8x8, Inc.
8X8 INC /DE/ (Form: 10-Q, Received: 11/01/2011 06:03:06)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to _________

Commission file number 000-21783

8X8, INC.
(Exact name of Registrant as Specified in its Charter)

 

Delaware
77-0142404
  (State or Other Jurisdiction of Incorporation or Organization) 
(I.R.S. Employer Identification Number)

810 West Maude Avenue
Sunnyvale, CA    94085

(Address of Principal Executive Offices)

(408) 727-1885
(Registrant's Telephone Number, including Area Code)

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.    x YES      ¨ NO   

      Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES   x     NO   ¨

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    ¨

Accelerated filer    x

Non-accelerated filer    ¨
(Do not check if a smaller reporting company)

Smaller reporting company    ¨

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES    ¨        NO    x

      The number of shares of the Registrant's Common Stock outstanding as of October 26, 2011 was 69,384,591.



FORM 10-Q      PDF as a courtesy
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION Page No.
     
Item 1. Financial Statements:
 
     
           Condensed Consolidated Balance Sheets at September 30, 2011 and March 31, 2011
3
     
           Condensed Consolidated Statements of Income for the three
           and six months ended September 30, 2011 and 2010
4
     
           Condensed Consolidated Statements of Cash Flows for the six
           months ended September 30, 2011 and 2010
5
     
           Notes to Unaudited Condensed Consolidated Financial Statements
6
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
22
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk
27
     
Item 4. Controls and Procedures
28
     
PART II. OTHER INFORMATION
 
     
Item 1. Legal Proceedings
28
     
Item 1A. Risk Factors
28
     
Item 6. Exhibits
33
     
Signature
34

- 2 -


Part I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

8X8, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)

      September 30,         March 31,    
      2011     2011
ASSETS            
Current assets:            
     Cash and cash equivalents $ 17,200    $ 16,474 
     Restricted cash     28     
     Short-term investments     1,904      1,927 
     Accounts receivable, net     1,796      863 
     Inventory     654      2,105 
     Deferred cost of goods sold     137      123 
     Other current assets     1,058      584 
          Total current assets     22,777      22,076 
Property and equipment, net     3,252      2,398 
Intangible assets, net     12,336      214 
Goodwill     22,642      1,210 
Other assets     660      686 
               Total assets   $ 61,667    $ 26,584 
             
LIABILITIES AND STOCKHOLDERS' EQUITY            
Current liabilities:            
     Accounts payable   $ 4,719    $ 4,551 
     Accrued compensation     2,611      1,722 
     Accrued warranty     391      362 
     Accrued taxes     1,701      1,828 
     Deferred revenue     1,323      835 
     Other accrued liabilities     2,372      1,386 
          Total current liabilities     13,117      10,684 
             
Other liabilities     409      39 
          Total liabilities     13,526      10,723 
             
Commitments and contingencies (Note 9)            
             
Stockholders' equity:            
     Common stock     62      62 
     Additional paid-in capital     237,742      208,218 
     Accumulated other comprehensive loss     (96)     (73)
     Accumulated deficit     (189,567)     (192,346)
          Total stockholders' equity     48,141      15,861 
               Total liabilities and stockholders' equity   $ 61,667    $ 26,584 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

- 3 -


8X8, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts; unaudited)

      Three Months Ended     Six Months Ended
      September 30,     September 30,
      2011     2010     2011     2010
Service revenue   $ 18,013    $ 16,071    $ 35,034    $ 31,434 
Product revenue     1,806      1,296      3,292      2,767 
          Total revenue     19,819      17,367      38,326      34,201 
                         
Operating expenses:                        
     Cost of service revenue     4,059      3,589      7,874      6,971 
     Cost of product revenue     2,613      2,031      4,883      4,057 
     Research and development     1,540      1,271      2,947      2,497 
     Selling, general and administrative     10,742      8,525      20,151      17,883 
          Total operating expenses     18,954      15,416      35,855      31,408 
Income from operations     865      1,951      2,471      2,793 
Other income (expense), net     (11)     12          34 
Income on change in fair value of warrant liability                 167 
Income before provision (benefit) for income taxes     854      1,972      2,480      2,994 
Provision (benefit) for income taxes     22          (299)    
Net income   $ 832    $ 1,969    $ 2,779    $ 2,987 
                         
Net income per share:                        
     Basic   $ 0.01    $ 0.03    $ 0.04    $ 0.05 
     Diluted   $ 0.01    $ 0.03    $ 0.04    $ 0.05 
Weighted average number of shares:                        
     Basic     63,710      63,383      62,989      63,495 
     Diluted     67,759      64,847      66,833      64,807 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

- 4 -


8X8, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)

      Six Months Ended
      September 30,
      2011     2010
Cash flows from operating activities:            
Net income   $ 2,779    $ 2,987 
Adjustments to reconcile net income to net cash            
     provided by operating activities:            
          Depreciation and amortization     790      599 
          Stock compensation     595      129 
          Change in fair value of warrant liability         (167)
          Deferred income tax benefit     (336)    
          Other     37      34 
Changes in assets and liabilities            
          Accounts receivable, net     (438)     (268)
          Inventory     1,491      634 
          Other current and noncurrent assets     153      (134)
          Deferred cost of goods sold     (14)     (2)
          Accounts payable     (1,737)     782 
          Accrued compensation     (366)     197 
          Accrued warranty     29      49 
          Accrued taxes and fees     (127)     268 
          Deferred revenue     235      203 
          Other current and noncurrent liabilities     151      (1,017)
               Net cash provided by operating activities     3,242      4,294 
             
Cash flows from investing activities:            
     Purchases of property and equipment     (1,211)     (1,080)
     Purchase of strategic investment         (315)
     Acquisition of businesses, net of cash acquired     (713)     (998)
     Sale of property and equipment        
               Net cash used in investing activities     (1,924)     (2,392)
             
Cash flows from financing activities:            
     Capital lease payments     (247)     (18)
     Repurchase of common stock     (1,038)     (2,700)
     Proceeds from issuance of common stock         278 
     Proceeds from issuance of common stock under employee stock plans     693      357 
               Net cash used in financing activities     (592)     (2,083)
Net increase in cash and cash equivalents     726      (181)
             
Cash and cash equivalents at the beginning of the period     16,474      18,056 
Cash and cash equivalents at the end of the period   $ 17,200    $ 17,875 
             
Supplemental cash flow information            
     Issuance of common stock in connection with acquisitions of businesses   $ 29,125    $ 600 
     Acquisition of property and equipment, net in connection with             
          acquisitions of businesses     372      80 
     Acquisition of capital lease in connection with acquisitions of businesses     297     
     Transfer of net assets in purchase of strategic investment         41 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

- 5 -


8X8, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

1. DESCRIPTION OF THE BUSINESS

THE COMPANY

8x8, Inc. ("8x8" or the "Company") develops and markets telecommunications services for Internet protocol, or IP, telephony and video applications as well as web-based conferencing, unified communications services, managed hosting and cloud-based computing services. As of September 30, 2011, the Company had more than 26,700 business customers.

The Company was incorporated in California in February 1987 and was reincorporated in Delaware in December 1996. The Company's fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in these notes to the consolidated financial statements refers to the fiscal year ending March 31 of the calendar year indicated (for example, fiscal 2012 refers to the fiscal year ending March 31, 2012).

2. BASIS OF PRESENTATION

The accompanying interim condensed consolidated financial statements are unaudited and have been prepared on substantially the same basis as our annual financial statements for the fiscal year ended March 31, 2011. In the opinion of the Company's management, these financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of our financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.

The March 31, 2011 year-end condensed consolidated balance sheet data in this document were derived from audited consolidated financial statements and do not include all of the disclosures required by U.S. generally accepted accounting principles. These financial statements should be read in conjunction with the Company's audited consolidated financial statements as of and for the fiscal year ended March 31, 2011 and notes thereto included in the Company's fiscal 2011 Annual Report on Form 10-K.

The results of operations and cash flows for the interim periods included in these financial statements are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.

Service Revenue

The Company recognizes new subscriber revenue in the month in which the new order is shipped, net of an allowance for expected cancellations. The allowance for expected cancellations is based on the Company's history of subscriber cancellations within the 30-day trial period offered with new services.

Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605-25 requires that revenue arrangements with multiple deliverables be divided into separate units of accounting if the deliverables in the arrangement meet specific criteria. In addition, arrangement consideration must be allocated among the separate units of accounting based on their relative fair values, with certain limitations. The provisioning of the 8x8 service with the accompanying IP phone equipment constitutes a revenue arrangement with multiple deliverables. In accordance with the guidance of ASC 605-25, the Company allocates revenue from new subscriptions, including activation fees, between the IP phone equipment and subscriber services. Revenue allocated to the IP phone equipment is recognized as product revenue during the period of the sale less the allowance for estimated returns during the 30-day trial period. All other revenue is recognized when the related services are provided.

6


Product revenue

The Company recognizes revenue from product sales for which there are no related services to be rendered upon shipment to partners and end users provided that persuasive evidence of an arrangement exists, the price is fixed, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations. Gross outbound shipping and handling charges are recorded as revenue, and the related costs are included in cost of goods sold. Reserves for returns and allowances for partner and end user sales are recorded at the time of shipment. In accordance with the ASC 985-605, the Company records shipments to distributors, retailers, and resellers, where the right of return exists, as deferred revenue. The Company defers recognition of revenue on sales to distributors, retailers, and resellers until products are resold to the end user.

Deferred Cost of Goods Sold

Deferred cost of goods sold represents the cost of products sold for which the customer has a right of return. The cost of the products sold is recognized contemporaneously with the recognition of revenue.

Goodwill and Other Intangible Assets

Goodwill and intangible assets with indefinite useful lives are not amortized. Intangible assets with finite useful lives are amortized on a straight-line basis over the periods benefited. The Company reviews the recoverability of its long-lived assets, such as plant and equipment, when events or changes in circumstances occur that indicate that the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on the Company's ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets.

Amortization expense for the customer relationship intangible asset is included in selling, general and administrative expenses. Amortization expense for technology is included in cost of service revenue. The carrying values of intangible assets as of September 30, 2011 and 2010 were as follows (in thousands):

    September 30, 2011     September 30, 2010
    Gross                 Gross            
    Carrying     Accumulated     Net Carrying     Carrying     Accumulated     Net Carrying
    Amount     Amortization     Amount     Amount     Amortization     Amount
Technology $ 8,242    $ (20)   $ 8,222    $   $   $
Customer relationships   3,305      (148)     3,157      308      (43)     265 
Trade names/domains   957          957             
Total acquired identifiable                                  
     intangible assets $ 12,504    $ (168)   $ 12,336    $ 308    $ (43)   $ 265 

7


Annual amortization of intangible assets, based upon our existing intangible assets and current useful lives, is estimated to be the following as of September 30, 2011 (in thousands):

      Amount
Remaining 2012                                                   $ 714 
2013     1,428 
2014     1,334 
2015     1,325 
2016     1,325 
Thereafter     5,253 
Total   $ 11,379 

Warrant Liability

The Company previously had two outstanding warrants that were classified as liabilities, which expired on December 19, 2010. The Company accounts for its warrants in accordance with ASC 480-10 which requires warrants to be classified as permanent equity, temporary equity or as assets or liabilities. In general, warrants that either require net-cash settlement or are presumed to require net-cash settlement are recorded as assets and liabilities at fair value and warrants that require settlement in shares are recorded as equity instruments.

Accounting for Stock-Based Compensation

The Company accounts for stock-based compensation under ASC 718 - Stock Compensation which establishes standards for the accounting for equity instruments exchanged for employee services. Under the provisions of ASC 718, share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity grant), net of estimated forfeitures.

Stock-based compensation expense recognized in the Company's condensed consolidated statements of income for the three and six months ended September 30, 2011 included the unvested portion of stock-based awards granted. Stock-based awards were measured based on ASC 718 criteria and the compensation expense for all share-based payment awards granted is recognized using the straight-line single-option method. Stock-based compensation expense includes the impact of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Stock-based Compensation Plans

The Company has several stock-based compensation plans that are described in Note 5 "Stockholders' Equity" of the Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2011. The Company, under its various equity plans, grants stock-based awards for shares of common stock to employees, non-employee directors and consultants.

As of September 30, 2011, the 1992 Stock Plan, 1996 Stock Plan and 1996 Director Option Plan had expired and the 1999 Nonstatutory Stock Option Plan had been cancelled by the Board, but there were unexercised options granted under these plans. Options granted under these plans generally vested over four years, were granted at fair market value on the date of the grant and expire ten years from that date.

8


The Company has reserved a total of 7,000,000 shares of common stock for issuance under its 2006 Stock Plan (the "2006 Plan"). The 2006 Plan is the Company's only active plan for providing stock-based incentive compensation ("awards") to its eligible employees, non-employee directors or consultants. Awards that may be granted under the 2006 Plan include incentive stock options, nonstatutory stock options and stock purchase rights. The exercise price of incentive stock options granted and purchase price of stock purchase rights may not be less than the fair market value on the effective date of the grant. Other types of options and awards under the 2006 Plan may be granted at any price approved by the administrator, which generally will be the board of directors. Options and stock purchase rights generally vest over four years and expire ten years after grant. The 2006 Plan expires in May 2016.

In the second fiscal quarter of 2012, the Company assumed the Amended and Restated Contactual, Inc. 2003 Stock Option Plan (the "2003 Contactual Plan") and registered an aggregate of 171,974 shares of the Company's common stock that may be issued upon the exercise of stock options previously granted under the 2003 Contactual Plan. No new grants can be granted under 2003 Contactual Plan.

Option and Stock Purchase Right Activity

Stock purchase right activity since March 31, 2011 is summarized as follows:

          Weighted     Weighted
          Average     Average
          Grant-Date     Remaining
    Number of     Fair Market     Contractual
    Shares     Value     Term (in Years)
Balance at March 31, 2011   886,445    $ 1.51       
Granted   401,568      3.41       
Released   (136,576)     1.24       
Forfeited            
Balance at September 30, 2011   1,151,437    $ 2.20      2.91 

Option activity since March 31, 2011 is summarized as follows:

                Weighted
          Shares     Average
    Shares     Subject to     Exercise
    Available     Options     Price
    for Grant     Outstanding     Per Share
Balance at March 31, 2011   1,553,979      6,969,196    $ 1.56 
Granted (1)(2)   (567,568)     337,974      3.77 
Exercised       (252,772)     1.38 
Canceled/forfeited   10,000      (10,000)     2.58 
Termination of plans           -  
Balance at September 30, 2011   996,411      7,044,398    $ 1.65 

(1) The reduction to shares available for grant includes awards granted of 401,568.
(2) The increase to shares subject to options outstanding includes 171,974 options assumed under the 2003 Contactual Plan.

9


The following table summarizes the stock options outstanding and exercisable at September 30, 2011:

    Options Outstanding   Options Exercisable
          Weighted   Weighted               Weighted      
          Average   Average               Average      
          Exercise   Remaining     Aggregate         Exercise     Aggregate
          Price   Contractual     Intrinsic         Price     Intrinsic
    Shares     Per Share   Life (Years)     Value   Shares     Per Share     Value
$0.01 - $1.15   1,438,641    $ 0.87    6.38    $ 4,584,830    1,438,641    $ 0.87    $ 4,584,830 
$1.16 - $1.27   1,832,990    $ 1.25    4.92      5,149,017    1,832,990    $ 1.25      5,149,017 
$1.28 - $1.72   1,409,098    $ 1.50    3.99      3,605,214    1,409,098    $ 1.50      3,605,214 
$1.73 - $2.69   1,423,169    $ 1.92    4.08      3,048,963    1,239,452    $ 1.85      2,741,702 
$2.70 - $4.95   940,500    $ 3.43    6.62      756,375    399,500    $ 3.62      251,355 
    7,044,398              $ 17,144,399    6,319,681          $ 16,332,118 

Stock-based Compensation Expense

As of September 30, 2011, there was $3.2 million of unamortized stock-based compensation expense related to unvested stock awards which is expected to be recognized over a weighted average period of 3.38 years.

To value option grants and other awards for actual and pro forma stock-based compensation, the Company has used the Black-Scholes option valuation model. When the measurement date is certain, the fair value of each option grant is estimated on the date of grant. Fair value determined using Black-Scholes varies based on assumptions used for the expected stock price volatility, expected life, risk-free interest rates and future dividend payments. During the three and six month periods ended September 30, 2011 and 2010, the Company used historical volatility of the common stock over a period equal to the expected life of the options to estimate their fair value. The expected life assumption represents the weighted-average period stock-based awards are expected to remain outstanding. These expected life assumptions are established through the review of historical exercise behavior of stock-based award grants with similar vesting periods. The risk-free interest rate is based on the closing market bid yields on actively traded U.S. treasury securities in the over-the-counter market for the expected term equal to the expected term of the option. The dividend yield assumption is based on the Company's history and expectation of future dividend payouts.

The following table summarizes the weighted average assumptions used to compute reported stock-based compensation to employees and directors for the three and six months ended September 30, 2011 and 2010:

      Three Months Ended     Six Months Ended
      September 30,     September 30,
      2011     2010     2011     2010
Expected volatility     76%         76%    
Expected dividend yield                
Risk-free interest rate     0.31%         0.33%    
Weighted average expected option term     3.00 years         3.00 years    
Weighted average fair value of options granted   $ 2.27   $   $ 2.25   $

In accordance with ASC 718, the Company recorded $214,000 and $37,000 in compensation expense relative to stock-based awards for the three months ended September 30, 2011 and 2010 and $400,000 and $56,000 for the six months ended September 30, 2011 and 2010, respectively.

Employee Stock Purchase Plan

Under the Company's Employee Stock Purchase Plan, eligible employees can participate and purchase common stock semi-annually through payroll deductions at a price equal to 85% of the fair market value of the common stock at the beginning of each one year offering period or the end of the applicable six month purchase period within that offering period, whichever is lower. The contribution amount may not exceed 10% of an employee's base

10


compensation, including commissions but not including bonuses and overtime. The Company accounts for the Employee Stock Purchase Plan as a compensatory plan and recorded compensation expense of $115,000 and $19,000 for the three months ended September 30, 2011 and 2010 and $195,000 and $73,000 for the six months ended September 30, 2011 and 2010, respectively, in accordance with ASC 718.

The estimated fair value of stock purchase rights granted under the Employee Stock Purchase Plan was estimated at the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions:

      Three Months Ended     Six Months Ended
      September 30,     September 30,
      2011     2010     2011     2010
Expected volatility     68%     64%     68%     64%
Expected dividend yield                
Risk-free interest rate     0.10%     0.24%     0.10%     0.24%
Weighted average expected option term     0.75 years     0.75 years     0.75 years     0.75 years
Weighted average fair value of options granted   $ 1.49   $ 0.53   $ 1.49   $ 0.53

As of September 30, 2011, there was $225,000 of total unrecognized compensation cost related to employee stock purchases. These costs are expected to be recognized over a weighted average period of 0.6 years.

ASC 718 requires the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow, rather than as an operating cash flow. The future realization of tax benefits related to stock compensation is dependent upon the timing of employee exercises and future taxable income, among other factors. The Company did not realize any tax benefit from the stock compensation charge incurred during the three and six months ended September 30, 2011 and 2010 as the Company believes that it is more likely than not that it will not realize the benefit from tax deductions related to such equity compensation.

The following table summarizes the distribution of stock-based compensation expense related to employee stock options and employee stock purchases under ASC 718 among the Company's operating functions for the three and six months ended September 30, 2011 and 2010 which was recorded as follows (in thousands):

      Three Months Ended     Six Months Ended
      September 30,     September 30,
      2011     2010     2011     2010
Cost of service revenues   $ 26    $   $ 46    $ 16 
Cost of product revenues                
Research and development     56      15      104      37 
Selling, general and administrative     247      34      445      76 
Total stock-based compensation expense                         
     related to employee stock options and                         
     employee stock purchases, pre-tax     329      56      595      129 
                         
Tax benefit                
Stock based compensation expense related to                         
     employee stock options and employee stock                        
     purchases, net of tax   $ 329    $ 56    $ 595    $ 129 

Recent Accounting Pronouncements

In December 2010, FASB issued ASU 2010-29, "Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force)." ASU 2010-29 provides amendments to subtopic 805-10 of the FASB ASC, that requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. ASU 2010-29 is effective

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prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. The adoption of ASU 2010-29 did not have a material impact on the Company's consolidated results of operation and financial condition.

In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRSs")." Under ASU 2011-04, the guidance amends certain accounting and disclosure requirements related to fair value measurements to ensure that fair value has the same meaning in U.S. GAAP and in IFRSs and that their respective fair value measurement and disclosure requirements are the same. ASU 2011-03 is effective for public entities during interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The Company does not believe that the adoption of ASU 2011-04 will have a material impact on the Company's consolidated results of operation and financial condition.

In June 2011, the FASB issued ASU No. 2011-05, "Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income," ("ASU 2011-05") which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders' equity. Instead, we must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after Dec. 15, 2011 with early adoption permitted. The Company does not believe that the adoption of ASU 2011-05 will have a material impact on the Company's consolidated results of operation and financial condition.

In September 2011, the FASB issued ASU No. 2011-08, "Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment," ("ASU 2011-08") which simplifies how entities test goodwill for impairment. This accounting update permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step good will impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelyhood of more than 50 percent. ASU 2011-08 will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. We do not believe that the adoption of ASU 2011-08 will have a material impact on the Company's consolidated results of operation and financial condition.

3. FAIR VALUE MEASUREMENT

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal market or the most advantageous market in which it would transact.

The accounting guidance for fair value measurement requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that reflect the assumptions market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the factors that market participants would use in valuing the asset or liability developed based on the best information available in the circumstances.

The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value by requiring that the most observable inputs be used when available. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

  • Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
  • Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets).

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  • Level 3 applies to assets or liabilities for which fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including the Company's own assumptions.

The following table presents the Company's fair value hierarchy for assets and liabilities measured at fair value on a recurring basis at September 30, 2011 (in thousands):

    Quoted Prices                  
    in Active                  
    Markets     Other     Significant      
    for Identical     Observable     Unobservable      
    Assets     Inputs     Inputs     Balance at
    (Level 1)     (Level 2)     (Level 3)     9/30/2011
                       
Cash equivalents:                      
     Money market funds $ 14,362    $ -     $ -     $ 14,362 
                       
Short-term investments:                      
     Mutual funds (1)   -       1,904      -       1,904 
                       
Total $ 14,362    $ 1,904    $ -     $ 16,266 

(1) The fair value of mutual funds is determined based on published net asset values. The Company uses such pricing data as the primary input to make its assessments and determinations as to the ultimate valuation of its investment portfolio.

4. BALANCE SHEET DETAIL

      September 30,         March 31,    
      2011     2011
Inventory (in thousands):            
     Work-in-process   $ 142   $ 1,510
     Finished goods                                             512     595
    $ 654   $ 2,105

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5. NET INCOME PER SHARE

Basic net income per share is computed by dividing net income available to common stockholders (numerator) by the weighted average number of vested, unrestricted common shares outstanding during the period (denominator). Diluted net income per share is computed on the basis of the weighted average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include shares issuable upon exercise of outstanding stock options and warrants and under the employee stock purchase plan.

      Three Months Ended     Six Months Ended
      September 30,     September 30,
      2011     2010     2011     2010
      (in thousands, except per share amounts)
Numerator:                        
Net income available to common stockholders   $ 832    $ 1,969    $ 2,779    $ 2,987 
                         
Denominator:                        
Common shares     63,710      63,383      62,989      63,495 
                         
Denominator for basic calculation     63,710      63,383      62,989      63,495 
Employee stock options      3,622      1,331      3,443      1,184 
Stock purchase rights     427      133      401      128 
Employee stock purchase plan                 
Warrants                
Denominator for diluted calculation      67,759      64,847      66,833      64,807 
                         
Net income per share                        
     Basic    $ 0.01    $ 0.03    $ 0.04    $ 0.05 
     Diluted    $ 0.01    $ 0.03    $ 0.04    $ 0.05 

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):

      Three Months Ended     Six Months Ended
      September 30,     September 30,
      2011     2010     2011     2010
Employee stock options     174      4,258      549      4,797 
Warrants         1,786          1,786 
      174      6,044      549      6,583 

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6. COMPREHENSIVE INCOME

Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. The difference between the Company's net income and comprehensive income is due primarily to an unrealized loss on investments classified as available-for-sale. Comprehensive income for the three and six months ended September 30, 2011 and 2010 were as follows (in thousands):

      Three Months Ended     Six Months Ended
      September 30,     September 30,
      2011     2010     2011     2010
Net income, as reported   $ 832    $ 1,969    $ 2,779    $ 2,987 
Unrealized loss on investments in securities     (38)         (23)    
Comprehensive income   $ 794    $ 1,969    $ 2,756    $ 2,987 

7. SEGMENT REPORTING

ASC 280 - Segment Reporting establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. The method for determining what information to report is based upon the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. The Company has determined that it has only one reportable segment. Revenue for this segment is presented by groupings of similar products and services (in thousands) in the following table:

      Three Months Ended     Six Months Ended
      September 30,     September 30,
      2011     2010     2011     2010
8x8 service, equipment and other   $ 19,818    $ 17,290    $ 38,324    $ 34,118 
Technology licensing and related software         77          83 
     Total revenues   $ 19,819    $ 17,367    $ 38,326    $ 34,201 

No customer represented greater than 10% of the Company's total revenue for the three and six months ended September 30, 2011 or 2010. Revenue from customers outside the United States was not material for either the three or six months ended September 30, 2011 or 2010.

8. INCOME TAXES

Income taxes are accounted for using the asset and liability approach. Under the asset and liability approach, a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year. A deferred tax liability or asset is recognized for the estimated future tax effects attributed to temporary differences and carryforwards. If necessary, the deferred tax assets are reduced by a valuation allowance that takes into account the amount of benefits that the Company determines, based on available evidence, is more likely than not to be realized. Other than accruals for state gross receipt and franchise taxes and the foreign subsidiary taxes, the Company made no provision for income taxes in any periods presented in the accompanying condensed consolidated financial statements because of net losses incurred, or because it expects to utilize net operating loss carryforwards for which there is a valuation allowance.

The Company accounts for the uncertainty in income taxes under the provisions of ASC 740 - Income Taxes which clarifies the accounting and disclosure for uncertainty in income taxes recognized in an enterprise's financial statements. This interpretation requires that the Company recognize in its financial statements the impact of a tax position if that position is more likely than not to be sustained on audit, based on the technical merits of the position.

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The Company believes that any income tax filing positions and deductions not sustained on audit will not result in a material change to its financial position or results of operations.

At March 31, 2011, the total amount of unrecognized tax benefits that, if recognized, would have affected the effective tax rate was $1.7 million, but any such effect would have been fully offset by the application of the valuation allowance. The Company does not believe that there has been any change in the unrecognized tax benefits in the three and six month periods ended September 30, 2011 and does not believe it is reasonably possible that the unrecognized tax benefit will materially change in the next 12 months. To the extent that the unrecognized tax benefits are ultimately recognized they may have an impact on the effective tax rate in future periods; however, such impact on the effective tax rate would only occur if the recognition of such unrecognized tax benefits occurs in a future period when the Company has already determined it is more likely than not that its deferred tax assets are realizable.

The Company is subject to taxation in the U.S., California and various other states and foreign jurisdictions in which it has or had a subsidiary or branch operations or it is collecting sales tax. All tax returns from fiscal 1995 to fiscal 2011 may be subject to examination by the Internal Revenue Service, California and various other states. The Company extended the filing date of the 2011 federal tax return and all state income tax returns. As of October 26, 2011, there were no active federal or state income tax audits. Returns filed in foreign jurisdictions may be subject to examination for the fiscal years 2007 to 2011.

The Company's policy for recording interest and penalties associated with audits is to record such items as a component of operating expense income before taxes. During the three and six months ended September 30, 2011 and 2010, the Company did not recognize any interest or penalties related to unrecognized tax benefits.

9. COMMITMENTS AND CONTINGENCIES

Guarantees

Indemnifications

In the normal course of business, the Company or its subsidiaries have agreed or otherwise obligated to indemnify other parties, including customers, lessors and parties to other transactions with the Company, with respect to certain matters. Under these arrangements, the Company typically agrees to hold the other party harmless against losses arising from a breach of representations or covenants, intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors.

It is not possible to determine the maximum potential amount of the Company's exposure under these indemnification agreements due to the limited history of indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material impact on the Company's operating results, financial position or cash flows. Under some of these agreements, however, the Company's potential indemnification liability might not have a contractual limit.

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Product Warranties

The Company accrues for the estimated costs that may be incurred under its product warranties upon revenue recognition. Changes in the Company's product warranty liability, which is included in cost of product revenue in the condensed consolidated statements of income, during the three and six months ended September 30, 2011 and 2010 were as follows (in thousands):

      Three Months Ended     Six Months Ended
      September 30,     September 30,
      2011     2010     2011     2010
Balance at beginning of period   $ 378    $ 356    $ 362    $ 331 
Accruals for warranties     130      134      268      278 
Settlements     (117)     (110)     (239)     (229)
Balance at end of period   $ 391    $ 380    $ 391    $ 380 

Leases

In May 2009, the Company entered into a three-year lease for its primary facility in Sunnyvale, California that expires in fiscal 2013. The Company has the option to accelerate the termination date of the lease to the 12 th , 18 th , 24 th , or 30 th full calendar month of the lease term by providing six months advance notice. In the event the Company exercises this early termination option, the Company will be required to pay a fee to the landlord equal to the unamortized portion of any leasing commission and the unamortized portion of the initial alteration expenses incurred by the landlord as summarized in a current report on Form 8-K filed by the Company with the SEC on May 7, 2009.

In September 2011, the Company assumed a lease for Contactual's headquarters facility in Redwood City, California that expires in fiscal 2013. At September 30, 2011, future minimum annual lease payments under current operating leases were as follows (in thousands):

Year ending March 31:      
     Remaining 2012   $ 460 
     2013     403 
Total minimum payments   $ 863 

In each of March 2007 and August 2009, the Company entered into a series of noncancelable capital lease agreements for office equipment bearing interest at various rates and in September 2011, the Company assumed noncancelable capital lease agreements for equipment and software bearing interest at various rates with the acquisition of Contactual. At September 30, 2011, future minimum annual lease payments under noncancelable capital leases were as follows (in thousands):

Year ending March 31:      
     Remaining 2012   $ 40 
     2013     48 
     2014     11 
Total minimum payments     99 
Less: Amount representing interest     (5)
      94 
Less: Short-term portion of capital lease obligations     (63)
Long-term portion of capital lease obligations   $ 31 

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Capital leases included in computer equipment, office equipment and software were $525,000 at September 30, 2011. Total accumulated depreciation was $280,000 at September 30, 2011. Amortization expense for assets recorded under capital leases is included in depreciation expense.

Minimum Third Party Customer Support Commitments

In the third quarter of fiscal 2010, the Company amended a contract with one of its third party customer support vendors containing a minimum monthly commitment of approximately $430,000. The agreement requires a 150-day notice to terminate. The total remaining obligation under the amended contract is $2.2 million.

Minimum Third Party Network Service Provider Commitments

The Company entered into contracts with multiple vendors for third party network services that expire on various dates through fiscal 2015. At September 30, 2011, future minimum annual payments under these third party network service contracts were $593,000 in 2012, $538,000 in 2013, $70,000 in 2014 and $7,000 in 2015.

Legal Proceedings

From time to time, the Company may become involved in various legal claims and litigation that arise in the normal course of its operations. While the results of such claims and litigation cannot be predicted with certainty, the Company is not currently aware of any such matters that it believes would have a material adverse effect on its financial position, results of operations or cash flows.

On March 15, 2011, the Company was named a defendant in a lawsuit, Bear Creek Technologies, Inc. v. 8x8, Inc. et al., along with more than 20 other defendants. On August 17, 2011, the Company was dismissed without prejudice from this lawsuit under Rule 21 of the Federal Rules of Civil Procedure. On August 17, 2011, the Company was sued again by Bear Creek Technologies, Inc. in the United States District Court for the District of Delaware. The Company believes it has factual and legal defenses to these claims and is presenting a vigorous defense. The plaintiff has not made a specific monetary demand, and the Company cannot estimate potential liability in this case at this early stage of litigation.

On October 25, 2011, the Company was named a defendant in a lawsuit, Klausner Technologies, Inc. v. Oracle Corporation et al., along with 30 other defendants. The Company believes it has factual and legal defenses to these claims and is presenting a vigorous defense. The plaintiff has not made a specific monetary demand and the Company cannot estimate potential liability in this case at this early stage of litigation.

Non-Income Based State and Municipal Taxes

From time to time, the Company has received inquiries from a number of state and municipal taxing agencies with respect to the remittance of non-income based taxes. The Company collects or has accrued for taxes that it believes are required to be remitted. The amounts that have been remitted have historically been within the accruals established by the Company.

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10. STOCK REPURCHASES

On October 19, 2010, the Company's board of directors authorized the Company to create a new stock repurchase plan to purchase up to $10.0 million of its common stock from time to time until October 19, 2011. The stock repurchase plan expired on October 19, 2011. The remaining authorized repurchase amount at September 30, 2011 under the $10.0 million repurchase plan was $4.1 million. The stock repurchase activity for the six months ended September 30, 2011 is summarized as follows:

          Weighted      
          Average      
    Shares     Price     Amount
    Repurchased     Per Share     Repurchased
Balance at March 31, 2011   3,870,985    $ 2.26    $ 8,022,690 
Repurchase of common stock   301,800      2.95      888,964 
Balance at September 30, 2011   4,172,785    $ 2.33    $ 8,911,654 

The total purchase prices of the common stock repurchased and retired were reflected as a reduction to stockholders' equity during the period of repurchase.

11. ACQUISITIONS

Zerigo, Inc.

On June 16, 2011, the Company entered into an agreement with Zerigo, Inc. ("Zerigo"), a provider of cloud services pursuant to which the Company acquired 100% of the outstanding stock of Zerigo from its sole shareholder. Under the terms of the agreement, the Company paid the selling shareholder $750,000 in cash and issued 207,756 shares of its common stock. In addition, the Company agreed to pay the selling shareholder an earn-out of up to $500,000 cash upon the achievement of specified software development milestones by December 31, 2011. The fair value of the consideration transferred consisted of the following (in thousands):

Cash         $ 750 
Contingent payments           441 
Fair value of shares of stock issued           750 
     Total purchase price         $ 1,941 

The Company recorded the acquired tangible and identifiable intangible assets and liabilities assumed based on their estimated fair values. The excess of the consideration transferred over the aggregate fair values of the assets acquired and liabilities assumed is recorded as goodwill. The amount of goodwill recognized is primarily attributable to the operating synergies expected to be realized through the acquisition of Zerigo and the workforce of the acquired business. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management. Intangible assets will be amortized on a straight-line basis.

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The estimated fair values of the assets acquired and liabilities assumed are as follows (in thousands):

            Estimated
            Fair Value
Assets acquired:            
     Cash         $ 35 
     Property and equipment, net           25 
     Intangible assets           1,046 
          Total assets acquired           1,106 
Liabilities assumed            
     Accounts payable           (8)
     Deferred income tax liability, non-current           (413)
          Total liabilities assumed           (421)
               Net identifiable assets acquired           685 
Goodwill           1,256 
               Total purchase price         $ 1,941 

Contactual, Inc.

On September 15, 2011, the Company entered into an agreement with Contactual, Inc. ("Contactual"), a provider of cloud-based call center and customer interaction management solutions pursuant to which the Company acquired 100% of the outstanding shares of capital stock of Contactual from its shareholders. Under the terms of the agreement, the Company issued 6,700,000 shares of common stock. The share amount was reduced at closing by 215,100 shares of common stock in exchange for 8x8's agreement to pay statutory tax withholding on behalf of five former executives of Contactual. The preliminary estimated fair value of the consideration transferred consisted of the following (in thousands):

Cash         $ 892 
Fair value of shares of stock issued           28,375 
     Total purchase price         $ 29,267 

The Company recorded the acquisition of tangible and identifiable intangible assets and liabilities assumed based on their estimated fair values. The excess of the consideration transferred over the aggregate fair values of the assets acquired and liabilities assumed is recorded as goodwill. The amount of goodwill recognized is primarily attributable to the operating synergies expected to be realized through the acquisition of Contactual and the workforce of the acquired business. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management. Intangible assets will be amortized on a straight-line basis.

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The preliminary estimated fair values of the assets acquired and liabilities assumed are as follows:

            Estimated
            Fair Value
Assets acquired:            
     Cash         $ 894 
     Restricted cash           28 
     Accounts receivable, net           572 
     Prepaids and other assets           265 
     Property and equipment, net           347 
     Intangible assets           11,150 
          Total assets acquired           13,256 
Liabilities assumed            
     Accounts payable           (2,059)
     Accrued compensation           (1,255)
     Deferred revenue           (253)
     Other accrued liabilities           (166)
          Total current liabilities           (3,733)
Deferred income tax liability, non-current           (301)
Accrued liabilities, non-current           (131)
          Total liabilities assumed           (4,165)
               Net identifiable assets acquired           9,091 
Goodwill           20,176 
          Total purchase price         $ 29,267 

The above estimated fair values of consideration transferred and assets acquired and liabilities assumed are provisional and are based on the information that was available as of the acquisition date. Measurement period adjustments reflect new information obtained about facts and circumstances that existed as of the acquisition date. The Company believes that information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the Company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. Such changes could be significant. The Company expects to finalize the valuation as soon as practicable but no later than one-year from the acquisition date.

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of operations for the Company and Contactual as if the merger occurred at the beginning of each of the reporting periods presented. The pro forma financial information for all periods presented also includes the business combination accounting effects resulting from this acquisition including the acquisition costs of $0.5 million and amortization charges from acquired intangible assets. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each reporting period presented.

The unaudited pro forma financial information for the three and six months ended September 30, 2011 combined the historical results of the Company for the three and six months ended September 30, 2011, the historical results of Contactual for the three and six months ended June 30, 2011, and the effects of the pro forma adjustments described above.

The unaudited pro forma financial information for the three and six months ended September 30, 2010 combined the historical results of the Company for the three and six months ended September 30, 2010, the historical results of Contactual for the three and six months ended June 30, 2010 and the effects of the pro forma adjustments described above.

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      Three Months Ended     Six Months Ended
      September 30,     September 30,
      2011     2010     2011     2010
      (In thousands, except per share data)
Pro forma net revenue   $ 21,664    $ 19,196    $ 42,216    $ 37,736 
Pro forma net income   $ 695    $ 1,364    $ 2,007    $ 1,495 
Pro forma net income per share (basic)   $ 0.01    $ 0.02    $ 0.03    $ 0.02 
Pro forma net income per share (diluted)   $ 0.01    $ 0.02    $ 0.03    $ 0.02 

There is no impact to the Company's tax provision for the three and six months ended September 30, 2011 and 2010 from the pro forma adjustments since the Contactual had tax losses and the Company had a 100% valuation allowance on deferred tax assets in those periods.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Management Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as "may," "will," "should," "estimates," "predicts," "potential," "continue," "strategy," "believes," "anticipates," "plans," "expects," "intends," and similar expressions are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Actual results and trends may differ materially from historical results or those projected in any such forward-looking statements depending on a variety of factors. These factors include, but are not limited to, customer acceptance and demand for our voice over Internet protocol, or VoIP, telephony products and services, the reliability of our services, the prices for our services, customer renewal rates, customer acquisition costs, actions by our competitors, including price reductions for their telephone services, potential federal and state regulatory actions, compliance costs, potential warranty claims and product defects, our needs for and the availability of adequate working capital, our ability to innovate technologically, the timely supply of products by our contract manufacturers, potential future intellectual property infringement claims that could adversely affect our business and operating results, and our ability to retain our listing on the NASDAQ Capital Market. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. In addition to those factors discussed elsewhere in this Form 10-Q, see the Risk Factors discussion in Item 1A of our 2011 Form 10-K and Part II, Item 1A of this Form 10-Q. The forward-looking statements included in this Form 10-Q are made only as of the date of this report, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances.

BUSINESS OVERVIEW

We develop and market telecommunications services for Internet protocol, or IP, telephony and video applications as well as web-based conferencing, unified communications services, managed hosting, and cloud-based computing services. As of September 30, 2011, we had more than 26,700 business customers. Since fiscal 2004, substantially all of our revenue has been generated from the sale, license and provision of VoIP products, services and technology. Prior to fiscal 2003, our focus was on our VoIP semiconductor business.

Our fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in this report refers to the fiscal year ending March 31 of the calendar year indicated (for example, fiscal 2012 refers to the fiscal year ending March 31, 2012).

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CRITICAL ACCOUNTING POLICIES & ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011. As of September 30, 2011, there had been no material changes to our critical accounting policies and estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

See Item 1 of Part I, "Financial Statements - Note 2 - Basis of Presentation - Recent Accounting Pronouncements."

SELECTED OPERATING STATISTICS

We periodically review certain key business metrics, within the context of our articulated performance goals, in order to evaluate the effectiveness of our operational strategies, allocate resources and maximize the financial performance of our business. The selected operating statistics include the following:

  Selected Operating Statistics
  Sept. 30,   June 30,   March 31,   Dec 31,   Sept. 30,   June 30,   March 31,   Dec 31,
  2011   2011   2011   2010   2010   2010   2010   2009
Gross business customer additions (1) 3,176    2,897    3,009    2,798    2,450    2,756    2,875    2,785 
Gross business customer                               
     cancellations (less cancellations                               
     within 30 days of sign-up) 1,620    1,593    1,645    1,524    1,459    1,592    1,616    1,331 
Business customer churn (less                               
     cancellations within 30 days                              
     of sign-up) (2) 2.1%   2.1%   2.3%   2.2%   2.2%   2.5%   2.7%   2.4%
Total business customers (3) 26,727    25,455    24,385    23,251    22,167    21,362    20,428    19,407 
                               
Business customer average monthly                               
     service revenue per customer (4) $ 207    $ 200    $ 204    $ 209    $ 209    $ 208    $ 204    $ 204 
                               
Overall service margin 77%   78%   78%   77%   78%   78%   77%   78%
Overall product margin -45%   -53%   -73%   -65%   -57%   -38%   -43%   -59%
     Overall gross margin 66%   67%   67%   68%   68%   68%   68%   68%
                               
Business subscriber acquisition cost                              
     per service (5) $ 101    $ 89    $ 91    $ 99    $ 108    $ 109    $ 97    $ 102 
Average number of services subscribed                               
     to per business customer 9.0    8.4    8.0    7.8    7.7    7.5    7.5    7.3 
Business customer subscriber                               
     acquisition cost (6) $ 906    $ 743    $ 725    $ 768    $ 826    $ 818    $ 723    $ 749 

 

(1)

Includes 49 and 250 customers acquired directly from our acquisitions in the first quarter of fiscal 2011 and second quarter of fiscal 2012 from Central Host, Inc. ("Central Host") and Contactual, Inc. ("Contactual"), respectively, and does not include customers of Virtual Office Solo or Zerigo, Inc. ("Zerigo").

(2)

Business customer churn is calculated by dividing the number of business customers that terminated (after the expiration of the 30-day trial) during that period by the simple average number of business customers during the period and dividing the result by the number of months in the period. The simple average number of business customers during the period is the number of business customers on the first day of the period plus the number of business customers on the last day of the period divided by two.

(3)

Business customers are defined as customers paying for service. Customers that are currently in the 30- day trial period are considered to be customers that are paying for service. Customers subscribing to Virtual Office Solo or Zerigo services are not included as business customers.

(4)

Business customer average monthly service revenue per customer is service revenue from business customers in the period divided by the number of months in the period divided by the simple average number of business customers during the period.

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(5)

Business subscriber acquisition cost per service is defined as the combined costs of advertising, marketing, promotions, sales commissions and equipment subsidies for business services sold during the period divided by the number of gross business services added during the period.

(6)

Business customer subscriber acquisition cost is business subscriber acquisition cost per service times the average number of services subscribed to per business customer.

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto.

      September 30,     Dollar   Percent
Service revenue     2011     2010     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 18,013    $ 16,071    $ 1,942    12.1%
Percentage of total revenue     90.9%     92.5%          
Six months ended   $ 35,034    $ 31,434    $ 3,600    11.5%
Percentage of total revenue     91.4%     91.9%          

Service revenue consists primarily of revenue attributable to the provision of our service and royalties earned under our VoIP technology licenses. We expect that service revenue will continue to comprise nearly all of our revenue for the foreseeable future. Service revenue increased in the second quarter of fiscal 2012 primarily due to the increase in our business customer subscriber base, which grew from approximately 22,200 business customers on September 30, 2010, to 26,727 on September 30, 2011 and the acquisition of Contactual in September 2011. The increase for the first six months of fiscal 2012 was primarily attributable to the increase in our business customer base from approximately 24,000 businesses on April 1, 2011 to 26,727 on September 30, 2011 and the acquisition of Contactual in September 2011.

      September 30,     Dollar   Percent
Product revenue     2011     2010     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 1,806    $ 1,296    $ 510    39.4%
Percentage of total revenue     9.1%     7.5%          
Six months ended   $ 3,292    $ 2,767    $ 525    19.0%
Percentage of total revenue     8.6%     8.1%          

Product revenue consists primarily of revenue from sales of IP telephones attributable to our service. Product revenue increased for the three and six months ended September 30, 2011 primarily because of an increase in equipment sales to business customers. No customer represented greater than 10% of our total revenue for the three and six months ended September 30, 2011 and 2010. Revenue from customers outside the United States was not material for the three and six months ended September 30, 2011 or 2010.

      September 30,     Dollar   Percent
Cost of service revenue     2011     2010     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 4,059    $ 3,589    $ 470    13.1%
Percentage of service revenue     22.5%     22.3%          
Six months ended   $ 7,874    $ 6,971    $ 903    13.0%
Percentage of service revenue     22.5%     22.2%          

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The cost of service revenue primarily consists of costs associated with network operations and related personnel, telephony origination and termination services provided by third party carriers and technology license and royalty expenses. Cost of service revenue for the three months ended September 30, 2011 increased over the comparable period in the prior fiscal year primarily due to a $0.2 million increase in payroll and related costs, a $0.1 million increase in consulting and outside service expenses, a $0.1 million increase in license and fee expenses, and a $0.1 million increase in depreciation expense.

Cost of service revenue for the six months ended September 30, 2011 increased from the comparable period in the prior fiscal year primarily due to a $0.4 million increase in payroll and related costs, a $0.2 million increase in depreciation expense, a $0.1 million increase in third party network service fees, a $0.1 million increase in consulting and outside service expenses and a $0.1 million increase in expensed computer equipment and furniture and fixtures.

      September 30,     Dollar   Percent
Cost of product revenue     2011     2010     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 2,613    $ 2,031    $ 582    28.7%
Percentage of product revenue     144.7%     156.7%          
Six months ended   $ 4,883    $ 4,057    $ 826    20.4%
Percentage of product revenue     148.3%     146.6%          

The cost of product revenue consists of costs associated with systems, components, system manufacturing, assembly and testing performed by third-party vendors, estimated warranty obligations and direct and indirect costs associated with product purchasing, scheduling, quality assurance, shipping and handling. We allocate a portion of service revenue to product revenue but this revenue is less than the cost of the IP phone equipment. The cost of product revenue for the three months ended September 30, 2011 increased over the comparable period in the prior fiscal year primarily due to an increase in the shipment of equipment to customers.

The cost of product revenue for the six months ended September 30, 2011 increased over the comparable period in the prior fiscal year due to an increase in the shipment of equipment to customers. The increase in cost of product revenue was partially offset by a $0.1 million decrease in payroll and related costs.

      September 30,     Dollar   Percent
Research and development     2011     2010     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 1,540    $ 1,271    $ 269    21.2%
Percentage of total revenue     7.8%     7.3%          
Six months ended   $ 2,947    $ 2,497    $ 450    18.0%
Percentage of total revenue     7.7%     7.3%          

Historically, our research and development expenses have consisted primarily of personnel, system prototype design, and equipment costs necessary for us to conduct our engineering and development efforts. We expense research and development costs, including software development costs, as they are incurred. The research and development expenses for the three months ended September 30, 2011 increased over the comparable period in the prior fiscal year primarily due to a $0.2 million increase in payroll and related costs and a $0.1 million increase consulting and outside service expenses.

The research and development expenses for the six months ended September 30, 2011 increased over the comparable period in the prior fiscal year due to a $0.2 million increase in payroll and related costs and a $0.2 million increase in consulting and outside service expenses.

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      September 30,     Dollar   Percent
Selling, general and administrative     2011     2010     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 10,742    $ 8,525    $ 2,217    26.0%
Percentage of total revenue     54.2%     49.1%          
Six months ended   $ 20,151    $ 17,883    $ 2,268    12.7%
Percentage of total revenue     52.6%     52.3%          

Selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, customer support, finance, human resources and general management. Such costs also include outsourced customer service call center operations, sales commissions, as well as trade show, advertising and other marketing and promotional expenses. Selling, general and administrative expenses for the three months ended September 2011 increased over the comparable period in the prior fiscal year primarily because of a $0.9 million increase in payroll and related costs, a $0.5 million increase in advertising expenses, a $0.4 million increase in legal fees primarily due to the acquisition of Contactual in September 2011, a $0.2 million increase in sales promotion expenses, a $0.1 million increase in tradeshow expenses and a $0.1 million increase in other misc. expenses.

Selling, general and administrative expenses for the first six months of fiscal 2012 increased over the same period in the prior fiscal year primarily because of a $1.4 million increase in payroll and related costs, a $0.4 million increase in legal fees primarily due to the acquisition of Contactual in September 2011, a $0.4 million increase in sales promotion expenses, a $0.1 million increase in tradeshow expenses, a $0.1 million increase in credit card discount fees and a $0.1 million increase in other misc. expenses. The increase in expenses was partially offset by a $0.1 million reduction in advertising expenses and a $0.1 million reduction in third party rep commissions.

      September 30,     Dollar   Percent
Other income (expense), net     2011     2010     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ (11)   $ 12    $ (23)   -191.7%
Percentage of total revenue     -0.1%     0.1%          
Six months ended   $   $ 34    $ (25)   -73.5%
Percentage of total revenue     0.0%     0.1%          

In the three and six months ended September 30, 2011 and 2010, other income (expense), net consisted of interest expense, distribution of capital gains on investments and interest income earned on our cash, cash equivalents and investments. Other income (expense), net decreased for the three and six months ended September 30, 2011 primarily because of the buyout, including interest expense, of capital leases acquired with the acquisition of Contactual in September 2011.

Income on change in fair value     September 30,     Dollar   Percent
     of warrant liability     2011     2010     Change   Change
      (dollar amounts in thousands)    
Three months ended   $   $   $ (9)   -100.0%
Percentage of total revenue     0.0%     0.1%          
Six months ended   $   $ 167    $ (167)   -100.0%
Percentage of total revenue     0.0%     0.5%          

In connection with the sale of shares of our common stock in fiscal 2005 and 2006, we issued warrants in three different equity financings. The change in income on change in fair value of the warrant liability for the three and six months ended September 30, 2011 is due to the partial exercise and expiration of the warrants in the third quarter of fiscal 2011. These warrants expired in December 2010.

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      September 30,     Dollar   Percent
Provision (benefit) for income tax     2011     2010     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 22    $   $ 19    633.3%
Percentage of total revenue     0.1%     0.0%          
Six months ended   $ (299)   $   $ (306)   -4371.4%
Percentage of total revenue     -0.8%     0.0%          

The increase in income tax expense for the three months ended September 30, 2011 compared with the same period in the prior fiscal year was primarily due to an increase in the state gross receipt and franchise taxes in several states compared to the comparable period in the prior year.

The income tax benefit for the six months ended September 30, 2011 was primarily due a $0.3 million release of the valuation allowance against the deferred tax asset as the Company has deemed it is more likely than not it will be used to offset a deferred tax liability of $0.3 million recorded in connection with the acquisition of Zerigo in June 2011.

Liquidity and Capital Resources

As of September 30, 2011, we had approximately $19.1 million in cash, cash equivalents and short-term investments.

Net cash provided by operating activities for the six months ended September 30, 2011 was approximately $3.2 million, compared with $4.3 million for the six months ended September 30, 2010. The decrease in cash flow was primarily due to an increase in operating expenses in the first six months of fiscal 2012, including legal fees incurred for the purchase of Contactual ($0.4 million) and liabilities assumed with purchase of Contactual in September 2011, including broker fees of $0.7 million and legal fees of $0.2 million, partially offset by a $0.3 million release of the valuation allowance against the deferred tax asset as the Company has deemed it is more likely than not it will be used to offset the $0.3 million deferred tax liability recorded in connection with the acquisition of Zerigo. Cash provided by operating activities has historically been affected by the amount of net income, sales of subscriptions, changes in working capital accounts particularly in deferred revenue due to timing of annual plan renewals, add-backs of non-cash expense items such as depreciation and amortization, the expense associated with stock-based awards and the change in fair value of warrant liability.

Net cash used in investing activities was $1.9 million during the six months ended September 30, 2011, compared with $2.4 million used in investing activities for the six months ended September 30, 2010. The decrease in cash used in investing activities during the six months ended September 30, 2011 is primarily related to a reduction in the acquisition of strategic investments ($0.3 million) and a decrease in acquisition of business ($0.3 million). The decrease in investing activities was partially offset by an increase in the purchase of additional equipment ($0.1 million).

Our financing activities for the six months ended September 30, 2011 consisted primarily of cash used to repurchase shares of our common stock ($1.0 million), payment of capital leases, including buyout of capital leases acquired with purchase of Contactual in September 2011 ($0.2 million) which was partially offset by the issuance of shares due to exercise of employee stock options and purchase of shares under the employee stock purchase plan ($0.7 million).

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency

Our financial market risk consists primarily of risks associated with international operations and related foreign currencies. We derive a portion of our revenue from customers in Europe and Asia. In order to reduce the risk from fluctuation in foreign exchange rates, the vast majority of our sales are denominated in U.S. dollars. In addition, almost all of our arrangements with our contract manufacturers are denominated in U.S. dollars. We have not

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entered into any currency hedging activities. To date, our exposure to exchange rate volatility has not been significant; however, there can be no assurance that there will not be a material impact in the future.

Investments

We maintain an investment portfolio of various holdings, types and maturities. These marketable securities and investments are generally classified as available for sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive loss. Part of this portfolio includes investments in mutual funds.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Disclosure Controls") that are designed to ensure that information we are required to disclose in reports filed or submitted under the Securities and Exchange Act of 1934 is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

As of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision of our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our Disclosure Controls. Based on this evaluation our Chief Executive Officer and our Chief Financial Officer have concluded that our Disclosure Controls were effective as of September 30, 2011.

Limitations on the Effectiveness of Controls

Our management, including the Chief Executive Officer and Chief Financial Officer, do not expect that our Disclosure Controls or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Changes in Internal Control over Financial Reporting.

During the second quarter of fiscal 2012, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II -- OTHER INFORMATION

ITEM 1. Legal Proceedings

Descriptions of our legal proceedings are contained in Part I, Item 1, Financial Statements - Notes to Condensed Consolidated Financial Statements - "Note 9".

ITEM 1A. Risk Factors

We face many significant risks in our business, some of which are unknown to us and not presently foreseen. These risks could have a material adverse impact on our business, financial condition and results of operations in the future. We have disclosed a number of material risks under Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended March 31, 2011, which we filed with the Securities and Exchange Commission on May 23, 2011 in addition to the following updated risk factor disclosures.

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The FCC is poised to adopt an order reforming the system of payments between regulated carriers that we partner with to interface with the public switch telephone network. The rates we pay for the services performed by these carriers may increase as a result of the FCC's reform order. As a result, we may increase rates for service, making our offerings less competitive with others in the marketplace, or reduce our profitability.

On October 27, 2011, the FCC will hold an open meeting where it will consider a Report and Order and Further Notice of Proposed Rulemaking to comprehensively reform the intercarrier compensation system. If the FCC adopts this item during its open meeting, the text and implementing rules may not occur until a later date. It is expected that the item will address the compensation arrangements between carriers that handle traffic like ours. It is likely that rates we pay carriers to handle our traffic will increase as a result of this Order. In the event that this does occur we will either raise the retail price of our service offerings or our profit margins will be reduced.

Our business depends on continued and unimpeded access to the Internet by us and our users. Internet access providers and Internet backbone providers may be able to block, degrade or charge for access to certain of our products and services, which could lead to additional expenses and the loss of users.

Our products and services depend on the ability of our users to access the Internet, and certain of our products require significant bandwidth to work effectively. Currently, this access is provided by companies that have significant and increasing market power in the broadband and Internet access marketplace, including incumbent telephone companies, cable companies and mobile communications companies. Some of these providers offer products and services that directly compete with our own offerings, which gives them a significant competitive advantage. Some of these providers have stated that they may take measures that could degrade, disrupt or increase the cost of user access to certain of our products by restricting or prohibiting the use of their infrastructure to support or facilitate our offerings, or by charging increased fees to us or our users to provide our offerings, while others, including some of the largest providers of broadband Internet access services, have committed to not engaging in such behavior. The FCC recently adopted rules that would prohibit providers of broadband Internet access services from blocking, degrading or engaging in other discriminatory actions. These rules are scheduled to become effective on November 20, 2011. On October 6, 2011, appeals of the rules were filed by numerous parties and consolidated before the U.S. Court of Appeals for the District of Columbia. We cannot predict the outcome of these appeals nor the impact of these rules on our business at this time. While interference with access to our products and services seems unlikely, broadband Internet access provider interference has occurred, in very limited circumstances in the U.S., and could result in a loss of existing users and increased costs, and could impair our ability to attract new users, thereby negatively impacting our revenue and growth.

The FCC may require us to deploy an E-911 service that automatically determines the location of our customers. The adoption of such a requirement could increase our costs that could make our service more expensive, decrease our profit margins, or both.

On June 1, 2007, the FCC released a Notice of Proposed Rulemaking in which it tentatively concluded that all interconnected VoIP service providers that allow customers to use their service in more than one location (nomadic VoIP service providers such as us) must utilize an automatic location technology that meets the same accuracy standards which apply to providers of commercial mobile radio services (mobile phone service providers). In September 2010, the FCC released a Notice of Inquiry again requesting comment on what type of automatic location standards should apply to providers of nomadic VoIP service providers, whether the FCC's rules concerning the delivery of emergency services should be extended beyond providers of interconnected VoIP services, and whether such emergency service obligations should apply to mobile VoIP applications used on smartphones, computers and other devices. In July 2011, the FCC released a Second Further Notice of Proposed Rulemaking, seeking comment on a number of issues including (i) whether to apply the FCC's E-911 rules to "outbound-only" interconnected VoIP services ( i.e. , services that support placing calls to the PSTN); (ii) whether to adopt rules requiring all interconnected VoIP service to automatically provide location information for emergency calls; and (iii) whether to revise the FCC's definition of interconnected VoIP service to require an "Internet connection" rather than a broadband connection, and to "define connectivity in terms of the ability to connect calls to the United States E.164 telephone numbers rather than the PSTN." Also, the FCC released a Notice of Proposed Rulemaking that sought comment on whether any amendment of the definition of interconnected VoIP service should be limited to E-911 requirements, or should apply other regulatory requirements to these additional services. In September 2011, the FCC released a Notice of Proposed Rulemaking soliciting comment on what the role the agency could play in the fostering the development and implementation of newer 911 technologies including, but not limited to, prioritization of 911

29


traffic triggered by an event such as a natural disaster, long-term implementation of IP-based alternatives for delivering different kinds of media to emergency call takers like video, photographs, and other forms of data, and text-to-911 solutions.

The outcome of these proceedings cannot be determined at this time and we may or may not be able to comply with any such obligations that may be adopted. At present, we currently have no means to automatically identify the physical location of one of our customers on the Internet. The FCC's VoIP E-911 order has increased our cost of doing business and may adversely affect our ability to deliver the 8x8 service to new and existing customers in all geographic regions or to nomadic customers who move to a location where emergency calling services compliant with the FCC's mandates are unavailable. Our compliance with and increased costs due to the FCC's VoIP E-911 order put us at a competitive disadvantage to those VoIP service providers who are either not subject to the requirements or have chosen not to comply with the FCC's mandates. We cannot guarantee that emergency calling service consistent with the VoIP E-911 order will be available to all of our customers, especially those accessing our services from outside of the United States. The FCC's current VoIP E- 911 order or follow-on orders or clarifications or their impact on our customers due to service price increases or other factors could have a material adverse effect on our business, financial condition or operating results.

A recent petition filed by tw telecom inc. with the FCC seeks an Order that its provision of facilities-based interconnected VoIP services should be classified as "telecommunications services," "telephone exchange services," and/or "exchange access" under relevant federal law. We cannot predict the outcome of this proceeding nor its impact on our business at this time.

In July 2011, the FCC released a Public Notice concerning a Petition for Declaratory Ruling filed by tw telecom inc. The Petitioner requests the FCC to clarify that incumbent providers of local telephone service, like AT&T and Verizon, allow for direct IP-to-IP interconnection with incumbent local exchange carriers for certain IP-based services. Specifically, tw telecom seeks direct IP-to-IP interconnection from incumbent local telephone companies for the transmission and routing of tw telecom's facilities-based VoIP services and for voice services that originate and terminate in Time Division Multiplexing format but are converted to IP format for transport (referred to by the industry as "IP-in-the-middle" voice services). Additionally, tw telecom is asking for the FCC to clarify that its facilities-based VoIP services are "telecommunications services" as well as "telephone exchange services" and/or "exchange access," as those terms are defined under the Communications Act of 1934, as amended by the Telecommunications Act of 1996. We cannot predict the outcome of this proceeding nor its potential impact on our business at this time. Depending on how the FCC rules on the tw telecom petition, we could be subject to greater regulation at the state level which would increase our costs of doing business. It is also possible that an adverse ruling by the FCC in this proceeding could change the intercarrier compensation rate that our carriers pay to handle our traffic which could also increase our costs. Increased costs to us may require us to raise our prices, making our services less competitive, reduce our profit margins, or both.

The FCC may require providers like us to comply with regulations related to how we present bills to customers. The adoption of such obligations may require us to revise our bills and may increase our costs of providing service which could either result in price increases or reduce our profitability.

In July 2011, the FCC released a Notice of Proposed Rulemaking, requesting comment on proposed rules that are designed to aid consumers in identifying and preventing the placement of unauthorized charges on their telephone bills, a practice referred to in the industry as "cramming." Among other things, the FCC seeks comment on whether the proposed rules or similar obligations should apply to providers of interconnected VoIP services, like us. Additionally, the FCC is seeking comment on whether its "Truth-in-Billing" rules should apply to interconnected VoIP service providers. We cannot predict the outcome of this proceeding, nor can we predict its potential impact on our business at this time. These events could increase our expenses, which would have an adverse effect on our operating results.

The FCC may expand disabilities access requirements to additional services we offer.

In October, 2010, the "Twenty-First Century Communications and Video Accessibility Act" was signed into law. The law requires the FCC to initiate a proceeding to determine what services should be required to offer access for people with disabilities and what those accessibility requirements should entail. In October, 2011, the FCC adopted an order implementing the new accessibility requirements as well as released a Notice of Proposed Rulemaking

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concerning certain, additional, discrete issues. We cannot predict whether we will be subject to additional accessibility requirements or whether any of our service offerings that are not currently subject to disabilities access requirements will be subject to such obligations. These events could increase our expenses, which would have an adverse effect on our operating results.

Risks Relating to the Merger and 8x8 Common Stock

The integration of 8x8 and Contactual may not be completed successfully, cost-effectively or on a timely basis.

After completing the acquisition of Contactual, we have more assets and employees to manage than we did prior to the acquisition. The integration process will require us to expand the scope of our existing operations and financial systems. Our management will be required to devote time and attention to the process of integrating the operations of Contactual with ours. There is a significant degree of difficulty and management involvement inherent in that process. These difficulties include, among others:

  • the diversion of management's attention from the day-to-day operations of the combined company;
  • the management of a larger company than before completion of the acquisition;
  • the assimilation of Contactual employees and the integration of two business cultures;
  • challenges in attracting and retaining key personnel;
  • the integration of information, network, accounting, finance, sales, billing, payroll and regulatory compliance systems;
  • challenges in keeping existing customers and obtaining new customers; and
  • challenges in combining product offerings and sales and marketing activities.

There is no assurance that we will successfully or cost-effectively integrate Contactual's operations with our own. For example, the costs of achieving systems integration may substantially exceed its current estimates. As a non-public company, Contactual has not had to comply with the requirements of the Sarbanes-Oxley Act of 2002 for internal control and other procedures. Bringing its systems into compliance with those requirements may cause us to incur substantial additional expense. In addition, the integration process may cause an interruption of, or loss of momentum in, our business activities after completion of the acquisition. If we are not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer and its results of operations and financial condition may be harmed.

We may not be able to realize the anticipated synergies and other benefits it expects to achieve from the acquisition of Contactual within the timeframe that is currently expected, or at all.

Strategic transactions like our acquisition of Contactual create numerous uncertainties and risks. As a result, the combined company may not be able to realize the expected revenue growth and other benefits and synergies that we seek to achieve from the acquisition. For example, we may not be successful in our goal to sell our services to larger business that have historically been the primary subscribers of the Contactual call center services which could prevent us from achieving the increased revenues it expects from the acquisition of Contactual. Even if we are successful in continuing to sell Contactual products to larger customers, these customers may not subscribe to the Contactual contact center services at the levels anticipated by us based on its past experience.

We believe that the businesses conducted by us and Contactual are complementary in a number of respects and that the combined company can take advantage of synergies, economies of scale and other benefits in the following areas, among others:

  • market expansion;
  • increased sales to existing customers;
  • product and technology synergies;
  • operational and manufacturing synergies;
  • research and development synergies;
  • expansion of intellectual property and patent portfolio;
  • geographic synergies; and
  • cultural synergies.

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However, these anticipated benefits and synergies are based on projections and assumptions, not actual experience, and actual results may deviate from our expectations for a variety of reasons, including the following:

  • integration of the operations of Contactual with ours may be more difficult, time-consuming or costly than expected and may not be as successful as the parties anticipate;
  • revenues of the combined business following the transaction may be lower than expected;
  • operating costs, customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers) of the combined business may be greater than expected following the transaction;
  • the ability to retain key employees of Contactual subsequent to the completion of the transaction;
  • the parties might not be able to meet expectations regarding the timing, completion and effects of the transaction;
  • the businesses of Contactual and us are subject to intense competition;
  • our failure protect the Contactual intellectual property rights may weaken the competitive position of the combined company; and
  • in the future third parties may assert claims, including, without limitation, intellectual property infringement claims, that could materially adversely affect the operating results of the combined company.

As shares of 8x8 common stock issued in the acquisition of Contactual become eligible for resale, the sale of those shares could adversely impact 8x8's stock price.

All of the shares of our common stock issued as merger consideration on or around the closing date will be subject to restrictions under federal securities laws that prohibit any resale of such shares for a period of at least six months from the closing date of September 15, 2011. The total number of shares of our common stock issued on the closing date was approximately 5.5 million shares (exclusive of shares retained in escrow), which represented approximately 9% of the number of shares of our common stock outstanding immediately prior to the completion of the acquisition. Accordingly, a substantial number of shares of our common stock may become eligible for resale six months after the closing date. Our stock price may suffer a significant decline as a result of the sudden increase in the number of shares sold in the public market or market perception that the increased number of shares available for sale will exceed the demand for our common stock.

32


ITEM 6. EXHIBITS

Exhibit
Number


Description


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)

101.INS*

XBRL Instance Document

101.SCH*

XBRL Taxonomy Extension Schema

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase

101.DEF*

XBRL Taxonomy Extension Definition Linkbase

101.LAB*

XBRL Taxonomy Extension Label Linkbase

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase

 

 

*

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

33


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: October 31, 2011

8X8, INC.

(Registrant)

By: /s/ D ANIEL W EIRICH          

Daniel Weirich

Chief Financial Officer
(Principal Financial and Chief Accounting Officer and Duly Authorized Officer)

 

 

 

 

 

34


Exhibit 31.1

CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Bryan R. Martin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of 8x8, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

  1. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  2. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  3. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
  4. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

  1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
  2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

October 31, 2011

/s/ B RYAN R. M ARTIN
Bryan R. Martin
Chairman, Chief Executive Officer and President








Exhibit 31.2

CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Daniel Weirich, certify that:

1. I have reviewed this quarterly report on Form 10-Q of 8x8, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

  1. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  2. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  3. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
  4. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

  1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
  2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

October 31, 2011

/s/ D ANIEL W EIRICH
Daniel Weirich
Chief Financial Officer and Secretary








Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of 8x8, Inc. (the "Company") for the period ended September 30, 2011, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bryan R. Martin, Chairman, Chief Executive Officer and President of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ B RYAN R. M ARTIN
Bryan R. Martin
Chairman, Chief Executive Officer and President

October 31, 2011

This certification accompanies this Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, or otherwise required, be deemed filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.








Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of 8x8, Inc. (the "Company") for the period ended September 30, 2011, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel Weirich, Chief Financial Officer and Secretary of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ D ANIEL W EIRICH
Daniel Weirich
Chief Financial Officer and Secretary

October 31, 2011

This certification accompanies this Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, or otherwise required, be deemed filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.