2.Supplemental Balance Sheet Disclosures

Unbilled Receivables

Unbilled receivables represent primarily sales recorded under the percentage-of-completion method of accounting that, in accordance with applicable contract terms, have not been billed to customers. Unbilled receivables, net of customer payments, were $8.3 million and $6.5 million at March 31, 2014 and September 30, 2013, respectively.

The percentage-of-completion method of accounting for EDC sales requires estimates of profit margins for contracts be reviewed by the Company on a quarterly basis. If the initial estimates of sales and costs under a contract are accurate, the percentage-of-completion method results in the profit margin being recorded evenly as revenue is recognized under the contract. Changes in these underlying estimates because of revisions in sales and cost estimates or the exercise of contract options may result in profit margins being recognized unevenly over the life of a contract because such changes are accounted for on a cumulative basis in the period in which the estimates are revised. Significant changes in estimates related to accounting for long-term contracts may have a material effect on the Company’s results of operations in the period in which the revised estimates are made. Cumulative catch-up adjustments resulting from changes in estimates reduced operating income by $443,000 and $614,000, respectively, for the three and six months ended March 31, 2014. Cumulative catch-up adjustments resulting from changes in estimates reduced operating income by $328,000 and $112,000, respectively, for the three and six months ended March 31, 2013.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market, net of reserve for excess and obsolete inventory, and consist of the following:

	March 31,		September 30,
	2014		2013
Raw materials	$	3,784,599	$	3,126,592
Work-in-process	1,377,674		857,602
Finished goods	243,100		393,319
	$	5,405,373	$	4,377,513

Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

	March 31,		September 30,
	2014		2013

Prepaid insurance	$	359,670	$	350,913
Other	304,787		291,297
	$	664,457	$	642,210

Property and equipment

Property and equipment, net consists of the following balances:

	March 31,			September 30,
	2014			2013

Land	$	1,021,245		$	1,021,245
Computer equipment	2,246,423			2,173,266
Corporate airplane	3,128,504			3,128,504
Furniture and office equipment	1,063,254			1,062,296
Manufacturing facility	5,716,971			5,631,001
Equipment	4,969,778			4,678,678

	18,146,175			17,694,990
Less: Accumulated depreciation and amortization	(10,573,507		)	(10,374,495		)
	$	7,572,668		$	7,320,495

Depreciation and amortization related to property and equipment was approximately $144,000 and $111,000 for the three months ended March 31, 2014 and 2013, respectively. The corporate airplane is utilized primarily in support of product development and has been depreciated to its estimated salvage value.

Depreciation and amortization related to property and equipment was approximately $274,000 and $217,000 for the six months ended March 31, 2014 and 2013, respectively.

Other assets

Other assets consist of the following:

	March 31,		September 30,
	2014		2013
Intangible assets, net of accumulated amortization of $495,037 at March 31, 2014 and September 30, 2013	$	105,200	$	105,200
Other non-current assets	126,780		116,333
	$	231,980	$	221,533

Intangible assets consist of licensing and certification rights which are amortized over a defined number of units. No impairment charges were recorded in the six months ended March 31, 2014 and 2013.

Total amortization expense was approximately $0 and $16,000 for the three months ended March 31, 2014 and 2013, respectively. Total amortization expense for the six months ended March 31, 2014 and 2013 was $0 and $29,000, respectively. Because the intangible assets are being amortized over a defined number of units, the timing of future amortization expense is not determinable.

Accrued expenses

Accrued expenses consist of the following:

	March 31,		September 30,
	2014		2013

Warranty	$	743,482	$	701,456
Salary, benefits and payroll taxes	743,979		679,325
Professional fees	380,884		393,570
Income taxes payable	44,023		337,993
EDC program costs	1,295,042		560,428
Litigation claims	—		656,865
Other	761,032		343,272
	$	3,968,442	$	3,672,909

Other accrued expenses consist primarily of accruals for inventory-in-transit and sales commissions as of March 31, 2014 and for payments to sub-contractors and consultants for services completed as of September 30, 2013.

Warranty cost and accrual information for the three and six months ended March 31, 2014 is highlighted below:

	Three Months Ending			Six Months Ending
	March 31, 2014			March 31, 2014

Warranty accrual, beginning of period	$	756,544		$	701,456
Accrued expense for the three and six months ended March 31, 2014	40,733			156,993
Warranty cost for the three and six months ended March 31, 2014	(53,795		)	(114,967		)
Warranty accrual, end of period	$	743,482		$	743,482