Axogen, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Fair Value Measurement

Fair Value Measurement

12 Months Ended

Dec. 31, 2022

The following tables represent the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2022, and 2021:


(in thousands)	Level 1		Level 2		Level 3		Total
December 31, 2022
Assets:
Money market funds	$	10,354	$	—	$	—	$	10,354
U.S. government securities	12,316		—		—		12,316

Commercial paper	—		21,189		—		21,189
Total assets	$	22,669	$	21,189	$	—	$	43,859

Liabilities:

Debt derivative liabilities	$	—	$	—	$	4,518	$	4,518
Total liabilities	$	—	$	—	$	4,518	$	4,518


December 31, 2021	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 liability	$	—	$	—	$	5,562	$	5,562
Total liabilities	$	—	$	—	$	5,562	$	5,562

The changes in Level 3 liabilities measured at fair value on a recurring basis were as follows:


(in thousands)	Debt Derivative Liabilities
Balance, December 31, 2020	$	2,497
Acquired	3,037
Change in fair value included in net loss	28

Balance, December 31, 2021	5,562

Change in fair value included in net loss	(1,044)
Balance, December 31, 2022	$	4,518

There were no changes in the levels or methodology of the measurement of financial assets or liabilities during the years ended December 31, 2022, and 2021.

The fair value of cash, restricted cash, accounts receivable, accounts payable and accrued expenses approximates the carrying values because of the short-term nature of these instruments. The carrying value and fair value of the Credit Facility were $45,712 and $50,293 at December 31, 2022, respectively, $45,325 and $52,605 at December 31, 2021, respectively. See Note 9 - Long-Term Debt, Net of Debt Discount and Financing Fees .

The debt derivative liabilities are measured using a ‘with and without’ valuation model to compare the fair value of each tranche of the Credit Facility including the identified embedded derivative feature and the fair value of a plain vanilla note with the same terms. The fair value of the Credit Facility including the embedded derivative features was determined using a probability-weighted expected return model based on four potential settlement scenarios for the Credit Facility included in the table below. The estimated settlement value of each scenario, which would include any required make-whole payment (see

Note 9 - Long-Term Debt, Net of Debt Discount and Financing Fees ), is then discounted to present value using a discount rate that is derived based on the initial terms of the Credit 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:


	December 31, 2022		December 31, 2021
Input
Remaining term (years)	4.5		5.5
Maturity date	June 30, 2027		June 30, 2027
Coupon rate	9.5% - 12.7%		9.50%
Revenue participation payments	Maximum each year		Maximum each year
Discount rate	13.90%	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:


	December 31, 2022			December 31, 2021
Input
Remaining term (years)	5.5			6.5
Maturity date	June 30, 2028			June 30, 2028
Coupon rate	9.5% - 12.7%			9.50%
Revenue participation payments	Maximum each year			Maximum each year
Discount rate	17.56	%	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.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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