Commitments and Contingencies

9 Months Ended

Sep. 30, 2016

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Note 3 — Commitments and Contingencies

In conjunction with the acquisition of the XTouch technology, the Company entered into a lease for office and production facilities for approximately 28,918 square feet at 1150 E. Cheyenne Mountain Boulevard, Colorado Springs, Colorado 80906 under a third party non-cancelable operating lease through April 15, 2017. In July 2015, the company entered into a lease for office space for 4,478 square feet at 4699 Old Ironsides Drive, Ste. 300, Santa Clara, CA 95054 through July 14, 2018. In addition, the company leases approximately 7,186 square feet at 3400 Research Forest Drive, Suite B2, The Woodlands, TX that expires on May 31, 2018. Future minimum lease commitments as of September 30, 2016 are as follows:

Year Ending September 30 (in thousands)
Three months ending 2016	$	189
2017		463
2018		141
2019		—
2020		—
2021		—
Total	$	793

Eco-System Partner Royalty Obligation

In April 2013, we entered into an agreement with Intel Corporation (“Intel”) (the “Capacity License Agreement”) whereby we were to receive $10 million of cash proceeds to assist us in increasing our production capacity. Under the terms of the Capacity License Agreement, there were two milestones with related contingent consideration of $5 million for each milestone plus certain commissions as described below. The Capacity License Agreement required us to purchase certain equipment, which we purchased in 2013 and which we consider not a substantive milestone. The Capacity License Agreement required us to have the capability to produce at least 1 million sensor units per month (as defined in the Capacity License Agreement) by April 2014, which we consider a substantive milestone. We received $5 million in May 2013, which is non-refundable and was recorded as deferred revenue in the consolidated balance sheet at December 31, 2014. Upon achieving the deliverables of the Capacity License Agreement, we would have paid a commission to Intel of 10% on revenue derived from the sales of InTouch™ Sensors jointly developed with Kodak made directly to Designated Customers. The commission amount was to be paid until the aggregate commissions paid equaled the commission cap of $18.5 million. The term of the Capacity License Agreement is the later of 3 years or the full payment of the commission cap. If the Company committed a material breach of the license agreement, certain equipment of the Company with an original cost of approximately $10.1 million would be assigned to Intel to make them whole on any remaining amounts due under the commission cap of $18.5 million.

In April 2014, we entered into the First Amendment to the Capacity License Agreement with Intel (the “Amended Capacity License Agreement”). The Amended Capacity License Agreement modified the original Capacity License Agreement terms as follows: 1) the inability of the Company to reach, by April 2014, the minimum production capability and the required quality standards specified in the Capacity License Agreement will no longer constitute a material breach to the Capacity License Agreement; 2) the total amount of cash proceeds to be received was reduced from $10 million to $5 million, which included the $5 million we received in May 2013; 3) the cap on the commission amount was reduced from $18.5 million to $6.25 million; 4) the term “commission” is defined as 10% of gross revenue from the sale of all sensors sold by the Company, which includes sales of InTouch™ Sensors to all customers including, but not limited to, Intel and its Designated Customers; 5) if the Company becomes the subject of any proceeding under any bankruptcy, insolvency or liquidation law, the Company will assign all title and ownership to the Equipment to Intel; and 6) if the Company materially breaches the Amended Capacity License Agreement, which breach is not cured within 30 days after receipt of notice from Intel, the Company may choose to either (A) pre-pay the cap on the commission to Intel (less the total of all previously paid commissions) or (B) assign all title and ownership to the Equipment to Intel. The only remaining milestone of the Amended Capacity License Agreement is the capability to produce at least 1 million sensors units per month. The Capacity License Agreement pertained to the InTouch™ Sensor technology that was jointly developed with Kodak pursuant to an agreement that was terminated after the acquisition of the XTouch sensor technology in 2015 and the Company has abandoned this InTouch™ Sensor technology.

In the fourth quarter of 2015, the Company recorded a $5.0 million gain on relief of deferred revenue liability for discontinued operations. The $5 million was originally received in 2013 and under the terms of the Capacity License Agreement, pertained to the Capacity License Agreement that was based on the InTouch™ Sensor technology which is no longer used.

In March 2016, Intel requested that the Company refund over time the $5 million discussed above that the Company had received from Intel in May 2013. The Company declined to refund the money as the payment was not refundable under the Amended Capacity License Agreement or otherwise due to Intel. As noted above, the agreement with Intel pertained to a technology that the Company abandoned when it terminated its joint development agreement with Kodak in 2015. Intel requested that the refund be accomplished by the Company paying Intel commissions on XTouch sensor revenue until the $5 million was refunded. The Company responded that no commissions are owed under the Amended Capacity License Agreement because it is not selling the abandoned InTouch™ Sensors or otherwise using the technology covered by the Amended Capacity License Agreement in its current products. The only products the Company has recognized revenue on are based on the XTouch sensor technology acquired from Atmel Corporation and CIT Technology Ltd. in April of 2015. No litigation or other legal proceeding has commenced on Intel’s request. The Company has engaged in discussions with Intel regarding formulation of a mutually agreeable commercial relationship. While it is not possible to predict the outcome of these discussions with certainty at the present time, if the Company is unable to reach an acceptable relationship, it intends to vigorously contest any claim that Intel might make.

Securities and Exchange Commission Complaint against former Officers of the Company and Settlement with the Company

On November 19, 2013, the Company learned that the Fort Worth Regional Office of the United States Securities and Exchange Commission (“SEC”) issued subpoenas concerning the Company’s agreements related to our InTouch™ Sensors. The Company cooperated fully with the SEC regarding this non-public, fact-finding inquiry, which resulted in a complaint filed by the SEC on March 9, 2016 naming the Company and two of the Company’s former executive officers as defendants. The allegations of the SEC in this complaint against the two former executive officers, Reed Killion and Jeffrey Tomz, who were respectively the Chief Executive Officer and Chief Financial Officer of the Company during the relevant periods of time at issue in the SEC’s complaint, include that they made more than $2 million in personal profits from selling their own shares of the Company’s common stock following disclosures regarding the Company’s agreement related to our InTouch™ Sensors.

On March 16, 2016, the U.S. District Court for the Southern District of Texas on March 16, 2016 signed a final judgment on this complaint pursuant to our consent (the “Final Judgment”), which the Company gave without admitting or denying the allegations of the SEC’s complaint. Without admitting or denying the allegations of the SEC’s complaint, we consented to the Final Judgment, which permanently enjoins us from violating Sections 10(b) and 13(b)(2)(A) and (B) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 of the SEC and Section 17(a) of the Securities Act of 1933. The Final Judgment also permanently enjoins the filing with the SEC any periodic report pursuant to Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13 and 12b-20 of the SEC, which contains any untrue statement of material fact, or which omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or which fails to comply in any material respect with the requirements of Section 13(a) of the Exchange Act and the rules and regulations thereunder. The Final Judgment also provides for a civil penalty in the amount of $750,000 to be paid in accordance with the following schedule:

(1) $20,000, within 14 days of entry of the Final Judgment;

(2) $20,000, within 104 days of entry of the Final Judgment;

(3) $30,000, within 194 days of entry of the Final Judgment;

(4) $45,000, within 284 days of entry of the Final Judgment;

(5) $60,000, within 374 days of entry of the Final Judgment;

(6) $70,000, within 464 days of entry of the Final Judgment;

(7) $80,000, within 554 days of entry of the Final Judgment;

(8) $80,000, within 644 days of entry of the Final Judgment;

(9) $80,000, within 734 days of entry of the Final Judgment;

(10) $85,000, within 824 days of entry of the Final Judgment;

(11) $90,000, within 914 days of entry of the Final Judgment;

(12) $90,000, within 1004 days of entry of the Final Judgment

The $750,000 settlement was recorded in other expense on the consolidated statement of operations for the year ended December 31, 2015. As of September 30, 2016, the remaining settlement accrual is reflected in current liabilities of $255,000 and $425,000 in long-term liabilities.

Complaint by former Officers of the Company for Advancement of Expenses

The Company’s Amended and Restated Bylaws contain provisions regarding indemnification and advancement of expenses actually and reasonably incurred by the Company’s officers in connection with civil, criminal, administrative or investigative matters provided that such officers acted in good faith and in a manner such officers reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reason or cause to believe such officer’s conduct was unlawful. The advancement of expenses is expressly conditioned upon receipt of an undertaking by the officer to repay all such amounts so advanced in the event that it shall ultimately be determined that the officer is not entitled to be indemnified by the Company. The Company, or its insurance company, has paid as agreed all invoices for all years through the end of 2015 for the defense of Messrs. Killion and Tomz in the investigation by the SEC that resulted in the filing of the complaint against them by the SEC. A portion of payments for 2016 invoices have has also been made, but the Company has disputed other 2016 invoices totaling approximately $265,000 as containing expenses that have not been reasonably incurred by Messrs. Killion and Tomz in defense of the SEC’s complaint. Through the course of 2016, the Company has been in discussions with counsel to Messrs. Killion and Tomz of resolving counsels’ charges on these invoices. Notwithstanding those discussions, on August 22, 2016, Messrs. Killion and Tomz filed an action against the Company for advancement of expenses in the Delaware Chancery Court. The Company has contested the claims made by Messrs. Killion and Tomz that it has not advanced expenses reasonably incurred by them in the underlying action brought by the SEC. In October 2016, the Chancery Court appointed a former Vice Chancellor of the Delaware Chancery Court to act as a Special Master to determine whether expenses are reasonably incurred to the extent that the Company and Messrs. Killion and Tomz are not capable to resolve the dispute concerning whether expenses have been reasonably incurred without the assistance of the judicial process.