Vonage 2010 Annual Report Download - page 23

w
i
t
h
t
h
e
i
r current te
l
ep
h
one serv
i
ce prov
id
er or ma
y
c
h
oose t
o
r
eturn to service provided b
y
traditional telephone companies
.
O
ur emergency and E-911 calling services may expose u
s
to signi
f
icant liability
.
T
he F
CC
rules for the provision of 911 service b
y
inter
-
connected VoIP
p
roviders, such as the VoIP service we
p
rovide
,
r
equire that for all
g
eo
g
raphic areas covered by the traditiona
l
wire line E-911 network, interconnected VoIP
p
roviders must
p
ro-
v
ide E-911 service as defined by the F
CC
’s rules. Under th
e
F
CC
’s rules, E-911 service means that interconnected VoIP
p
ro
-
v
iders must transmit the caller’s telephone number and re
g
istere
d
l
ocation information to the appropriate P
S
AP for the caller’s re
g
is
-
t
ered location. Vona
g
e provides E-911 service, under the F
CC
’
s
r
ules, to approximately 99.97
%
o
f
its subscriber lines
.
T
he remainin
g
subscriber lines do not have E-911 service
f
o
r
a variety of reasons includin
g
refusal by PSAPs to accept VoIP
911 calls, the inability of PSAPs to receive the registered location
data
f
rom us, and the
f
ailure b
y
third part
y
companies with who
m
we contract to provide aspects o
f
our E-911 service to obtain th
e
necessar
y
access or complete implementation o
f
the necessar
y
i
nter
f
aces to the traditional wire line E-911 in
f
rastructure. In addi-
t
ion, certain o
f
our services designed to be highly mobile including
s
o
f
t phone service, which is so
f
tware that enables a customer t
o
make telephone calls from a computer, route callers to a nationa
l
emergency ca
ll
center t
h
at
i
n turns routes t
h
eca
ll
to t
h
e appro
-
p
riate P
S
AP.
We could be subject to enforcement action b
y
the F
CC
for
ou
r
subsc
ri
be
r lin
es
th
a
t
do
n
o
th
a
v
e
E-
9
11
se
rvi
ce
. Thi
s
enforcement action could result in si
g
nificant monetary penaltie
s
and restrictions on our ability to offer non-compliant services.
Delays our customers may encounter when makin
g
emer-
g
ency services calls and any inability of a PSAP to automaticall
y
r
eco
g
nize the caller’s location or telephone number can have
devastatin
g
consequences. Customers have attempted, and may
i
n the
f
uture attempt, to hold us responsible
f
or any loss, dama
g
e,
p
ersonal injur
y
or death su
ff
ered as a result. In Jul
y
2008, the Ne
w
and Emerging Technologies 911 Improvement Act o
f
200
8
b
ecame
l
aw an
d
prov
id
e
d
t
h
at
i
nterconnecte
dV
o
IP
prov
id
er
s
have the same protections
f
rom liabilit
yf
or the operation o
f
91
1
s
erv
i
ce as tra
di
t
i
ona
l
w
i
re
li
ne an
d
w
i
re
l
ess prov
id
ers.
Li
m
i
tat
i
on
s
on liability
f
or the provision o
f
911 service are normally governed
by
state
l
aw an
d
t
h
ese
li
m
i
tat
i
ons t
y
p
i
ca
lly
are not a
b
so
l
ute.
Th
us
,
f
or example, we could be subject to liabilit
yf
or a problem with our
911 service where our
f
ailures are greater than mere negligence. I
t
i
s also unclear under the F
CC
’s rules whether the limitations o
n
li
a
bili
ty wou
ld
app
l
ytot
h
ose su
b
scr
ib
er
li
nes w
h
ere
V
onage
d
oes
not prov
id
e
E
-911 serv
i
ce
.
We are de
p
endent on a small number of individuals, and i
f
we
l
ose
k
ey personne
l
upon w
h
om we are
d
epen
d
ent, ou
r
business will be adversel
y
affected
.
M
an
y
of the ke
y
responsibilities of our business have bee
n
assigned to a relatively small number of individuals.
O
ur future
s
uccess
d
epen
d
s to a cons
id
era
bl
e
d
egree on t
h
ev
i
s
i
on, s
kill
s
,
experience, and effort of our senior management, especiall
y
M
arc P. Lefar
,
our
C
hief Executive
O
fficer. The loss of the service
s
of these officers could have a material adverse effect on our busi
-
ness.
I
na
ddi
t
i
on, our cont
i
nue
d
growt
hd
epen
d
s on our a
bili
ty t
o
attract an
d
reta
i
n exper
i
ence
dk
e
y
emp
l
o
y
ees
.
W
e
h
ave
i
ncurre
dl
osses s
i
nce our
i
ncept
i
on, an
d
we ma
y
co
ntin
ue
t
o
in
cu
rl
osses
in th
e
f
u
t
u
r
e
.
While we achieved profitabilit
y
in certain quarters in 2009 and
2010 under United
S
tates
G
enerally Accepted Accounting Princi-
p
les (“GAAP”), we incurred net losses of
$
42,598 and
$
83,665 for
th
e
y
ears en
d
e
dD
ecem
b
er 31, 2009 an
d
2010, respect
i
ve
ly
.
F
o
r
t
he period from our inception through December 31, 2010, ou
r
accumulated deficit was
$
1,171,901. Our net losses initiall
y
wer
e
driven primarily by start-up costs and the cost of developing our
t
ec
h
no
l
ogy an
dl
ater
b
y patent
li
t
i
gat
i
on sett
l
ements an
d
mar
k
et
-
i
ng expenses.
M
ost recent
l
y, our net
l
osses
h
ave
b
een
d
r
i
ven
p
r
i
nc
i
pa
ll
y
b
y mar
k
et
i
ng expenses,
i
nvestments
i
n researc
h
an
d
d
eve
l
opment an
d
customer care,
i
ncrease
di
nterest expense as
a
r
esult of the financing that we completed in November 2008 and
non-cash charges associated with the conversion feature of th
e
now converte
d
convert
ibl
e notes an
d
our
D
ecem
b
er 2010
r
efinancing.
Althou
g
h we believe we will achieve consistent pro
f
itability in
t
he
f
uture, we ultimately may not be success
f
ul. We believe tha
t
our ability to achieve consistent pro
f
itability will depend, amon
g
other
f
actors, on our ability to continue to achieve and maintain
s
ubstantive o
p
erational im
p
rovements and structural cost reduc
-
ti
ons w
hil
ema
i
nta
i
n
i
n
g
an
dg
row
i
n
g
our net revenues.
I
na
ddi
t
i
on,
ce
rt
a
in
of
th
e cos
t
sofou
r
bus
in
ess a
r
e
n
o
t within
ou
r
co
ntr
o
l
a
n
d
ma
yi
ncrease.
F
or examp
l
e, we an
d
ot
h
er te
l
ecommun
i
cat
i
ons
p
rov
id
ers are su
bj
ect to regu
l
atory term
i
nat
i
on c
h
arges
i
mpose
d
b
y regu
l
atory aut
h
or
i
t
i
es
i
n countr
i
es to w
hi
c
h
customers ma
ke
ca
ll
s, suc
h
as
I
n
di
aw
h
ere regu
l
atory aut
h
or
i
t
i
es
h
ave
b
een pet
i-
ti
one
dbyl
oca
l
prov
id
ers to cons
id
er term
i
nat
i
on rate
i
ncreases.
A
s we attract a
ddi
t
i
ona
li
nternat
i
ona
ll
ong
di
stance
callers, we will be more a
ff
ected b
y
these increases to the exten
t
t
hat we are unable to o
ff
set such costs by passing through pric
e
i
ncreases to customers
.
Jeffrey A.
C
itron, our founder, non-executive
C
hairman,
and a signi
f
icant stockholder, exerts signi
f
icant in
f
luenc
e
o
v
e
r
us.
As of December 31, 2010, Mr.
C
itron beneficiall
y
owne
d
approximately 26.0% of our outstanding common stock, including
outstanding securities exercisable for common stock within 6
0
days of such date. As a result, Mr.
C
itron is able to exert sig
-
nificant influence over all matters presented to our stockholder
s
for approval, including election and removal of our directors an
d
change of control transactions. In addition, as our non-executive
C
hairman
,
Mr.
C
itron has and will continue to have influence ove
r
our strategy and other matters as a board member. Mr.
C
itron’s
i
nterests ma
y
not alwa
y
s coincide with the interests of other
holders of our common stock.
We may be unable to
f
ully realize the bene
f
its o
f
our net
operatin
g
loss (“NOL”) carry forwards if an ownershi
p
c
h
ange occurs
.
I
f
we were to experience another “chan
g
e in ownership
”
under Section 382 of the Internal Revenue Code
(
“Section 382”
)
,
t
he NOL carry forward limitations under Section 382 would
i
m
p
ose an annual limit on the amount o
f
the
f
uture taxable incom
e
t
hat may be offset by our NOL
g
enerated prior to the chan
g
ei
n
ownership. I
f
a chan
g
e in ownership were to occur, we may b
e
unable to use a si
g
nificant portion of our NOL to offset futur
e
1
6
VO
NA
G
E ANN
U
AL REP
O
RT 2010