11. Commitments and Contingencies

Leases

The Company has operating leases for office facilities through 2020 and office equipment through 2019. The future minimum rental payments under these leases at September 30, 2014 are as follows:


Year	Amount
2014	$	251
2015		926
2016		810
2017		655
Thereafter		1,248

Future minimum lease payments	$	3,890

During the quarter ended June 30, 2014, the Company recorded a capital lease for office equipment. As of September 30, 2014, the office equipment had a cost of $161, accumulated depreciation of $10, and a net book value of $151 recorded in property and equipment, net on the consolidated balance sheets.

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
2014	$	8
2015		34
2016		34
2017		34
2018		34
2019		23

Total minimum payments required:		167
Less amount representing interest:		16

Present value of net minimum lease payments:	$	151

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 $0.1 million and $0.2 million at September 30, 2014 and December 31, 2013, respectively.

The Company offers repair and replacement warranties of primarily two years for antenna products and 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, 2014 and December 31, 2013, 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, 2014 and 2013, were as follows:


	Nine Months Ended September 30,
	2014			2013
Beginning balance	$	305		$	270
Provisions for warranties		62			124
Consumption of reserves		(60	)		(120	)

Ending balance	$	307		$	274

Restructuring

During 2013, the Company integrated the TelWorx business with its Bloomingdale, IL operations. The Company moved kitting operations and order fulfillment to its Bloomingdale facility from the Lexington, North Carolina facility. As part of the integration, the Company separated eighteen PCTelWorx employees between March and September 2013. During the nine months ended September 30, 2013, the Company recorded $0.3 million as restructuring expense for employee severance costs and asset disposals and 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.

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 and the assumption of certain specified liabilities of the TelWorx Entities on July 9, 2012 (the “Acquisition”).

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

•

PCTelWorx acquired an option to terminate the 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. 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.

As part of the Acquisition, PCTelWorx 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. In May 2013, the Company gave notice of its election to exercise its option to terminate the Lexington facility lease, with termination effective October 31, 2013.

The Company also engaged in efforts to seek further restitution from two other parties used by the TelWorx Parties in the acquisition. On September 30, 2014 the Company settled with one for $0.1 million in cash. The company recorded that settlement as income in the quarter ended September 30, 2014, consistent with accounting for legal settlements. On October 10, 2014 the Company settled with the other party for $0.8 million. The settlement will be recorded as income in the quarter ended December 31, 2014, consistent with accounting for legal settlements. Both payments were received in October 2014. See also Footnote 8. – Acquisition of TelWorx Communications LLC and Footnote 15 - Subsequent Events.