Note 14. Commitments and Contingencies

Legal Matters

The Company’s industry is characterized by frequent claims and litigation, including claims regarding intellectual property and product liability. As a result, the Company may be subject to various legal proceedings from time to time. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. Any current litigation is considered immaterial and counter claims have been assessed as remote.

Employment Agreements

The Company has entered into employment agreements or other arrangements with certain named executive officers, which provides salary continuation payments, bonuses and, in certain instances, the acceleration of the vesting of certain equity awards to individuals in the event that the individual is terminated other than for cause, as defined in the applicable agreement.

Indemnification Agreements

In the course of operating its business, the Company has entered into, and continues to enter into, separate indemnification agreements with the Company’s directors and executive officers, in addition to the indemnification provided for in the Company’s amended and restated bylaws. These agreements may require the Company to indemnify its directors and executive officers for certain expenses incurred in any action or proceeding arising out of their services as one of the Company’s directors or executive officers.

Leases

The Company leases office and laboratory space under two non-cancelable operating leases in Tucson, Arizona. The Company amended its facilities leases in August 2015 to extend the terms for approximately five years and to receive lessor approval for and establish lessee oversight of leasehold improvements by the Company (lessee) and the lessor, respectively, which improvements expanded and improved the Company’s existing research, development, operations and administration office facilities. The lease amendments included an increase of $804,000 in total monthly rent over the remaining term of the leases. The landlord constructed certain of the leasehold improvements as an incentive to extend the leases. The total cost of the improvements constructed by the landlord of $710,000 was capitalized when the construction was completed in February 2016, and is being depreciated over the remaining term of the lease agreement. The incentive of $710,000 has been recognized as deferred rent within other current liabilities and other liabilities on the balance sheets, and is being accreted at $11,833 per month over the lease term as a reduction of rent expense.

As a result of the amendments, the Company’s annual minimum facility lease payments before common area maintenance charges as of December 31, 2016 are as follows:

2017	$	510,125
2018		512,533
2019		514,977
2020		517,457
2021		43,139
	$	2,098,231

Rent expense, including common area maintenance costs for the Company’s facilities leases was $561,293, including $130,167 of depreciation for capitalized leasehold improvements for the year ended December 31, 2016. Rent expense, including common area maintenance costs for the Company’s facility leases was $443,085 for the year ended December 31, 2015.

As of December 31, 2016, the Company also has capital lease commitments consisting of approximately $123,500 under leases for computer equipment varying in length from 36-48 months and an equipment financing arrangement of approximately $28,500 with a vendor that expires in December 2017 that have not been included in the minimum lease payments schedule above.

Product Warranty

The following is a summary of the Company’s general product warranty liability, which is included in accrued liabilities in the accompanying balance sheets for the year ended December 31, 2016:

	Years Ended December 31,
	2016			2015
Beginning balance	$	20,213		$	—
Cost of warranty claims		(71,404	)		(545	)
Warranty accrual		101,617			20,758
Ending balance	$	50,426		$	20,213

Prior to the third quarter of 2015, no warranty reserves were recorded by the Company.

Defined Contribution Plan

In January 2003, the Company established a defined contribution plan (“401(k) Plan”) under Internal Revenue Code section 401(k). All employees upon hire who are over the age of 21 are eligible for participation in the 401(k) Plan. The Company may make discretionary contributions to the 401(k) Plan, but has not done so during the years ended December 31, 2016 and 2015.