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, 2020


☐	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 October 27, 2020, the registrant had 40,126,253 shares of common stock outstanding.

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Part I - Financial Information
Item 1.	Financial Statements	3

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	36


Part II - Other Information

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults Upon Senior Securities	39

Item 4.	Mine Safety Disclosures	39

Item 5.	Other Information	39

Item 6.	Exhibits	40

	Signature Page	41

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Forward-Looking Statements

From time to time, in reports filed with the U.S. Securities and Exchange Commission (the “SEC”) (including this 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 our growth, product development, product potential, financial performance, sales growth, product adoption, market awareness of our products, data validation, our assessment of our internal controls over financial reporting, 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. Such risks and uncertainties include, but are not limited to, risks and uncertainties caused by extraordinary events or circumstances, such as the COVID-19 pandemic, and their impact on our business and operations, the business and operations of our customers, suppliers and other business partners and economic conditions generally. 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 and other risk factors detailed from time to time as described in “Risk Factors” included in Item 1A of our Annual Filing on Form 10-K, as amended on Form 10-K/A. 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.

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PART 1 — FINANCIAL INFORMATION

ITEM 1 —FINANCIAL STATEMENTS

Axogen, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(In Thousands, Except Share and Per Share Amounts)



	September 30,		December 31,
	2020		2019
Assets
Current assets:
Cash and cash equivalents	$	60,002	$	35,724
Restricted cash		7,607		6,000
Investments		39,126		60,786
Accounts receivable, net of allowance for doubtful accounts of $478 and $1,092, respectively		18,758		16,944
Inventory		11,929		13,861
Prepaid expenses and other		2,551		1,706
Total current assets		139,973		135,021
Property and equipment, net		36,110		14,887
Operating lease right-of-use assets		15,987		3,133
Finance lease right-of-use assets		70		87
Intangible assets		1,797		1,515
Total assets	$	193,937	$	154,643

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	16,279	$	19,130
Current maturities of long-term lease obligations		2,499		1,736
Contract liabilities, current		14		14
Total current liabilities		18,792		20,880

Long-term Debt, net of financing fees		31,817		—
Debt derivative liability		2,450		—
Common stock derivative option liability		183		—
Long-term lease obligations		18,976		1,595
Long-term contract liabilities		6		15
Total liabilities		72,224		22,490

Commitments and Contingencies - see Note 13

Shareholders’ equity:
Common stock, $0.01 par value per share; 100,000,000 shares authorized; 40,123,841 and 39,589,755 shares issued and outstanding		401		396
Additional paid-in capital		318,949		311,618
Accumulated deficit		(197,637)		(179,861)
Total shareholders’ equity		121,713		132,153
Total liabilities and shareholders’ equity	$	193,937	$	154,643

See notes to condensed consolidated financial statements.

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Axogen, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(In Thousands, Except Share and Per Share Amounts)


	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2020		2019		2020		2019

Revenues	$	33,428	$	28,564	$	79,805	$	78,550
Cost of goods sold		5,697		4,510		16,118		12,468
Gross profit		27,731		24,054		63,687		66,082
Costs and expenses:
Sales and marketing		17,726		18,245		49,854		53,146
Research and development		4,230		4,181		12,915		12,602
General and administrative		6,820		7,740		18,726		24,321
Total costs and expenses		28,776		30,166		81,495		90,069
Loss from operations		(1,045)		(6,112)		(17,808)		(23,987)
Other income (expense):
Investment income		28		555		576		1,925
Interest expense		(397)		(7)		(459)		(32)
Change in fair value of derivatives		(71)		—		(71)		—
Other (expense)/income		6		(7)		(14)		(3)
Total other income (expense), net		(434)		541		32		1,890
Net Loss	$	(1,479)	$	(5,571)	$	(17,776)	$	(22,097)
Weighted average common shares outstanding — basic and diluted		40,093,588		39,340,492		39,873,167		39,151,218
Loss per common share — basic and diluted	$	(0.04)	$	(0.14)	$	(0.45)	$	(0.56)

See notes to condensed consolidated financial statements.

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Axogen, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In Thousands)


	Nine Months Ended
	September 30,		September 30,
	2020		2019
Cash flows from operating activities:
Net loss	$	(17,776)	$	(22,097)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		993		631
Amortization of right-of-use assets		1,282		1,352
Amortization of intangible assets		111		89
Amortization of deferred financing fees		22		—
Provision for bad debt		(115)		(150)
Provision for inventory write-down		2,108		(44)
Changes in fair value of derivatives		71		—
Changes in investment gains and losses		(29)		(957)
Share-based compensation		5,725		7,384
Change in operating assets and liabilities:
Accounts receivable		(1,700)		20
Inventory		(176)		(1,657)
Prepaid expenses and other		(844)		(1,099)
Accounts payable and accrued expenses		(911)		1,288
Operating lease obligations		(1,213)		(1,276)
Cash paid for interest portion of finance leases		(2)		(3)
Contract and other liabilities		(9)		(23)
Net cash used in operating activities		(12,463)		(16,542)

Cash flows from investing activities:
Purchase of property and equipment		(18,907)		(3,676)
Purchase of investments		(41,794)		(104,314)
Proceeds from sale of investments		63,483		122,071
Cash payments for intangible assets		(393)		(396)
Net cash provided by investing activities		2,389		13,685

Cash flows from financing activities:
Proceeds from the issuance of long-term debt		35,000		—
Proceeds from the paycheck protection program		7,820		—
Repayment of paycheck protection program		(7,820)		—
Payments for debt issuance costs		(642)		—
Payments of employee tax withholding in exchange of common stock awards		(665)		—
Cash paid for debt portion of finance leases		(10)		(24)
Proceeds from exercise of stock options		2,276		3,142
Net cash provided by financing activities		35,959		3,118
Net increase in cash, cash equivalents, and restricted cash		25,885		261
Cash, cash equivalents, and restricted cash, beginning of period		41,724		30,294
Cash, cash equivalents and restricted cash, end of period	$	67,609	$	30,555

Supplemental disclosures of cash flow activity:
Cash paid for interest	$	379	$	31
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of fixed assets in accounts payable and accrued expenses	$	1,271	$	684
Obtaining a right-of-use asset in exchange for a lease liability	$	14,119	$	26
Embedded derivative associated with the long-term debt	$	2,562	$	—

See notes to condensed consolidated financial statements.

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Axogen, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(unaudited)

(In Thousands, Except Share Amounts)


	Common Stock			Paid-in		Accumulated		Shareholders'
	Shares	Amount		Capital		Deficit		Equity/(Deficit)
Three Months Ended September 30, 2020
Balance at June 30, 2020	40,022,499	$	400	$	315,518	$	(196,158)	$	119,760
Net Loss	-		-		-		(1,479)		(1,479)
Stock-based compensation	-		-		2,947		-		2,947
Issuance of restricted and performance stock units	22,529		-		-		-		-
Shares surrendered by employees to pay tax withholdings	(1,230)		-		(8)		-		(8)
Exercise of stock options and employee stock purchase plan	80,043		1		492		-		493
Balance at September 30, 2020	40,123,841	$	401	$	318,949	$	(197,637)	$	121,713

Nine Months Ended September 30, 2020
Balance at December 31, 2019	39,589,755	$	396	$	311,618	$	(179,861)	$	132,153
Net Loss	-		-		-		(17,776)		(17,776)
Stock-based compensation	-		-		5,725		-		5,725
Issuance of restricted and performance stock units	168,311		2		(2)		-		-
Shares surrendered by employees to pay tax withholdings	(38,086)		(1)		(664)		-		(665)
Exercise of stock options and employee stock purchase plan	403,861		4		2,272		-		2,276
Balance at September 30, 2020	40,123,841	$	401	$	318,949	$	(197,637)	$	121,713

Three Months Ended September 30, 2019
Balance at June 30, 2019	39,252,294	$	393	$	304,819	$	(167,252)	$	137,960
Net Loss	-		-		-		(5,571)		(5,571)
Stock-based compensation	-		-		2,397		-		2,397
Issuance of restricted and performance stock units	3,312		-		-		-		-
Exercise of stock options and employee stock purchase plan	205,712		2		623		-		625
Balance at September 30, 2019	39,461,318	$	395	$	307,839	$	(172,823)	$	135,411

Nine Months Ended September 30, 2019
Balance at December 31, 2018	38,900,875	$	389	$	297,319	$	(150,726)	$	146,982
Net Loss	-		-		-		(22,097)		(22,097)
Stock-based compensation	-		-		7,384		-		7,384
Issuance of restricted and performance stock units	41,340		-		-		-		-
Exercise of stock options and employee stock purchase plan	519,103		6		3,136		-		3,142
Balance at September 30, 2019	39,461,318	$	395	$	307,839	$	(172,823)	$	135,411

See notes to condensed consolidated financial statements.

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Axogen, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(In Thousands, Except Per Share Amounts)

Unless the context otherwise requires, all references in these Notes to “Axogen,” “the Company,” “we,” “us” and “our” refer to Axogen, Inc. and its wholly owned subsidiaries Axogen Corporation (“AC”), Axogen Processing Corporation, and Axogen Europe GmbH.

1.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company as of September 30, 2020 and December 31, 2019 and for the three and nine-month periods ended September 30, 2020 and 2019. 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, 2019, which are included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2019, as amended on Form 10-K/A. 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, 2020 are not necessarily indicative of the results to be expected for the full fiscal 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 2020. Specifically, we are uncertain of the extent to which the Coronavirus Disease 2019 (“COVID-19”) pandemic will affect our sales channels, supply chain, manufacturing, distribution capabilities, clinical trials, employee availability and productivity and capital expenditures. The Company’s access to healthcare facilities has improved each month, although restrictions remain and supporting customers remotely continues to be an important learned capability. There can be no assurances that resurgences of COVID-19 will not affect our future results.

2.	Summary of Significant Accounting Policies

Credit Losses

On January 1, 2020, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for loans and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models previously used under U.S. generally accepted accounting principles, which generally require that a loss be incurred before it is recognized. The new standard also applies to financial assets arising from revenue transactions such as contract assets and accounts receivables. The adoption did not have a material impact on our condensed consolidated financial statements.

Credit losses for trade receivables is determined based on historical information, current information and reasonable and supportable forecasts. We have concluded that the adoption of the standard was not material as the composition of the trade receivables at the reporting date is consistent with that used in developing the historical credit-loss percentages. Further, the risk characteristics of the Company’s customer and composition of the portfolio have not changed significantly over time.

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Fair Value Measurements

On January 1, 2020, the Company adopted 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. The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements.

Cloud Based Arrangements

On January 1, 2020, the Company adopted ASU No. 2018-15, Guidance on Cloud Computing Arrangements. ASU 2018-15 provides guidance on implementation costs incurred in a cloud computing arrangement (“CCA”) that is a service contract and aligns the accounting for such costs with the guidance on capitalizing costs associated with developing or obtaining internal-use software. More specifically, the ASU 2018-15 provides guidance on accounting for implementation, set-up and other upfront costs incurred in a CCA hosted by a vendor. As of January 1, 2020, this standard did not have a material impact on the Company’s consolidated financial statements.

Reference Rate Reform

On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (ASC 848). The ASU also establishes (1) a general contract modification principle that entities can apply in other areas that may be affected by reference rate reform and (2) certain elective hedge accounting expedients. The elective contract modification guidance in the ASU applies to “contracts or other transactions that reference [LIBOR] or a reference rate that is expected to be discontinued as a result of reference rate reform” (an “affected rate”). The optional amendments are effective for all entities as of March 12, 2020 through December 31, 2020. As of September 30, 2020, this standard did not have a material impact on the Company’s consolidated financial statements.

Derivative Instruments

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

Revenue Recognition

The Company enters into contracts to sell and distribute products and services to hospitals and surgical facilities for use in caring for patients with peripheral nerve damage or transection. Revenue is recognized when the Company has met its performance obligations pursuant to its contracts with its customers in an amount that the Company expects to be entitled to in exchange for the transfer of control of the products and services to the Company’s customers.

In the case of products or services sold to a customer under an international distribution or purchase agreement, the distributors are granted exclusive distribution rights to sell the products or services in an international territory defined by the contract. These international distributor agreements contain provisions that allow the Company to terminate the distribution agreement with the distributor, and upon termination, the right to repurchase inventory from the distributor at the distributor’s cost. The Company has determined that its contractual rights to repurchase international distributor inventory upon termination of such distributor agreement are not substantive and do not impact the timing of when control transfers; and, therefore, the Company has determined it is appropriate to recognize revenue when: i) the product is shipped via common carrier; or ii) the product is delivered to the customer or distributor, depending on the terms of the agreement. Determining the timing of revenue recognition for such contracts is subject to significant judgment, because an evaluation

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must be made regarding the international distributor’s ability to direct the use of, and obtain substantially all of the remaining benefits from, the implants received from the Company. Changes in these assessments could have a significant impact on the timing of revenue recognition from sales to distributors.

A portion of the Company's product revenue is generated from consigned inventory maintained at hospitals and domestic 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.

In connection with the Acroval^® Neurosensory and Motor Testing System, a product previously offered by the Company, the Company sold extended warranty and service packages to certain customers, 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, 2019	$	15,321	$	18	$	42
Closing, September 30, 2019		15,451		14		22
Increase (decrease)		130		(4)		(20)

Opening, January 1, 2020	$	16,944	$	14	$	15
Closing, September 30, 2020		18,758		14		6
Increase (decrease)		1,814		-		(9)

Loss Per Share of Common Stock

Basic and diluted net loss per share is computed 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

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awards of 5,496,833 and 4,584,991 shares which were outstanding as of September 30, 2020 and 2019, respectively, were not included in the computation of diluted net loss per share because they are anti-dilutive.

3.	Recently Issued Standards to be Adopted

In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs. The guidance is effective for fiscal years beginning after December 15, 2020. Early adoption is not permitted. We are currently evaluating the impact the standard may have on our consolidated financial statements and related disclosures.

4.	Inventory

Inventories are comprised of unprocessed tissue, work-in-process, Avance® Nerve Graft, Axoguard® Nerve Connector, Axoguard^® Nerve Protector, Axoguard^® Nerve Cap, 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,
	2020		2019

Finished goods	$	8,339	$	10,403
Work in process		798		730
Raw materials		2,792		2,728
Inventories	$	11,929	$	13,861

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 nine months ended September 30, 2020 and 2019, the Company had adjustments to the provision for inventory write downs of $2,108 and ($44) respectively.

5.	Fair Value Considerations

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for classification and disclosure of fair value measurements as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company classifies cash equivalents and investments according to the hierarchy of techniques used to determine fair value based on the types of inputs. The Company has elected the Fair Value Option for all investments in debt securities.

On June 30, 2020, the Company entered into the Oberland Facility (see Note 10 Long Term Debt), concluding that the term debt instrument included certain embedded features that required separate accounting (the “Debt Derivative Liability”) and that the equity contract entered into concurrently was required to be classified as a liability and recorded at its fair value (the “Common Stock Derivative Option Liability”). These instruments were determined to be financial liabilities requiring Level 3 fair value measurements.

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Debt Derivative Liability

The debt derivative liability was measured using a ‘with and without’ valuation model to compare the fair value of the Oberland Facility including the identified embedded derivative features and the fair value of a plain vanilla note with the same terms. The fair value of the Oberland Facility including the embedded derivative features was determined using a probability-weighted expected return model (“PWERM”) based on four potential settlement scenarios for the Oberland Facility due to a mandatory prepayment event between January 1, 2024 and June 30, 2027; (a) the prepayment of the Oberland Facility at the Company’s option; and (b) the repayment of the Oberland Facility at its maturity in accordance with the terms of the debt agreement. The estimated settlement value of each scenario, which would include any required make-whole payment (see Note 10 Long Term Debt) is then discounted to present value using a discount rate that is derived based on the initial terms of the Oberland Facility at issuance and corroborated utilizing a synthetic credit rating analysis.

The significant inputs that are included in the valuation of the debt derivative liability include:


	September 30, 2020
Input
Remaining term (years)		6.75 years
Maturity date		June 30, 2027
Coupon rate		9.50%
Revenue participation payments		Maximum each year
Discount rate		10.03%	⁽¹⁾
Probability of mandatory prepayment before 2024		5.0%	⁽¹⁾
Estimated timing of mandatory prepayment event before 2024		December 31, 2023	⁽¹⁾
Probability of mandatory prepayment 2024 or after		15.0%	⁽¹⁾
Estimated timing of mandatory prepayment event 2024 or after		March 31, 2026	⁽¹⁾
Probability of optional prepayment event		5.0%	⁽¹⁾
Estimated timing of optional prepayment event		December 31, 2025	⁽¹⁾

(1)

Represents a significant unobservable input

Common Stock Derivative Option Liability

The common stock option liability was measured using a Monte Carlo simulation model to simulate the future changes in the Company’s common stock price from the issuance date of the option agreement through the termination date of the option agreement. The 45-day volume weighted average price (“VWAP”) (see Note 10 Long Term Debt) is calculated for each simulation trial to determine the effective exercise price and number of common shares to be issued. The model assumes the holder will only exercise the option if the common stock is in the money on the exercise date. The value of the option is then determined based on the number of shares to be issued and the stock price on the date that the option is exercised. This option value is then discounted back to present value. The calculated present value of the option is then estimated using the average of 100,000 trials of the simulation model.

The significant inputs that are included in the valuation of the common stock option liability include:


	September 30, 2020
Input
Option term		6.75 years
Company stock price	$	11.63
Risk free rate		0.45%
Equity volatility		60%	⁽¹⁾
Simulation trials		100,000

(1)

Represents a significant unobservable input

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The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2020:


	(Level 1)		(Level 2)		(Level 3)		Total
September 30, 2020
Assets:
Money market funds	$	39,112	$	—	$	—	$	39,112
U.S. government securities		4,520		—		—		4,520
Corporate bonds		—		6,441		—		6,441
Commercial paper		—		28,165		—		28,165
Asset-backed securities		—		—		—		—
Total assets	$	43,632	$	34,606	$	—	$	78,238

Liabilities
Debt derivative liability	$	—	$	—	$	2,450	$	2,450
Common stock derivative option liability		—		—		183		183
Total liabilities	$	—	$	—	$	2,633	$	2,633

	(Level 1)		(Level 2)		(Level 3)		Total
December 31, 2019
Assets:
Money market funds	$	26,812	$	—	$	—	$	26,812
U.S. government securities		4,544		—		—		4,544
Corporate bonds		—		17,754		—		17,754
Commercial paper		—		24,679		—		24,679
Asset-backed securities		—		13,808		—		13,808
Total assets	$	31,356	$	56,241	$	—	$	87,597

There were no changes in the levels or methodology of the measurement of financial assets or liabilities during the three and nine months ended September 30, 2020. The maturity date of the Company’s investments is less than one year.

The following represents the rollforward of the fair value of instruments classified as Level 3 measurements for the three and nine months ended September 30, 2020:



Quarter Ending September 30, 2020
Beginning Balance, July 1, 2020	$	2,562
Change in fair value of option derivative		11
Change in fair value of debt derivative		60
Ending Balance, September 30, 2020	$	2,633

Year Ending December 31, 2020
Beginning Balance	$	—
Option to purchase shares		183
Fair Value of Derivative Feature		2,450
Ending Balance, September 30, 2020	$	2,633

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6.	Prepaid Expense and Other

Prepaid and other assets consist of the following:


	September 30,		December 31,
	2020		2019

Prepaid insurance	$	539	$	—
Stock option receivable		—		244
Litigation receivable		23		98
Prepaid events		493		110
Prepaid marketing		480		227
Prepaid software license		135		207
Prepaid professional fees		529		433
Other Prepaid items		352		387
Prepaid and Other Assets	$	2,551	$	1,706

Our policy year for our insurance runs on a calendar year and as such a significant portion of the policy payment is made at the beginning of the new year and amortized to expense throughout the remaining year.

7.	Property and Equipment

Property and equipment consist of the following:


	September 30,		December 31,
	2020		2019

Furniture and equipment	$	2,236	$	2,059
Leasehold improvements		12,223		2,203
Processing equipment		2,887		2,772
Land		731		731
Projects in process		22,790		10,886
Property and equipment, at cost		40,867		18,651
Less: accumulated depreciation and amortization		(4,757)		(3,764)
Property and equipment, net	$	36,110	$	14,887

Depreciation expense for the three months ended September 30, 2020 and 2019 was $374 and $192, respectively. Depreciation expense for the nine months ended September 30, 2020 and 2019 was $993 and $631, respectively. The significant increase in projects in process is related to our Axogen Processing Center (“APC”) facility (See Note 13 Commitments and Contingencies).

On September 20, 2018, the Company entered into an agreement (the “Heights Agreement”) with Heights Union, LLC, a Florida limited liability company (“Heights Union”), for the lease of seventy-five thousand square feet of office space (the “Heights Union Premises”) in Tampa, Florida (See Note 13 Commitments and Contingencies). In May 2020, the Company entered into a construction escrow agreement (the “Escrow Agreement”) with Heights Union and Commonwealth Land Title Insurance Company (“Escrow Agent”) which provided for the establishment of a federally insured escrow bank account (the “Escrow Account”) to hold Company funds to be used for tenant improvements in excess of the tenant allowance as provided in the Heights Agreement. The Company deposited $6,289 into the Escrow Account for use in completing construction of the tenant improvements. The Escrow Agent will disburse the funds upon joint written instructions from Heights Union and the Company. During the three months and nine months ended September 30, 2020, $3,464 and $4,682, respectively, was disbursed from the Escrow Account and recorded in property and equipment account of the balance sheet. The Company anticipates depleting the Escrow Account by November 2020. As

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of September 30, 2020, $1,607 remained in the Escrow Account and is recorded as restricted cash in the condensed consolidated balance sheet.

8.	Intangible Assets

The Company’s intangible assets consist of the following:


	September 30, 2020						December 31, 2019
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortized intangible assets
Patents	$	1,201	$	(122)	$	1,079	$	845	$	(84)	$	761
License agreements		1,089		(720)		369		1,067		(647)		420
Total amortizable intangible assets	$	2,290	$	(842)	$	1,448	$	1,912	$	(731)	$	1,181

Unamortized intangible assets
Trademarks	$	349	$	—