A Bankrupt Vonage?

The beleaguered VoIP provider files SEC statement outlining options if Vonage fails to stay injunction cutting off new customers.

By Roy Mark | Posted Apr 18, 2007
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Vonage Holdings Corp. outlined a bleak future for the Internet telephony company -- including a possible bankruptcy -- if it loses its ability to solicit new customers as ordered by a U.S. district court judge on April 4. Vonage hopes to stay that ruling Tuesday before the U.S. Court of Appeals in Washington.

In a filing Tuesday with the Securities and Exchange Commission (SEC), Vonage predicted if the Court of Appeals denies the stay, Vonage customers may face service interruptions and the company's precarious financial condition could be "materially and adversely" affected.

"If we are unable to acquire additional customers, this would delay or prevent our profitability, result in the acceleration of expenditures to preserve existing revenues and further negatively affect our business," Vonage stated in the SEC filing.

Vonage faces the possible cutoff of new customers after losing a patent infringement case to Verizon . Ruling that Vonage infringed on three Verizon patents that allow Vonage to connect Voice over IP (VoIP) calls to the publicly switched telephone network, a jury awarded Verizon $58 million in damages.

U.S. District Judge Claude Hilton then ordered an injunction against Vonage soliciting new customers while the company appeals the jury verdict. Hilton also set a $66 million appeals bond for Vonage. In addition, Vonage was ordered to pay a 5.5 percent royalty rate on a quarterly basis to Verizon to continue servicing Vonage's existing customers.

"If we are prohibited from offering our service to new customers, we will be required to cease selling our service through all channels and may still be obligated to make payments to certain of our existing vendors," Vonage stated.

Another option for Vonage would be to develop a technological workaround of the infringed Verizon patents, but the company said Tuesday that path is questionable.

"Implementation of these [workarounds], including those we may in the future implement in connection with our patent litigation with Verizon, may not be feasible or, if feasible, may take several months to implement," Vonage wrote.

Vonage said that any workaround, "may cause service interruptions or be temporarily or permanently incompatible with some of the features we currently offer."

The SEC filing also outlines other pending patent-infringement claims against Vonage, including lawsuits by Sprint, Klausner Technologies and Web Telephony. In all three cases, the companies are seeking compensatory damages, treble damages, attorneys' fees and injunctive relief.

If any of the companies win their infringement claims, the Holmdel, N.J.-based Vonage said it could lead to default on its convertible notes and could accelerate the payment of approximately $253.6 million of principal and interest under the notes. Vonage added that adverse decisions would result in substantial employee layoffs.

"We believe that we have meritorious defenses against the claims. However, we might not ultimately prevail in these actions. Whether or not we ultimately prevail, litigation could be time-consuming and costly and injure our reputation," Vonage stated.

"If any of the plaintiffs prevail in their respective actions, we may be required to negotiate royalty or license agreements with respect to the patents at issue, and may not be able to enter into such agreements on acceptable terms, if at all."

Last week, Vonage announced CEO Mike Snyder was fired over "disappointing results" and that the VoIP provider would slash its marketing budget by $110 million.

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