12.  Commitments and Contingencies

 

Operating Leases

 

On November 12, 2013, AxoGen entered into the Third Amendment to Lease with SNH Medical Office Properties Trust (“SNH”).  SNH was the landlord of AxoGen’s corporate headquarters leased facility in Alachua, Florida and AxoGen and SNH agreed to the amendment by which AxoGen relocated and expanded its corporate headquarters to a new space owned by SNH within the same office park.  The lease amendment provides for 11,761 square feet of office space until October 31, 2018, renewable thereafter by agreement of the parties, subject to AxoGen’s right to earlier termination after three years from the effective date of the lease. AxoGen’s annual cost of such property ranges from approximately $194,000 to $214,000 per year. 

 

In addition, on October 25, 2013, AxoGen entered into a Commercial Lease with Ja-Cole. Under the terms of the Commercial Lease, AxoGen leased 5,400 square feet of warehouse/office space in Burleson, Texas until November 30, 2016 at an annual cost of $43,200 per year. On April 21, 2015, AxoGen entered into a new commercial lease, as amended by Addendum on such date, with Ja-Cole. The new lease superseded and replaced the original lease with Ja-Cole. Under the terms of the new lease, AxoGen leased an additional 2,100 square feet of warehouse space that will be combined with its current 5,400 square feet of warehouse/office space in Burleson, Texas.   The new lease is for a three-year term expiring April 21, 2018, renewable thereafter by agreement of the parties, at an annual cost of $66,000 per year.  The expanded Burleson facility will house raw material storage and product distribution and allow expansion space as required for AxoGen operations.

 

The Burleson facility houses raw material storage and product distribution, allowing AxoGen to fulfill same day orders for both coasts of the United States.

 

The Company leases its lab space on a month to month basis.

 

Estimated future minimum rental payments on the leases are as follows:

 

 

Total rent expense for the Company’s leased office and lab space for the years ended December 31, 2015 and 2014 was approximately $351,000 and $288,000, respectively.

 

Service Agreements

 

Since 2009, AxoGen has processed and packaged Avance® Nerve Graft using its employees and equipment located at LifeNet Health, Virginia Beach, Virginia (“LifeNet Health”).  Business requirements of LifeNet Health led to their need for additional space and they notified AxoGen that AxoGen would need to transition out of the Virginia Beach facility on or before February 27, 2016.  On August 6, 2015, AxoGen entered into a License and Services Agreement with Community Blood Center (d/b/a Community Tissue Services) (“CTS”), Dayton, Ohio, an FDA registered tissue establishment.  Processing of the Avance® Nerve Graft pursuant to the CTS agreement began in February 2016.  The CTS agreement is for a  five year term, subject to earlier termination by either party for cause, or after August 6, 2017 without cause, upon 18 months notice. Under the CTS agreement AxoGen pays CTS a facility fee for clean room/manufacturing, storage and office space.  CTS also provides services in support of AxoGen’s manufacturing such as routine sterilization of daily supplies, providing disposable supplies, microbial services and office support.

 

In August 2008, the Company entered into an agreement to distribute the AxoGuard® product worldwide in the field of peripheral nerve repair, and the parties subsequently amended the agreement in March, 2012. The agreement expires in August 2022. The Cook Biotech agreement also requires certain minimum purchases, although through mutual agreement the parties have not established such minimums and to date have not enforced such provision, and establishes a formula for the transfer cost of the AxoGuard® products. Under the agreement, AxoGen provides purchase orders to Cook Biotech, and Cook Biotech fulfills the purchase orders.

 

In December 2011, the Company also entered into a Master Services Agreement for Clinical Research and Related Services.  The Company was required to pay $151,318 upon execution of this agreement and $20,416 per month for 42 months starting in January 2012 through August 2015.    

 

Certain executive officers of the Company are parties to employment contracts.  All such contracts have severance payments for certain conditions including change of control.

 

Concentrations

 

Vendor

 

Substantially all of AxoGen’s revenue is currently derived from three products, Avance® Nerve Graft, AxoGuard® Nerve Protector and AxoGuard® Nerve Connector.  AxoGen has an exclusive distribution agreement with Cook Biotech for the purchase of AxoGuard ® which expires August 27, 2022    The Cook Biotech agreement also requires certain minimum purchases, although through mutual agreement the parties have not established such minimums and to date have not enforced such provision, and establishes a formula for the transfer cost of the AxoGuard® products.

 

The agreement allows for termination provisions for both parties.  Although there are products that AxoGen believes it could develop or obtain that would replace the AxoGuard® products, the loss of the ability to sell the AxoGuard®  products could have a material adverse effect on AxoGen’s business until other replacement products would be available.

 

Processor

 

AxoGen is highly dependent on the continued availability of its processing facilities at CTS and could be harmed if the physical infrastructure of this facility is unavailable for any prolonged period of time.  In addition, disruptions could lead to significant costs and reductions in revenues, as well as a potential harm to the AxoGen’s business reputation and financial results. . The CTS agreement is for a five year term, subject to earlier termination by either party for cause, or after August 6, 2017 without cause, upon 18 months notice. Although AxoGen believes it can find and make operational a new facility in less than six months, and did so with its move from LifeNet Health to CTS, the regulatory process for approval of facilities is time-consuming and unpredictable. AxoGen’s ability to rebuild or find acceptable lease facilities would take a considerable amount of time and expense and could cause a significant disruption in service to its customers. Although AxoGen has business interruption insurance which would, in instances other than lease termination, cover certain costs, it may not cover all costs nor help to regain AxoGen’s standing in the market.