Vonage 2010 Annual Report Download - page 46

through 2015, and
$
38 for apartment space leased in New Jerse
y
for certain executives throu
g
h 2011.
P
urc
h
ase o
bli
gat
i
ons.
W
e
h
ave engage
d
a ven
d
or to ass
i
st w
i
t
h
local number portability, which allows customers to keep their existin
g
p
hone number when switchin
g
to our service. We have committed t
o
p
ay this vendor a minimum of $1,200 in 2011. We have engaged a
credit card processor to process our billings. We have committed to
p
ay this vendor approximately
$
3,700 each year throu
g
h 2015. W
e
h
ave engaged a vendor who will (i) license to us billing and ordering
s
oftware,
(
ii
)
provide professional services relatin
g
to th
e
im
p
lementation, o
p
eration, su
pp
ort and maintenance of the licensed
s
ystem, and (iii) transition support, services in connection with migra-
tion to the licensed s
y
stems. We have committed to pa
y
this vendo
r
$
17,860 throu
g
h 2015; however, we may terminate the contrac
t
s
ooner subject to payment of early termination fees which range fro
m
$
5,500 for termination in the first
y
ear to
$
1,500 for termination in the
fifth year. We have also en
g
a
g
ed a vendor to provide tele
-
commun
i
cat
i
on serv
i
ces.
W
e
h
ave comm
i
tte
d
to pay t
hi
s ven
d
or
$
10,500 throu
g
h 2012; however, we may terminate the contrac
t
s
ooner subject to a minimum payment of
$
1,000. We have en
g
a
g
ed
a
ven
d
or to prov
id
evo
i
cema
il
to text transcr
i
pt
i
on serv
i
ces.
W
e
h
ave
committed to pay this vendor approximately
$
3,845 throu
g
h 2013. W
e
h
ave en
g
a
g
ed a vendor to provide local inbound services. We hav
e
committed to pay this vendor $3,225 through 2012
.
O
ther obligations.
A
t
D
ecem
b
er 31, 2010 we were o
bli
gate
d
t
o pay AT&T
$
13,000 through 2012 under a settlement agree-
ment, which required Vona
g
e to pay AT&T
$
650 each month
.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
O
ur significant accounting policies are summarized in Note
1
t
o our consolidated financial statements. The following describe
s
our cr
i
t
i
ca
l
account
i
ng po
li
c
i
es an
d
est
i
mates
:
Use o
f
Estimate
s
O
ur consolidated financial statements are
p
re
p
ared in con
-
f
ormity with accountin
g
principles
g
enerally accepted in th
e
U
nited States, which require mana
g
ement to make estimates and
assum
p
tions that a
ff
ect the amounts re
p
orted and disclosed i
n
t
he consolidated
f
inancial statements and the accompanyin
g
notes. Actual results could di
ff
er materially
f
rom these estimates.
O
n an ongoing basis, we evaluate our estimates, including
t
he following:
>
t
hose related to the avera
g
e period o
f
service to a
customer
(
the “customer life”
)
used to amortize deferre
d
revenue and de
f
erred customer ac
q
uisition costs asso
-
ciated with customer activation
;
>
t
he use
f
ul lives o
f
propert
y
and equipment, so
f
twar
e
costs, an
di
ntang
ibl
e assets
;
>
assumptions used for the purpose of determining share-
based compensation and the fair value of our stock war
-
rant using the Black-
S
choles option pricing mode
l
(
“Model”
)
, and various other assumptions that w
e
believed to be reasonable. The ke
y
inputs for this Model
are our stoc
k
pr
i
ce at va
l
uat
i
on
d
ate, exerc
i
se pr
i
ce, t
he
dividend
y
ield, risk-free interest rate, life in
y
ears, and
h
istorical volatilit
y
of our common stock;
>
assum
p
tions used to determine the
f
air value o
f
th
e
embedded conversion o
p
tion within our Convertible
Notes usin
g
the Monte Carlo simulation model. The ke
y
i
nputs are maturity date, risk-
f
ree interest rate, our stoc
k
price at valuation date, and historical volatility o
f
ou
r
common stoc
k
;an
d
>
assumptions used to determine the
f
air value o
f
the
embedded make-whole premium
f
eature within our prio
r
First Lien Senior Facilit
y
and our prior Second Lien Senio
r
F
ac
ili
t
y.
W
e
b
ase our est
i
mates on
hi
stor
i
ca
l
exper
i
ence, ava
il
a
bl
e
market in
f
ormation, appropriate valuation methodologies, and o
n
v
ar
i
ous ot
h
er assumpt
i
ons t
h
at we
b
e
li
eve
d
to
b
e reasona
bl
e, t
h
e
r
esults of which form the basis for making judgments about th
e
carrying values of assets and liabilities
.
R
evenue
R
ecogn
i
t
i
o
n
O
perating revenues consist of telephony services revenue
s
and customer equipment
(
which enables our telephon
y
services
)
an
d
s
hi
pp
i
ng revenues.
Th
epo
i
nt
i
nt
i
me at w
hi
c
h
revenues are
r
ecognized is determined in accordance with
S
taff Accountin
g
B
u
ll
et
i
n
N
o. 104,
R
evenue
R
ecogn
i
t
i
on, an
dFi
nanc
i
a
lA
ccount
i
n
g
S
tandards Board
(
“FA
S
B”
)
Accounting
S
tandards
C
odificatio
n
(
“A
SC
”
)
605, Revenue Recognition
.
S
ubstantially all of our operating revenues are telephony serv
-
i
ces revenues, which are derived primaril
y
from monthl
y
sub
-
scription fees that customers are charged under our service plans
.
We also derive telephon
y
services revenues from per minute fee
s
for international calls and for any calling minutes in excess of a
customer’s monthl
y
plan limits. Monthl
y
subscription fees are
automat
i
ca
ll
yc
h
arge
d
to customers
’
cre
di
t car
d
s,
d
e
bi
t car
d
so
r
electronic check payments or E
C
P in advance and are recognize
d
over the following month when services are provided. Revenue
s
g
enerated from international calls and from customers exceedin
g
allocated call minutes under limited minute plans are reco
g
nize
d
as services are
p
rovided, that is, as minutes are used, and ar
e
billed to a customer’s credit cards, debit cards or E
C
P in arrears.
A
s a result of our multiple billin
g
cycles each month, we estimat
e
t
h
ea
m
ou
nt
of
r
e
v
e
n
ues ea
rn
ed f
r
o
m int
e
rn
a
ti
o
n
a
l
ca
ll
sa
n
df
r
om
customers exceedin
g
allocated call minutes under limited minute
plans but not billed
f
rom the end o
f
each billin
g
cycle to the end o
f
each reportin
g
period. These estimates are based primarily upo
n
h
i
s
t
o
ri
ca
l min
u
t
es a
n
d
h
a
v
e bee
n
co
n
s
i
s
t
e
nt with
ou
r
ac
t
ua
l
r
esu
lt
s.
From time to time we have
g
enerated revenue by char
g
in
ga
f
ee
f
or activatin
g
service, althou
g
h we do not currently or expec
t
t
o char
g
e an activation
f
ee to customers. In these instances when
n
o activation
f
ee is bein
g
collected, no customer acquisition costs
are deferred. Customer activation fees when collected, alon
g
wit
h
t
he related incremental direct customer ac
q
uisition amounts
f
o
r
customer e
q
ui
p
ment in the direct channel and
f
or rebates and
retailer commissions in the retail channel, up to but not exceedin
g
t
he activation
f
ee, are de
f
erred and amortized over the estimate
d
avera
g
e customer li
f
e. The amortization o
f
de
f
erred customer
equipment is recorded to direct cost o
fg
oods sold. The amor
-
t
ization o
f
de
f
erred rebates is recorded as a reduction o
f
tele
p
h
-
ony services revenues. The amortization o
f
de
f
erred retaile
r
comm
i
ss
i
ons
i
s recor
d
e
d
as mar
k
et
i
n
g
expense.
W
e est
i
mat
e
customer li
f
e by analyzin
g
historical trends and applyin
g
those
t
rends to
f
uture periods. This customer li
f
e is solel
y
used to amor-
t
ize de
f
erred activation
f
ees collected, along with the related
i
ncremental customer acquisition costs. The average customer li
fe
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