Vonage warns of potential bankruptcy

Vonage's intellectual property battles could prove disastrous

VoIP provider Vonage has warned in a regulatory filing that its intellectual property battle could bankrupt the company. 

Vonage operates as an internet telephony provider in Canada, the UK and the US. The company has been widely criticised for a disastrous IPO last year and for overspending on its marketing campaign.

A jury last month found that the provider's telephony services infringed on a set of five patents owned by Verizon. It ordered the company to pay $58m in damages and 5.5 per cent of all future earnings.  

Vonage is also threatened by a legal order that prevents it from signing up any new customers, and is facing another patent case from Sprint-Nextel later this year. 

"In the event of a successful claim of infringement or in the case of the Verizon litigation, we may need to obtain one or more licences from third parties, which may not be available at a reasonable cost, if at all," Vonage stated in its annual report.

"The defence of any lawsuit could result in time-consuming and expensive litigation, regardless of the merits of such claims."

The company also warned that the legal issues could cause it to default on the terms of a convertible bond, forcing the accelerated payment of $253.6m.

If Vonage's financial position continues to weaken, the firm could receive less favourable terms from its suppliers and lose access to key distribution channels, the report warned.

Vonage has painted an optimistic picture in its public statements so far, claiming that it has plenty of cash reserves to face its legal challenges. The statements in the annual report appear more realistic.

The firm is rumoured to be in takeover talks with mobile operator Sprint-Nextel. Although the company is relatively cheap, analysts have questioned he business logic of such a deal for Sprint-Nextel.