commercial paper
and corporate bonds. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Effectiveness of Disclosure Controls and Procedures The Company maintains
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 ("Disclosure
Controls") that are designed to ensure that information the Company is 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. - 25 -
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 the end of December 31,
2007. Limitations on the Effectiveness of Controls The Company's
management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company's 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, within the Company have been detected. Changes in Internal Control over Financial Reporting During the third quarter of fiscal 2008, there were no material changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) 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 8". 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 Item 1A of our annual report on Form 10-K for the year ended March 31, 2007,
which we filed with the Securities and Exchange Commission on June 29, 2007. The following discussion is of material changes to risk
factors disclosed in that report. We have a history of losses
and are uncertain as to our future profitability. We recorded an operating loss of $4.4 million for the nine months ended December 31, 2007, and we ended the period with an
accumulated deficit of $201 million. We recorded an operating loss of $14.3 million for the year ended March 31, 2007 and ended the period
with an accumulated deficit of $200 million. In addition, we recorded operating losses of $25 million and $20 million for the fiscal years ended
March 31, 2006 and 2005, respectively. We may continue to incur operating losses for the foreseeable future, and such losses may be
substantial. We will need to increase revenues in order to generate sustainable operating profit. Given our history of fluctuating revenues and
operating losses, we cannot be certain that we will be able to achieve profitability on either a quarterly or annual basis in the future. We may not be able to maintain our listing on the NASDAQ Capital Market. Our common stock trades on the NASDAQ Capital Market, which has certain compliance requirements for continued listing of
common stock. We have in the past been subject to delisting procedures due to a drop in the price of our common stock. If our minimum
closing bid price per share falls below $1.00 for a period of 30 consecutive trading days in the future, we may again be subject to delisting
procedures. As of the close of business on February 1, 2008, our common stock had a closing bid price of approximately $1.22 per share. We
must also meet additional continued listing requirements contained in NASDAQ Marketplace Rule 4310(c)(2)(b), which requires that we have a
minimum of $2,500,000 in stockholders' equity or $35,000,000 market value of listed securities held by non-affiliates or $500,000 of net income
from continuing operations for the most recently completed fiscal year (or two of the three most recently completed fiscal years). As of
February 1, 2008, based on our closing price as of that day, the market value of our securities held by non-affiliates approximated $74,917,000
and we were in compliance with NASDAQ Marketplace Rule 4310(c)(2)(b). There can be no assurance that we will continue to meet the
continued listing requirements. - 26 -
Delisting could reduce the ability of our shareholders to purchase or sell shares as quickly and as inexpensively as they have done
historically. For instance, failure to obtain listing on another market or exchange may make it more difficult for traders to sell our securities.
Broker-dealers may be less willing or able to sell or make a market in our common stock. Not maintaining our NASDAQ Capital Market listing
may: We may be subject to liabilities for past sales and additional taxes, surcharges and fees. Excluding California sales and use tax, sales and use tax in one state other than California, the federal
Universal Service Fund, or USF, and E911 state and local fees, we do not collect state and federal telecommunications taxes or other
telecommunications surcharges with respect to our Packet8 service in accordance with current industry practice. Based upon a new ruling
published by the Internal Revenue Service, or IRS, we ceased collecting Federal Excise Tax, or FET, on June 1, 2006. We do not collect
Value Added Tax, or VAT, for services that we provide to customers in European Union, or EU, member countries. Future expansion of our
Packet8 service, along with other aspects of our evolving business, may result in additional sales and other tax obligations. One or more states
or foreign countries may seek to impose sales or other tax collection obligations on out-of-jurisdiction companies that provide telephone
service. A successful assertion by one or more states or foreign countries that we should collect sales or other taxes on the sale of
merchandise or services could result in substantial tax liabilities for past sales, decrease our ability to compete with traditional telephone
companies, and could have a material adverse effect on our business, financial condition or operating results. We have received inquiries or demands from numerous states and municipal taxing and 911 agencies seeking payment of taxes that are
applied to or collected from the customers of providers of traditional public switched telephone network services. We have consistently
maintained that these taxes do not apply to our service, in states other than California, for a variety of reasons depending on the statute or rule
that establishes such obligations. In September 2006, our largest third party network service provider vendor began passing through E911
taxes to us. On October 1, 2006, we began collecting certain state and local E911 charges from our customers for these amounts. The
amounts collected from our customers are paid to the third party network service provider. We have not collected or accrued liabilities for E911
taxes prior to October 1, 2006, and it is possible that substantial claims for back taxes may be asserted against us, which could adversely
affect our business financial condition or operating results. One or more states or foreign countries may seek to impose sales, use or other tax collection obligations on us. We have received
inquiries or demands from numerous state authorities and are currently under audit by one state. A successful assertion by one or more states
or foreign countries that we should collect sales, use or other taxes on the sale of customer premise equipment or services could result in
substantial tax liabilities for past sales, decrease our ability to compete with traditional telephone companies, and could have a material
adverse effect on our business, financial condition or operating results. On October 1, 2007, we began collecting sales and use tax in one state
other than California and we will begin to collect and remit sales and use tax in additional states in the fourth quarter of fiscal 2008 and
throughout fiscal 2009. We have recorded
an expense of $619,000 and $633,000 for the nine months ended December 31, 2007 and 2006, respectively, as our best estimate of the
probable tax exposure for such assessments. The
cumulative estimate for total assessments is $2,189,000 as of December 31, 2007, which is recorded in the accrued taxes and fees line item in
the condensed consolidated balance sheets. - 27 -
31.1 Certification of Chief Executive Officer pursuant to
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (PDF as a courtesy) 31.2 Certification of Chief Financial Officer pursuant to
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (PDF as a courtesy) 32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (PDF as a courtesy) 32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (PDF as a courtesy) - 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: February 6, 2008 8X8, INC. (Registrant) By: /s/ DANIEL WEIRICH Daniel Weirich Chief Financial Officer - 29 -
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Weighted
Shares
Average
Shares
Subject to
Exercise
Available
Options
Price
for Grant
Outstanding
Per Share
Balance at March 31, 2007
5,926,459
8,929,978
$
2.17
Changes in options available for grant
-
-
-
Granted
(2,125,000)
2,125,000
1.27
Exercised
-
(22,208)
0.90
Canceled/forfeited
745,601
(745,601)
1.88
Termination of plans
(546,685)
-
-
Balance at December 31, 2007
4,000,375
10,287,169
$
2.01
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 - $1.26
2,807,474
$
1.18
8.17
$
60,663
938,648
$
1.06
$
60,663
$1.27 - $1.49
2,067,500
$
1.38
8.33
-
745,616
$
1.38
-
$1.50 - $1.79
2,227,877
$
1.70
7.05
-
1,570,678
$
1.70
-
$1.80 - $3.35
2,122,942
$
2.22
4.55
-
1,879,326
$
2.19
-
$3.36 - $14.94
1,061,376
$
5.66
3.10
-
1,050,417
$
5.68
-
10,287,169
$
60,663
6,184,685
$
60,663
Three Months Ended
Nine Months Ended
December 31,
December 31,
2007
2006
2007
2006
Expected volatility
75%
85%
79%
90%
Expected dividend yield
-
-
-
-
Risk-free interest rate
3.50%
4.63%
4.44%
4.87%
Weighted average expected option term
3.00 years
3.53 years
3.45 years
3.40 years
Weighted average fair value of options granted
$
0.66
$
0.80
$
0.72
$
0.87
Three Months Ended
Nine Months Ended
December 31,
December 31,
2007
2006
2007
2006
Expected volatility
54%
107%
54%
107%
Expected dividend yield
-
-
-
-
Risk-free interest rate
4.89%
4.64%
4.89%
4.64%
Weighted average expected option term
0.75 years
0.74 years
0.75 years
0.74 years
Weighted average fair value of options granted
$
0.46
$
0.66
$
0.46
$
0.66
Three Months Ended
Nine Months Ended
December 31,
December 31,
2007
2006
2007
2006
Cost of service revenues
$
7
$
16
$
14
$
79
Cost of product revenues
6
4
13
15
Research and development
59
96
184
333
Selling, general and administrative
252
286
747
1,111
Total stock-based compensation expense related to
employee stock options and employee stock purchases, pre-tax
324
402
958
1,538
Tax benefit
-
-
-
-
Stock based compensation expense related to employeee
stock options and employee stock purchases, net of tax
$
324
$
402
$
958
$
1,538
December 31,
March 31,
2007
2007
Inventory (in thousands):
Work-in-process
$
704
$
1,919
Finished goods
1,192
710
$
1,896
$
2,629
Three Months Ended
Nine Months Ended
December 31,
December 31,
2007
2006
2007
2006
Numerator:
Net income (loss) available to common stockholders
$
1,389
$
(2,833)
$
(661)
$
(7,021)
Denominator:
Common shares
61,927
61,420
61,857
61,297
Denominator for basic calculation
61,927
61,420
61,857
61,297
Employee stock options
100
-
-
-
Employee stock purchase plan
43
-
-
-
Warrants
43
-
-
-
Denominator for diluted calculation
62,113
61,420
61,857
61,297
Net income (loss) per share
Basic
$
0.02
$
(0.05)
$
(0.01)
$
(0.11)
Diluted
$
0.02
$
(0.05)
$
(0.01)
$
(0.11)
Three Months Ended
Nine Months Ended
December 31,
December 31,
2007
2006
2007
2006
Common stock options
9,591
9,659
10,287
9,659
Warrants
7,976
8,663
8,081
8,663
17,567
18,322
18,368
18,322
Three Months Ended
Nine Months Ended
December 31,
December 31,
2007
2006
2007
2006
Net income (loss), as reported
$
1,389
$
(2,833)
$
(661)
$
(7,021)
Unrealized gain (loss) on investments in securities
(3)
5
6
29
Comprehensive income (loss)
$
1,386
$
(2,828)
$
(655)
$
(6,992)
Three Months Ended
Nine Months Ended
December 31,
December 31,
2007
2006
2007
2006
Packet8 services and videophones/equipment
$
15,724
$
13,210
$
45,095
$
38,476
Semiconductors and related software
80
92
197
230
Hosted iPBX solutions
-
13
22
36
Total revenues
$
15,804
$
13,315
$
45,314
$
38,742
Three Months Ended
Nine Months Ended
December 31,
December 31,
2007
2006
2007
2006
Americas (principally US)
99%
99%
99%
99%
Other locations
1%
1%
1%
1%
100%
100%
100%
100%
Three Months Ended
Nine Months Ended
December 31,
December 31,
2007
2006
2007
2006
Balance at beginning of period
$
339
$
303
$
323
$
301
Accruals for warranties
66
26
250
229
Settlements
(69)
(59)
(237)
(221)
Changes in estimates
-
-
-
(39)
Balance at end of period
$
336
$
270
$
336
$
270
Year ending March 31:
Remaining 2008
$
123
2009
493
2010
206
Total minimum payments
$
822
Year ending March 31:
Remaining 2008
$
11
2009
42
2010
42
2011
26
2012
22
Total minimum payments
143
Less: Amount representing interest
(12)
131
Less: Short-term portion of capital lease obligations
(36)
Long-term portion of capital lease obligations
$
95
December 31,
Dollar
Percent
Service revenues
2007
2006
Change
Change
(dollar amounts in thousands)
Three months ended
$
14,426
$
11,515
$
2,911
25.3%
Percentage of total revenues
91.3%
86.5%
Nine months ended
$
41,109
$
32,632
$
8,477
26.0%
Percentage of total revenues
90.7%
84.2%
December 31,
Dollar
Percent
Product revenues
2007
2006
Change
Change
(dollar amounts in thousands)
Three months ended
$
1,378
$
1,800
$
(422)
-23.4%
Percentage of total revenues
8.7%
13.5%
Nine months ended
$
4,205
$
6,110
$
(1,905)
-31.2%
Percentage of total revenues
9.3%
15.8%
Three Months Ended
Nine Months Ended
December 31,
December 31,
2007
2006
2007
2006
Americas (principally US)
99%
99%
99%
99%
Other locations
1%
1%
1%
1%
100%
100%
100%
100%
December 31,
Dollar
Percent
Cost of service revenues
2007
2006
Change
Change
(dollar amounts in thousands)
Three months ended
$
4,364
$
4,555
$
(191)
-4.2%
Percentage of service revenues
30.3%
39.6%
Nine months ended
$
12,780
$
14,332
$
(1,552)
-10.8%
Percentage of service revenues
31.1%
43.9%
December 31,
Dollar
Percent
Cost of product revenues
2007
2006
Change
Change
(dollar amounts in thousands)
Three months ended
$
1,175
$
1,818
$
(643)
-35.4%
Percentage of product revenues
85.3%
101.0%
Nine months ended
$
5,210
$
6,100
$
(890)
-14.6%
Percentage of product revenues
123.9%
99.8%
December 31,
Dollar
Percent
Research and development
2007
2006
Change
Change
(dollar amounts in thousands)
Three months ended
$
1,081
$
1,094
$
(13)
-1.2%
Percentage of total revenues
6.8%
8.2%
Nine months ended
$
3,164
$
3,672
$
(508)
-13.8%
Percentage of total revenues
7.0%
9.5%
December 31,
Dollar
Percent
Selling, general and administrative
2007
2006
Change
Change
(dollar amounts in thousands)
Three months ended
$
9,604
$
8,833
$
771
8.7%
Percentage of total revenues
60.8%
66.3%
Nine months ended
$
28,573
$
26,536
$
2,037
7.7%
Percentage of total revenues
63.1%
68.5%
December 31,
Dollar
Percent
Other income, net
2007
2006
Change
Change
(dollar amounts in thousands)
Three months ended
$
1,361
$
112
$
1,249
1115.2%
Percentage of total revenues
8.6%
0.8%
Nine months ended
$
1,654
$
539
$
1,115
206.9%
Percentage of total revenues
3.7%
1.4%
Income on change in fair
December 31,
Dollar
Percent
value of warrant liability
2007
2006
Change
Change
(dollar amounts in thousands)
Three months ended
$
448
$
40
$
408
1020.0%
Percentage of total revenues
2.8%
0.3%
Nine months ended
$
2,098
$
4,338
$
(2,240)
-51.6%
Percentage of total revenues
4.6%
11.2%
Year Ending March 31,
2008
2009
2010
2011
2012
Total
Capital leases
$
11
$
42
$
42
$
26
$
22
$
143
Office leases
123
493
206
-
-
822
Purchase obligations
Third party network service providers
1,200
800
-
-
-
2,000
Third party customer support provider
1,308
5,232
-
-
-
6,540
Open purchase orders
1,091
294
-
-
-
1,385
$
3,733
$
6,861
$
248
$
26
$
22
$
10,890
(Principal Financial and Accounting Officer)