11.  Commitments and Contingencies

 

Operating Leases

 

The Company finances its use of certain facilities and equipment under committed lease arrangements provided by various institutions.  Since the terms of these arrangements meet the accounting definition of operating lease agreements, the aggregate sum of future minimum lease payments is not reflected on the condensed consolidated balance sheet.

 

On September 20, 2018 (the “Heights Union Lease Effective Date”), the Company entered into an agreement with Heights Union, LLC, a Florida limited liability company (“Heights Union”), for the lease of 75,000 square feet of office space (the “Heights Union Premises”) in a 150,051 square foot office building that Heights Union intends to construct and complete on or before February 15, 2020, on an area of land in Tampa, Florida (the “Site”).  Pursuant to the Heights Union Lease, the Company will use the Heights Union Premises for general office, medical laboratory, training and meeting purposes.  Heights Union is expected to become the fee simple owner of the Site within sixty (60) days of the Heights Union Lease Effective Date. The Company has a termination right if Heights Union does not become the fee simple owner of the Site within such timeframe and, in such event, Heights Union will reimburse the Company for the Company’s actual expenses incurred in negotiating the Heights Union Lease, up to a maximum of $100,000.

 

Estimated future minimum rental payments on the leases, including the lease agreement for the Heights Union Premises, are as follows:

 

 

Total rent expense for the Company’s leased office and lab space for the three months ended September 30, 2018 and 2017 was approximately $141,000 and $118,000, respectively, and for the nine months ended September 30, 2018 and 2017 was approximately $358,000 and $368,000, respectively.

 

Service Agreements

 

On August 6, 2015, AC entered into a License and Services Agreement (the “CTS 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 (subject to the non-terminating party’s right to cure, in certain circumstances), or without cause, upon 18 months’ prior notice. Under the CTS Agreement, AC pays CTS a facility fee for clean room/manufacturing, storage and office space.  CTS also provides services in support of AC’s manufacturing such as routine sterilization of daily supplies, providing disposable supplies, microbial services and office support.  During the three months ended September 30, 2018 and 2017, AxoGen paid license fees to CTS of approximately $553,000 and $347,000, respectively, and during the nine months ended September 30, 2018 and 2017, approximately $1.4 million and $1.0 million, respectively, and are included in cost of goods sold on the accompanying condensed consolidated statements of operations.

 

In August 2008, the Company entered into an agreement to distribute the AxoGuard® products worldwide in the field of peripheral nerve repair, and the parties subsequently amended the agreement on February 26, 2018. Pursuant to the February 2018 amendment, the agreement expires on September 30, 2027. 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 the remainder monthly based on activities associated with the execution of AxoGen’s phase 3 pivotal clinical trial to support a biologics license application (BLA) for Avance® Nerve Graft. 

 

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

 

Concentrations

 

Vendor

 

Substantially all of AxoGen’s revenue is currently derived from four products, Avance® Nerve Graft, AxoGuard® Nerve Protector, AxoGuard® Nerve Connector and Avive® Soft Tissue Membrane.  AxoGen has an exclusive distribution agreement with Cook Biotech for the purchase of AxoGuard® which expires September 30, 2027.  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 AxoGen’s business reputation and financial results. The CTS agreement is for a five-year term, subject to earlier termination by either party at any time for cause (subject to the non-terminating party’s right to cure, in certain circumstances), or without cause, upon 18 months’ prior notice. Although AxoGen believes it can find and make operational a new leased facility in less than six months, the regulatory process for approval of facilities is time-consuming and unpredictable. AxoGen’s ability to rebuild or find acceptable lease facilities could take a considerable amount of time and expense and could cause a significant disruption in service to its customers. AxoGen purchased a facility (the “APC”) in Vandalia, Ohio in July 2018 located near AC’s current leased processing facility for Avance® Nerve Graft and Avive® Soft Tissue Membrane.  The APC is comprised of a 70,000 square foot building on approximately 8.6 acres of land.  It is expected that renovations to the APC will be completed by the third quarter of 2020 so that the APC can be included in our Biologics License Application (“BLA”) for the Avance® Nerve Graft.  The capacity of the APC once operational, along with the ability for expansion, is expected to provide processing capabilities that will meet our intended sales growth.  AxoGen believes the APC would meet its needs in the event of CTS lease termination, but, depending on timing, may not provide required processing space if the CTS facility was unavailable in the next 18 months.  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.