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 $200,000 to $212,000 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, renewable thereafter by agreement of the parties, at an annual cost of $43,200 per year.  The Burleson facility will house raw material storage, a function that is currently provided by a third party vendor, 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:

 

Year ending December 31
2014		$	243,000
2015		243,000
2016		241,000
2017		207,000
2018		177,000
TOTAL		$		1,111,000

 

Total rent expense for the Company’s leased office and lab space for the years ended December 31, 2013 and 2012 was approximately $197,000 and $171,000, respectively.

 

Service Agreements

 

In 2008, the Company entered into a biostorage and management services agreement with a vendor. The agreement specifies monthly administration fees, storage fees based on volume, and retrieval fees per specimen based on lead times. The agreement can be terminated with 30 days written notice.

 

In 2009, the Company also entered into a two-year tissue processing agreement with another vendor. Tissue processing fees are based on a combination of a per week and a per donor batch rate. In 2012 the parties agreed to an extension for an additional twelve months and amended the agreement to provide for automatic twelve month renewals.

 

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 has an initial seven-year term from the date of the original agreement and following such initial term, the agreement automatically renews for an additional seven (7) year period provided that the parties agree to meet at least ninety (90) days before the end of such initial term to review whether the purchase price of the products obtained from Cook Biotech need to be adjusted and reasonably agree to such adjustment in writing, where such agreement shall not be unreasonably withheld.  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.

 

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 in the event of a Company change of control, provided certain conditions are met.  One contract has a severance provision in the event of termination without cause.

 

Concentrations

 

Vendor

 

All of AxoGen’s revenue is currently derived from three products, the Avance® Nerve Graft, AxoGuard® Nerve Protector and AxoGuard® Nerve Connector.  AxoGen has an exclusive distribution agreement with Cook Biotech for the purchase of AxoGuard®.  This contract is in year six of the initial seven year term and following such initial term, the agreement automatically renews for an additional seven years provided that the parties have met all the required provisions of the contract.  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 LifeNet Health 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. Termination of the LifeNet Health facility lease can occur upon six months’ notice from either party. Although AxoGen believes it can find and make operational a new 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 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.