13. Commitments and Contingencies

Leases

The Company's operating lease obligations result from the lease of land and buildings that comprise the Company's corporate headquarters and manufacturing facilities, leases related to additional manufacturing, office, and warehouse space, leases on Company vehicles, and leases on a variety of office equipment.

The Company had deferred rent obligations of $1.7 million and $1.6 million as of December 31, 2015 and 2014, respectively, primarily related to the lease on its corporate headquarters, which expires in 2022. Total rental expense for operating leases was $3.4 million in 2015 and $3.0 million in both 2014 and 2013. The increase in rent expense in 2015 is due to a lease the Company entered into for additional office space in Kennesaw, GA.



	Operating
	Leases
2016	$	3,167
2017		3,536
2018		3,524
2019		3,462
2020		3,534
Thereafter		6,974
Total minimum lease payments	$	24,197

Liability Claims

At December 31, 2015 and 2014 the Company’s unreported loss liability was $1.4 million and the related insurance recoverable amounts were $600,000. The Company accrues its estimate of unreported product and tissue processing liability claims as other long‑term liabilities and records the related recoverable insurance amounts as other long‑term assets. Further analysis indicated that the liability as of December 31, 2015 could be estimated to be as high as $2.6 million, after including a reasonable margin for statistical fluctuations calculated based on actuarial simulation techniques.

Employment Agreement

In July 2014 the Company’s Board of Directors appointed Mr. James P. Mackin as President and Chief Executive Officer (“CEO”), and the Company and Mr. Mackin entered into an employment agreement, which became effective September 2, 2014. The employment agreement has an initial three-year term. Beginning on the second anniversary of the effective date, and subject to earlier termination pursuant to the agreement, the employment term will, on a daily basis, automatically extend by one day. In accordance with the agreement, on September 2, 2014, Mr. Mackin received a one-time signing bonus of $200,000, a grant of 400,000 stock options, and a performance stock award grant of 250,000 shares. The agreement also provides for a severance payment, which would become payable upon the occurrence of certain employment termination events, including termination by the Company without cause.

The employment agreement of the Company’s former President, CEO, and Executive Chairman, Mr. Steven G. Anderson, conferred certain benefits on Mr. Anderson upon his retirement or termination of employment in conjunction with certain change in control events. As of December 31, 2014 the Company had $2.2 million included in its accrued expenses and other current liabilities on the Consolidated Balance Sheet, primarily related to severance payable upon Mr. Anderson’s voluntary retirement. Mr. Anderson’s employment agreement took effect on January 1, 2013 and would have terminated on December 31, 2016.

On April 9, 2015 Mr. Anderson retired from service as an employee of the Company and Chair of its Board of Directors, and entered into a Separation Agreement (the “Agreement”) with the Company. In accordance with the Agreement, in addition to the severance benefit discussed above, Mr. Anderson received an additional $400,000 in cash; and will receive 25% of the annual bonus he would have been entitled to under his employment agreement, estimated at target payout rates to be approximately $100,000; reimbursement of a Medicare supplement policy for Mr. Anderson and his spouse for the duration of their lives; accelerated vesting of all outstanding and unvested stock options and awards; and reimbursement of attorneys’ fees not to exceed $20,000. The Company recorded expense of approximately $1.4 million related to the Agreement in the second quarter of 2015. The acceleration of Mr. Anderson’s stock options and awards was effective as of the date of his retirement. The Company made a payment of approximately $2.4 million in cash severance and compensation payments to Mr. Anderson in October 2015, six months after his retirement. The bonus payment is expected to be made in February 2016 at the same time as annual bonus payments, if any, are made to the Company’s officers.

PerClot Technology

On September 28, 2010 the Company entered into a worldwide distribution agreement (the “Distribution Agreement”) and a license and manufacturing agreement (the “License Agreement”) with SMI, for PerClot, a polysaccharide hemostatic agent used in surgery. The Distribution Agreement contains certain minimum purchase requirements and has a term of 15 years. Following U.S. regulatory approval and the start of U.S. manufacturing, CryoLife may terminate the Distribution Agreement and the related requirements to purchase minimum amounts of PerClot manufactured by SMI. Upon termination of the Distribution Agreement, CryoLife would manufacture and sell PerClot pursuant to the License Agreement. The Company would pay royalties to SMI at stated rates on net revenues of products manufactured under the License Agreement.

In April 2014 CryoLife received 510(k) clearance from the FDA to market PerClot Topical in the U.S. PerClot Topical is a version of the Company’s PerClot product, which was manufactured by the Company at its headquarters and labeled for use in certain topical indications. CryoLife launched PerClot Topical in August 2014. In March 2015 CryoLife ceased all marketing, sales, and distribution of PerClot, including PerClot Topical, in the U.S. in accordance with the District Court order that granted the motion of Medafor for a preliminary injunction in its patent dispute with CryoLife. See Note 8 for further discussion of the Company’s lawsuit with Medafor.

The Company is conducting its pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in the U.S. Management believes that the costs of this clinical trial will be significant in 2016. The Company began enrollment in the second quarter of 2015. Enrollment in the clinical trial was slower than anticipated, and the Company voluntarily suspended enrollment in the clinical trial pending discussions with the FDA to modify the IDE study protocol. These planned modifications will need to be approved by the FDA in an IDE supplement. Depending on the outcome of those discussions, the Company will determine when it anticipates resuming enrollment in the clinical trial. If the Company is able to resume enrollment in the clinical trial during 2016, the Company would expect to receive PMA from the FDA in early 2019.

CryoLife paid $500,000 to SMI in January 2015 related to the achievement of a contingent milestone. The Company will make additional contingent payments to SMI of up to $1.0 million if certain FDA regulatory and other commercial milestones are achieved.