axgn-20220930

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, 2022


☐			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 class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.01 par value	AXGN	The 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 filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller 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 November 1, 2022, the registrant had 42,286,590 shares of common stock outstanding.

Table of Contents


Part I - Financial Information
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheet as of September 30, 2022 and December 31, 2021 (Unaudited)	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021 (Unaudited)	4
	Condensed Consolidated Statements of Cash flows for the nine months ended September 30, 2022 and 2021 (Unaudited)	5
	Condensed Consolidated Statements of Changes in Shareholders' Equity for the three and nine months ended September 30, 2022 and 2021 (Unaudited)	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	29

Part II - Other Information

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 3.	Defaults Upon Senior Securities	30

Item 4.	Mine Safety Disclosures	31

Item 5.	Other Information	31

Item 6.	Exhibits	31

	Signatures	32

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. These statements are based on management's current expectations or predictions of future conditions, events, or results based on various assumptions and management's estimates of trends and economic factors in the markets in which the Company is active, as well as its business plans. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “projects,” “forecasts,” “continue,” “may,” “should,” “will,” “goals,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Actual results or event could differ materially from those described in any forward-looking statements as a result of various factors, including, without limitation,, the impact of the COVID-19 and any and all variants thereof on our business, including but not limited to global supply chain issues; hospital staffing challenges and its impact on our business; statements regarding our growth, our financial guidance and performance; product development; product potential; Axogen Processing Center renovation timing and expense; sales growth; product adoption; market awareness of our products; anticipated capital requirements, including the potential of future financings; data validation; expected clinical study enrollment, timing and outcomes; our visibility at and sponsorship of conferences and our educational events; regulatory process and approvals; and other factors, including legislative, regulatory, political, geopolitical and economic developments, including record inflation and global business disruption caused by Russia’s invasion of Ukraine and related sanctions, not within our control. 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 risks and uncertainties that affect the Company’s business and its market, particularly those discussed in the risk factors and cautionary statements set forth in the Company’s filings with the SEC, including as described in “Risk Factors” included in Item 1A and "Risk Factor Summary" included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. Forward-looking statements are not guarantees of future performance, and actual results may differ materially from those projected. The forward-looking statements are representative only as of the date they are made and, except as required by applicable law, the Company assumes no responsibility to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or otherwise.

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, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	14,318	$	32,756
Restricted cash	6,251		6,251
Investments	38,792		51,330
Accounts receivable, net of allowance for doubtful accounts of $606 and $276, respectively	21,363		18,158
Inventory	19,116		16,693
Prepaid expenses and other	2,614		1,861
Total current assets	102,454		127,049
Property and equipment, net	74,867		62,923
Operating lease right-of-use assets	14,751		15,193

Intangible assets, net	3,448		2,859

Total assets	$	195,520	$	208,024

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable and accrued expenses	$	22,017	$	22,459
Current maturities of long-term lease obligations	1,530		1,834
Total current liabilities	23,547		24,293

Long-term debt, net of debt discount and financing fees	45,487		44,821
Long-term lease obligations	20,634		20,798
Debt derivative liabilities	4,407		5,562

Total liabilities	94,075		95,474

Commitments and contingencies - see Note 12

Shareholders’ equity:
Common stock, 0.01 par value per share; 100,000,000 shares authorized; 42,272,223 and 41,736,950 shares issued and outstanding	423		417
Additional paid-in capital	355,187		342,765
Accumulated deficit	(254,165)		(230,632)
Total shareholders’ equity	101,445		112,550
Total liabilities and shareholders’ equity	$	195,520	$	208,024

See notes to condensed consolidated financial statements.

Axogen, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(In Thousands, Except Per Share Amounts)


	Three Months Ended				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021

Revenues	$	36,959	$	31,204	$	102,420	$	95,821
Cost of goods sold	6,176		5,239		18,006		17,503
Gross profit	30,783		25,965		84,414		78,318
Costs and expenses:
Sales and marketing	19,792		18,370		60,349		55,594
Research and development	7,050		6,404		20,347		17,875
General and administrative	8,796		7,880		27,817		24,912
Total costs and expenses	35,638		32,654		108,513		98,381
Loss from operations	(4,855)		(6,689)		(24,099)		(20,063)
Other (expense) income:
Investment income	186		17		172		80
Interest expense	(61)		(417)		(664)		(1,427)
Change in fair value of derivatives	469		(46)		1,155		(152)
Other expense	(57)		(6)		(97)		(137)
Total other expense, net	537		(452)		566		(1,636)
Net loss	$	(4,318)	$	(7,141)	$	(23,533)	$	(21,699)

Weighted average common shares outstanding — basic and diluted	42,220,519		41,467,596		42,008,013		41,087,568
Loss per common share — basic and diluted	$	(0.10)	$	(0.17)	$	(0.56)	$	(0.53)

See notes to condensed consolidated financial statements.

Axogen, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In Thousands)


	Nine Months Ended
	September 30, 2022		September 30, 2021
Cash flows from operating activities:
Net loss	$	(23,533)	$	(21,699)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	2,182		2,059
Amortization of right-of-use assets	1,303		1,418
Amortization of intangible assets	198		148
Amortization of debt discount and deferred financing fees	667		384
Provision for bad debt	566		(145)
Provision for inventory write-down	1,381		2,850
Change in fair value of derivatives	(1,155)		152
Investment losses	44		49
Stock-based compensation	11,437		9,410
Change in operating assets and liabilities:
Accounts receivable	(3,695)		(804)
Inventory	(3,804)		(5,774)
Prepaid expenses and other	(828)		1,146
Accounts payable and accrued expenses	(870)		(927)
Operating lease obligations	(1,320)		(154)

Cash paid for interest portion of finance leases	(1)		(1)
Contract and other liabilities	—		(3)
Net cash used in operating activities	(17,428)		(11,891)

Cash flows from investing activities:
Purchase of property and equipment	(13,456)		(20,641)
Economic development grant proceeds	—		950
Purchase of investments	(24,607)		(39,139)
Proceeds from sale of investments	37,100		49,300
Cash payments for intangible assets	(1,028)		(534)
Net cash used in investing activities	(1,991)		(10,064)

Cash flows from financing activities:





Proceeds from the issuance of long-term debt	—		15,000
Cash paid for debt portion of finance leases	(9)		(12)
Proceeds from exercise of stock options and ESPP stock purchases	990		4,421
Net cash provided by financing activities	981		19,409
Net decrease in cash, cash equivalents, and restricted cash	(18,438)		(2,546)
Cash, cash equivalents, and restricted cash, beginning of period	39,007		55,609
Cash, cash equivalents, and restricted cash, end of period	$	20,569	$	53,063

Supplemental disclosures of cash flow activity:
Cash paid for interest, net of capitalized interest	$	—	$	646
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of fixed assets in accounts payable and accrued expenses	$	2,090	$	1,460
Obtaining a right-of-use asset in exchange for a lease liability	$	920	$	1,375
Obtaining of property and equipment in exchange for a lease liability	$	22	$	—
Embedded derivative associated with the long-term debt	$	—	$	1,173
Acquisition of intangible assets in accounts payable and accrued expenses	$	177	$	261

See notes to condensed consolidated financial statements.

Axogen, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(unaudited)

(In Thousands, Except Share Amounts)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Total Shareholders' Equity
	Shares	Amount
Three Months Ended September 30, 2022
Balance at June 30, 2022	42,134,504	$	420	$	351,117	$	(249,847)	$	101,690
Net loss	—	—		—		(4,318)		(4,318)
Stock-based compensation	—	—		3,849		—		3,849
Issuance of restricted and performance stock units	55,934	1		(1)		—		—
Exercise of stock options and employee stock purchase plan	81,785	2		222		—		224
Balance at September 30, 2022	42,272,223	$	423	$	355,187	$	(254,165)	$	101,445

Nine Months Ended September 30, 2022
Balance at December 31, 2021	41,736,950	417		$	342,765	$	(230,632)	$	112,550
Net loss	—	—		—		(23,533)		(23,533)
Stock-based compensation	—	—		11,437		—		11,437
Issuance of restricted and performance stock units	315,275	3		(3)		—		—

Exercise of stock options and employee stock purchase plan	219,998	3		988		—		991
Balance at September 30, 2022	42,272,223	$	423	$	355,187	$	(254,165)	$	101,445

Three Months Ended September 30, 2021
Balance at June 30, 2021	41,337,108	$	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 units	67,249	$	1	$	(1)	$	—	$	—
Exercise of stock options and employee stock purchase plan	154,572	1		807		—		808
Balance at September 30, 2021	41,558,929	$	415	$	340,212	$	(225,346)	$	115,281

Nine Months Ended September 30, 2021
Balance at December 31, 2020	40,618,766	$	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 units	206,193	2		(2)		—		—
Exercise of stock options and employee stock purchase plan	733,970	7		4,414		—		4,421
Balance at September 30, 2021	41,558,929	$	415	$	340,212	$	(225,346)	$	115,281

See notes to condensed consolidated financial statements.

Axogen, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(In Thousands, Except Per Share Amounts)

1.Basis of Presentation

General

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.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company as of September 30, 2022, and December 31, 2021, and for the three and nine months ended September 30, 2022, and 2021. 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, 2021, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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, 2022, 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 2022. Specifically, there can be no assurance that the resurgence of COVID-19 will not affect future results.

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

2.Summary of Significant Accounting Policies

Please see Note 2 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022 for a description of all 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, 2022, $13,818 of the cash and cash equivalents balance was in excess of Federal Deposit Insurance Corporation limits. The Company had restricted cash balances of $6,251 for each of the periods ended September 30, 2022, and December 31, 2021. The September 30, 2022, and December 31, 2021, balances both include $6,000 and $250, which represent collateral for two irrevocable standby letters of credit. See "Note 8 - Long-Term Debt, Net of Debt Discount and Financing Fees."

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows:


(In thousands)	September 30, 2022		December 31, 2021
Cash and cash equivalents	$	14,318	$	32,756
Restricted cash	6,251		6,251
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	20,569	$	39,007

Stock-Based Compensation

The Company measures stock options granted to employees at a premium price based on market conditions, such as the trading price of the Company’s common stock, using a Monte Carlo Simulation model in estimating the fair value at grant date. The determination of the fair value is affected by the Company's stock price, as well as assumptions regarding several subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards. 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. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of operations. The expense has been reduced for forfeitures as they occur.

The Company recognizes expense for all stock-based compensation awards, including stock options, restricted stock units ("RSUs"), and performance stock units ("PSUs") granted to employees eligible for retirement, as defined within the award notice and allowing for continued vesting post-retirement, over the retirement notice period and continuously updates its estimate of expense over the notice period each reporting period if a retirement notice has not been provided.

Costs of Goods Sold

Cost of sales includes direct labor and materials costs related to each product sold or produced, including processing, quality assurance labor and scrap, as well as facility and warehousing overhead supporting our manufacturing operations. All of our manufacturing costs are included in cost of sales.

Shipping and Handling

All shipping and handling costs, including facility and warehousing overhead, directly related to bringing the Company’s products to their final selling destination are in included in selling and marketing expenses. Shipping and handling costs included in sales and marketing were $1,330 and $1,366 for the three months ended September 30, 2022, and 2021, respectively and $3,863 and $3,657 for the nine months ended September 30, 2022, and 2021, respectively.

Recent Accounting Pronouncements

In November 2021, the Financial Accounting Standards ("FASB") amended Accounting Standards Codification ("ASC") 832, Government Assistance (issued under Accounting Standards Update ("ASU") 2021-10, Disclosures by Business Entities about Government Assistance). This amendment requires annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy, including, (1) the types of transactions; (2) the financial statement line items affected by the transaction, and; (3) significant terms and conditions associated with the transactions. The Company adopted the guidance on January 1, 2022 and the adoption of ASU 2021-10 did not to have a material impact on the Company's condensed consolidated financial condition, results of operations or disclosures.

3. Inventory

Inventory consisted of the following (in thousands):


	September 30, 2022		December 31, 2021
Finished goods	$	12,823	$	11,011
Work in process	903		813
Raw materials	5,390		4,869
Inventory	$	19,116	$	16,693

The provision for inventory write-down was $452 and $395 for the three months ended September 30, 2022, and 2021, respectively, and for the nine months ended September 30, 2022, and 2021, the Company had adjustments to the provision for inventory write-downs of $1,381 and $2,850 (including the write-down of Avive inventory of $1,251 in the 2021 period), respectively.

4. Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):


	September 30, 2022		December 31, 2021
Furniture and equipment	$	5,408	$	5,100
Leasehold improvements	15,569		14,952
Processing equipment	4,229		3,984
Land	731		731
Projects in process	58,595		45,660
Finance lease right-of-use assets	131		110
Property and equipment, at cost	84,663		70,537
Less: accumulated depreciation and amortization	(9,796)		(7,614)
Property and equipment, net	$	74,867	$	62,923

The Company further added to its projects in process total which is related to our Axogen Processing Center (“APC Facility”). See "Note 12 - Commitments and Contingencies."

Depreciation expense consisted of following (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Depreciation expense	$	764	$	654	$	2,182	$	2,059

Depreciation expense is allocated among cost of sales, sales and marketing, research and development, and general and administrative expense on the condensed consolidated statements of operations.

5. Intangible Assets, Net

The Company’s intangible assets consisted of the following (in thousands):


	September 30, 2022						December 31, 2021
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizable intangible assets:
Patents	$	3,245	$	(342)	$	2,903	$	2,469	$	(234)	$	2,235
License agreements	1,101		(943)		158		1,101		(852)		249
Total amortizable intangible assets	4,346		(1,285)		3,061		3,570		(1,086)		2,484

Unamortized intangible assets
Trademarks	387		—		387		375		—		375
Total intangible assets	$	4,733	$	(1,285)	$	3,448	$	3,945	$	(1,086)	$	2,859

Amortization expense consisted of the following (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Amortization expense	$	66	$	52	$	198	$	148

Expected future amortization of intangible assets as of September 30, 2022, is as follows (in thousands):


Year Ending December 31,	Expected Amortization Expense
2022 (excluding the nine months ended September 30, 2022)	$	68
2023	237
2024	169
2025	169
2026	167
Thereafter	2,251
Total amortized intangible assets	$	3,061

License Agreements

The Company has License Agreements with the University of Florida Research Foundation and the University of Texas at Austin in which certain royalty payments are paid quarterly.

Royalty expense consisted of the following (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Royalty expense	$	848	$	687	$	2,287	$	2,037

Royalty fees are included in sales and marketing expense on the accompanying condensed consolidated statements of operations.

6. Fair Value Measurement

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.

There has been no movement between Level 1 and Level 2 or between Level 2 and Level 3 from December 31, 2021, to September 30, 2022. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Debt Derivative Liabilities

The Debt Derivative Liabilities are measured using a ‘with and without’ valuation model to compare the fair value of the Company's financing agreement with Oberland Capital 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 5% probability of a mandatory prepayment event of the Oberland Facility on December 31, 2023; (b) a 15% probability of a mandatory prepayment event of the Oberland Facility on March 31, 2026; (c) a 5% probability of the prepayment of the Oberland Facility at the Company’s option on December 31, 2025; and (d) a 75% probability that the Oberland Facility will be held to its scheduled maturity dates in accordance with the terms of the debt agreement. The estimated settlement value of each scenario, which would include any required make-whole payment, 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.

The significant inputs that are included in the valuation of the Debt derivative liability - first tranche include:


	September 30, 2022			December 31, 2021
Input
Remaining term (years)	4.75 years			5.5 years
Maturity date	June 30, 2027			June 30, 2027
Coupon rate	9.5% - 12.3%			9.5	%
Revenue participation payments	Maximum each year			Maximum each year
Discount rate	14.7%		(1)	10.72%		(1)
Probability of mandatory prepayment before 2024	5.0	%	(1)	5.0	%	(1)
Estimated timing of mandatory prepayment event before 2024	December 31, 2023		(1)	December 31, 2023		(1)
Probability of mandatory prepayment 2024 or after	15.0	%	(1)	15.0	%	(1)
Estimated timing of mandatory prepayment event 2024 or after	March 31, 2026		(1)	March 31, 2026		(1)
Probability of optional prepayment event	5.0	%	(1)	5.0	%	(1)
Estimated timing of optional prepayment event	December 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, 2022			December 31, 2021
Input
Remaining term (years)	5.75 years			6.5
Maturity date	June 30, 2028			June 30, 2028
Coupon rate	9.5% - 12.3%			9.5%
Revenue participation payments	Maximum each year			Maximum each year
Discount rate	18.3	%	(1)	13.21	%	(1)
Probability of mandatory prepayment before 2024	5.0%		(1)	5.0%		(1)
Estimated timing of mandatory prepayment event before 2024	December 31, 2023		(1)	December 31, 2023		(1)
Probability of mandatory prepayment 2024 or after	15.0%		(1)	15.0%		(1)
Estimated timing of mandatory prepayment event 2024 or after	March 31, 2026		(1)	March 31, 2026		(1)
Probability of optional prepayment event	5.0%		(1)	5.0%		(1)
Estimated timing of optional prepayment event	December 31, 2025		(1)	December 31, 2025		(1)

(1)Represents a significant unobservable input

The following table presents the financial assets and liabilities that the Company measured at fair value on a recurring basis as of September 30, 2022, classified in accordance with the fair value hierarchy (in thousands):


	Fair Value Measurements Using
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Money market funds	$	7,610	$	—	$	—	$	7,610
U.S. government securities	22,874		—		—		22,874
Commercial paper	—		15,918		—		15,918
Total assets	$	30,484	$	15,918	$	—	$	46,402

Liabilities

Debt derivative liabilities	—		—		4,407		4,407
Total liabilities	$	—	$	—	$	4,407	$	4,407

The following table presents the financial assets and liabilities that the Company measured at fair value on a recurring basis as of December 31, 2021, classified in accordance with the fair value hierarchy (in thousands):


	Fair Value Measurements Using
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Money market funds	$	22,012	$	—	$	—	$	22,012
U.S. government securities	12,081		—		—		12,081

Commercial paper	—		39,249		—		39,249

Total assets	$	34,093	$	39,249	$	—	$	73,342

Liabilities

Debt derivative liabilities	$	—	—		$	5,562	$	5,562
Total liabilities	$	—	$	—	$	5,562	$	5,562

The changes in Level 3 liabilities measured at fair value on a recurring basis for the three and nine months ended September 30, 2022, were as follows (in thousands):


Three Months Ended September 30, 2022
Beginning Balance, July 1, 2022	$	4,876



Change in fair value included in net loss	(469)
Ending Balance, September 30, 2022	$	4,407


Nine Months Ended September 30, 2022
Beginning Balance, January 1, 2022	$	5,562



Change in fair value included in net loss	(1,155)
Ending Balance, September 30, 2022	$	4,407

The changes in Level 3 liabilities measured at fair value on a recurring basis for the three and nine months ended September 30, 2021, were as follows (in thousands):


Three Months Ended September 30, 2021
Beginning Balance, July 1, 2021	54,439





Change in fair value of Oberland Facility	(826)
Change in fair value of debt derivative	46
Ending Balance, September 30, 2021	$	53,659


Nine Months Ended September 30, 2021
Beginning Balance, January 1, 2021	$	39,352



Addition of Oberland Facility - second tranche	13,827
Addition of debt derivative - second tranche	1,173
Change in fair value of Oberland Facility	(845)
Change in fair value of debt derivative	152
Ending Balance September 30, 2021	$	53,659

The fair value of cash, restricted cash, accounts receivable, accounts payable and accrued expenses approximate the carrying values because of the short-term nature of these instruments. The Oberland Facility is classified as Level 3 within the fair value hierarchy. The carrying value and estimated fair value of the Oberland Facility were $45,487 and $49,392 at September 30, 2022, and $45,325 and $52,605 at December 31, 2021, respectively. See "Note 8 - Long-Term Debt, Net of Debt Discount and Financing Fees."

7. Leases

The Company leases administrative, manufacturing, research and distribution facilities through operating leases. Several leases include fixed payments including rent and non-lease components such as common-area or other maintenance costs.

On January 27, 2022, the Company entered into a Commercial Lease Amendment ("Amendment") with JA-Cole L.P., with an effective date of February 1, 2022, pursuant to the original Commercial Lease dated April 21, 2015, as amended (the "Lease"). The lease is for the office and warehouse facility located in Burleson, Texas. The Amendment revised the commencement date to May 1, 2022, and the expiration date to April 30, 2027. The Company accounted for the Lease revisions as a lease modification in accordance with ASC 842, Leases, as the modification effectively terminated the existing lease and created a new lease which commenced on February 1, 2022. The Company valued the lease using a 11.3% incremental borrowing rate and recorded a right-of-use asset and a lease liability of $641 as a result of this amendment.

On August 22, 2022, the Company, entered into the First Amendment to Lease Agreement (the “First Amendment”) with Ja-Cole, L.P. with an effective date of October 1, 2022, pursuant to the original Commercial Lease dated October 1, 2020, as amended (the "Lease"). The lease is for the office and warehouse facility located in Burleson, Texas. The First Amendment adds an additional 2,500 square feet to the Leased Premises, for a total of 5,000 square feet and revises the expiration date of the Lease to mean September 30, 2027. The Company accounted for the Lease revisions as a lease modification in accordance with ASC 842, Leases, as the modification effectively terminated the existing lease and created a new lease. The Company valued the lease using a 12.8% incremental borrowing rate and recorded a right-of-use asset and a lease liability of 221 as a result of this amendment.

Total operating lease expense for the three months ended September 30, 2022, and 2021 was $1,337 and $1,211 respectively and $4,100 and $3,652 for the nine months ended September 30, 2022, and 2021, respectively.

Supplemental balance sheet information related to the operating and financing leases is as follows:


(In thousands, except lease term and discount rate)	September 30, 2022			December 31, 2021
Operating Leases
Right-of-use operating assets	$	14,751		$	15,193
Current maturities of long-term lease obligations	$	1,523		$	1,825
Long-term lease obligations	$	20,615		$	20,794
Financing Leases
Right-of-use financing leases (1)	$	46		$	42
Current maturities of long-term lease obligations	$	7		$	9
Long-term lease obligations	$	19		$	4

Weighted average operating lease term (in years):	10.9			12.1
Weighted average operating financing term (in years):	4.2			2.2

Weighted average discount rate operating leases	10.48		%	10.32%
Weighted average discount rate financing leases	11.69%			7.23%

(1) Financing leases are included within property and equipment, net on the condensed consolidated balance sheets.

Future minimum lease payments under operating and financing leases at September 30, 2022, were as follows:


(In thousands)
2022 (excluding the nine months ended September 30, 2022)	$	1,092
2023	3,476
2024	3,253
2025	3,336
2026	3,348
2027	2,921
Thereafter	20,931
Total	$	38,356
Less: Imputed interest	(16,192)
Total lease liability	$	22,164
Less: Current lease liability	(1,530)
Long-term lease liability	$	20,634

8. Long-Term Debt, Net of Debt Discount and Financing Fees

Long-term debt, net of debt discount and financing fees consists of the following:


(In thousands)	September 30, 2022		December 31, 2021
Oberland Facility - first tranche	$	35,000	$	35,000
Oberland Facility - second tranche	15,000		15,000
Less - unamortized debt discount and deferred financing fees	(4,513)		(5,179)
Long-term debt, net of debt discount and financing fees	$	45,487	$	44,821

Oberland Facility

On June 30, 2020, the Company entered into a seven-year financing agreement with Oberland Capital (the "Oberland Facility") 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 Oberland Facility requires quarterly interest payments for seven years. Interest is calculated as 7.5% plus the greater of LIBOR or 2.0% (9.8% as of September 30, 2022). Each tranche of the Oberland Facility has 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 under the Revenue Participant Agreement commenced on September 30, 2021. The royalty structure of the Revenue Participant Agreement results in approximately 1.0% per year of additional interest payments on the outstanding loan amount. The Company recorded interest expense of $49 and $337 for this Revenue Participation Agreement for the three months ended September 30, 2022, and 2021 and $756 and $590 for the nine months ended September 30, 2022 and 2021, respectively. The Company exceeded the maximum annual revenue participation threshold of $70,000 during the third quarter of 2022. The Company pays Oberland Capital quarterly debt interest on the last day of the quarter. The Company paid $1,249 and $1,218 for the three months ended September 30, 2022, and 2021, respectively, and $3,637 and $2,890 for the nine months ended September 30, 2022, and 2021, respectively. The Company capitalized interest of $1,450 and $1,338 for the three months ended September 30, 2022 and 2021, respectively and $4,474 and $2,526 for the nine months ended September 30, 2022 and 2021, respectively, towards the costs to construct and retrofit the APC Facility in Vandalia, OH. See "Note 12 - Commitments and Contingencies." Since inception, the Company has capitalized interest of $9,748 related to this project. The capitalized interest is recorded as part of property and equipment, net in the condensed consolidated balance sheets. As of September 30, 2022, the Company was in compliance with all financial covenants. See "Note 12 - Commitments and Contingencies."

Embedded Derivatives

The Debt Derivative Liabilities are recorded at fair value, with the change in fair value reported in the condensed consolidated statements of operations at each reporting date. The fair values of the Debt Derivative Liabilities were $4,407 and $5,562 at September 30, 2022, and December 31, 2021, respectively. See "Note 6 - Fair Value Measurement."

Unamortized Debt Discount and Financing Fees

The unamortized debt discount consists of the remaining unamortized initial fair values of the embedded derivatives related to the first and second tranches of the Oberland Facility. The debt discount is amortized over the respective life of the related tranche and recorded in interest expense using the effective yield method.

The financing fees for the Oberland Facility were $642 and were recorded as a contra liability to the debt facility. The financing fees are amortized over the life of the first tranche of the Oberland Facility and recorded in interest expense.

Amortization of debt discount and deferred financing fees for the three months ended September 30, 2022, and 2021 was $225 and $157, respectively, and for the nine months ended September 30, 2022, and 2021 was $667 and $384, respectively.

Other credit facilities

The Company had restricted cash of $6,251 at September 30, 2022, and December 31, 2021. The September 30, 2022, and December 31, 2021, balances both include $6,000 and $250, which represent collateral for two irrevocable standby letters of credit.

9. Stock-Based Incentive Plans

The Company maintains two share-based incentive plans: the Axogen, Inc. Second Amended and Restated 2019 Long-Term Incentive Plan, (“2019 Plan”), and the Axogen 2017 Employee Stock Purchase Plan (“2017 ESPP”). As of September 30, 2022, 3,340,010 shares of common stock were available for issuance under the 2019 Plan. The Company recognized share-based compensation expense, which consisted of compensation expense related to 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 of $3,849 and $2,911 for the three months ended September 30, 2022 and 2021, respectively, and $11,437 and $9,410 for the nine months ended September 30, 2022, and 2021, respectively.

A summary of the stock option activity is as follows:


	Options	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (in thousands)
Outstanding, December 31, 2021	3,194,738	$15.65	6.45	$	2,236

Granted	1,185,749	$9.13
Exercised	(153,290)	$4.44
Cancelled	(229,964)	$14.83

Outstanding, September 30, 2022	3,997,233	$14.20	6.77	$	7,772
Exercisable, September 30, 2022	2,117,574	$15.63	4.85	$	4,059

The Company used the following weighted-average assumptions for options granted during the nine months ended September 30, 2022:



Expected term (in years)	6.02
Expected volatility	61.06	%
Risk free rate	2.26	%
Expected dividends	—	%

As of September 30, 2022, there was approximately $8,251 of total unrecognized compensation costs related to unvested stock options. These costs are expected to be recognized over a weighted-average period of 2.6 years.

Restricted and Performance Stock Units

A summary of the restricted and performance stock unit activity is as follows:


	Outstanding Stock Units
	Stock Units	Weighted-Average Fair Value at Date of Grant per Share		Weighted Average Remaining Vesting Life	Aggregate Intrinsic Value (in thousands)
Unvested, December 31, 2021	1,730,765	$	18.45	1.51	$	19,633

Granted	1,916,963	$	8.31
Released	(315,275)	$	14.12
Forfeited	(331,260)	$	13.42

Unvested, September 30, 2022	3,001,193	$	12.98	1.82	$	35,774

Performance Stock Units

At September 30, 2022, the total future stock compensation expense related to non-vested performance awards at maximum target payout is expected to be approximately $3,774. As of September 30, 2022, there was approximately $17,487 of total unrecognized compensation costs related to both the PSU and RSU unvested awards. The Company expects to recognize these costs over a weighted-average period of 2.8 years.

On March 16, 2022, the Compensation Committee of the Board of Directors approved PSUs that were tied to 2022, 2023 and 2024 revenue (the “2022 PSU award.”) The 2022 PSU award consists of a targeted award of 526,467 shares with a payout ranging from 0% to 150% upon achievement of specific revenue goals.

Employee Stock Purchase Plan

The Company also maintains the 2017 ESPP, which allows eligible employees to acquire shares of the Company’s common stock through payroll deductions at a discount to market price. A total of 600,000 shares of the Company’s common stock are authorized for issuance under the 2017 ESPP, and as of September 30, 2022, 126,674 shares remain available for issuance.

10. Net Loss Per Common Share

The following reflects the net loss attributable to common shareholders and share data used in the basic and diluted earnings per share computations using the two-class method:


	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands, except per share amounts)		2022		2021		2022		2021
Numerator:
Net loss		$	(4,318)	$	(7,141)	$	(23,533)	$	(21,699)
Denominator:
Weighted-average common shares outstanding (Basic)		42,220,519		41,467,596		42,008,013		41,087,568
Weighted-average common shares outstanding (Diluted)		42,220,519		41,467,596		42,008,013		41,087,568
Net loss per common share (Basic and Diluted)		$	(