14. 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 $2.4 million and $1.7 million as of December 31, 2016 and 2015, respectively, primarily related to the lease on its corporate headquarters, which expires in 2022. Total rental expense for operating leases was $4.3 million in 2016, $3.4 million in 2015, and $3.0 million in 2014. The increase in rent expense in 2016 is due to the acquisition of On-X and its lease for manufacturing, warehouse, and office space in Austin, TX. The increase in rent expense in 2015 is due to a lease the Company entered into for additional office space in Kennesaw, GA. The Company began subleasing some of its additional office space late in December 2016 and earned nominal sublease income in 2016. Future minimum lease payments and sublease rental income are as follows (in thousands):



	Operating		Sublease
	Leases		Income
2017	$	4,470	$	375
2018		4,779		512
2019		4,722		525
2020		4,127		538
2021		3,647		552
Thereafter		3,788		--
Total minimum lease payments	$	25,533	$	2,502

Liability Claims

At December 31, 2016 and 2015 the Company’s unreported loss liability was $1.5 million and $1.4 million, respectively. As of December 31, 2016 and 2015, the related insurance recoverable amounts were $626,000 and $600,000, respectively. 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, 2016 could be estimated to be as high as $2.8 million, after including a reasonable margin for statistical fluctuations calculated based on actuarial simulation techniques.

Employment Agreements

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. 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 with the Company. The Company recorded expense of approximately $1.4 million related to Mr. Anderson’s separation agreement in the second quarter of 2015. The Company had remaining obligations due under Mr. Anderson’s separation agreement of $83,000 and $93,000 as of December 31, 2016 and December 31, 2015, respectively.

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 Starch Medical, Inc. (“SMI”), for PerClot, a polysaccharide hemostatic agent used in surgery. The Distribution Agreement has a term of 15 years, but can be terminated for any reason before the expiration date by CryoLife by providing 180 days’ notice. The Distribution Agreement also contains minimum purchase requirements that expire upon the termination of the Distribution Agreement or following U.S. regulatory approval for PerClot. Separate and apart from the terms of the Distribution Agreement, pursuant to the License Agreement, as amended by a September 2, 2011 technology transfer agreement, CryoLife can manufacture and sell PerClot, assuming appropriate regulatory approvals, in the U.S. and certain other jurisdictions and may be required to pay royalties to SMI at certain rates on net revenues of products.

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

The Company is conducting its pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in the U.S. The Company began enrollment in the trial in the second quarter of 2015 but later suspended enrollment pending consultation with the FDA regarding the trial protocol. These discussions resulted in two amendments to the trial protocol, the last of which was approved by the FDA in July 2016. The Company is in the process of conducting site start-up activities and resumed enrollment into the trial in the fourth quarter of 2016 with the goal of receiving PMA from the FDA in the first half of 2019.

As of December 31, 2016 the Company had $1.5 million in prepaid royalties, $2.9 million in net intangible assets, and $1.2 million in property and equipment, net on the Company’s Consolidated Balance Sheets related to the PerClot product line. If the Company does not ultimately pursue or receive FDA approval to commercialize PerClot in the U.S., these assets could be materially impaired in future periods.