Vonage 2008 Annual Report Download - page 24

a reasonable possibilit
y
that a material misstatement o
f
the
company’s annual or interim financial statements will not be pre-
v
ente
d
or
d
etecte
d
on a t
i
me
ly b
as
i
s.
Our management, after discussions with our audit committee
and our independent registered public accounting firm, BD
O
S
eidman LLP, determined that it was necessar
y
to restate our
consolidated
f
inancial statements
f
or the quarters ended June 30,
2007 and
S
e
p
tember 30, 2007 in order to correct the amount o
f
s
tock-based compensation expense recorded b
y
us for those
p
eriods. In light o
f
the restatement, we believe that a materia
l
weakness existed in the design of our internal control procedure
s
r
e
l
at
i
n
g
to recor
di
n
g
stoc
k
-
b
ase
d
compensat
i
on expense, w
hi
c
h
was remediated as o
f
December 31
,
2007.
I
f we fail to maintain the adequacy of our internal controls, w
e
m
a
y
not be able to conclude in the
f
uture that we have e
ff
ective
internal control over
f
inancial reporting in accordance with th
e
S
arbanes-
O
xley Act. Moreover, effective internal controls ar
e
n
ecessar
yf
or us to produce reliable
f
inancial reports and are
important to help prevent
f
raud. As a result, our
f
ailure to maintai
n
effective internal controls could result in the loss of investor con-
f
idence in the reliabilit
y
o
f
our
f
inancial statements, which in tur
n
could harm the market value o
f
our common stock. An
yf
ailure t
o
m
aintain effective internal controls also could impair our ability t
o
m
ana
g
e our business and harm our financial results.
Our common stockholders ma
y
suffer dilution in the
future upon exercise of our
C
onvertible Notes.
I
n connection with the Financin
g
, we issued $18,000
a
gg
re
g
ate principal amount of Convertible Notes to Silver Point
Finance, LLC, certain of its affiliates, other third
p
arties and affili
-
ates of us. If the conversion ri
g
hts in the
C
onvertible Notes are
exercised, the exercisin
g
noteholders may obtain a si
g
ni
f
ican
t
equity interest in us and other stockholders may experience sig-
n
ificant and immediate dilution. Conversion of the entire $18,000
a
gg
re
g
ate principal amount of Convertible Notes at the initial
conversion rate would have resulted in an increase o
f
our out
-
s
tandin
g
common stock from 156,647,943 shares
(
as o
f
December 31, 2008) to 218,716,909 shares, an approximat
e
3
9.6
%
increase or 28
%
dilution to our common stockholders
.
Jeffrey A. Citron, our founder, Chairman and a si
g
nificant
stockholder, exerts si
g
nificant influence over us
.
A
s of December 31, 2008, Mr. Citron beneficiall
y
owne
d
approximately 36.5
%
o
f
our outstanding common stock, includin
g
outstandin
g
securities convertible into or exercisable for commo
n
s
tock prior to December 31, 2008. As a result, Mr. Citron is abl
e
t
o exert signi
f
icant in
f
luence over all matters presented to our
s
tockholders for approval, includin
g
election and removal of our
directors and chan
g
eo
f
control transactions. In addition, as our
C
hairman, Mr. Citron has and will continue to have significan
t
i
nfluence over our strate
g
y and other matters. Mr.
C
itron’s inter
-
ests ma
y
not alwa
y
s coincide with the interests o
f
other holders o
f
our common stock
.
We ma
y
be unable to full
y
realize the benefits of our net
operatin
g
loss (“NOL”) carryforwards if an ownership
chan
g
e occurs
.
I
f we were to experience a “chan
g
e in ownership” unde
r
Section 382 of the Internal Revenue Code (“Section 382”), th
e
NOL carr
y
forward limitations under Section 382 would impose an
a
nnual limit on the amount of the future taxable income that ma
y
b
e offset by our N
O
L
g
enerated prior to the chan
g
e in ownership
.
I
f
a chan
g
e in ownership were to occur, we may be unable to use
a
significant portion of our N
O
L to offset future taxable income. I
n
g
eneral, a chan
g
e in ownership occurs when, as of any testin
g
d
ate, there has been a cumulative chan
g
e in the stock ownership
of
the corporation held by 5
%
stockholders o
f
more than 50 per
-
c
enta
g
epo
i
nts over an app
li
ca
bl
et
h
ree-year per
i
o
d
.
F
or t
h
ese
p
urposes, a 5
%
stockholder is
g
enerally any person or
g
roup o
f
p
ersons that at any time during an applicable three-year period
has owned 5% or more of our outstandin
g
common stock. I
n
a
ddition, persons who own less than 5
%
o
f
the outstandin
g
c
ommon stock are grouped together as one or more “publi
c
g
roup” 5% stockholders. Under
S
ection 382, stock ownership
w
ould be determined under complex attribution rules and
g
en-
e
rally includes shares held directly, indirectly (though intervenin
g
e
ntities
)
and constructively
(
by certain related parties and certai
n
unrelated parties actin
g
as a
g
roup).
T
he market
p
rice of our common stock has been and ma
y
c
ontinue to be volatile, and purchasers o
f
our common
s
toc
k
cou
ld i
ncur su
b
stant
i
a
ll
osses.
S
ecurities markets experience significant price and volum
e
fluctuations. This market volatility, as well as general economi
c
c
onditions, could cause the market price of our common stock t
o
f
luctuate substantially. The trading price o
f
our common stock has
b
een, and is likely to continue to be, volatile. Many factors that ar
e
b
eyond our control may si
g
nificantly affect the market price of ou
r
s
hares. These
f
actors include:
>
j
u
d
gments
i
n our
li
t
i
gat
i
on;
>
ch
anges
i
n our earn
i
ngs or var
i
at
i
ons
i
n operat
i
ng resu
l
ts;
>
a
ny shortfall in revenue or increase in losses from level
s
e
xpecte
dby
secur
i
t
i
es ana
ly
sts;
>
ch
an
g
es
i
nre
g
u
l
atory po
li
c
i
es or tax
l
aw;
>
o
peratin
g
per
f
ormance o
f
companies comparable to us; and
>
g
eneral economic trends and other external
f
actors
.
I
f
any o
f
these
f
actors causes the price o
f
our common stoc
k
to fall, investors may not be able to sell their common stock at or
a
bove their respective purchase prices.
O
ur certificate of incorporation and bylaws, the agree-
m
ents governing our indebtedness and the terms o
f
cer-
t
ain settlement a
g
reements to which we are a part
y
c
ontain provisions that could delay or discoura
g
e a take-
o
ver attem
p
t, which could
p
revent the com
p
letion of
a
t
ransact
i
on
i
nw
hi
c
h
our stoc
kh
o
ld
ers cou
ld
rece
i
ve
a
s
u
b
stant
i
a
l
prem
i
um over t
h
et
h
en-current mar
k
et pr
i
ce
fo
rth
e
ir
s
h
a
r
es.
C
ertain provisions of our restated certificate of incorporatio
n
a
nd our second amended and restated b
y
laws ma
y
make it mor
e
d
ifficult for, or have the effect of discouraging, a third party fro
m
a
cquirin
g
control of us or chan
g
in
g
our board of directors and
management. These provisions:
>
p
ermit our board of directors to issue additional shares of
c
ommon stock and preferred stock and to establish th
e
number of shares, series designation, voting powers (if any),
p
references, other special rights, qualifications, limitations or
restrictions of an
y
series of preferred stock;
1
6
VO
NA
G
E ANN
U
AL REP
O
RT 2008