11. Commitments and Contingencies

Leases

The Company has operating leases for office facilities through 2020 and office equipment through 2014. The future minimum rental payments under these leases at September 30, 2013, are as follows:


Year	Amount
2013	$	211
2014		834
2015		815
2016		699
2017		586
Thereafter		1,182

Future minumum lease payments	$	4,327

The Company has capital leases for office equipment. The office equipment had a cost of $3, accumulated depreciation of $1, and a net book value of $2 as of September 30, 2013.

The following table presents future minimum lease payments under capital leases together with the present value of the net minimum lease payments due in each year:


Year	Amount
2013	$	1
2014		2

Total minimum payments required:		3
Less amount representing interest:		0

Present value of net minimum lease payments:	$	3

Warranty Reserve and Sales Returns

The Company allows its major distributors and certain other customers to return unused product under specified terms and conditions. The Company accrues for product returns based on historical sales and return trends. The Company’s allowance for sales returns was $0.2 million at September 30, 2013 and $0.1 million at December 31, 2012.

The Company offers repair and replacement warranties of typically two years for antenna products and one to three years for scanning receiver products. The Company’s warranty reserve is based on historical sales and costs of repair and replacement trends. The warranty reserve was $0.3 million at September 30, 2013 and at December 31, 2012, respectively, and is included in other accrued liabilities in the accompanying condensed consolidated balance sheets.

Changes in the warranty reserves during the nine months ended September 30, 2013 and 2012, were as follows:


	Nine Months Ended September 30,
	2013			2012
Beginning balance	$	270		$	249
Provisions for warranty		124			127
Consumption of reserves		(120	)		(106	)

Ending balance	$	274		$	270

Restructuring

During the second and third quarters of 2013, the Company integrated the TelWorx business with its Bloomingdale operations. The Company moved kitting operations and order fulfillment to its Bloomingdale, Illinois facility from the Lexington, North Carolina facility. As part of the integration, the Company separated eighteen PCTelWorx employees between March and September 2013. The Company recorded $0.3 million as restructuring expense during the nine months ended September 30, 2013, consisting of employee related costs and asset disposals. The Company also recorded $0.3 million in cost of sales for the disposal of TelWorx inventory that was not compatible with the Company’s Bloomingdale facility or Bloomingdale operations. In October 2013, the Company moved to a smaller Lexington office facility for its sales, procurement, and administrative functions.

The following table summarizes the restructuring activity during the nine months ended September 30, 2013 and the status of the reserves at September 30. 2013:


	Accrual							Accrual
	Balance at							Balance at
	December 31,		Restructuring		Payments/			September 30,
	2012		Expense		Charges			2013
2013 TelWorx integration:
Employee related costs	$	0	$	188	($	132	)	$	56
Asset disposals		0	$	66	($	66	)		0

Subtotal		0		254		(198	)		56

2012 Bloomingdale manufacturing:		1		0		(1	)		0

Totals	$	1	$	254	($	199	)	$	56

During the three months ended September 30, 2012, the Company eliminated twelve positions in its Bloomingdale, Illinois manufacturing organization and recorded restructuring expense of $0.2 million for severance costs and related benefits.

TelWorx Settlement

On March 27, 2013, the Company, its wholly-owned subsidiary PCTelWorx, Inc. (“PCTelWorx”), and the TelWorx Parties (as defined below) entered into an Amendment (the “Amendment”) to the Asset Purchase Agreement dated July 9, 2012 (the “Original Agreement), among the Company, PCTelWorx, Ciao Enterprises, LLC f/k/a TelWorx Communications, LLC and certain of its affiliated entities (collectively, the “TelWorx Entities”) and Tim and Brenda Scronce (“Sellers” and collectively with the TelWorx Entities, the “TelWorx Parties”), as part of a settlement arrangement relative to PCTelWorx’s acquisition of substantially all of the assets of and the assumption of certain specified liabilities of the TelWorx Entities on July 9, 2012 (the “Acquisition”).

As part of the Acquisition, PCTelWorx previously executed a five-year lease with Scronce Real Estate, LLC for the continued use of an operating facility and offices in Lexington, North Carolina, which provided for annual rental payments of approximately $0.2 million.

As disclosed in the Company’s Form 8-K/A filed with the Securities and Exchange Commission (the “Commission”) on March 13, 2013, after completion of the Acquisition, the Company became aware of certain accounting irregularities with respect to the TelWorx Entities and the Company’s Board of Directors directed management to conduct an internal investigation. Based on the results of the Company’s investigation, the Company’s Board of Directors directed management to seek restitution from the TelWorx Parties, and after protracted negotiations and concurrent litigation, the parties entered into the Amendment and related settlement agreements to resolve their dispute.

The following is a summary of the material terms of the Amendment:

•

the TelWorx Parties paid the Company a cash payment of $4.3 million, which included $1.0 million pursuant to the working capital adjustment provisions of the Original Agreement;

•

the TelWorx Parties forfeited all $1.5 million of the potential contingent consideration earnable under the Original Agreement, which had a fair value of $0.6 million, and which, if earned, would have been payable in the form of common stock of the Company;

•

the TelWorx Parties forfeited the $0.5 million holdback escrow under the Original Agreement;

•

the parties agreed to the elimination of all indemnification obligations provided for under the Original Agreement;

•

the Company, PCTelWorx and Sellers each agreed to execute mutual releases of all claims arising in connection with the dispute; and

•

PCTelWorx acquired an option to terminate its current facility lease in Lexington, North Carolina with Scronce Real Estate, LLC (which is controlled by Sellers) upon 180 days written notice.

The settlement had an aggregate fair value of $5.4 million, consisting of $4.3 million cash received, $0.6 million for the contingent consideration forfeited, and $0.5 million for the holdback escrow balance released. Approximately $1.0 million of the cash received was pursuant to the working capital adjustment provisions of the Original Agreement and settle the miscellaneous accounts receivable recorded in prepaid expenses and other assets at December 31, 2012. The remaining $4.3 million settlement amount, consisting of $3.2 million cash and the release of the $0.6 million contingent consideration fair value and the $0.5 million release of the holdback escrow, was recorded as income in the quarter ended March 31, 2013, consistent with accounting for legal settlements.

The Company recorded a $12.5 million impairment of goodwill related to the TelWorx Entities in the fourth quarter of 2012. See Footnote 8 -Acquisition of TelWorx Communications LLC for full details. The Company is also engaged in efforts to seek further restitution from the independent accountants that provided the 2010 and 2011 audited financial statements for TelWorx and the investment banking firm used by the TelWorx Parties. The Company cannot predict the total amount of restitution it will eventually obtain. In settling with the TelWorx parties, management considered the risks and expenses associated with protracted litigation as well as the consumption of Company resources that would otherwise be applied to operating activities.

In May 2013, the Company gave notice of its election to exercise its option with respect to its Lexington facility lease, with termination effective October 31, 2013.