Bank and Other Cash Equivalent
Deposits in Excess of FDIC Insurance Limits
The Company maintains
cash and cash equivalent accounts with Federal Deposit Insurance Corporation (FDIC) insured financial institutions.
Under provisions of the Dodd Frank Wall Street Reform and Consumer Protection Act, unlimited FDIC insurance is provided for all
funds in non-interest bearing transaction accounts through December 31, 2012. In addition, certain of the Companys
interest bearing collateral money market accounts are each insured up to $250,000 by the FDIC. The Companys exposure for
amounts in excess of FDIC insured limits at September 30, 2012 was approximately $5.5 million. The Company has not experienced
any losses in such accounts.
1, 2012 the Company leased approximately 6,800 square feet of improved office, laboratory, assembly and warehouse space in Poway,
California for a period of 39 months terminating July 2015. The gross monthly base rent is approximately $7,200 increasing 3.5%
per annum subject to other certain future adjustments. The agreement provided for concessions including a $17,000 tenant improvement
allowance and three free months rent during the lease term.
1, 2011 the Company leased 3,498 square feet of space now used for warehousing in Poway, California for a period of 25 months
terminating June 30, 2013. The gross monthly base rent is $3,603 per month for the remaining term of the lease, subject to certain
future adjustments. The Companys President, Mr. Norris, executed a personal guarantee of the lease without compensation.
The Company has
no other operating leases and the remaining future annual minimum lease payment obligation under the foregoing facility leases
are $117,521, $84,246 and $83,171 for the years ending September 30, 2013, 2014 and 2015, respectively.
In April 2012 the
Company entered into a five-year employment agreement with Kenneth F. Potashner as Executive Chairman. Under the terms of the
employment agreement, the Company may be obligated to pay to Mr. Potashner severance equal to one year of his annual base salary
plus targeted bonus if his employment is terminated without cause. The Company also granted him an option to purchase up to 175,000
shares of common stock exercisable at $4.50 per share until April 3, 2017 vesting upon achievement of performance targets established
by the Board of Directors. In connection with this employment option grant, the vesting of a December 2011 consultancy option
to purchase 410,000 shares at an exercise price of $3.25 per share was modified such that 195,000 shares were vested as of April
3, 2012, 195,000 shares will vest equally over eight calendar quarters that commenced March 31, 2012 and 20,000 shares will vest
upon achievement of performance targets established by the Board of Directors. A total of 20,000 performance shares vested during
the year ended September 30, 2012. In April 2012 the Company paid Mr. Potashner $125,000 for consulting services from December
2011 through his April 2012 employment.
On May 1, 2012
the Company adopted a cash bonus plan for the period April 1, 2012 to December 31, 2012, pursuant to which each of the Companys
executive officers and certain other officers, consultants and employees designated by the Board of Directors are eligible to
receive a target bonus equal to a percentage of the executive officers or other individuals annualized base compensation
if applicable performance objectives are met. The performance objectives are based 25% upon the Company achieving certain revenue
performance targets, 25% upon the Company achieving certain licensing targets, 25% based upon the Company achieving certain technology
development targets and 25% upon the Company or its licensees or partners achieving certain new HSS technology product launch
targets. The performance objectives include both objective determinations and subjective determinations to be made by the Board
of Directors. The maximum bonus percentage for each participant is 50% of his or her annual base compensation, except for the
Companys Executive Chairman whose maximum bonus percentage is 60% of his annual base compensation. All computations are
adjusted to 75% to reflect the nine-month bonus period for the period April 1, 2012 to December 31, 2012 and payments of earned
bonuses are deferred if certain cash generation targets are not met. At September 30, 2012 the Company had accrued an aggregate
of $35,298 for bonuses under the plan.
Guarantees and Indemnifications
Our officers and
directors are indemnified as to personal liability as provided by the Nevada Revised Statutes, the Companys articles of
incorporation and bylaws and by indemnification agreements with the Company. The Company may also undertake indemnification obligations
in the ordinary course of business related to its products and the issuance of securities with customers, investors, vendors and
business parties. The Company is unable to estimate with any reasonable accuracy the liability that may be incurred pursuant to
any such indemnification obligations now or in the future. Because of the uncertainty surrounding these circumstances, the Companys
current or future 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 no liabilities recorded for such indemnities.