Note 12. Commitments and Contingencies

Indemnification Agreements

We have entered into indemnification agreements with our directors and officers that require us to indemnify our directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature; to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified; and to obtain directors’ and officers’ insurance if available on reasonable terms, which we currently have in place.

Product Warranty

We provide warranties for our products for a specific period of time, generally twelve months, against material defects. We provide for the estimated future costs of warranty obligations in cost of sales when the related revenue is recognized. The accrued warranty costs represent the best estimate at the time of sale of the total costs that we expect to incur to repair or replace product parts that fail while still under warranty. The amount of accrued estimated warranty costs are primarily based on historical experience as to product failures as well as current information on repair costs. On a quarterly basis, we review the accrued balances and update the historical warranty cost trends. The following table reflects the change in our warranty accrual which is included in “Accrued liabilities” on the condensed consolidated balance sheets, during the three and six months ended June 30, 2017 and 2016 (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Beginning accrued warranty and related costs	$	133	$	431	$	251	$	497
Accruals for warranties issued		37		4		70		23
Adjustments related to pre-existing warranties including expirations and changes in estimates		(27)		(64)		(132)		(131)
Cost of warranty repair		(13)		(41)		(59)		(59)
Ending accrued warranty and related costs	$	130	$	330	$	130	$	330

Contractual Obligations

We lease certain office space, warehouse facilities and equipment under long-term operating leases expiring at various dates through December 2025. The majority of our lease obligations relates to our lease agreement for the facility in Fremont, California with approximately 19,467 square feet, which expires in 2017. We have an option to extend the lease for an additional three years. In May 2017, we exercised this option and the lease was extended for an additional three years. All terms remain the same and this lease will expire in 2020.

We entered into a royalty agreement with a competitor effective December 3, 2010 with a term of eight years, terminating December 31, 2018. We and our related companies are granted a worldwide, nonexclusive, royalty bearing, irrevocable license to certain patents for the term of the agreement. We shall pay up to $7.0 million of royalty payments over eight years that began in 2011 based on future royalty bearing sales. This royalty agreement contains a clause that allows us to claim a credit, starting in 2013, in the event that the royalty bearing sales for the year are lower than a pre-determined amount set forth in this agreement.

The following table summarizes our contractual obligations as of June 30, 2017 (in thousands):


	Payments due by period
					1-3		4-5		More than
Contractual Obligations	Total		Less than 1 year		years		years		5 years
Operating leases	$	670	$	221	$	351	$	92	$	6
Royalty agreement		862		575		287		—		—
Total	$	1,532	$	796	$	638	$	92	$	6

Purchase Obligations with Penalties for Cancellation

In the normal course of business, we issue purchase orders to various suppliers. In certain cases, we may incur a penalty if we cancel the purchase order. As of June 30, 2017, we do not have any outstanding purchase orders that will incur a penalty if cancelled by the Company.

Legal Proceedings

From time to time we may be involved in judicial or administrative proceedings concerning matters arising in the ordinary course of business. We do not expect that any of these matters, individually or in the aggregate, will have a material adverse effect on our business, financial condition, cash flows or results of operations.