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

Annual report pursuant to Section 13 and 15(d)

Stock-Based Compensation

Stock-Based Compensation

12 Months Ended

Dec. 31, 2022

Share-Based Payment Arrangement [Abstract]

The Company maintains two stock-based incentive plans: the Axogen, Inc. 2019 Amended and Restated Long-Term Incentive Plan, as amended ("2019 Plan") approved by shareholders on May 25, 2022, which provides incentives through the grants of stock options, non-qualified stock options, PSUs and RSUs to employees, directors, and consultants which replaced the Company's 2010 Stock Incentive Plan ("2010 Plan") and the Axogen 2017 Employee Stock Purchase Plan (“2017 ESPP”).

At the May 25, 2022, Annual Shareholder Meeting, approval was received to increase the number of shares available under the 2019 Plan by 2,500,000 to 8,000,000. The 2019 Plan replaced the 2010 Plan, accordingly, no new grants have been issued under the 2010 Plan.

As of December 31, 2022, there were 3,374,881 shares of common stock for future grant under the 2019 Plan.

Stock-based compensation expense is included in the following line items in the accompanying consolidated statements of operations for the years ended:


	December 31, 2022
(in thousands)		2022		2021		2020
Costs of goods sold		$	215	$	157	$	167
Sales and marketing		2,341		2,905		2,585
Research and development		2,640		1,923		1,376
General and administrative		10,395		5,934		4,341
Total stock-based compensation expense		$	15,591	$	10,919	$	8,470

Stock Options

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 or 25% per quarter over one year. Options typically have terms ranging from seven to ten years. The Company estimates the fair value of each option award on the date of grant using a multiple-point Black-Scholes model. 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 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 following weighted-average assumptions were used in the calculation of fair value for stock options granted for the following periods:



	Year Ended December 31,
	2022		2021		2020
Expected term (in years)	6.01		5.88		5.88
Expected volatility	61.17	%	58.38	%	58.46	%
Risk free interest rate	2.31	%	1.02	%	0.49	%
Expected dividends	—	%	—	%	—	%

The following table summarizes the Company's stock option activity for the year ended December 31, 2022:


	Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2021	3,194,738	$	15.65	6.45	$	2,236
Granted	1,228,920	$	9.20
Forfeited	(267,839)	$	14.98
Exercised	(260,963)	$	4.97
Outstanding at December 31, 2022	3,894,856	$	14.38	6.78	$	2,783

Exercisable at December 31, 2022	2,034,249	$	16.31	4.94	$	1,462

The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2022, 2021 and 2020 was $4.65, $10.53, $4.73, respectively.

The total intrinsic value of options exercised for the years ended December 31, 2022, 2021 and 2020 was $2,643, $14,167 and $5,595, respectively.

As of December 31, 2022, there was approximately $6,839 of total unrecognized compensation costs related to unvested stock options. These costs are expected to be recognized over a weighted-average period of 2.4 years.

Restricted Stock Units

RSUs granted to employees have a requisite service period of four years. The RSUs granted to directors and certain RSUs granted from time to time to certain executive officers have a requisite service period of three years, while certain of these RSUs have a requisite service period of one year. The Company expenses the fair value of RSUs on a straight-line basis over the requisite service period.

The following table summarizes the activity for restricted stock units for the indicated periods:


	Outstanding Restricted and Performance Stock Units
	Stock Units	Weighted Average Fair Value at Date of Grant per Share		Weighted Average Remaining Vesting Life (Years)	Aggregate Intrinsic Value (in thousands)
Unvested December 31, 2021	967,068	$	16.06	1.45	$	9,061
Granted	1,413,755	$	8.40
Released	(265,420)	$	13.48
Forfeited	(254,297)	$	12.24
Unvested December 31, 2022	1,861,106	$	11.13	1.60	$	18,574

The weighted-average grant-date fair value of restricted stock units granted during the years ended December 31, 2022, 2021 and 2020 was $8.40, $20.13, $9.55, respectively.

As of December 31, 2022, there was approximately $13,756 of total unrecognized compensation costs related to unvested restricted stock. These costs are expected to be recognized over a weighted-average period of 2.74 years. The total fair market value of restricted stock vested during the years ended December 31, 2022, 2021 and 2020 was $2,288, $2,179 and $2,699, respectively.

Performance Stock Units

The Company estimates the fair value of the PSUs based on its closing stock price at the time of grant and its estimate of achieving such performance target and records compensation expense as the milestones are achieved. PSUs generally have a requisite service period of three years and are subject to graded vesting conditions based on revenue goals of the Company. The Company expenses their fair value over the requisite service period. Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the related compensation expense will be adjusted based upon the Company’s estimate of achieving such performance target. The number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on the actual performance metrics as set forth in the applicable PSU award agreement. The amount actually awarded will be based upon achievement of the performance measures.

The following table summarizes the activity for performance stock units for the indicated periods:


	Outstanding Restricted and Performance Stock Units
	Stock Units	Weighted Average Fair Value at Date of Grant per Share		Weighted Average Remaining Vesting Life (Years)	Aggregate Intrinsic Value (in thousands)
Unvested December 31, 2021	763,697	$	21.47	2.36	$	7,156
Granted	530,983	8.23
Released	(77,671)	18.08
Forfeited	(104,978)	16.08
Unvested December 31, 2022	1,112,031	$	15.90	1.86	$	11,098

The weighted-average grant-date fair value of performance stock units during the years ended December 31, 2022, 2021 and 2020 was $8.23, $20.70 and $9.58, respectively.

As of December 31, 2022, there was approximately $1,723 of total unrecognized compensation costs related to unvested performance stock. These costs are expected to be recognized over a weighted-average period of 1.86 years. The total fair market value of performance stock vested during the years ended December 31, 2022, 2021 and 2020 was $673, $2,302 and $1,112, respectively.

PSU Awards

On December 18, 2017, December 27, 2018, and December 17, 2019, the Compensation Committee of the Board of Directors approved PSU awards to certain employees related to their work on the Company’s Biologics License Application

("BLA"). As of December 31, 2022, 294,968 PSU awards were available to vest. The number of shares is allocated to certain milestones related to the BLA submission to and approval by the FDA. These awards are expected to vest beginning when the BLA is submitted to the FDA, which is not expected to be until the second half of 2023. The performance measure is based upon achieving each of the specific milestones and will vest 50% upon achieving each of the milestones and 50% one year later. No expense has been recognized on these awards.

On July 17, 2020, the Compensation Committee of the Board of Directors approved PSU awards of 144,300 shares tied to 2020 revenue. These awards were granted in mid-year with certain revenue targets adjusted for the impact of COVID-19. These 2020 awards granted in July reached 110% achievement of revenue targets.

On March 16, 2021, the Compensation Committee of the Board of Directors approved PSU awards of 332,200 shares tied to 2022 revenue, with a payout ranging from 0% to 200% upon achievement of specific revenue goals. In the fourth quarter of 2021, it was determined that the performance metrics tied to 2022 revenue were no longer probable; therefore, stock compensation expense related to these awards of $1,831 was reversed in 2021.

On March 16, 2022, the Compensation Committee of the Board of Directors approved PSU awards of 526,467 shares tied to revenue from 2022 to 2024 with a pay-out range from 0% to 150% upon achievement of specific revenue targets.At December 31, 2022, the total future stock compensation expense related to non-vested performance awards is expected to be $1,693 for those awards issued on March 16, 2022. Future stock compensation expense has not been calculated on the awards for which expensing has not yet begun which include the BLA awards.

2017 ESPP

The 2017 ESPP allows eligible employees to acquire shares of the Company's common stock through payroll deductions at a discount to market price (currently 15.0%) of the lesser of the closing price of the Company’s common stock on the first day or last day of the offering period. The offering period is currently 6 months. Participants may not purchase more than $25 or 3,000 shares of the Company’s common stock in a calendar year through the ESPP. Stock-based compensation expense related to the 2017 ESPP, included in total stock-based compensation expense, was $844, $401 and $493 for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, there were 600,000 shares of the Company's common stock authorized for issuance under the 2017 ESPP and 69,155 shares remain available for issuance.

The following are the weighted average assumptions used in the valuation of ESPP options for the years ended December 31:


	Year Ended December 31,

	2022		2021		2020
Expected term (in years)	0.5		0.5		0.5
Expected volatility	66.5	%	48.0	%	81.4	%
Risk-free interest rate	1.1	%	0.10	%	1.0	%
Expected dividends	—	%	—	%	—	%

The weighted-average grant-date fair value of ESPP options during the years ended December 31, 2022, 2021 and 2020 was $2.87, $5.18, $5.24 respectively.