6. Commitments and Contingencies

Operating Leases

As of September 30, 2017, the Company leases office facilities under non‑cancelable operating lease agreements. The Company currently occupies approximately 104,000 square feet of laboratory and office space at its San Carlos, California corporate headquarters pursuant to a lease that it directly entered into with its landlord in October 2016. This lease covers two office spaces (the “First Space” and the “Second Space”). The First Space covers approximately 88,000 square feet at a base rent of $309,372 per month. The Second Space covers approximately 16,000 square feet at a base rent of $60,730 per month. The Company paid a security deposit totaling $0.7 million on this lease. The term of this lease is approximately eighty-four months and expires in October 2023.

The Company terminated the previous sublease of the First Space (as defined above), which was then separated into two subleases with two separate lessors. One sublease covered approximately 61,000 square feet beginning January 2013, which was secured by a $0.8 million letter of credit in favor of the lessor (as described in Note 2 under Restricted Cash) and terminated in October 2016. The other sublease covered approximately 27,000 square feet beginning March 2014, which was secured by a $0.3 million letter of credit in favor of the lessor and terminated in January 2017. As of January 31, 2017, the $0.3 million letter of credit expired, and its associated restricted cash balance was released. The $0.8 million letter of credit expired in July 2017, which accordingly released its associated restricted cash balance.

In October 2016, the Company entered into a sublease for additional office space that covers approximately 13,000 square feet to accommodate its sales and marketing team. The lease term of the additional space began in November 2016 and carried a monthly base rent of $49,140, subject to an annual increase of 3%, with a security deposit of $0.1 million. The term of this sublease is approximately twenty-eight months, with the expiration date in February 2019.

In October 2015, the Company’s subsidiary entered into a one-year lease agreement for temporary office space in Austin, Texas. The property carried a monthly rent of $12,900 per month for the 12 months of the lease and $12,900 per month on a month-to-month basis following the twelfth month. This lease expired in October 2016. The terms of the lease included a $12,900 security deposit, which was refunded by the landlord to the Company in June 2017.

In September 2015, the Company’s subsidiary entered into a long-term lease agreement for laboratory and office space totaling approximately 94,000 square feet in Austin, Texas. The lease term was 132 months beginning in December 2015 and expiring in November 2026 with monthly payments beginning in December 2016, increasing from $0.1 million to $0.2 million. Pursuant to the terms of the lease, the subsidiary has paid a security deposit of $0.4 million, and the landlord allotted the subsidiary an allowance for leasehold improvements of up to $7.8 million. As of September 30, 2017, the full amount of the allowance has been reimbursed by the landlord.

The future annual minimum lease payments under all non-cancelable operating leases as of September 30, 2017 are as follows:


	Operating Leases
	(in thousands)
Year ending December 31:
2017 (remaining 3 months)	$	1,842
2018		8,035
2019		8,548
2020		8,675
2021		8,913
2022 and thereafter		23,897
Total future minimum lease payments	$	59,910

Rent expense for the three months ended September 30, 2017 and 2016 was $1.7 million and $1.3 million, respectively, and $5.1 million and $3.9 million for the nine months ended September 30, 2017 and 2016, respectively. The Company is also required to pay its share of facility operating expenses with respect to the facilities in which it operates.

Legal Proceedings

From time to time, the Company is involved in disputes, litigation, and other legal actions. The Company is aggressively prosecuting and defending its current litigation matters. There are many uncertainties associated with any litigation and these actions or other third-party claims against the Company may cause the Company to incur costly litigation and/or substantial settlement charges.

In addition, the resolution of any intellectual property litigation may require the Company to make royalty payments, which could adversely affect gross margins in future periods. If this were to occur, the Company's business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from the Company's estimates, if any, which could result in the need to record or adjust a liability and record additional expenses. During the periods presented, the Company has not recorded any accrual for loss contingencies associated with such legal proceedings.

On each of February 17, 2016, March 10, 2016, March 28, 2016 and April 4, 2016, purported class action lawsuits were filed in the Superior Court of the State of California for the County of San Mateo (the “San Mateo Superior Court”), against Natera, its directors, certain of its officers and 5% stockholders and their affiliates, and each of the underwriters of the Company’s July 1, 2015 initial public offering (the "IPO"). The complaints assert claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended (the “’33 Act”). The complaints allege, among other things, that the Registration Statement and Prospectus for the Company’s IPO contained materially false or misleading statements, and/or omitted material information that was required to be disclosed, about the Company’s business and prospects. Among other relief, the complaints seek class certification, unspecified compensatory damages, rescission, attorneys' fees, and costs. The Company removed these actions to the United States District Court for the Northern District of California, and the actions were subsequently remanded back to the San Mateo Superior Court. The Company has appealed the remand and discovery has been stayed, or held, pending the appeal. The Company also filed a demurrer, or a request for dismissal as a matter of law, in the San Mateo Superior Court, which was granted on October 23, 2017. The San Mateo Superior Court demurred the claims under Sections 12(a)(2) and 15 of the Securities Act of 1933, as amended, without leave to re-file. The San Mateo Superior Court granted the demurrer as to Section 11 of the Act with leave to re-file prior to November 24, 2017. Plaintiffs have not-refiled, but if they do, the Company intends to defend the matter vigorously, but cannot provide any assurance as to the ultimate outcome or that an adverse resolution would not have a material adverse effect on its financial condition and results of operations. The Company is unable to predict the ultimate outcome and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from any unfavorable outcome.

On March 4, 2016, a lawsuit was filed against the Company in the Superior Court of the State of California for the County of San Diego, by a patient alleging that Natera failed to perform a carrier screening test that was ordered. The complaint seeks compensatory damages. This matter is in the discovery stage. On May 26, 2017, the Company filed a motion for summary judgment, which was denied. The matter is set for trial in March 2018. The Company intends to vigorously defend against the claims in this lawsuit, and assert any counterclaims that may be available to it. The Company cannot provide any assurance as to the ultimate outcome or that an adverse resolution of this lawsuit would not have a material adverse effect on its financial condition and results of operations. In light of, among other things, the early stage of the litigation, the Company is unable to predict the outcome and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from any unfavorable outcome.

On December 12, 2015, the Company received a civil investigative demand from the United States Department of Justice in connection with what it understands to be a qui tam action related to the billing of some of its testing. The Company has produced documents in response to the demand. An adverse ruling in this proceeding could require the Company to pay treble damages, civil penalties, and attorneys’ fees, costs and expenses, which could materially and adversely affect its business, financial condition and results of operations. The Company is unable to predict the outcome and is unable to make a meaningful estimate of the amount or range of loss, if any, that could result from any unfavorable outcome.

Director and Officer Indemnifications

As permitted under Delaware law, and as set forth in the Company’s Certificate of Incorporation and its Bylaws, the Company indemnifies its directors, executive officers, other officers, employees and other agents for certain events or occurrences that may arise while in such capacity. The maximum potential amount of future payments the Company could be required to make under this indemnification is unlimited; however, the Company has insurance policies that may limit its exposure and may enable it to recover a portion of any future amounts paid. Assuming the applicability of coverage, the willingness of the insurer to assume coverage, and subject to certain retention, loss limits and other policy provisions, the Company believes any obligations under this indemnification would not be material, other than an initial $1.5 million for securities related claims and $0.3 million for commercial general liability claims. However, no assurances can be given that the covering insurers will not attempt to dispute the validity, applicability, or amount of coverage without expensive litigation against these insurers, in which case the Company may incur substantial liabilities as a result of these indemnification obligations.

Third-Party Payer Reimbursement Audits

Three third-party payers have alleged that they have overpaid the Company, and demanded recoupment of the alleged overpayments. The Company disagrees with the contentions.

Contractual Commitments

As of September 30, 2017, the Company has non-cancelable contractual commitments with a supplier for approximately $6.7 million and other material supplier commitments for approximately $2.1 million for inventory material used in the laboratory testing process.

As of September 30, 2017, the Company has a non-cancelable license agreement with a vendor for approximately $2.0 million. This represents binding and remaining commitments with the vendor through December 31, 2019.

As of September 30, 2017, the Company has non-cancelable contractual commitments with a vendor for biological sample processing and storage totaling approximately $2.6 million. This represents binding and remaining commitments with the vendor through December 31, 2021.