Vonage Holdings, Inc. (NYSE:VG) shares dropped more than 10% this week after a federal court ruled Friday that the company stop signing up new customers in connection with a patent dispute with Verizon Communications Inc. (NYSE:VZ). The courts found in March that Vonage infringed on three of Verizon's patents, including those related to retrieving voicemail and terminating voice calls from someone using an Internet-based telecommunications network to a traditional network. While Vontage plan on appealing the ruling, concerns are mounting about the long-term viability of the non-profitable Vonage.

New customers are the lifeblood of telecom providers who typically record high customer churn rates. Vonage said in court that it loses about 50,000 customers per month, which means that in a year roughly a quarter of the company's customers could leave the company if it were prevented from adding new subscribers. In the end, patent infringement penalties, customer defection, and increased cost from workarounds could cause Vonage bond-holders to exercise a $250 million put on notes issued in December of 2005. If this put is exercised, the bond-holders could call for payment in December 2008 which could pose a significant problem for the company. Assuming that the put is exercised, the company could face a significant liquidity event if the bonds are repaid in cash or swapped equity. Combined, Vonage is looking at some serious problems that need to be addressed before a higher stock price can be justified. However, if the company can find its way out of this mess through an acquisition or court ruling, it would mean significant share appreciation over the short-term. This make VG a stock worth watching!