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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, 2019

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

41-1301878

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification No.)

13631 Progress Blvd., Suite 400, Alachua, FL

32615

(Address of Principal Executive Offices)

(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 5, 2019, the registrant had 39,468,518 shares of common stock outstanding.

Table of Contents 

Table of Contents

Part I - Financial Information

Item 1.

Financial Statements

3

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

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3.

Defaults Upon Senior Securities

32

Item 4.

Mine Safety Disclosures

32

Item 5.

Other Information

32

Item 6.

Exhibits

33

Signature Page

34

1

Table of Contents 

Forward-Looking Statements

From time to time, in reports filed with the U.S. Securities and Exchange Commission (the “SEC”) (including this 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” or “our”) 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 we are active, as well as our business plans. 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 assessment of our internal controls over financial reporting, our growth, our 2019 guidance, product development, product potential, 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 Form 10-Q should be evaluated together with the many 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 of our Annual Filing on Form 10-K. 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.

2

Table of Contents 

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,

December 31,

2019

2018

Assets

Current assets:

Cash and cash equivalents

$

24,555

$

24,294

Restricted cash

6,000

6,000

Investments

75,511

92,311

Accounts receivable, net of allowance for doubtful accounts of $967 and $1,117, respectively

 

15,451

 

15,321

Inventory

 

13,682

 

11,982

Prepaid expenses and other

 

2,144

 

1,045

Total current assets

 

137,343

 

150,953

Property and equipment, net

 

11,673

 

8,039

Operating lease right-of-use assets

3,595

Finance lease right-of-use assets

93

Intangible assets

 

1,488

 

1,181

Total assets

$

154,192

$

160,173

Liabilities and Shareholders’ Equity

Current liabilities:

Accounts payable and accrued expenses

14,970

12,998

Current maturities of long term obligations

1,773

28

Contract liabilities, current

 

14

 

18

Total current liabilities

 

16,757

 

13,044

Long Term Obligations, net of current maturities

2,002

35

Other long-term liabilities

70

Contract liabilities

 

22

 

42

Total liabilities

 

18,781

 

13,191

Commitments and contingencies - see Note 12

Shareholders’ equity:

Common stock, $0.01 par value per share; 100,000,000 shares authorized; 39,461,318 and 38,900,875 shares issued and outstanding

 

395

 

389

Additional paid-in capital

 

307,839

 

297,319

Accumulated deficit

 

(172,823)

 

(150,726)

Total shareholders’ equity

 

135,411

 

146,982

Total liabilities and shareholders’ equity

$

154,192

$

160,173

See notes to condensed consolidated financial statements.

3

Table of Contents 

Axogen, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(In Thousands, Except Share and Per Share Amounts)

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

    

2019

    

2018

    

2019

    

2018

    

Revenues

$

28,564

$

22,660

$

78,550

$

60,504

Cost of goods sold

 

4,510

 

3,464

 

12,468

 

9,282

Gross profit

 

24,054

 

19,196

 

66,082

 

51,222

Costs and expenses:

Sales and marketing

 

18,245

 

14,653

 

53,146

 

41,149

Research and development

 

4,181

 

3,307

 

12,602

 

7,967

General and administrative

 

7,740

 

6,071

 

24,321

 

16,751

Total costs and expenses

 

30,166

 

24,031

 

90,069

 

65,867

Loss from operations

 

(6,112)

 

(4,835)

 

(23,987)

 

(14,645)

Other income (expense):

Investment income

555

727

1,925

884

Interest expense

 

(7)

 

6

 

(32)

 

(1,124)

Interest expense — deferred financing costs

 

 

 

 

(81)

Loss on extinguishment of debt

(2,186)

Other expense

 

(7)

 

 

(3)

 

(16)

Total other income (expense), net

 

541

 

733

 

1,890

 

(2,523)

Net Loss

$

(5,571)

$

(4,102)

$

(22,097)

$

(17,168)

Weighted average common shares outstanding — basic and diluted

 

39,340,492

 

38,504,810

 

39,151,218

 

36,582,261

Loss per common share — basic and diluted

$

(0.14)

$

(0.11)

$

(0.56)

$

(0.47)

See notes to condensed consolidated financial statements.

4

Table of Contents 

Axogen, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In Thousands)

Nine Months Ended

September 30,

September 30,

    

2019

    

2018

    

Cash flows from operating activities:

Net loss

$

(22,097)

$

(17,168)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation

 

631

 

575

Amortization of right-of-use assets

1,352

Amortization of intangible assets

 

89

 

59

Amortization of deferred financing costs

 

 

81

Loss on extinguishment of debt

2,186

Provision for bad debt

(150)

298

Provision for inventory writedown

(44)

877

Changes in investment gains and losses

(957)

 

(375)

Share-based compensation

 

7,384

 

5,981

Change in operating assets and liabilities:

Short term investments

Accounts receivable

 

20

 

(3,223)

Inventory

 

(1,657)

 

(4,510)

Prepaid expenses and other

 

(1,099)

 

(624)

Accounts payable and accrued expenses

 

1,288

 

3,005

Operating lease obligations

(1,276)

Cash paid for interest portion of finance leases

(3)

Contract and other liabilities

 

(23)

 

(48)

Net cash used in operating activities

 

(16,542)

 

(12,886)

Cash flows from investing activities:

Purchase of property and equipment

 

(3,676)

 

(6,052)

Purchase of investments

(104,314)

(103,865)

Proceeds from sale of investments

122,071

3,500

Cash payments for intangible assets

 

(396)

 

(320)

Net cash provided by / (used for) investing activities

 

13,685

 

(106,737)

Cash flows from financing activities:

Proceeds from issuance of common stock

132,963

Cash paid for equity offering

(257)

Borrowing on revolving loan

26,253

Payments on revolving loan and prepayment penalties

(30,489)

Repayments of long-term debt and prepayment penalties

(22,503)

Cash paid for debt portion of finance leases

(24)

Proceeds from exercise of stock options

 

3,142

 

2,778

Net cash provided by financing activities

 

3,118

 

108,745

Net increase in cash, cash equivalents, and restricted cash

 

261

 

(10,878)

Cash, cash equivalents, and restricted cash, beginning of period

 

30,294

 

36,507

Cash, cash equivalents and restricted cash, end of period

$

30,555

$

25,629

Supplemental disclosures of cash flow activity:

Cash paid for interest

$

31

$

1,322

Supplemental disclosure of non-cash investing and financing activities:

Acquisition of fixed assets in accounts payable and accrued expenses

$

684

$

Right-of-use asset and operating lease liability

$

26

$

See notes to condensed consolidated financial statements.

5

Table of Contents 

Axogen, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(unaudited)

(In Thousands)

    

Common Stock

    

Additional Paid-in Capital

    

Accumulated Deficit

    

Total Shareholders' Equity

Three Months Ended September 30, 2019

Balance at June 30, 2019

$

393

$

304,820

$

(167,252)

$

137,960

Net Loss

(5,571)

(5,571)

Stock-based compensation

2,397

2,397

Exercise of stock options

2

623

625

Balance at September 30, 2019

$

395

$

307,839

$

(172,823)

$

135,411

Nine Months Ended September 30, 2019

Balance at December 31, 2018

$

389

$

297,319

$

(150,726)

$

146,982

Net Loss

-

-

(22,097)

(22,097)

Stock-based compensation

-

7,384

-

7,384

Exercise of stock options and employee stock purchase plan

6

3,136

-

3,142

Balance at September 30, 2019

$

395

$

307,839

$

(172,823)

$

135,411

Three Months Ended September 30, 2018

Balance at June 30, 2018

$

383

$

291,515

$

(141,395)

$

150,503

Net Loss

(4,102)

(4,102)

Issuance of common stock

Stock-based compensation

2,211

2,211

Exercise of stock options

4

863

867

Balance at September 30, 2018

$

387

$

294,589

$

(145,497)

$

149,479

Nine Months Ended September 30, 2018

Balance at December 31, 2017

$

343

$

153,168

$

(128,329)

$

25,182

Net Loss

-

-

(17,168)

(17,168)

Issuance of common stock

35

132,671

-

132,706

Stock-based compensation

-

5,981

-

5,981

Exercise of stock options and employee stock purchase plan

9

2,769

-

2,778

Balance at September 30, 2018

$

387

$

294,589

$

(145,497)

$

149,479

6

Table of Contents 

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, 2019 and December 31, 2018 and for the three and nine-month periods ended September 30, 2019 and 2018. 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, 2018, which are included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2018. 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.

2.

Summary of Significant Accounting Policies

Leases

We adopted ASU No. 2016-02—Leases (Topic 842), as of January 1, 2019, (the “Application Date”) using the modified retrospective approach. We will continue to report financial information for fiscal years prior to 2019 under the previous lease accounting standards. The modified retrospective approach provides a method for recording on the balance sheet as of January 1, 2019, leases that have commenced on or before the Application Date.

We elected the package of practical expedients permitted under the transition guidance, which allowed us to not reassess whether any existing contracts contain a lease, to not reassess historical lease classification as operating or finance leases, and to not reassess initial direct costs. We also elected the practical expedient allowing us to not separate the lease and non-lease components for all classes of underlying assets, apart from equipment. We did not elect the practical expedient to use hindsight to determine the lease term for leases at January 1, 2019.

We made an accounting policy election to not recognize right-to-use assets and lease liabilities that arise from short term leases, which are defined as leases with a lease term of 12 months or less at the lease commencement date.

Adoption of the new standard resulted in the recording of right-to-use assets and lease liabilities of approximately $3,786 and $3,823, respectively, and the derecognition of capital lease assets, capital lease liabilities, and operating lease deferred rent of $96, $63, and $70, respectively, as of January 1, 2019 with zero cumulative-effect adjustment to retained earnings. The new standard did not materially impact our consolidated net earnings.

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Share Based Payment Arrangements

On January 1, 2019, we adopted ASU No. 2018-07, which supersedes ASC 505-50 and expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. As result, most of the guidance in ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to nonemployee share-based payment arrangements. This standard did not have a material impact on our consolidated financial statements.

Revenue Recognition

On January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 606, Revenue from Contracts with Customers, utilizing the modified retrospective method applied to contracts that were not completed.

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. In the case of products or services sold to a customer under a distribution or purchase agreement, the Company has no further performance obligations and revenue is recognized at the point control transfers which occurs either when: i) the product is shipped via common carrier; or ii) the product is delivered to the customer or distributor, in accordance with the terms of the agreement.

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 elected to account 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 the cost of sales.

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 30 to 60 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.

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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

Net Receivables

Contract Liabilities, Current

Contract Liabilities, Long-Term

Opening, January 1, 2018

$

11,065

31

68

Closing, September 30, 2018

13,990

23

49

Increase (decrease)

2,925

(8)

(19)

Opening, January 1, 2019

$

15,321

18

42

Closing, September 30, 2019

15,451

14

22

Increase (decrease)

130

(4)

(20)

Loss Per Share of Common Stock

Basic and diluted net loss per share is computed in accordance with FASB ASC No. 260, Earnings Per Share, by dividing the net loss by the weighted average number of common shares outstanding during the period. Since the Company has experienced net losses for all periods presented, options and awards of 1,629,475 and 2,931,360 shares which were outstanding as of September 30, 2019 and 2018, respectively, were not included in the computation of diluted EPS because they are anti-dilutive.

3.Recently Issued Standards to be Adopted

Fair Value Measurements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 changes the fair value measurement disclosure requirements of ASC 820, “Fair Value Measurement” by adding, eliminating, and modifying certain disclosure requirements. ASU 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019 and requires application of the prospective method of transition. The Company is currently assessing the impact the guidance will have on its consolidated financial statements.

Financial Instruments – Credit Losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic326): Measurement of Credit Losses on Financial Instruments. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We will adopt ASU 2016-13 as of January 1, 2020. We are currently evaluating the impact the standard may have on our consolidated financial statements and related disclosures.

In May 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments. ASU 2019-04 clarifies certain

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aspects of accounting for credit losses, hedging activities, and financial instruments. This update is effective fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact the guidance will have on its consolidated financial statements.

In May 2019, the FASB issued ASU No. 2019-05, Targeted Transition Relief. ASU 2019-05 provides transition relief for entities adopting ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The amendment allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized costs and (2) are within the scope of ASC 326-20, Financial Instruments – Credit Losses: Measured at Amortized Costs, if the instruments are eligible for the fair value option under ASC 825-10, Financial Instruments: Overall. . This update is effective fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact the guidance will have on its consolidated financial statements.

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.

4.Inventories

Inventories are comprised of unprocessed tissue, work-in-process, Avance® Nerve Graft, Axoguard® Nerve Connector, Axoguard Nerve Protector, Avive® Soft Tissue Membrane, Acroval Neurosensory and Motor Testing System, Axotouch® Two-Point Discriminator and supplies and are valued at the lower of cost (first-in, first-out) or net realizable value and consist of the following:

    

September 30,

    

December 31,

    

2019

2018

Finished goods

$

10,338

$

9,194

Work in process

 

796

 

454

Raw materials

2,548

 

2,334

Inventories

$

13,682

$

11,982

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. For the three months ended September 30, 2019 and 2018, the Company had inventory write-downs of $51 and $295, respectively. For the nine months ended September 30, 2019 and 2018, the Company adjusted the provision for inventory write downs by ($44) and $877 respectively.

5.

Fair Value of Investments

The Company has elected the Fair Value Option for all investments in debt securities. 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.

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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 following table represents the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of September 30, 2019:

(Level 1)

(Level 2)

(Level 3)

Total

September 30, 2019

Assets:

Money market funds

$

16,602

$

$

$

16,602

U.S. government securities

9,985

9,985

Corporate bonds

17,791

17,791

Commercial paper

31,437

31,437

Asset-backed securities

16,299

16,299

Total assets

$

26,587

$

65,527

$

$

92,114

(Level 1)

(Level 2)

(Level 3)

Total

December 31, 2018

Assets:

Money market funds

$

12,947

$

$

$

12,947

U.S. government securities

15,923

15,923

Corporate bonds

31,495

31,495

Commercial paper

27,869

27,869

Asset-backed securities

17,025

17,025

Total assets

$

28,870

$

76,389

$

$

105,259

There were no changes in the levels or methodology of the measurement of financial assets or liabilities during the nine months ended September 30, 2019. The maturity date of the Company’s investments is less than one year.

6. Prepaid and Other Assets

Prepaid and other assets consist of the following:

    

September 30,

    

December 31,

    

2019

2018

Prepaid Insurance

$

465

$

85

Prepaid events

389

132

Prepaid software license

160

5

Prepaid professional fees

126

35

Litigation receivable

98

Other Prepaid items

906

 

788

Prepaid and Other Assets

$

2,144

$

1,045

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In connection with our litigations (See Litigation under Note 12 Commitment and Contingencies), we have now paid legal fees in excess of our deductible under our directors’ and officers’ insurance policy by $98.  As such, we have recorded a receivable from our insurance carrier in our prepaid and other assets account of our balance sheet.

7.

Property and Equipment

Property and equipment consist of the following:

    

September 30,

    

December 31,

    

2019

2018

Furniture and equipment

$

2,026

$

1,763

Leasehold improvements

 

1,331

 

1,151

Processing equipment

 

2,718

 

2,349

Land

731

731

Projects in process

8,358

4,906

Property and equipment, at cost

15,164

10,900

Less: accumulated depreciation and amortization

 

(3,491)

 

(2,861)

Property and equipment, net

$

11,673

$

8,039

Depreciation expense for the three months ended September 30, 2019 and 2018 was $192 and $200, respectively. Depreciation expense for the nine months ended September 30, 2019 and 2018 was $631 and $575, respectively.

8.

Intangible Assets

The Company’s intangible assets consist of the following:

    

September 30,

    

December 31,

    

2019

2018

License agreements

$

1,067

$

1,034

Less: accumulated amortization

(624)

(553)

License agreements, net

$

443

$

481

Patents

1,118

755

Less: accumulated amortization

 

(73)

 

(55)

Patents, net

$

1,045

$

700

Intangible assets, net

$

1,488

$

1,181

License agreements are being amortized over periods ranging from 17-20 years. Patent costs are being amortized over periods up to 20 years. Amortization expense was approximately $33 and $19 for the three months ended September 30, 2019 and 2018, respectively and $89 and $59 for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, future amortization of license agreements and patents is $34 for remainder of 2019, $132 for 2020 through 2023, and $531 thereafter.

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

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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:

Axogen 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 $12.5 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 Axogen 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 Axogen sublicenses technologies covered by the License Agreements to third parties, Axogen would pay a percentage of sublicense fees received from the third party to the licensor. Currently, Axogen 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;

Axogen 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, Axogen 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 $125 is due if Axogen 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 Axogen products.

Royalty fees were approximately $577 and $444 during the three months ended September 30, 2019 and 2018, respectively, and approximately $1,573 and $1,198 during the nine months ended September 30, 2019 and 2018, respectively, and are included in sales and marketing expense on the accompanying condensed consolidated statements of operations.

9.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

    

September 30,

    

December 31,

    

2019

2018

Accounts payable

$

3,787

$

4,517

Accrued expenses

3,247

2,004

Accrued compensation

7,936

 

6,477

Accounts Payable and Accrued Expenses

$

14,970

$

12,998

10.

Long Term Obligations

Long Term Obligations consist of the following:

    

September 30,

    

December 31,

    

2019

2018

Term Loan Agreement

$

$

Revolving Loan Agreement

Capital Lease Obligations

63

Operating & Finance Lease Obligations

3,775

Total

3,775

63

Less current maturities of long-term obligations

(1,773)

(28)

Long-term portion

$

2,002

$

35

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On October 25, 2016, the Company entered into Term Loan and a Revolving Loan with MidCap Financial Trust (“MidCap”) maturing on May 1, 2021. Interest on the Term Loan was payable monthly at 8.0% per annum plus the greater of LIBOR or 0.5%. Interest on the Revolving Loan was payable monthly at 4.5% per annum plus the greater of LIBOR or 0.5% on outstanding advances.

The Company had the option at any time to prepay the Term Loan in whole or in part, subject to payment of a prepayment fee and an exit fee. On May 22, 2018, the Company exercised its option and paid $22,500 to prepay the Term Loan in full, which included exit and pre-payment fees totaling $1,500.

The Company also had the option to terminate or permanently reduce the Revolving Loan prior to the maturity date subject to its payment of a deferred origination fee. On May 22, 2018, the Company exercised its option to terminate and paid $3,000 to prepay the Revolving Loan in full, which amount included pre-payment fees of $236.

11.

Stock Incentive Plan

At the 2017 Annual Meeting of Shareholders, the shareholders approved the adoption of the Axogen 2017 Employee Stock Purchase Plan (the “2017 ESPP”), which allows for eligible employees to acquire shares of the Company’s common stock through payroll deductions at a discount from market value. The 2017 ESPP authorized a total of 600,000 shares of the Company’s common stock to be provided under the 2017 ESPP. As of September 30, 2019, 486,563 shares of common stock were available for issuance under the 2017 ESPP.

At the 2019 Annual Meeting of Shareholders held on August 14, 2019, the shareholders approved the Axogen 2019 Long-Term Incentive Plan (the “New Axogen Plan”), which allows for issuance of incentive stock options, non-qualified stock options, performance stock units (“PSUs”) and restricted stock units (“RSUs”) to employees, directors and consultants at exercise prices not less than the fair market value at the date of grant. The number of shares of common stock authorized for issuance under the New Axogen 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 “Prior Axogen Plan”), that were not then subject to outstanding awards; plus (B) shares under the Prior Axogen Plan and the New Axogen 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 New Axogen Plan, no future awards will be made under the Prior Axogen Plan. As of September 30, 2019, 3,308,699 shares of common stock were available for issuance under the New Axogen Plan.

The options granted to employees prior to July 1, 2017 typically vest 25% one 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, 25% per quarter over one year or had no vesting period. Options typically have terms ranging from seven to ten years.

The Company recognized stock-based compensation expense, which consisted of compensation expense related to employee stock options, PSUs, RSUs and the 2017 ESPP based on the value of share-based payment awards that are ultimately expected to vest during the period, of approximately $2,395 and $2,211 for the three months ended September 30, 2019 and 2018, respectively and approximately $7,384 and $5,981 for the nine months ended September 30, 2019 and 2018, respectively.

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

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currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life of the award.

The Company used the following weighted-average assumptions for options granted during the periods indicated:

Nine months ended September 30,

    

2019

2018

    

Expected term (in years)

 

5.76

6.22

Expected volatility

 

56.03

%  

49.73

%  

Risk free rate

 

1.54

%  

2.69

%  

Expected dividends

 

%  

%  

The Company granted stock-based awards for 285,091 shares of its common stock pursuant to the New Axogen Plan during the nine months ended September 30, 2019. The weighted average fair value of the awards granted at market during the nine months ended September 30, 2019 and 2018 was $15.78 and $26.19 per award, respectively.

At September 30, 2019, the total future stock compensation expense related to non-vested awards is expected to be approximately $20,960.

12. Income Taxes

The Company has not recorded current income tax expense due to the generation of net operating losses. Deferred income taxes are accounted for using the balance sheet approach, which requires recognition of deferred tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting basis and the tax basis of assets and liabilities. A valuation allowance is provided when it is more-likely-than-not that a deferred tax asset will not be realized. A full valuation allowance has been established on the deferred tax asset as it is more-likely-than-not that a future tax benefit will not be realized. In addition, future utilization of the available net operating loss carryforward may be limited under Internal Revenue Code Section 382 as a result of changes in ownership.

The Company identifies and evaluates uncertain tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the balance sheet. The Company has not recognized a liability for uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company’s remaining open tax years subject to examination by the Internal Revenue Service include the years ended December 31, 2015 through 2018.

13. Commitments and Contingencies

Leases

We lease office space, medical lab and research space, a distribution center, a tissue processing center and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

Certain of our leases include options for the Company to extend the lease term. None of the options were reasonably certain of exercise and therefore are not included in the measure of our lease obligations and right-to-use assets.

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Certain of our lease agreements include provisions for the Company to reimburse the lessor for common area maintenance, real estate taxes, and insurance, which the Company accounts for as variable lease costs. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The components of total lease expense for the three and nine months ended September 30, 2019 were as follows:

Amount

For the Three months Ended September 30, 2019:

Finance lease costs

Amortization of right-to-use assets

$

6

Interest on lease liabilities

 

1

Operating lease costs

483

Short term lease costs

12

Variable lease costs

1

Total lease cost

$

501

For the Nine Months Ended September 30, 2019:

Finance lease costs

Amortization of right-to-use assets

$

16

Interest on lease liabilities

 

3

Operating lease costs

1,447

Short term lease costs

28

Variable lease costs

16

Total lease cost

$

1,510

The short-term lease cost shown above reasonably reflects the Company’s ongoing short-term lease commitment.

Supplemental balance sheet information related to leases as of September 30, 2019 was as follows:

Amount

Operating Leases

Operating lease right-of-use assets

$

3,595

Current maturities of long-term obligations

$

1,750

Long term obligations

$

1,974

Finance Leases

Finance lease right-of-use assets

$

93

Current maturities of long-term obligations

$

23

Long term obligations

$

28

Other information related to leases was as follows:

Amount

Cash paid for amounts included in the measurement of operating lease liabilities

$

1,314

Right-to-use assets obtained in exchange for new finance lease liabilities

$

16

Weighted-average remaining lease term - finance leases

3.18 Yrs

Weighted-average remaining lease term - operating leases

2.09 Yrs

Weighted-average discount rate - finance leases

7.28%

Weighted-average discount rate - operating leases

6.28%

The weighted-average discount rate for the majority of the Company’s leases is based on the Company’s estimated incremental borrowing rate since the rates implicit in the leases were not determinable. The Company’s incremental borrowing rate is based on Management’s estimate of the rate of interest the Company would have to pay to borrow on a fully collateralized basis over a similar term an amount equal to the lease payments.

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Future minimum lease payments under non-cancellable leases as of September 30, 2019 were as follows:

    

Operating

    

Finance

Year Ending December 31,

Leases

Leases

2019 (excluding nine months ended September 30, 2019)

$

494

$

5

2020

2,664

19

2021

4,007

 

19

2022

2,573

10

2023

2,581

3

2024

2,644

Thereafter

27,251

Total Future Minimum Lease Payments

$

42,213

$

57

Less future payments for leases that have not yet commenced

(38,245)

Less imputed interest on commenced leases

(244)

(6)

Total Lease Liability

$

3,724

$

51

The lease for office space in Tampa, Florida with Heights Union, LLC, a Florida limited liability company, has not commenced and is therefore not included in the measurement of right-to-use assets and lease liabilities.

As previously disclosed in our 2018 Annual Report on Form 10-K, which followed the lease accounting guidance prior to our adoption of ASC 842, future commitments relating to noncancelable operating and capital leases as of December 31, 2018 were as follows:

Year Ending December 31,

Operating

 

Capital

2019

 

1,866

 

28

2020

 

2,540

 

13

2021

3,970

15

2022

2,518

7

2023

2,574

Thereafter

30,111

Total

$

43,579

$

63

Rent expense for the three and nine months ended September 30, 2018 was $141 and $358, respectively.

Service Agreements

On August 6, 2015, the Company entered into a License and Services Agreement (the “CTS Agreement”) with Community Blood Center (d/b/a Community Tissue Services) (“CTS”), Dayton, Ohio, an FDA registered tissue establishment. Processing of the Avance Nerve Graft pursuant to the CTS Agreement began in February 2016. The CTS Agreement initially had a five-year term ending August 31, 2020. On February 22, 2019, the agreement was amended to extend the term through December 31, 2021. The amendment also gives the Company the right to terminate the agreement on or after March 1, 2021 with six-months advance notice. Under the CTS Agreement, the Company pays CTS a facility fee for use of clean room/manufacturing, storage and office space, which the Company accounts for as an embedded lease in accordance with ASC 842, “Leases”. The Company also pays CTS for services in support of its manufacturing process such as for routine sterilization of daily supplies, providing disposable supplies, microbial services and office support. During the three months ended September 30, 2019 and 2018, the Company paid fees to CTS of approximately $