14. Commitments and Contingencies

Leases

Our operating and capital lease obligations result from the lease of land and buildings that comprise our corporate headquarters and various manufacturing facilities, leases related to additional manufacturing, office, and warehouse space, leases on Company vehicles, and leases on a variety of office and other equipment.

We had deferred rent obligations of $2.9 million and $2.4 million as of December 31, 2017 and 2016, respectively, primarily related to the lease on our corporate headquarters, which expires in 2022. Total rental expense for operating leases was $4.9 million in 2017, $4.3 million in 2016, and $3.4 million in 2015. The increase in rent expense in 2017 is due to the acquisition and our lease of equipment and manufacturing, warehouse, and office space in Hechingen, Germany. The increase in rent expense in 2016 is due to the acquisition of On-X and our lease for manufacturing, warehouse, and office space in Austin, Texas. We began subleasing some of our additional office space late in December 2016 and earned $564,000 of sublease income in 2017 and nominal sublease income in 2016.

Future minimum lease payments and sublease rental income are as follows (in thousands):



	Capital		Operating		Sublease
	Leases		Leases		Income
2018	$	1,034	$	5,927	$	512
2019		1,061		6,231		525
2020		874		5,098		538
2021		838		4,249		552
2022		781		2,038		--
Thereafter		6,243		5,301		--
Total minimum lease payments	$	10,831	$	28,844	$	2,127
Less amount representing interest		3,415
Present value of net minimum lease payments		7,416
Less current maturities		580
Capital lease obligations, less current maturities	$	6,836

Assets acquired under capital leases are as follows (in thousands):


	Gross
	Carrying		Accumulated
	Value		Amortization		NBV
Equipment	$	1,306	$	594	$	712
Leasehold improvements		6,908		256		6,652
Total	$	8,214	$	850	$	7,364

Liability Claims

At December 31, 2017 and 2016 our unreported loss liability was $1.8 million and $1.5 million, respectively. As of December 31, 2017 and 2016, the related insurance recoverable amounts were $692,000 and $626,000, respectively. We accrue our estimate of unreported product and tissue processing liability claims as other long‑term liabilities and record the related recoverable insurance amounts as other long‑term assets. Further analysis indicated that the liability as of December 31, 2017 could be estimated to be as high as $2.9 million, after including a reasonable margin for statistical fluctuations calculated based on actuarial simulation techniques.

Employment Agreements

In July 2014 our Board of Directors appointed Mr. James P. Mackin as President and Chief Executive Officer (“CEO”), and we 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. The agreement provides for a severance payment, which would become payable upon the occurrence of certain employment termination events, including termination by us without cause.

The employment agreement of our 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 our employee and Chair of our Board of Directors, and entered into a separation agreement with us. We recorded expenses of approximately $1.4 million related to Mr. Anderson’s separation agreement in the second quarter of 2015. We had remaining obligations due under Mr. Anderson’s separation agreement of $77,000 and $83,000 as of December 31, 2017 and December 31, 2016, respectively.

PerClot Technology

On September 28, 2010 we 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 we can terminate it for any reason before the expiration date 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, we 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.

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

We are conducting our pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in the U.S. We resumed enrollment into the PerClot U.S. clinical trial in the fourth quarter of 2016, and assuming enrollment proceeds as anticipated, we could receive Premarket Approval (“PMA”) from the U.S. Food and Drug Administration (“FDA”) in the second half of 2019.

As of December 31, 2017 we had $1.5 million in prepaid royalties, $2.6 million in net intangible assets, and $1.4 million in property and equipment, net on our Consolidated Balance Sheets related to the PerClot product line. If we do not ultimately pursue or receive FDA approval to commercialize PerClot in the U.S., these assets could be materially impaired in future periods.