6. Commitments and Contingencies

Leases

In February 2008, the Company entered into a sublease agreement for office, engineering, and research and development space in Carlsbad, California. The Sublease term commenced May 2008 and ended on January 31, 2016. In January 2016, the Company entered into a new lease agreement (the “Building Lease”) for the same property with the lease term through July 31, 2021. Under the new Building Lease the Company’s monthly rent payable is approximately $105,000 per month during the first year and increases by approximately $3,000 per month each year thereafter.

The Company also leases certain equipment and vehicles under operating leases which expire on various dates through 2018, and certain equipment under capital leases which expire on various dates through 2022.

Future minimum annual lease payments under the Company’s operating and capital leases are as follows (in thousands):

Year ending December 31,	Operating		Capital
2018	$	1,679	$	105
2019		1,583		37
2020		1,624		37
2021		993		37
2022		—		37
		5,879		253
Less: amount representing interest				(31	)
Present value of minimum lease payments				222
Current portion of capital leases				(93	)
Capital leases, less current portion			$	129

Rent expense under operating leases for the years ended December 31, 2017 and 2016 was $1.3 million and $2.1 million, respectively.

Litigation

The Company is and may become involved in various legal proceedings arising from its business activities. While management is not aware of any litigation matter that in and of itself would have a material adverse impact on the Company’s consolidated results of operations, cash flows or financial position, litigation is inherently unpredictable, and depending on the nature and timing of a proceeding, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual or disclosure in our consolidated financial statements. An estimated loss contingency is accrued in the Company’s consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against the Company may be unsupported, exaggerated or unrelated to reasonably possible outcomes, and as such are not meaningful indicators of the Company’s potential liability.

As more fully described in Note 14, on February 15, 2018, NuVasive, Inc. filed suit against the Company in the United States District Court for the Southern District of California, alleging that certain of the Company’s products infringe, or contribute to the infringement of several NuVasive’s patents. The case is in the very early stages of proceedings, with an order establishing a schedule for the case expected within the next few months. As of the date of this Annual Report on Form 10-K, the probability of an outcome cannot be reasonably determined, nor can the Company reasonably estimate a potential loss; therefore, in accordance with Accounting Standards Codification 450, Contingencies, the Company has not recorded an accrual related to this litigation.

Indemnifications

In the normal course of business, the Company enters into agreements under which it occasionally indemnifies third-parties for intellectual property infringement claims or claims arising from breaches of representations or warranties. In addition, from time to time, the Company provides indemnity protection to third-parties for claims relating to past performance arising from undisclosed liabilities, product liabilities, environmental obligations, representations and warranties, and other claims. In these agreements, the scope and amount of remedy, or the period in which claims can be made, may be limited. It is not possible to determine the maximum potential amount of future payments, if any, due under these indemnities due to the conditional nature of the obligations and the unique facts and circumstances involved in each agreement.

In October 2017, a competitor of the Company filed a lawsuit against Mr. Miles, the Company’s executive chairman who was a former employee of this competitor. The Company itself was not a named defendant in this lawsuit. However, the Company agreed to indemnify Mr. Miles in connection with this lawsuit, and recorded an expense of $0.1 million during the year ended December 31, 2017. As of December 31, 2017, the Company did not record any liability in the consolidated balance sheet related to this matter.

Royalties

The Company has entered into various intellectual property agreements requiring the payment of royalties based on the sale of products that utilize such intellectual property. These royalties primarily relate to products sold by Alphatec Spine and are based on fixed fees or calculated either as a percentage of net sales or in one instance on a per-unit sold basis. Royalties are included on the accompanying consolidated statements of operations as a component of cost of revenues. As of December 31, 2017, the Company is obligated to pay guaranteed minimum royalty payments under these agreements of approximately $6.5 million through 2022 and beyond.