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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to______________
Commission file number: 001-36046
Axogen, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Minnesota
(State or other jurisdiction of
incorporation or organization)

13631 Progress Blvd., Suite 400 Alachua, FL
(Address of principal executive offices)
41-1301878
(I.R.S. Employer
Identification No.)

32615
(Zip Code)

386-462-6800
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.01 par valueAXGNThe Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 
As of October 29, 2021, the registrant had 41,562,559 shares of common stock outstanding.



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Forward-Looking Statements

From time to time, in reports filed with the U.S. Securities and Exchange Commission (the “SEC”) (including this Quarterly Report on Form 10-Q), in press releases, and in other communications to shareholders or the investment community, Axogen, Inc. (including Axogen, Inc.’s wholly owned subsidiaries, Axogen Corporation, Axogen Processing Corporation and Axogen Europe GmbH, the “Company,” “Axogen,” “we,” “our,” or “us”) may provide forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, concerning possible or anticipated future results of operations or business developments. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “projects,” “forecasts,” “continue,” “may,” “should,” “will,” “goals,” variations of such words and similar expressions are intended to identify such forward-looking statements. The forward-looking statements may include, without limitation, statements regarding our assessment of our internal controls over financial reporting, our growth, the impact of COVID-19, product development, product potential, regulatory process and approvals, Axogen Processing Center renovation timing and expense, financial performance, sales growth, product adoption, market awareness of our products, data validation, and our visibility at and sponsorship of, conferences and educational events. The forward-looking statements are and will be subject to risks and uncertainties, which may cause actual results to differ materially from those expressed or implied in such forward-looking statements. Forward-looking statements contained in this Quarterly Report on Form 10-Q should be evaluated together with the many uncertainties that affect our business and our market, particularly those discussed in the risk factors and cautionary statements set forth in our filings with the SEC, including as described in “Risk Factors” included in Item 1A and “Risk Factor Summary” included in our 2020 Annual Report on Form 10-K. Forward-looking statements are not guarantees of future performance, and actual results may differ materially from those projected. Forward-looking statements are representative only as of the date they are made, and, except as required by applicable law, we assume no responsibility to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or otherwise.
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PART 1 — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
Axogen, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(In Thousands, Except Share and Per Share Amounts)
September 30,
2021
December 31,
2020
Assets
Current assets:
Cash and cash equivalents$46,730 $48,767 
Restricted cash6,333 6,842 
Investments44,989 55,199 
 Accounts receivable, net of allowance for doubtful accounts of $173 and $416, respectively
18,567 17,618 
Inventory15,453 12,529 
Prepaid expenses and other2,896 4,296 
Total current assets134,968 145,251 
Property and equipment, net56,328 38,398 
Operating lease right-of-use assets15,588 15,614 
Finance lease right-of-use assets47 64 
Intangible assets, net2,701 2,054 
Other long-term assets339  
Total assets$209,971 $201,381 
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued expenses$21,685 $21,968 
Current maturities of long-term lease obligations1,674 863 
Total current liabilities23,359 22,831 
Long-term debt, net of financing fees46,238 32,027 
Long-term lease obligations21,271 20,874 
Debt derivative liabilities3,822 2,497 
Other long-term liabilities 3 
Total liabilities94,690 78,232 
Commitments and contingencies - see Note 13
Shareholders’ equity:
Common stock, $0.01 par value per share; 100,000,000 shares authorized; 41,558,929 and 40,618,766 shares issued and outstanding
415 406 
Additional paid-in capital340,212 326,390 
Accumulated deficit(225,346)(203,647)
Total shareholders’ equity115,281 123,149 
Total liabilities and shareholders’ equity$209,971 $201,381 
See notes to condensed consolidated financial statements.
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Axogen, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
(In Thousands, Except Share and Per Share Amounts)
Three Months EndedNine Months Ended
September 30,
2021
September 30,
2020
September 30,
2021
September 30,
2020
Revenues$31,204 $33,428 $95,821 $79,805 
Cost of goods sold5,239 5,697 17,503 16,118 
Gross profit25,965 27,731 78,318 63,687 
Costs and expenses:
Sales and marketing18,370 17,726 55,594 49,854 
Research and development6,404 4,230 17,875 12,915 
General and administrative7,880 6,820 24,912 18,726 
Total costs and expenses32,654 28,776 98,381 81,495 
Loss from operations(6,689)(1,045)(20,063)(17,808)
Other (expense) income:
Investment income17 28 80 576 
Interest expense(417)(397)(1,427)(459)
Change in fair value of derivatives(46)(71)(152)(71)
Other expense(6)6 (137)(14)
Total other (expense) income, net(452)(434)(1,636)32 
Net Loss$(7,141)$(1,479)$(21,699)$(17,776)
Weighted average common shares outstanding — basic and diluted41,467,596 40,093,588 41,087,568 39,873,167 
Loss per common share — basic and diluted$(0.17)$(0.04)$(0.53)$(0.45)
See notes to condensed consolidated financial statements.
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Axogen, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(In Thousands)
Nine Months Ended
September 30,
2021
September 30,
2020
Cash flows from operating activities:
Net loss$(21,699)$(17,776)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation2,059 993 
Amortization of right-of-use assets1,418 1,282 
Amortization of intangible assets148 111 
Amortization of deferred financing fees384 22 
Provision for bad debt(145)(115)
Provision for inventory write-down2,850 2,108 
Change in fair value of derivatives152 71 
Change in investment gains and losses49 (29)
Share-based compensation9,410 5,725 
Change in operating assets and liabilities:
Accounts receivable(804)(1,700)
Inventory(5,774)(176)
Prepaid expenses and other1,146 (844)
Accounts payable and accrued expenses(927)(911)
Operating lease obligations(154)(1,213)
Cash paid for interest portion of finance leases(1)(2)
Contract and other liabilities(3)(9)
Net cash used in operating activities(11,891)(12,463)
Cash flows from investing activities:
Purchase of property and equipment(20,641)(18,907)
Economic development grant proceeds950  
Purchase of investments(39,139)(41,794)
Proceeds from sale of investments49,300 63,483 
Cash payments for intangible assets(534)(393)
Net cash (used in) provided by investing activities(10,064)2,389 
Cash flows from financing activities:
Proceeds from the issuance of long-term debt15,000 35,000 
Proceeds from the paycheck protection program 7,820 
Repayment of paycheck protection program (7,820)
Payments for debt issuance costs (642)
Payments of employee tax withholding in exchange of common stock awards (665)
Cash paid for debt portion of finance leases(12)(10)
Proceeds from exercise of stock options4,421 2,276 
Net cash provided by financing activities19,409 35,959 
Net (decrease) increase in cash, cash equivalents, and restricted cash(2,546)25,885 
Cash, cash equivalents, and restricted cash, beginning of period55,609 41,724 
Cash, cash equivalents and restricted cash, end of period$53,063 $67,609 
Supplemental disclosures of cash flow activity:
Cash paid for interest, net of capitalized interest$646 $379 
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of fixed assets in accounts payable and accrued expenses$1,460 $1,271 
Obtaining a right-of-use asset in exchange for a lease liability$1,375 $14,119 
Embedded derivative associated with the long-term debt$1,173 $2,562 
Acquisition of intangible assets in accounts payable and accrued expenses$261 $ 
See notes to condensed consolidated financial statements.
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Axogen, Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(unaudited)
(In Thousands, Except Share Amounts)
Common StockAdditional Paid-in
Capital
Accumulated
Deficit
Total Shareholders'
Equity
SharesAmount
Three Months Ended September 30, 2021
Balance at June 30, 202141,337,108 $413 $336,495 $(218,205)$118,703 
Net Loss— — — (7,141)(7,141)
Stock-based compensation— — 2,911 — 2,911 
Issuance of restricted and performance stock units67,249 1 (1)—  
Exercise of stock options and employee stock purchase plan154,572 1 807 — 808 
Balance at September 30, 202141,558,929 $415 $340,212 $(225,346)$115,281 
Nine Months Ended September 30, 2021
Balance at December 31, 202040,618,766 $406 $326,390 $(203,647)$123,149 
Net Loss— — — (21,699)(21,699)
Stock-based compensation— — 9,410 — 9,410 
Issuance of restricted and performance stock units206,193 2 (2)—  
Exercise of stock options and employee stock purchase plan733,970 7 4,414 — 4,421 
Balance at September 30, 202141,558,929 $415 $340,212 $(225,346)$115,281 
Three Months Ended September 30, 2020
Balance at June 30, 202040,022,499 $400 $315,518 $(196,158)$119,760 
Net Loss— — — (1,479)(1,479)
Stock-based compensation— — 2,947 — 2,947 
Issuance of restricted and performance stock units22,529   —  
Shares surrendered by employees to pay tax withholdings(1,230)— (8)— (8)
Exercise of stock options and employee stock purchase plan80,043 1 492 — 493 
Balance at September 30, 202040,123,841 $401 $318,949 $(197,637)$121,713 
Nine Months Ended September 30, 2020
Balance at December 31, 201939,589,755 $396 $311,618 $(179,861)$132,153 
Net Loss— — — (17,776)(17,776)
Stock-based compensation— — 5,725 — 5,725 
Issuance of restricted and performance stock units168,311 2 (2)—  
Shares surrendered by employees to pay tax withholdings(38,086)(1)(664)— (665)
Exercise of stock options and employee stock purchase plan403,861 4 2,272 — 2,276 
Balance at September 30, 202040,123,841 $401 $318,949 $(197,637)$121,713 
See notes to condensed consolidated financial statements.
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Axogen, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(In Thousands, Except Per Share Amounts)
Unless the context otherwise requires, all references in these Notes to “Axogen,” the “Company," “we,” “us” and “our” refer to Axogen, Inc. and its wholly owned subsidiaries Axogen Corporation (“AC”), Axogen Processing Corporation, and Axogen Europe GmbH.
1.Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company as of September 30, 2021 and December 31, 2020 and for the three and nine months ended September 30, 2021 and 2020. The Company’s condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and therefore, do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2020, which are included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2020. The interim condensed consolidated financial statements are unaudited and in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results for the periods presented. Results for interim periods are not necessarily indicative of results for the full year. All intercompany accounts and transactions have been eliminated in consolidation.
The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the full year due primarily to the impact of the continued uncertainty of general economic conditions that may impact our markets for the remainder of fiscal year 2021. Specifically, there can be no assurances that resurgences of coronavirus (“COVID-19”) will not affect future results.
2.Summary of Significant Accounting Policies
Cash and Cash Equivalents and Concentration
The Company considers highly liquid investments with maturities of three months or less at the date of acquisition as cash equivalents in the accompanying condensed consolidated financial statements. The Company has not experienced any losses related to these balances; however, as of September 30, 2021, $45,962 of the cash and cash equivalents balance was in excess of Federal Deposit Insurance Corporation limits. As of September 30, 2021 and December 31, 2020, the Company had restricted cash balances of $6,333 and $6,842, respectively. The September 30, 2021 and December 31, 2020 balances both include $6,000, which represents collateral for an irrevocable standby letter of credit. The September 30, 2021 and December 31, 2020 balances include $83 and $842, respectively, which is the balance of the Heights Union Escrow Account (See Note 13 - Commitments and Contingencies). Additionally, the September 30, 2021 balance includes an additional irrevocable standby letter of credit in the amount of $250 (See Note 10 - Long Term Debt).
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statement of cash flows:
(In thousands)September 30,
2021
December 31,
2020
Cash and cash equivalents$46,730 $48,767 
Restricted cash6,333 6,842 
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows$53,063 $55,609 

Revenue Recognition
The Company enters into contracts to sell and distribute products and services to hospitals and surgical facilities for use in caring for patients with peripheral nerve damage or transection. Revenue is recognized when the Company has met its performance obligations pursuant to its contracts with its customers in an amount that the Company expects to be entitled to in exchange for the transfer of control of the products and services to the Company’s customers.
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In the case of products or services sold to a customer under a distribution or purchase agreement, the customers are granted exclusive distribution rights to sell the implants internationally in a territory defined by the contract. These international distributor agreements contain provisions that allow the Company to terminate the distribution agreement with the distributor, and upon termination, the right to repurchase inventory from the distributor at the distributor’s cost. The Company has determined that its contractual rights to repurchase distributor inventory upon termination of the distributor agreement are not substantive and do not impact the timing of when control transfers; and, therefore, the Company has determined it is appropriate to recognize revenue when: i) the product is shipped via common carrier; or ii) the product is delivered to the customer or distributor, depending on the terms of the agreement. Determining the timing of revenue recognition for such contracts is subject to judgment, because an evaluation must be made regarding the distributor’s ability to direct the use of, and obtain substantially all of the remaining benefits from, the implants received from the Company. Changes in these assessments could have an impact on the timing of revenue recognition from sales to distributors.
A portion of the Company’s product revenue is generated from consigned inventory maintained at hospitals and independent sales agencies, and also from inventory physically held by field sales representatives. For these types of product sales, the Company retains control until the product has been used or implanted, at which time revenue is recognized.
The Company accounts for shipping and handling activities as a fulfillment cost rather than a separate performance obligation. Amounts billed to customers for shipping and handling are included as part of the transaction price and recognized as revenue when control of the underlying products is transferred to the customer. The related shipping and freight charges incurred by the Company are included in cost of goods sold.
The Company operates in a single reportable segment of peripheral nerve repair, offers similar products to its customers, and enters into consistently structured arrangements with similar types of customers. As such, the Company does not disaggregate revenue from contracts with customers as the nature, amount, timing and uncertainty of revenue and cash flows does not materially differ within and among the contracts with customers.
The contract with the customer states the final terms of the sale, including the description, quantity, and price of each implant distributed. The payment terms and conditions in the Company’s contracts vary; however, as a common business practice, payment terms are typically due in full within thirty to sixty days of delivery. Since the customer agrees to a stated price in the contract that does not vary over the contract term, the contracts do not contain any material types of variable consideration, and contractual rights of return are not material. The Company has several contracts with distributors in international markets which include consideration paid to the customer in exchange for distinct marketing and other services. The Company records such consideration paid to the customer as a reduction to revenue from the contracts with those distributor customers.
In connection with the Acroval Neurosensory and Motor Testing System, the Company sold extended warranty and service packages to some of its customers who purchased this evaluation and measurement tool, and the prepayment of these extended warranties represent contract liabilities until the performance obligations are satisfied ratably over the term of the contract. The sale of the aforementioned extended warranty represents the only performance obligation the Company satisfies over time and creates the contract liability disclosed below. The opening and closing balances of the Company’s contract receivables and liabilities are as follows:
Contract Balances
(In thousands)Net ReceivablesContract Liabilities, CurrentContract Liabilities, Long-Term
Opening, January 1, 2020$16,944 $14 $15 
Closing, September 30, 202018,758 14 6 
Increase (decrease)1,814  (9)
Opening, January 1, 2021$17,618 $14 $3 
Closing, September 30, 202118,567 14  
Increase (decrease)949  (3)


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Allowance for Doubtful Accounts Receivable and Concentration of Credit Risk
The Company evaluates the collectability of accounts receivable to determine the appropriate allowance for doubtful accounts. In determining the amount of the allowance, the Company considers aging of account balances, historical credit losses, customer-specific information, the current economic environment, supportable forecasts and other relevant factors. An increase to the allowance for doubtful accounts results in a corresponding increase in general and administrative expense. The Company reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. The Company’s history of write-offs has not been significant. The allowance for doubtful accounts balance was approximately $173 and $416 at September 30, 2021 and December 31, 2020, respectively.
Concentrations of credit risk with respect to accounts receivable are limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the credit risk. The Company also controls credit risk through credit approvals and monitoring procedures.

Derivative Instruments
The Company analyzes all financial instruments with features under Accounting Standards Codification ("ASC") 480, “Distinguishing Liabilities from Equity” and ASC 815, “Derivatives and Hedging”. The Company also reviews debt agreements for embedded features. If these features are not clearly and closely related to the debt host, they meet the definition of a derivative and require bifurcation from the host. All derivative instruments are recorded on the balance sheet at their respective fair values. The Company will adjust the carrying value of the derivative liability to fair value at each subsequent reporting date. The changes in the value of the derivatives are recorded in the consolidated statement of operations in the period in which they occur.

Net Loss Per Share
Basic net loss per share is computed by dividing reported net loss by the weighted average number of common shares outstanding for the reported period. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock of the Company during the reporting period. Diluted net loss per share is computed by dividing net loss by the sum of the weighted average number of common shares and the number of potential dilutive common share equivalents outstanding during the period. Potential dilutive common share equivalents consist of the incremental common shares issuable upon the exercise of vested share options. Potential dilutive common share equivalents consist of stock options, restricted stock units (“RSUs”), and performance stock units (“PSUs”).
Due to net losses for the three and nine months ended September 30, 2021 and 2020, basic and diluted net loss per share were the same, as the effect of potentially dilutive securities would have been anti-dilutive.
3.Recently Issued Standards to be Adopted
The Company’s management has reviewed and considered all other recent accounting pronouncements and believe there are none that could potentially have a material impact on the Company’s consolidated financial condition, results of operations, or disclosures.

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4.Inventory
Inventory is comprised of unprocessed tissue, work-in-process, Avance® Nerve Graft, Axoguard® Nerve Connector, Axoguard® Nerve Protector, Axoguard® Nerve Cap, Acroval® Neurosensory and Motor Testing System, Axotouch® Two-Point Discriminator and supplies. Inventory is valued at the lower of cost (first-in, first-out) or net realizable value and consists of the following:
(In thousands)September 30,
2021
December 31,
2020
Finished goods$10,687 $8,876 
Work in process580 751 
Raw materials4,186 2,902 
Inventory$15,453 $12,529 
Included within Inventory at December 31, 2020 is Avive® Soft Tissue Membrane ("Avive"). On May 17, 2021, the Company announced that it would suspend market availability of Avive effective June 1, 2021 pending ongoing discussions with the U.S. Food and Drug Administration (FDA) regarding the regulatory classification of Avive. The Company recorded a write-down of Avive inventory for an amount of $1,251 recorded in cost of goods sold in the condensed consolidated statement of operations for the nine months ended September 30, 2021 related to this announcement.
The Company monitors the shelf life of its products and historical expiration and spoilage trends and writes down inventory based on the estimated amount of inventory that may not be distributed before expiration or spoilage. The provision for inventory write-down was $395 and $484 for the three months ended September 30, 2021 and 2020, respectively. The provision for inventory write down was $2,850 (including the reserve for Avive of $1,251) and $2,108 for the nine months ended September 30, 2021 and 2020, respectively.
5.Fair Value Considerations
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for classification and disclosure of fair value measurements as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company classifies cash equivalents and investments according to the hierarchy of techniques used to determine fair value based on the types of inputs. The Company has elected the Fair Value Option for all investments in debt securities.
On June 30, 2020, the Company entered into a seven-year financing agreement with Oberland Capital (the “Oberland Facility” - See Note - 10 Long-Term Debt), and concluded that the term debt instrument included certain embedded features that required separate accounting (the “Debt Derivative Liability”) and that the equity contract entered into concurrently was required to be classified as a liability and recorded at its fair value. These instruments were determined to be financial liabilities requiring Level 3 fair value measurements.
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The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020:
(In thousands)(Level 1)(Level 2)(Level 3)Total
September 30, 2021
Assets:
Money market funds$33,334 $ $ $33,334 
U.S. government securities8,021   8,021 
Commercial paper 36,968  36,968 
Total assets$41,355 $36,968 $ $78,323 
Liabilities
Oberland facility$ $ $49,837 $49,837 
Debt derivative liabilities 3,822 3,822 
Total liabilities$ $ $53,659 $53,659 
(Level 1)(Level 2)(Level 3)Total
December 31, 2020
Assets:
Money market funds$23,044 $ $ $23,044 
U.S. government securities12,123   12,123 
Corporate bonds 6,408  6,408 
Commercial paper 36,668  36,668 
Total assets$35,167 $43,076 $ $78,243 
Liabilities
Oberland facility$ $ $36,855 $36,855 
Debt derivative liability 2,4972,497
Total liabilities$ $ $39,352 $39,352 
Oberland Facility

The Company estimates the fair value of long-term debt under the Oberland Facility using a discounted cash flow analysis and rates being offered for similar loans to borrowers with similar credit ratings. The discounted cash flow model uses unobservable inputs, including estimates of discount rates and loan prepayments. Both tranches of the Oberland Facility are classified as Level 3. The estimated fair value of the Company’s long-term debt under the Oberland Facility was $49,837 and $36,855 at September 30, 2021 and December 31, 2020, respectively (See Note 10 - Long-Term Debt).
Debt Derivative Liabilities
The Debt Derivative Liabilities are measured using a ‘with and without’ valuation model to compare the fair value of the Oberland Facility including the identified embedded derivative features and the fair value of a plain vanilla note with the same terms. The fair value of the Oberland Facility including the embedded derivative features was determined using a probability-weighted expected return model based on four potential settlement scenarios for the Oberland Facility due to (a) a mandatory prepayment event between January 1, 2024 and the respective maturity dates of June 30, 2027 and June 30, 2028 for the first and second tranche, respectively; (b) the prepayment of the Oberland Facility at the Company’s option; and (c) the repayment of the Oberland Facility at its maturity in accordance with the terms of the debt agreement. The estimated settlement value of each scenario, which would include any required make-whole payment (See Note 10 - Long-Term Debt) is then discounted to present value using a discount rate that is derived based on the initial terms of the Oberland Facility at issuance and corroborated utilizing a synthetic credit rating analysis.
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The significant inputs that are included in the valuation of the Debt Derivative Liability - first tranche include:
September 30, 2021December 31, 2020
Input
Remaining term (years)5.756.50
Maturity dateJune 30, 2027June 30, 2027
Coupon rate9.50 %9.50 %
Revenue participation paymentsMaximum each yearMaximum each year
Discount rate8.78 %(1)8.70 %(1)
Probability of mandatory prepayment before 20245.0 %(1)5.0 %(1)
Estimated timing of mandatory prepayment event before 2024December 31, 2023(1)December 31, 2023(1)
Probability of mandatory prepayment 2024 or after15.0 %(1)15.0 %(1)
Estimated timing of mandatory prepayment event 2024 or afterMarch 31, 2026(1)March 31, 2026(1)
Probability of optional prepayment event5.0 %(1)5.0 %(1)
Estimated timing of optional prepayment eventDecember 31, 2025(1)December 31, 2025(1)
(1)Represents a significant unobservable input
The significant inputs that are included in the valuation of the Debt Derivative Liability - second tranche include:
September 30, 2021
Input
Remaining term (years)6.75
Maturity dateJune 30, 2028
Coupon rate9.5
Revenue participation paymentsMaximum each year
Discount rate11.3 %(1)
Probability of mandatory prepayment before 20245.0(1)
Estimated timing of mandatory prepayment event before 2024December 31, 2023(1)
Probability of mandatory prepayment 2024 or after15.0(1)
Estimated timing of mandatory prepayment event 2024 or afterMarch 31, 2026(1)
Probability of optional prepayment event5.0(1)
Estimated timing of optional prepayment eventDecember 31, 2025(1)
(1)Represents a significant unobservable input
There were no changes in the levels or methodology of the measurement of financial assets or liabilities during the three and nine months ended September 30, 2021.  The maturity dates of the Company’s investments are less than one year.
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The following represents the rollforward of the fair value of instruments classified as Level 3 measurements for the three and nine months ended September 30, 2021 (in thousands):
Quarter Ending September 30, 2021
Beginning Balance, July 1, 2021$54,439 
Change in fair value of Oberland Facility(826)
Change in fair value of debt derivatives46 
Ending Balance, September 30, 2021$53,659 
Nine Months Ending September 30, 2021
Beginning Balance, January 1, 2021$39,352 
Addition of Oberland Facility - second tranche13,827 
Addition of debt derivative - second tranche1,173 
Change in fair value of Oberland Facility(845)
Change in fair value of debt derivatives152 
Ending Balance, September 30, 2021$53,659 

6.Prepaid Expenses and Other
Prepaid expenses and other consist of the following:
(In thousands)September 30,
2021
December 31,
2020
Prepaid insurance$796 $2,596 
Stock option receivable55 2 
Litigation receivable23 23 
Prepaid events224 203 
Prepaid marketing416 587 
Prepaid software license259 220 
Prepaid professional fees216 251 
Other prepaid items907 414 
Prepaid Expenses and Other$2,896 $4,296 
Our policy year for our insurance runs on a calendar year and as such a significant portion of the policy payment is made on or about the beginning of the new year and amortized to expense throughout the remaining year.

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7.Property and Equipment, Net
Property and equipment consist of the following:
(In thousands)September 30,
2021
December 31,
2020
Furniture and equipment$4,253 $2,334 
Leasehold improvements14,792 12,983 
Processing equipment3,840 2,634 
Land731 731 
Projects in process39,596 24,540 
Property and equipment, at cost63,212 43,223 
Less: accumulated depreciation and amortization(6,884)(4,825)
Property and equipment, net$56,328 $38,398 
Depreciation expense for the three months ended September 30, 2021 and 2020 was $654 and $374, respectively. Depreciation expense for the nine months ended September 30, 2021 and 2020 was $2,059 and $993, respectively. The significant increase in projects in process is related to our Axogen Processing Center (“APC”) facility (See Note 13 - Commitments and Contingencies).
On September 20, 2018, the Company entered into an agreement (the “Heights Agreement”) with Heights Union, LLC, a Florida limited liability company (“Heights Union”), for the lease of seventy-five thousand square feet of office space in Tampa, Florida (See Note 13 - Commitments and Contingencies). In May 2020, the Company entered into a construction escrow agreement with Heights Union and Commonwealth Land Title Insurance Company (“Escrow Agent”), which provided for the establishment of a federally insured escrow bank account (the “Escrow Account”) to hold Company funds to be used for tenant improvements in excess of the tenant allowance as provided in the Heights Agreement. The Company deposited $6,289 into the Escrow Account for use in completing construction of the tenant improvements. The Escrow Agent will disburse the funds upon joint written instructions from Heights Union and the Company. During the second quarter of 2021, $759 was disbursed from the Escrow Account and recorded in the property and equipment account on the condensed consolidated balance sheet. As of September 30, 2021, $83 remained in the Escrow Account and is recorded as restricted cash in the condensed consolidated balance sheet.
8.Intangible Assets, Net
The Company’s intangible assets consist of the following:
September 30, 2021December 31, 2020
(In thousands)Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Amortized intangible assets
Patents$2,258 $(206)$2,052 $1,496 $(139)$1,357 
License agreements1,101 (826)275 1,093 (745)348 
Total amortizable intangible assets$3,359 $(1,032)$2,327 $2,589 $(884)$1,705 
Unamortized intangible assets
Trademarks$374 $— $374 $349 $— $349 
Total intangible assets$3,733 $(1,032)$2,701 $2,938 $(884)$2,054 

License agreements are being amortized over periods ranging from 17-20 years. Patent costs are being amortized over periods of up to 20 years. Amortization expense was approximately $52 and $39 for the three months ended September 30, 2021 and 2020, respectively. Amortization expense was approximately $148 and $111 for the nine months ended September 30, 2021 and 2020, respectively. 
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As of September 30, 2021, future amortization of license agreements and patents is as follows:
Year Ending December 31,
(In thousands)
2021 (excluding the nine months ended September 30, 2021)$56 
2022222 
2023196 
2024119 
2025119 
Thereafter1,615 
Total$2,327 
License Agreements
The Company has entered into multiple license agreements (together, the “License Agreements”) with the University of Florida Research Foundation and the University of Texas at Austin. Under the terms of the License Agreements, the Company acquired exclusive worldwide licenses for underlying technology used in repairing and regenerating nerves. The licensed technologies include the rights to issued patents and patents pending in the United States and international markets. The effective term of the License Agreements extends through the term of the related patents and the agreements may be terminated by the Company with 60 days’ prior written notice. Additionally, in the event of default, licensors may terminate an agreement if the Company fails to cure a breach after written notice. The License Agreements contain the key terms listed below:
The Company pays royalty fees ranging from 1% to 3% under the License Agreements based on net sales of licensed products. One of the agreements also contains a minimum royalty of $13 per quarter, which may include a credit in future quarters in the same calendar year for the amount the minimum royalty exceeds the royalty fees. Also, when the Company pays royalties to more than one licensor for sales of the same product, a royalty stack cap applies, capping total royalties at 3.75%;
If the Company sublicenses technologies covered by the License Agreements to third parties, the Company would pay a percentage of sublicense fees received from the third party to the licensor. Currently, the Company does not sublicense any technologies covered by License Agreements. The Company is not considered a sub-licensee under the License Agreements and does not owe any sub-licensee fees for its own use of the technologies;
The Company reimburses the licensors for certain legal expenses incurred for patent prosecution and defense of the technologies covered by the License Agreements; and
Currently, under the University of Texas at Austin’s agreement, the Company would owe a milestone fee of $15 upon receiving a Phase II Small Business Innovation Research or Phase II Small Business Technology Transfer grant involving the licensed technology. The Company has not received either grant and does not owe such a milestone fee.  A milestone fee to the University of Florida Research Foundation of $2 is due if the Company receives FDA approval of its Avance Nerve Graft, a milestone fee of $25 is due upon the first commercial use of certain licensed technology to provide services to manufacture products for third parties and a milestone fee of $10 is due upon the first use to manufacture products that utilize certain technology that is not currently incorporated into the Company's products.
Royalty fees were approximately $687 and $701 during the three months ended September 30, 2021 and 2020, respectively, and approximately $2,037 and $1,635 during the nine months ended September 30, 2021 and 2020, respectively, and are included in sales and marketing expense on the accompanying condensed consolidated statements of operations.

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9.Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
(In thousands)September 30,
2021
December 31,
2020
Accounts payable$6,428 $4,597 
Accrued expenses6,361 3,778 
Accrued compensation8,896 13,593 
Accounts Payable and Accrued Expenses$21,685 $21,968 
10.Long-Term Debt, Net of Financing Fees
The carrying value of the Company’s outstanding debt consists of the following:
(In thousands)September 30, 2021December 31, 2020
Oberland Facility - first tranche$35,000 $35,000 
Oberland Facility - second tranche15,000  
Less - unamortized debt discount and deferred financing fees(3,762)(2,973)
Long-Term Debt, Net of Financing Fees$46,238 $32,027 
Oberland Facility
On June 30, 2020, the Company entered into a seven-year financing agreement with Oberland Capital and obtained the first tranche of $35,000 at closing. On June 30, 2021, the second tranche of $15,000 was drawn down by the Company. The third and final tranche of $25,000 may be drawn at the Company’s option upon achieving two consecutive quarters with revenue of $28,000. The financing costs for this facility were approximately $642 and were recorded as a contra liability to the debt facility. As of September 30, 2021, the Company has paid all of the financing costs.

The Oberland Facility requires quarterly interest payments for seven years. Interest is calculated as 7.5% plus the greater of LIBOR or 2.0% (9.5% as of September 30, 2021). Each tranche of the Oberland Facility, if and when issued, will have a term of seven years from the date of issuance (with the first tranche issued on June 30, 2020 maturing on June 30, 2027 and the second tranche issued on June 30, 2021 maturing on June 30, 2028).  In connection with the Oberland Facility, the Company entered into a revenue participation agreement with Oberland Capital, which provides that, among other things, a quarterly royalty payment as a percentage of the Company’s net revenues, up to $70 million in any given fiscal year, subject to certain limitations set forth therein, during the period commencing on the later of (i) April 1, 2021 and (ii) the date of funding of a tranche of the loan, and ending on the date upon which all amounts owed under the Oberland Facility have been paid in full (the “Revenue Participation Agreement”).  Payments commenced on September 30, 2021. This royalty structure results in approximately 1.0% per year of additional interest payments on the outstanding loan amount. The Company recorded $337 and $590 as interest expense for this revenue participation agreement for the three and nine months ended September 30, 2021, respectively. The Company pays the quarterly debt interest on the last day of the quarter, and for the three and nine months ended September 30, 2021, paid $1,218 and $2,890, respectively, to Oberland Capital. The Company has capitalized interest of $1,338 and $2,526 for the three and nine months ended September 30, 2021, respectively, towards the costs to construct and retrofit its Axogen Processing Center in Vandalia, OH (See Note 13 - Commitments and Contingencies). To date, the Company has capitalized interest of $3,495 related to this project. The capitalized interest is recorded as part of property and equipment in the condensed consolidated balance sheets.
Additionally, Oberland Capital had the right to purchase up to $3,500 worth of the Company's common stock from the Company in one transaction at any time after closing of the Oberland Facility until the later of (i) the date all amounts due under the Oberland Facility are repaid and (ii) June 30, 2027 (the “Oberland Option”). The purchase price of the common stock will be calculated based on the 45-day moving average of the closing stock price on the day prior to the purchase. On December 10, 2020, Oberland Capital exercised in full its option under the Option Agreement. The exercise price was determined to be $14.13, resulting in gross proceeds to the Company of approximately $3,500 and the issuance of 247,699 shares to TPC Investments II LP, a wholly owned subsidiary of Oberland Capital. In conjunction with the issuance, Oberland Capital received certain protective rights (including protection from down-round stock issuances) for a period of one year subsequent to the issuance.
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The amounts outstanding under the Oberland Facility may be accelerated upon certain events, including: (a) required mandatory prepayments upon an asset sale; (b) in the event the Company is subject to (i) any litigation brought by a Governmental Authority (as defined in the Oberland Facility) including intervention after litigation is commenced by a Person (as defined in the Oberland Facility), or (ii) any final administrative action by a Governmental Authority, in each case arising out of or in connection with any of the Company’s registry studies, payments made to doctors or training activities with respect to healthcare professionals (excluding certain final administrative action that have been fully and finally resolved by the parties pursuant to a settlement agreement) or (c) upon the occurrence of an event of default (either automatically or at the option of Oberland Capital depending on the nature of the event). In addition, the Company has the right to prepay any amounts outstanding under the Oberland Facility. Upon maturity or upon such earlier repayment of the Oberland Facility, the Company will repay the principal balance and provide a make-whole payment calculated to generate an internal rate of return to Oberland Capital of at least 11.5%, less the total of all quarterly interest and royalty payments previously paid to Oberland Capital.
Upon the occurrence of an event of default, the interest rate incurred on amounts outstanding under the Oberland Facility will be increased by 4%. The Oberland Facility includes a financial covenant requiring the Company to achieve revenue targets of $8,750 for the third and four quarters of 2020, $17,500 for the first and second quarter of 2021 and $20,000 for each quarter thereafter. In the event of a failure to meet such covenant the Company may avoid a default by electing to be subject to a liquidity covenant and meeting all of the obligations required by such covenant. Specifically, the liquidity covenant provides that the Company must maintain on deposit in a cash collateral account an amount not less than 1.1 times the aggregate outstanding principal balance of all outstanding loan amounts. The borrowings under the Oberland Facility are secured by substantially all of the assets of the Company. As of September 30, 2021, the Company was in compliance with all covenants.
Accounting Considerations
The Company assessed the accounting impact of the Oberland Facility and the related agreements entered into with Oberland Capital. The Company concluded that the Oberland Facility and the Revenue Participation Agreement should be assessed on a combined unit of account basis (with the Revenue Participation Agreement being considered as an embedded feature with the Oberland Facility), and that the Oberland Option should be considered as a separate freestanding instrument for analysis purposes.
In relation to the Oberland Facility and Revenue Participation Agreement, the Company assessed the identified embedded features to determine if they would require separate accounting. In performing this assessment, the Company concluded the following embedded features met the definition of a derivative and would not be considered clearly and closely related to the debt instrument, requiring separate accounting as bifurcated derivatives:
Mandatory prepayments upon an asset sale or litigation involving the government, including the make-whole payment (put rights)
Optional or automatic prepayment upon an event of default (put rights)
Payments under the Revenue Participation Agreement (contingent interest feature)
Additional interest upon events of default (contingent interest feature)

The Company considered these separable embedded features on a combined basis as a single derivative feature. The Company estimated the fair value of these features as $2,387 as of the date of issuance of the Oberland Facility and recorded this value as a debt derivative liability. As a result of the second tranche draw, the Company recorded an additional derivative and estimated the fair value to be $1,173.
Other credit facilities
The Company maintains restricted cash of $6,333 and $6,842 at September 30, 2021 and December 31, 2020, respectively. The September 30, 2021 and December 31, 2020 balances both include $6,000, which represents collateral for an irrevocable standby letter of credit. In March 2021, the Company entered into an agreement which required an additional irrevocable standby letter of credit in the amount of $250. The remaining activity in the account relates to the Heights Union Escrow Account (See Note 13 - Commitments and Contingencies).
11.Stock Incentive Plans
The Company maintains two share-based incentive plans: the Axogen 2019 Long-Term Incentive Plan (“2019 Plan”) and the Axogen 2017 Employee Stock Purchase Plan (“2017 ESPP”).

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Overview of Equity Incentive Plan
At the 2019 Annual Meeting of Shareholders held on August 14, 2019, the shareholders approved the Axogen 2019 Long-Term Incentive Plan, which allows for the award of incentive stock options, non-qualified stock options, PSUs and RSUs to employees, directors and consultants. Awards under the 2019 Plan are priced at, or above, the fair market value of the Company's common stock on the date of grant. The number of shares of common stock authorized for issuance under the 2019 Plan is (a) 3,385,482 shares, comprised of (i) 3,000,000 new authorized shares and (ii) 385,482 unallocated shares of common stock available for issuance as of August 14, 2019 pursuant to the Company’s 2010 Stock Incentive Plan, as amended and restated (the “2010 Plan”), that were not then subject to outstanding awards; plus (b) shares under the 2010 Plan and the 2019 Plan that are cancelled, forfeited, expired, unearned or settled in cash, in any such case that does not result in the issuance of common stock. Following shareholder approval of the 2019 Plan, no future awards will be made under the 2010 Plan. At the 2021 Annual Meeting of Shareholders held on May 10, 2021, the shareholders approved an additional 2,500,000 shares to be allocated for issuance under the 2019 Plan. As of September 30, 2021, 2,924,078 shares of common stock were available for issuance under the 2019 Plan.
The Company recognized stock-based compensation expense, which consisted of compensation expense related to employee stock options, PSUs and RSUs based on the value of share-based payment awards that are ultimately expected to vest during the period and stock-based compensation expense related to the 2017 ESPP, of approximately $2,911 and $2,947 for the three months ended September 30, 2021 and 2020, respectively, and approximately $9,410 and $5,725 for the nine months ended September 30, 2021 and 2020, respectively.
Stock Options
The options granted to employees prior to July 1, 2017 typically vest 25% 1 year after the grant date and 12.5% every six months thereafter for the remaining three-year period until fully vested after four years. The options granted to employees after July 1, 2017 typically vest 50% two years after the grant date and 12.5% every six months thereafter for the remaining two-year period until fully vested after four years. The options granted to directors and certain options granted from time to time to certain executive officers have vested ratably over three years or 25% per quarter over one year. Options typically have terms ranging from seven to ten years.
The Company estimates the fair value of each option award issued under such plans on the date of grant using a Multiple Point Black-Scholes option-pricing model which uses a weighted average of historical volatility and peer company volatility. The Company determines the expected life of each award giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. The Company uses the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life of the award.

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A summary of the stock option activity is as follows:
OptionsWeighted Average Exercise PriceWeighted Average Remaining Contractual LifeAggregate Intrinsic Value (in thousands)
Outstanding, December 31, 20203,516,484 $12.79 5.93$25,718 
Granted629,348 $20.20 
Exercised(698,150)$5.74 
Cancelled(173,001)$16.75 
Outstanding, September 30, 20213,274,681 $15.46 6.59$12,878 
Exercisable, September 30, 20211,890,173 $14.42 5.05$9,324 

The Company used the following weighted-average assumptions for options granted during the nine months ended September 30, 2021:
Nine Months Ended
September 30, 2021
Expected term (in years)5.88
Expected volatility58.41  %
Risk free rate1.01  %
Expected dividends  %
Restricted and Performance Stock Units
RSUs granted to employees have a requisite service period of four years. The RSUs granted to directors and certain RSUs granted from time to time to certain executive officers have vested ratably over three years or over one year. The Company expenses the fair value of RSUs on a straight-line basis over the requisite service period. PSUs generally have a requisite service period of three years and are subject to graded vesting conditions based on revenue goals of the Company. The Company expenses their fair value over the requisite service period.
A summary of the status of non-vested RSUs/PSUs as of September 30, 2021 and the changes during the nine months then ended are presented below:
Outstanding Stock Units
Stock Units