They were contracted by CIG to build the basic FPS game play and Star Marine (the FPS game within SC). Last fall they finished their work and the FPS work reverted back to CIG employees.
Lots of people think CIG "fired" them since Star Marine wasn't released "on time".
But I don't think that's really the case. I think the development took CIG in a different direction (i.e. release the 'baby PU' before a dedicated FPS arena) and they followed that direction.
I think, and CIG has alluded to as much, it had to do with the code merge. Illfonic were working on a branch of the code, and after their work was done CIG went to merge the code again (hence-forth known as the "Great Merge of 2015"). Unfortunately, a lot of the FPS mechanics broke on the new code, so the guys at Frankfurt have been rebuilding and improving on it as they do. They have the guys who did FarCry and Crysis 1/Warhead working on it, so lots of experience at making a Cry-shooter.
It'll come out, it's just going to take time. A lot of people think that all of the stuff seen in the first half of 2015 can just be copy and pasted into 2.1.1, but it's just not that easy. If CIG could flick a switch and shut up the critics, they absolutely would. If CIG had known what they know now, they never would've hired Illfonic (since they were going to hire their own Crytek devs) and they never would've branched the code. Those two decisions have been a huge waste of backer resources, and those are the only parts I'm irritated at.
Chris's comments yesterday could've been put a little better, but in general they're committed to SM. It's just more efficient going forward to piece meal it to us in the baby PU and then slap a wrapper on it and call it Star Marine once the mechanics are actually working.
Edit: It is true that things took a different direction. Due to the long delays with SM, the baby PU was ready to go before SM was. Since the baby PU is a more useful testing ground than a dedicated module, they're focusing on that while they implement things (including all the FPS mechanics) into it. Once everything is working, it's not much effort to spin off the module for it, but the baby PU is where the important work is done.
The original plan was for SM to allow us to test FPS mechanics before we had anywhere else to do it. Now that they can be tested in the large world like they're intended to be used, a dedicated module is less useful from a development standpoint.