. COMMITMENTS AND CONTINGENCIES

Facility Lease

November

29,

2011,

the Company entered into a lease for

31,360

square feet to replace the prior San Diego facility as the Company’s executive offices, research and development, assembly and operational facilities. The lease commenced

July

2012

and will expire

June

30,

2018.

The aggregate monthly payments, with abatements, averaged

$16,306

per month in the

first

year, and is

$25,088,

$26,656,

$28,224,

$29,792

and

$31,360

per month for the

second

through

sixth

years of the lease, plus certain other costs and charges as specified in the lease agreement, including the Company’s proportionate share of the building operating expenses and real estate taxes.

Operating Leases

Total operating lease expense, including facilities and business equipment commitments, recorded by the Company for the years ended

September

30,

2017

and

2016

was

$351,418

and

$377,033,

respectively.

The obligations under all operating leases are as follows:

Years ending September 30:
2018		298,797
2019		16,557
2020		15,177
Total lease obligations	$	330,531

Employment Agreements

The Company entered into an employment agreement in

August 2016

with its chief executive officer that provides for severance benefits including

twelve

months’ salary and health benefits, a pro-rata share of his annual cash bonus for the fiscal year in which the termination occurs to which he would have become entitled had he remained employed through the end of such fiscal year, and if his employment is terminated during fiscal year

2019

or later, vesting of a pro-rata share of the stock options held by him that are subject to performance-based vesting based on the extent to which the required performance criteria are achieved in the year of termination and on the portion of the year he was employed. The agreement also has a change of control clause whereby in the event of a specified termination event, the chief executive officer would be entitled to receive in a single lump sum (a) an amount equal to

two

times the sum of his base salary then in effect and his then target annual cash bonus, (b) a pro-rata share of his annual cash bonus for such year and (c) the cost of his and his dependents’ coverage under COBRA for an

-month period. In addition, in such event, (i) all of the time-vesting stock options held will vest, unless the termination occurs within the

first

year of his employment, in which case only the number of options scheduled to vest on the

first

anniversary of his employment date will vest pro-rated for the period of time he was employed during such

one

-year period, (ii)

375,000

of the stock options held that are subject to performance-based vesting will vest and (iii) if employment is terminated during fiscal year

2019

or later, a pro-rata share of the stock options held that are subject to performance-based vesting will vest based on the extent to which the required performance criteria are achieved for the fiscal year in which the termination occurs and based on the period of time he was employed during such fiscal year prior to the termination.

There are

other employment agreements with executive officers or other employees providing future benefits or severance arrangements.

Bonus Plan

fiscal

2017,

the Company implemented a bonus plan for employees, in accordance with their terms of employment, whereby they can earn a percentage of their salary, at

three

different levels, based on meeting targeted objectives for orders received, revenue, operating income and operating cash flow. In

2016,

the Company had a bonus plan for employees, in accordance with their terms of employment, whereby they can earn a percentage of their salary at

three

different levels based on meeting

three

different targeted objectives for earnings per share. In fiscal year

2017,

the company exceeded the minimum targeted level of orders received and revenues and has accrued

$1,100,693

of expense. In fiscal year

2016,

the Company did

not

meet the targeted objectives for earnings per share, so

accrual was recorded.

Employee Benefit

—401K

Plan

The Company has a defined contribution plan (

401

(k))

covering its employees. Matching contributions are made on behalf of all participants at the discretion of the board of directors. During the fiscal years ended

September

30,

2017

and

2016,

the Company made matching contributions of

$196,239

and

$157,081,

respectively.

Litigation

The Company

may

at times be involved in litigation in the ordinary course of business. The Company will, from time to time, when appropriate in management

’s estimation, record adequate reserves in the Company’s financial statements for pending litigation.

Guarantees and Indemnifications

The Company enters into indemnification provisions under (i)

its agreements with other companies in its ordinary course of business, typically with business partners, contractors, customers and landlords and (ii) its agreements with investors. Under these arrangements, the Company

may

indemnify other parties such as business partners, customers, underwriters, and investors for certain losses suffered, claims of intellectual property infringement, negligence and intentional acts in the performance of services, and violations of laws including certain violations of securities laws. The Company’s obligation to provide such indemnification in such circumstances would arise if, for example, a

third

party sued a customer for intellectual property infringement and the Company agreed to indemnify the customer against such claims. The Company is unable to estimate with any reasonable accuracy the liability that

may

be incurred pursuant to such indemnification obligations. Some of the factors that would affect this assessment include, but are

not

limited to, the nature of the claim asserted, the relative merits of the claim, the financial ability of the parties, the nature and amount of damages claimed, insurance coverage that the Company

may

have to cover such claims, and the willingness of the parties to reach settlement, if any. Because of the uncertainty surrounding these circumstances, the Company’s indemnification obligations could range from immaterial to having a material adverse impact on its financial position and its ability to continue in the ordinary course of business. The Company has

not

incurred material costs to defend lawsuits or settle claims related to these indemnification agreements in the past, and the Company had

liabilities recorded for these agreements as of

September

30,

2017

and

2016.

Under its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity.

In addition, the Company executed indemnification agreements in

June 2013

with the then current Directors and Officers of the Company, indemnifying them from any expenses arising out of any claims. All directors and officers have executed indemnification agreements. The term of the indemnification period is for the officer or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has a director and officers’ liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company does

not

believe that a material loss exposure related to these agreements is either probable or can be reasonably estimated. Accordingly, the Company has

liability recorded for these agreements as of

September

30,

2017

and

2016.