18. Loss on Long-Term Contract

In 2013 the Company entered into a long-term contract with a partner under which it agreed to share revenue generated under the contract with the partner. The revenue sharing arrangement included minimum annual guarantees payable to the partner over the term of the contract.

During the second quarter of 2014, the Company updated its analysis of the long-term contract. Based on results to date and an estimate of revenue to be generated in the future under the contract, the Company determined that sufficient revenue would not be generated under the contract for it to meet its minimum annual guarantees of revenue sharing to its partner. As a result, the Company recorded a $6,200,000 loss on the long-term contract at June 30, 2014 which represented the amount it expected the total minimum annual guarantees payable to the partner would exceed the revenue generated under the contract. The loss on the long-term contract was recorded as follows:

During the third quarter, the Company and its partner renegotiated the contract and agreed to significant changes in the contract which include, among other things, reductions in the minimum annual revenue-sharing guarantees if certain terms and conditions are met. In connection with amending the agreement, the Company granted its partner a subordinated security interest in the accounts receivable of its Enterprise business segment.  This security interest is subordinate to the security interest granted to its lenders under the Senior Credit Agreement. As a result of the agreed changes to the contract and the Company’s expectation that the terms and conditions contained in the amended agreement will be met by both parties, the Company now estimates that the loss on the long-term contract will be less than previously recorded. Consequently, the Company has recorded a credit to Cost of Revenue – loss on long-term contract of $2,756,733 during the three months ended September 30, 2014.

During the fourth quarter, the Company reviewed future revenue projections that were offsetting the accrued loss and now estimates that the loss on the long-term contract will be more than previously recorded. Consequently, the Company has recorded an additional loss on long-term contract of $1,358,679 during the three months ended December 31, 2014.