Photon Control Takes Legal Action Against Photon Control R&D and Others to protect its Intellectual Property

BURNABY, BC, Aug. 23, 2016 /CNW/ - Photon Control Inc. ("Photon Control" or the "Company") (TSX-V: PHO), a leading developer of optical measurement technologies, today announced it has commenced a lawsuit in the Supreme Court of British Columbia against Photon Control R&D Ltd. ("Photon R&D"), DCD Management Ltd., Michael Weston, Christopher Weston, David C. Dueck and Todd Wilke (the "Claim"). Michael Weston President of Photon R&D, was formerly Acting President of Photon Control. Christopher Weston, son of Michael Weston, was the CEO of Photon Control until his termination on June 26, 2016. David C. Dueck was until recently the Chairman of the Board of Photon Control. Todd Wilke is Vice President Technology for Photon R&D. DCD Management Ltd. is a company controlled by David C. Dueck and Michael Weston and provided management services to Photon Control at material times. The Claim, which is based on the findings of a review of the Company's intellectual property ownership and agreements, is intended to assert the Company's rightful ownership over its intellectual property and protect the interests of shareholders.

"Protecting our intellectual property is vitally important given the competitive and fast-changing markets that we operate in," said Michael Goldstein, Chairman and Acting CEO of Photon Control. "By asserting our right to ownership, we are protecting our market leadership position and executing on our plan to enter new segments and double our production capacity.  Combined, these efforts underscore our commitment to growing shareholder value."

The Claim relates to an October 1, 2008, agreement (the "2008 Agreement") between Photon Control and Photon R&D that established Photon R&D as a supplier of research and development services to Photon Control and defined the relationship between the two parties. The Company alleges that certain "Addenda" to the 2008 Agreement dated January 15 and December 15, 2013, which in effect purport to limit Photon Control's rights and impose obligations on the Company and would constitute material changes to the 2008 Agreement, are null and void. Photon Control and Photon R&D are non‑arm's length parties and any transaction between these parties is considered a "related party transaction" under the rules of the TSX Venture Exchange and subject to Board, regulatory and possibly shareholder approval. Photon Control understands that Photon R&D at the time of the "Addenda" was owned as to 25% by each of Michael Weston, Christopher Weston, David C. Dueck and Mr. Dueck's son, David L. Dueck. The "Addenda" were signed by Michael Weston for Photon R&D and by his son, Christopher Weston, on behalf of Photon Control, without the review and approval of Photon Control's Board, the involvement of corporate counsel on behalf of Photon Control or the application for and receipt of regulatory approval.

The basis for the legal claim came to light as a result of the Company's efforts to strengthen its governance practices following discovery of an unauthorized transfer of $4.5 million to Photon R&D which was arranged by Michael Weston and Christopher Weston and which amount was ultimately advanced by R&D to the personal benefit of David C. Dueck. Subsequent to the discovery of the unauthorized transfer, Photon Control took a series of measures primarily aimed at the recovery of the funds and ensuring that the Company followed appropriate governance and disclosure practices. Among measures taken, the Company strengthened its Board with the appointments of Mr. Goldstein as Chairman and Acting CEO and Ronan McGrath as Director, launched a forensic accounting audit and initiated a review of intellectual property ownership agreements.  The Company announced the full recovery of the funds on July 25, 2016.

Photon Control alleges that the "Addenda" to the agreement were procured through the undue influence of Michael Weston and that the fiduciary and other duties owed to Photon Control by Christopher Weston, then President and CEO, were not fulfilled. The Claim also alleges, among other things, that the defendants knowingly facilitated or participated in the breach of these fiduciary duties. Photon Control will also be seeking preservation of its property by the appointment of a custodian over the intellectual property of Photon Control in the possession or control of Photon R&D and developed by Photon R&D for Photon Control customers, an accounting of monies had and received by Photon R&D from Photon Control and a declaration of a constructive trust upon said monies, interlocutory and permanent injunctions restraining Photon R&D from certain conduct, and damages for, among other things, breach of contract and breach of fiduciary duty.

The Claim alleges that:

• pursuant to the terms of the 2008 Agreement, Photon Control outsourced its research and development division business to Photon R&D, which operated that business in a non-arms length capacity;
  
  
• per the terms of the 2008 Agreement, Photon Control transferred to Photon R&D its research and development employees, but expressly excluded the transfer of any and all (i) trademarks and tradenames, (ii) intellectual property in any developed software and hardware, (iii) in-process research and development, (iv) products or patents under development, (v) customer agreements and relationships, (vi) non-competition agreements, (vii) the backlog of research and development contracts, and (ix) licensing agreements;
  
  
• per the terms of the 2008 Agreement, any intellectual property, including concepts, procedures, discoveries or know-how developed by Photon R&D for Photon Control would become and remain Photon Control's property;
  
  
• the defendants subsequently took measures directed at appropriating Photon Control's confidential and proprietary information and its intellectual property, depriving the Company of its assets, burdening the Company with financial and other obligations and misappropriating corporate opportunities belonging to the Company;
  
  
• the Westons effected this scheme by causing Photon Control and Photon R&D to enter into two agreements styled as "Addenda" without the required legal, statutory and other corporate governance requirements for such transactions observed; and
  
  
• the specific terms of the Addenda came to the attention of Photon Control's Board of Directors following an investigation into the $4.5 million advanced from Photon Control to Photon R&D and subsequently used to the benefit of David C. Dueck. This transaction was also never presented to the Photon Control Board for consideration and approval (see News Release dated June 27, 2016) as a result of which Christopher Weston was terminated as CEO of Photon Control by the Board and David C. Dueck was removed as Chairman.

The Claim was filed on August 23, 2016.  The allegations it contains are subject to proof at trial.  The defendants have yet to respond to the Claim.

Mr. Goldstein added, "While we will make every effort to support our Claim before the Courts, our priority is to execute on our growth strategy.  We are very well positioned to capitalize on the demand for measurement technology solutions given the emergence of smart devices across a range of industries and applications. These growth opportunities are behind our decision to double our production capacity and move into new facilities in 2017."

About Photon Control Inc.

Photon Control Inc. designs, manufactures and distributes a wide range of optical sensors & instruments to measure temperature, pressure, position, and flow. These products are used by original equipment manufacturers (OEM) as well as end-users in the Semiconductor, Oil and Gas, Power, Life Science, and Manufacturing industries. Photon Control's products provide high accuracy and reliability in extreme conditions and are supported by a team of experts that offer onsite installation, training, and support. Photon Control Inc. also provides engineering services for customized optical measurement systems. Headquartered in an ISO 9001:2008 manufacturing facility in Burnaby, BC, Photon Control Inc. is listed on the TSX Venture Exchange, trading under the symbol ''PHO". Additional information about the company can be found at www.photon-control.com/investorrelations.html

Forward-Looking Statements
This News Release contains "forward looking statements" within the meaning of applicable Canadian securities legislation. Such forward looking statements include, without limitation, statements with respect to the Claim, the Company's assessment of and intentions with respect to the Claim, the unknown outcome of the Claim which is subject to proof at trial, and otherwise concern the business and anticipated financial performance of the Company and the Company's objectives, goals, liquidity, sources of capital, expectations of sales and continued development of technologies and products.

These forward looking statements are based on certain factors and assumptions, including, without limitation, the Company's evidence forming the basis of the Claim; the Company's financial and management resources and ability to pursue the Claim; the Company's ability to successfully complete new purchase orders along the timelines expected; continued and future demand for the Company's products; continued sales to the Company's major customers; the continued financial health of the semiconductor industry; and the Company's ability to continue and further enhance revenue diversification and open new market opportunities.

Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors which could cause actual events or results to differ from those expressed or implied by the forward-looking statements, including, without limitation, the Company may not be successful in obtaining the relief sought in the Claim and, therefore, may not have the all of the intellectual property rights and goodwill that it believes that it has and should have, the Company may face other legal action arising from the matters that are the subject of the Claim, additional measures and controls may not be implemented as expected or along the timelines anticipated, uncertainties in the availability and cost of financing for the Company to enable the Company to achieve its goals; uncertainties relating to the market for the Company's products and maintaining a stable level of orders; fluctuations in revenue as a result of volatility in the markets and product mix; risks relating to the Company's present reliance on four major customers for the majority of its sales; risks relating to the Company's reliance on the financial health of the semiconductor industry; risks relating to the development of competing technologies and the possibility of increased competition; the effect of slow growth in the United States, the Company's principal market, as well as in Canada and other economies generally and other economic trends and conditions in the markets that the Company and its customers serve; risks associated with technical difficulties or delays in product introductions, improvements, implementation; uncertainties in product pricing or other initiatives of the Company and its competitors; uncertainties in factors that may result in a reduction in capital expenditures and/or delayed buying decisions affecting demand for the Company's products; risks relating to currency fluctuations, particularly between the Canadian and United States dollars; and risks in pursuing additional development projects to support existing customers or pursue other business opportunities.

The foregoing assumptions, risks and uncertainties are not exhaustive of the items that may affect our forward looking statements. Should underlying assumptions prove to be incorrect or one or more of these risks and uncertainties materialize, actual results may vary materially from those described in the forward looking statements. The Company's forward looking statements are based on beliefs, expectations and opinions of management on the date the statements are made. For the reasons set forth above, readers should not place undue reliance on forward looking statements. The Company undertakes no obligation to update or revise any forward looking statements included herein if these beliefs, estimates and opinions or other circumstances should change, except as otherwise required by applicable law.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

SOURCE Photon Control Inc.

For Investor Relations Inquiries Please Contact: Helena Rebec, CPIR, Chief Administrative Officer / IR, [email protected], 604.422.8861 Ext 101