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.

Severance Agreements

The Company has entered into employment agreements or other arrangements with certain executive officers which provide 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 agreements or arrangements.

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 by a director executive officer 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 undergo leasehold improvements to expand and improve its existing research, development, operations and administration office facilities. The lease amendment includes an increase of $804,000 in total monthly rent over the remaining term of the leases. The landlord constructed certain 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 condensed 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 remaining minimum annual real estate lease payments before common area maintenance charges as of June 30, 2016 are as follows:

2016	$	253,974
2017		510,125
2018		512,533
2019		514,977
2020		517,457
2021 and beyond		43,139
	$	2,352,205

As of June 30, 2016, the Company also has capital lease commitments consisting of $158,000 of leases for computer equipment varying in length from 36 to 48 months and an equipment financing arrangement of approximately $43,000 with a vendor that expires in December 2017 that have not been included in the minimum lease payments schedule above.

Merck Non-Exclusive License Agreement

In June 2012, the Company entered into a non-exclusive license agreement with Merck Sharp & Dohme Co. (“Merck”) whereby the Company agreed to sublicense certain intellectual property related to breast cancer biomarkers with the intent to develop, manufacture and commercialize a diagnostic test utilizing this technology. The Company agreed to pay Merck certain contingent milestone payments between $50,000 and $1,000,000 and future royalties of 3%-6% of sales derived from such products developed that utilize the licensed technology. No amounts have been accrued or paid under this agreement as the Company has not achieved any of the milestone targets or developed any products that utilize the licensed technology.

Product Warranty

The following is a summary of the Company’s general product warranty liability for the six months ended June 30, 2016:

Warranty reserve, January 1, 2016	$	20,213
Cost of warranty claims		(32,760	)
Warranty accrual		49,024
Warranty reserve, June 30, 2016	$	36,477

Prior to September 30, 2015, no warranty reserves were recorded by the Company.