7. Commitments and contingencies

Operating leases

The Company leases office space and various office equipment under cancelable and non‑cancelable operating leases which expire on various dates through 2022. In general, leases relating to real estate include rent escalation clauses relating to increases in operating costs. Some leases also include renewal options of up to five years.

Operating lease expense is as follows:


	Year ended December 31,
	2016		2015		2014
Operating lease expense	$	1,477,382	$	1,577,764	$	1,549,343

Future minimum rental payments under non‑cancelable operating leases are as follows:


Years ending December 31,
2017	$	1,176,928
2018		737,115
2019		580,566
2020		82,285
2021		84,748
Thereafter		7,202
Total minimum lease payments	$	2,668,844

Capital leases

The following is an analysis of the leased property under capital leases:


	December 31,
	2016		2015
Computer hardware	$	2,267,950	$	2,145,668
Computer software		319,500		319,683
Total capital leases, gross		2,587,450		2,465,351
Less: Accumulated depreciation		(1,824,534)		(1,415,472)
Total capital leases, net	$	762,916	$	1,049,879

Future minimum rental payments under capital leases are as follows:


Years ending December 31,
2017	$	176,022
2018		83,603
2019		14,031
2020		5,244
2021		2,185
Thereafter		—
Total minimum lease payments		281,085
Less: Amounts representing taxes, included in total minimum lease payments(*)		—
Net minimum lease payments		281,085
Less: Amounts representing interest payments		(12,242)
Present value of net minimum lease payments	$	268,843

(*)Tax amounts related to capital lease payments are inconsequential.

Employment agreements

Pursuant to employment agreements with certain employees, the Company had a commitment to pay severance of approximately $1.2 million and $0.9 million as of December 31, 2016 and 2015, respectively, in the event of an involuntary termination, as defined in the employment agreements. Additionally, in the event of termination upon a change of control, as defined in the agreements, the Company had a commitment to pay severance of approximately $1.4 million and $1.1 million as of December 31, 2016 and 2015, respectively.

Contingent liabilities

In instances where the Company is acting as the merchant acquirer, the Company bears a risk that a merchant may engage in fraud by submitting for payment certain credit card transactions that may have been manipulated, are fictitious, or are otherwise not bona fide. Similarly, the Company bears the risk that a merchant becomes insolvent, owing money to cardholders. To the extent that such fraud or insolvency occurs in circumstances where the Company is liable to make good any resultant losses, this could affect the Company’s operating results and cash flows. The Company has required certain merchants to post cash reserves of approximately $0.9 million with the sponsoring bank against such liabilities and has itself paid the acquirer a reserve of $0.3 million in connection therewith, which is included in long-term ‘Restricted cash” on the consolidated balance sheets. In addition, the Company holds merchant reserves of approximately $2.2 million. This reserve amount is included in “Restricted cash” with an offset in “Due to merchants”. Under FASB ASC 460, Guarantees, the Company evaluates its ultimate risk and records an estimate of potential loss for chargeback’s related to merchant fraud and processing errors based upon an assessment of actual historical fraud rates and errors in processing compared to recent bank card processing volume levels. No contingent liability has been recorded as of December 31, 2016 and 2015, as the risk of material loss is considered remote. The Company monitors these contingent liabilities on a quarterly basis and will provide for a reserve if deemed necessary.

Outstanding litigation

From time to time, the Company’s operating entities are involved in legal proceedings in the ordinary course of business. While any litigation contains an element of uncertainty, the Company has no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on the financial condition or results of operations of the Company.

Acquiring bank sponsorship agreements

In order to offer merchant acquiring services for Visa and MasterCard transactions, the Company must be sponsored by a financial institution that is a principal member of the Visa and MasterCard networks.

The Company entered into a five-year agreement with a sponsoring bank effective September 1, 2013. The Company was required to pay minimum annual sponsorship transaction fees of $0.3 million in year one. The minimum fees escalate each subsequent year with minimum fees of $0.5 million due in year five for total minimum fees of $1.8 million to be paid over the term of the agreement. Sponsorship fees are recorded to payment processing service fees cost of sales with the total agreement minimum of $1.8 million recognized on a straight-line basis over the term of the agreement.

Pursuant to the agreement, the Company is liable for all losses incurred by the sponsoring bank with respect to the activities of its merchants sponsored under the agreement. No contingent liability has been recorded as December 31, 2016 as the risk of material loss is considered remote based on historical information. The Company monitors this contingent liability on a quarterly basis and will provide for a reserve if deemed necessary.

The Company has two acquiring bank sponsoring agreements expiring at various dates through 2018. The future minimum payments under those agreements are as follows:


Years ending December 31,
2017	$	416,667
2018		300,000
2019		—
2020		—
2021		—
Thereafter		—
Total payments	$	716,667