Commitments and Contingencies

Operating Leases

As of June 30, 2019, future minimum payments under the non-cancelable operating lease were as follows:



Year Ending December 31,
	(unaudited)
	(in thousands)
Remainder of 2019	$	2,746
2020	7,280
2021	8,144
2022	8,388
2023	9,022
2024 and thereafter	26,076
Total	$	61,656

Rent expense for the facility leases was $1.6 million and $1.1 million for the three months ended June 30, 2019 and 2018, respectively, and $2.9 million and $2.2 million for the six months ended June 30, 2019 and 2018, respectively.

Capital Leases

As of June 30, 2019, future minimum capital lease payments were as follows:



Year Ending December 31,
	(unaudited)
	(in thousands)
Remainder of 2019	$	54
2020	108
2021	36
Total minimum capital lease payments	198
Less: amount representing interest	(44		)
Present value of net minimum capital lease payments	154
Less: current installments of obligations under capital lease	(74		)
Obligations under capital lease, excluding current installments	$	80

Patent License Agreements

The Company has agreements with four different parties to in-license patent rights. Under these agreements, the Company has made one-time upfront and milestone payments, which it has capitalized and is amortizing to expense ratably over the useful life of the underlying patent right(s). Under some of these agreements, the Company is obligated to pay low single-digit percentage running royalties on net sales where the licensed patent right(s) are used in the product or service sold, subject to minimum annual royalties or fees in certain agreements.

Royalty expenses were included in cost of precision oncology testing on the accompanying condensed consolidated statements of operations. The Company recognized royalty expenses of $1.1 million and $445,000, or 3% and 2% of precision oncology testing revenue in each period, for the three months ended June 30, 2019 and 2018, respectively, and $1.7 million and $617,000, or 2% and 2% of precision oncology testing revenue in each period, for the six months ended June 30, 2019 and 2018, respectively.

As of June 30, 2019, future minimum royalty payments were due as follows regardless of sales amounts:



Year Ending December 31,
	(unaudited)
	(in thousands)
Remainder of 2019	$	710
2020	1,421
2021	1,421
2022	1,705
2023	1,705
2024 and thereafter	5,683
Total future minimum royalty payments	12,645
Less: amount representing interest	(5,509		)
Present value of future minimum royalty payments	$	7,136

Indemnification Agreements

The Company has entered into indemnification agreements with certain directors and officers that require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. To date, no such matters have arisen and the Company does not believe that the outcome of any claims under indemnification arrangements will have a material adverse effect on its financial positions, results of operations or cash flows. Accordingly, the Company has not recorded a liability related to such indemnifications as of June 30, 2019.

Security Incidents

In July 2018, the Company experienced security incidents involving an unauthorized actor obtaining access to its email system and sending phishing messages. The Company has implemented and continues to implement additional security measures to help prevent future unauthorized access to its systems and the data it maintains, including promptly engaging an independent cybersecurity firm to support its investigation, assess its systems and bolster security thereof. The Company provided timely notices to the U.S. Department of Health and Human Services (“HHS”), certain state regulators and certain credit agencies, as applicable, as well as to the individuals affected. Following such security incidents, the Company received a request for information in January 2019 regarding the incidents from the HHS Office for Civil Rights (“OCR”). The Company has responded to that request in a timely manner but does not know whether OCR will request additional information or pursue any further action. The Company currently cannot predict the ultimate resolution of the security incidents or the OCR inquiry and cannot estimate the amounts or ranges of potential loss that could result therefrom. The Company has insurance coverage in place for certain potential claims, liabilities and costs relating to the security incidents, but this coverage is limited in amount and may not be adequate to protect against all claims, liabilities and costs arising from such incidents, including fines and penalties.

Legal Proceedings

The Company is subject to claims and assessments from time to time in the ordinary course of business. The Company will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred.

Patent Disputes

In November 2017, the Company filed separate lawsuits against Foundation Medicine, Inc. (“Foundation Medicine”) and Personal Genome Diagnostics, Inc. (“Personal Genome Diagnostics”) in the United States District Court for the District of Delaware. The Company has alleged that each of the two companies has infringed four of the Company’s digital sequencing technology patents. The two companies have each asserted counterclaims of patent invalidity, unenforceabilty under the doctrine of inequitable conduct, and non-infringement. Personal Genome Diagnostics has also alleged antitrust violations related to the enforcement of the Company’s patent rights. In each lawsuit, the parties are seeking damages, injunctive relief and attorneys’ fees.

In March 2018, Personal Genome Diagnostics filed two petitions for post-grant review with the Patent Trial and Appeal Board (“PTAB”) at the United States Patent and Trademark Office, challenging the patentability of two of the patents asserted by the Company. The two post-grant review petitions were dismissed with prejudice in July 2018. Subsequently, Foundation Medicine filed six petitions for inter partes review with the PTAB, challenging the patentability of all four of the patents asserted by the Company. In June 2019, the PTAB denied institution of inter partes review for the first of the six petitions filed by Foundation Medicine. The Company plans to vigorously defend its patent rights during such PTAB actions. At this time, the Company cannot reasonably ascertain the likelihood that any of the remaining challenged patents will be found to be invalid or unenforceable.

License Dispute

In November 2018, the Company filed a request for arbitration to the International Chamber of Commerce claiming that KeyGene N.V. (“Licensor”) has breached its patent license agreement with the Company. Licensor counterclaimed that the Company has breached the agreement. The parties are seeking damages, declaratory relief and recovery of costs and fees, among other remedies. At this time, the Company cannot reasonably ascertain the likelihood that any of its claims or Licensor’s counterclaims will succeed on the merits.

Other Disputes

In the first quarter of 2018, the Company settled a commercial dispute. In connection with the settlement, the Company received a payment of $4.25 million, which was reported as other income in the condensed consolidated statements of operations for the three months ended March 31, 2018.