14.  Commitments and Contingencies

Lease Commitments

The Company leases offices and manufacturing facilities under various non-cancelable operating leases expiring at various times through the fiscal year ending March 31, 2018. All of the leases require the Company to pay maintenance, insurance and property taxes. The lease agreements for primary office and manufacturing facilities provide for rent escalation over the lease term and renewal options for five-year periods. Rent expense is recognized on a straight-line basis over the term of the lease. The difference between rent expense recorded and the amount paid is credited or charged to deferred rent, which is included in other long-term liabilities in the accompanying balance sheets. The balance of deferred rent was approximately $0.2 million and $0.3 million as of December 31, 2012 and March 31, 2012, respectively. Rent expense was approximately $0.5 million during each of the three months ended December 31, 2012 and 2011. Rent expense was approximately $1.6 million during each of the nine months ended December 31, 2012 and 2011.

Purchase Commitments

As of December 31, 2012, the Company had firm commitments to purchase inventories of approximately $26.5 million through Fiscal 2014. Certain inventory delivery dates and related payments are not firmly scheduled; therefore, amounts under these firm purchase commitments will be payable upon the receipt of the related inventories.

Other Commitments

In September 2010, the Company was awarded a grant from the U.S. Department of Energy (“DOE”) for the research, development and testing of a more efficient microturbine Combined Heat and Power (CHP) system. Part of the improved efficiency is expected to come from an improved microturbine design, with a projected electrical efficiency of 42% (compared to 33% for the C200) and power output of 370 kW. The project was estimated to last 24 months and cost approximately $17.4 million. During Fiscal 2012 this project was extended until September 2013. Pursuant to the contract, the DOE is expected to contribute $5.0 million toward the project, and the Company expects to incur approximately $12.4 million in research and development expense. As of December 31, 2012, the Company had billed the DOE a cumulative amount of $1.9 million for this project.

In November 2009, the Company was awarded a grant from the DOE for the research, development and testing of a more fuel flexible microturbine capable of operating on a wider variety of biofuels. The project was estimated to last 24 months and cost approximately $3.8 million. During Fiscal 2012 this project was extended until September 2013. Pursuant to the contract, the DOE is expected to contribute $2.5 million toward the project, and the Company expects to incur approximately $1.3 million in research and development expense. As of December 31, 2012, the Company had billed the DOE a cumulative amount of $1.3 million for this project.

The Company has agreements with some of its distributors requiring it to replace stocked parts if the Company renders parts obsolete in inventories the distributors own and hold in support of their obligations to serve fielded microturbines without charge to the distributors. While the Company has never incurred costs or obligations for these types of replacements, it is possible that future changes in the Company’s product technology could result and yield costs to the Company if significant amounts of inventory are held at distributors. As of December 31, 2012 and March 31, 2012, no significant inventories were held at distributors.

Legal Matters

From time to time, the Company may become subject to certain legal proceedings, claims and litigation arising in the ordinary course of business. In the opinion of management, the Company is not currently a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have a material effect on the Company’s operating results, cash flows, financial position or results of operations should such litigation be resolved unfavorably.