ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with our consolidated financial statements and the notes thereto contained in Item 8 of Part II in this Form 10-K, “Forward-Looking Statements” contained in Part 1 of this Form 10-K, “Risk Factors” contained in Item 1A of this Form 10-K, and the other information appearing elsewhere in, or incorporated by reference into, this Form 10-K. Dollar amounts referenced in this Item 7 are in thousands, except per share amounts.
Financial information for prior periods has been reclassified to reflect the retrospective application of voluntary changes in the Company’s accounting policy for shipping and handling costs and changes to certain allocated corporate costs, as discussed under “Note 2 – Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in this Form 10-K.
Unless the context otherwise requires, all references in this report to “Axogen,” the “Company,” “we,” “us” and “our” refer to Axogen, Inc., and its wholly owned subsidiaries Axogen Corporation (“AC”), Axogen Processing Corporation, Axogen Europe GmbH and Axogen Germany GmbH.
Overview
We are the leading company focused specifically on the science, development, and commercialization of technologies for peripheral nerve regeneration and repair. We are passionate about providing the opportunity to restore nerve function and quality of life for patients with peripheral nerve injuries. We provide innovative, clinically proven, and economically effective repair solutions for surgeons and healthcare providers. Peripheral nerves provide the pathways for both motor and sensory signals throughout the body. Every day, people suffer traumatic injuries or undergo surgical procedures that impact the function of their peripheral nerves. Physical damage to a peripheral nerve or the inability to properly reconnect peripheral nerves can result in the loss of muscle or organ function, the loss of sensory feeling, or the initiation of pain.
Product Portfolio
Our platform for peripheral nerve repair features a comprehensive portfolio of products, including:
•Avance® Nerve Graft, a biologically active off-the-shelf processed human nerve allograft for bridging severed peripheral nerves without the comorbidities associated with a second surgical site.
•Axoguard Nerve Connector®, a porcine (pig) submucosa extracellular matrix ("ECM") coaptation aid for tensionless repair of severed peripheral nerves.
•Axoguard Nerve Protector®, a porcine submucosa ECM product used to wrap and protect damaged peripheral nerves and reinforce the nerve reconstruction while preventing soft tissue attachments.
•Axoguard HA+ Nerve ProtectorTM, is comprised of a processed porcine submucosa ECM base layer with a hyaluronate-alginate gel coating designed to provide short- and long-term protection for peripheral nerve injuries. The gel layer facilitates enhanced nerve gliding to aid in minimizing soft tissue attachments, while the base layer is remodeled into a long-term protective tissue layer.
•Axoguard Nerve Cap®, a porcine submucosa ECM product used to protect a peripheral nerve end and separate the nerve from the surrounding environment to reduce the development of symptomatic or painful neuroma.
•Avive+ Soft Tissue MatrixTM, a multi-layer amniotic membrane allograft used to protect and separate tissues in the surgical bed during the critical phase of tissue healing.
Our portfolio of products is currently available in the United States ("U.S."), and 19 other countries including Canada, Germany, United Kingdom, Spain and several other European, Asian and Latin American countries.
We derive substantially all of our revenues from sales of our nerve repair products to customers in the U.S.
On June 24, 2024, we announced the launch of Avive+ Soft Tissue Matrix. Avive+ Soft Tissue Matrix is processed and distributed in accordance with U.S. Food and Drug Administration ("FDA") requirements for Human Cellular and Tissue-based Products under the Code of Federal Regulations ("CFR") Title 21 Part 1271 regulations and U.S. Public Health Service Act regulations as a Section 361 human tissue product. Products regulated solely under Section 361 of the Public Health Service Act are a product category under close scrutiny by the FDA for compliance with the regulatory requirements and potentially
P64
Table of Content
subject to regulatory change in the future. Failure to comply with applicable regulatory requirements could expose us to potential compliance actions by the FDA or state regulators and could risk the commercial availability of the product.
Our strategy remains focused on deepening our presence in high-potential accounts, specifically Level 1 trauma centers and academic-affiliated hospitals with a high number of trained microsurgeons. We will drive growth in these accounts through targeted expansion of nerve repair indications and driving deeper adoption of our nerve repair algorithm across multiple surgical specialties.
Summary of Operational and Business Highlights
•We completed the Biologics License Application ("BLA") submission for Avance Nerve Graft on September 6, 2024. On November 1, 2024, the FDA informed us that they had accepted the BLA for filing and assigned a Prescription Drug User Fee Act goal date of September 5, 2025. The FDA further indicated that it does not currently plan to hold an advisory committee meeting for the application.
•Revenue was $187,338 for the year ended December 31, 2024, an increase of $28,326, or 17.8%, compared to the year ended December 31, 2023.
•Gross profit was $141,977 for the year ended December 31, 2024, an increase of $20,108, or 16.5%, compared to the year ended December 31, 2023.
Results of Operations
Comparison of the Years Ended December 31, 2024 and 2023
The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of total revenue:
Year Ended December 31,
Amount % of Revenue Amount % of Revenue
(dollars in thousands)
Costs and expenses:
Other (expense) income:
Total other (expense) income, net (6,677) (3.7) (254) (0.2)
Revenues
Revenues for the year ended December 31, 2024 increased $28,326, or 17.8%, to $187,338, as compared to $159,012 for the year ended December 31, 2023. Revenue growth was driven by an increase in unit volume of approximately 9.0%, as well as the net impact of changes in product mix and price of approximately 5.5% and 3.3%, respectively.
P65
Table of Content
Gross Profit
Gross profit for the year ended December 31, 2024 increased $20,108, or 16.5%, to $141,977, as compared to $121,869 for the year ended December 31, 2023. Gross margin as a percentage of revenue decreased to 75.8% for the year ended December 31, 2024, as compared to 76.6% for the year ended December 31, 2023. The decrease in gross margin was due to the change in our product mix.
Costs and Expenses
Total costs and expenses increased $1,933, or 1.3%, to $145,264 for the year ended December 31, 2024, as compared to $143,331 for the year ended December 31, 2023. The increase in total operating costs was primarily attributable to the following: (i) $9,745 in compensation costs; (ii) $1,288 in professional services fees; and (iii) $308 in net other costs, partially offset by decreases of (i) $3,593 in research and development project costs; (ii) $3,114 in royalty expenses; (iii) $1,621 in marketing program costs; and (iv) $218 in travel costs.
Sales and marketing costs and expenses increased $881, or 1.1%, to $78,461 for the year ended December 31, 2024, as compared to $77,580 for the year ended December 31, 2023. The increase in sales and marketing costs and expenses was due to the following: (i) $6,028 in compensation costs and (ii) $311 in occupancy related costs, partially offset by decreases of (i) $3,114 in royalty expenses; (ii) $1,621 in marketing program costs; (iii) $173 in travel costs; (iv) $153 in professional services fees; and (v) $396 in net other costs.
Research and development costs and expenses increased $428, or 1.6%, to $27,767 for the year ended December 31, 2024, as compared to $27,339 for the year ended December 31, 2023. The increase was primarily due to product development and clinical expenses. Product development costs include spending for a number of specific programs, including the non-clinical expenses related to the BLA for Avance Nerve Graft. Product development costs and expenses represented approximately 53% and 60% of total research and development costs and expenses for the years ended December 31, 2024 and 2023, respectively. Clinical trial costs and expenses represented approximately 47% and 40% of total research and development costs and expenses for the years ended December 31, 2024 and 2023, respectively. The increase in research and development costs and expenses was due to the following: (i) $3,027 in compensation costs and (ii) $1,814 in professional services fees, partially offset by decreases of (i) $3,593 in research and development project costs; (ii) $414 in occupancy related costs; (iii) $173 in travel costs; and (iv) $97 in other costs to support these clinical and non-clinical expenses.
General and administrative costs and expenses increased $624, or 1.6%, to $39,036 for the year ended December 31, 2024, as compared to $38,412 for the year ended December 31, 2023. The increase was primarily due to (i) $921 in bad debt expense and (ii) $254 in occupancy related costs; partially offset by decreases of (i) $373 in professional services fees and (ii) $187 in compensation costs.
Other Expense
Total other expense increased $6,423, or 2528.7%, to $6,677 for the year ended December 31, 2024, as compared to $254 for the year ended December 31, 2023. The increase was primarily due to the increase in interest expense of $5,372 which was a result of no longer capitalizing interest due to the completion of the Axogen Processing Center facility (the "APC Facility") in 2023. In connection with our credit facility with Oberland Capital ("Credit Facility"), we recognized total interest charges of $8,101 and $8,083 for the years ended December 31, 2024 and 2023, respectively, and of the total interest charges, we capitalized to the construction of the APC Facility interest charges of $— and $5,285 for the years ended December 31, 2024 and 2023, respectively. The decrease in investment income was primarily related to the Federal Reserve decreasing interest rates 100 basis points throughout 2024.
Income Taxes
We had no federal income tax expense or benefit for the years ended December 31, 2024 and 2023 due to the incurrence of net operating losses in both years, the benefits of which have a full valuation allowance. From time to time, we receive notices of examination of prior tax filings from federal and state authorities. The Internal Revenue Service is currently examining the Company's 2021 federal income tax return. We do not believe that there are any additional tax expenses or benefits currently available.
P66
Table of Content
Comparison of the Years Ended December 31, 2023 and 2022
The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of total revenue:
Year Ended December 31,
Amount % of Revenue Amount % of Revenue
(dollars in thousands)
Costs and expenses:
Other (expense) income:
Total other (expense) income, net (254) (0.2) 759 0.5
Revenues
Revenues for the year ended December 31, 2023 increased $20,428, or 14.7%, to $159,012, as compared to $138,584 for the year ended December 31, 2022. Revenue growth was driven by an increase in unit volume of approximately 8.6%, as well as the net impact of changes in price and product mix of approximately 3.7% and 2.5%, respectively. The unit volume increase was attributed to growth in our core and active accounts. As of December 31, 2023, we had 1,006 active accounts, an increase of 3.9% from 968 at December 31, 2022 and 376 core accounts, an increase of 13.3% from 332 at December 31, 2022.
Gross Profit
Gross profit for the year ended December 31, 2023 increased $13,060, or 12.0%, to $121,869, as compared to $108,809 for the year ended December 31, 2022. Gross margin as a percentage of revenue decreased to 76.6% for the year ended December 31, 2023, as compared to 78.5% for the year ended December 31, 2022.
Costs and Expenses
Total costs and expenses increased $4,815, or 3.5%, to $143,331 for the year ended December 31, 2023, as compared to $138,516 for the year ended December 31, 2022. The increase in total operating costs and expenses was due to the following: (i) $5,469 in compensation costs; (ii) $1,243 in marketing program costs; (iii) $1,156 in professional services fees; (iv) $852 in travel costs; and (v) $326 in occupancy related costs; partially offset by decreases of (i) $1,190 in research and development projects and (ii) $3,041 of other general business costs, including insurance expenses of $1,033, bad debt recovery of $883, merchant fees of $727, and other items administrative in nature of $398.
Sales and marketing costs and expenses increased $5,597, or 7.8%, to $77,580 for the year ended December 31, 2023, as compared to $71,983 for the year ended December 31, 2022. The increase in sales and marketing costs and expenses was due to the following: (i) $2,497 in compensation costs; (ii) $1,243 in marketing program costs; (iii) $831 in travel costs; (iv) $625 in professional services fees; (v) other items administrative in nature of $251 and (vi) $150 in occupancy related costs.
P67
Table of Content
Research and development costs and expenses increased $1,712, or 6.7%, to $27,339 for the year ended December 31, 2023, as compared to $25,627 for the year ended December 31, 2022. The increase in research and development costs and expenses was primarily due to product development and clinical expenses. Product development costs include spending for a number of specific programs, including the non-clinical expenses related to the BLA for Avance Nerve Graft. Product development costs and expenses represented approximately 60% and 52% of total research and development costs and expenses for the years ended December 31, 2023 and 2022, respectively. Clinical trial costs and expenses represented approximately 40% and 48% of total research and development costs and expenses for the years ended December 31, 2023 and 2022, respectively. The increase in research and development costs and expenses was due to the following: (i) $2,171 in compensation costs; (ii) $331 in professional services fees; (iii) $287 in occupancy related costs; and (iv) $98 in travel costs to support these clinical and non-clinical expenses, partially offset by a decrease of $1,190 in research and development projects.
General and administrative costs and expenses decreased $2,494, or 6.1%, to $38,412 for the year ended December 31, 2023, as compared to $40,906 for the year ended December 31, 2022. The decrease in general and administrative costs and expenses was primarily due to the following: (i) $1,033 in insurance expenses, (ii) $883 in bad debt recovery, (iii) $727 in merchant fees, (iv) $330 in other services, (v) $205 in licenses and fees; (vi) other items administrative in nature of $128; (vi) $112 in occupancy related costs; and (vii) $78 in travel costs, partially offset by increases of (i) $801 in compensation costs and (ii) $201 in professional services fees.
Other (Expense) Income
Total other expense increased $1,013, or 133.5%, to expense of $254 for the year ended December 31, 2023, as compared to income of $759 for the year ended December 31, 2022. The increase was primarily due to the increase in interest expense of $2,211 and other expenses of $208, partially offset by the increase in investment income of $918 and the fair value of the derivative liability of $488. In connection with the Credit Facility, we recognized total interest charges of $8,083 and $6,721 for the years ended December 31, 2023 and 2022, respectively, and of this interest we capitalized to the construction of the APC Facility, interest charges of $5,285 and $6,155 for the years ended December 31, 2023 and 2022, respectively. The increase in investment income was primarily related to the Federal Reserve raising interest rates 100 basis points throughout 2023.
Income Taxes
We had no federal income tax expense or benefit for the years ended December 31, 2023 and 2022 due to the incurrence of net operating losses in both years, the benefits of which have been fully reserved. We do not believe that there are any additional tax expenses or benefits currently available.
Liquidity and Capital Resources
As of December 31, 2024, our principal sources of liquidity were our cash and cash equivalents and investments totaling $33,482. Our cash equivalent is comprised of a money market mutual fund and our investments are comprised of U.S. Treasuries. Our cash and cash equivalents and investments increased $2,458 to $33,482 from $31,024 at December 31, 2023, due to a reduction in capital expenditures and general operating activities. On December 31, 2024 and 2023, our current assets exceeded our current assets liabilities by $68,607 and $57,574, respectively. Based on current estimates, we believe that our existing cash and cash equivalents and investments, as well as cash provided by sales of our products will allow us to fund our operations through at least the next twelve months from the date of issuance of the accompanying financial statements.
Cash Flow Information
The following table presents a summary of our cash flows from operating, investing and financing activities:
Year Ended December 31,
Net cash provided by (used in):
Net (decrease) increase in cash and cash equivalents $ (3,472) $ 15,491
P68
Table of Content
Net Cash Provided By (Used In) Operating Activities
Net cash provided by operating activities was $4,535 compared to net cash used in operating activities of $5,716 for the years ended December 31, 2024 and 2023, respectively. The favorable change in net cash provided by operating activities of $10,251 was due to the decrease in net loss of $11,751 and the favorable change in noncash accounts of $6,093, partially offset by an unfavorable change in working capital of $7,594.
A discussion of net cash used in operating activities during the year ended December 31, 2022 can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the Securities and Exchange Commission ("SEC") on March 5, 2024.
Net Cash (Used In) Provided By Investing Activities
Net cash used in investing activities was $10,297 compared to net cash provided by investing activities of $19,253 for the years ended December 31, 2024 and 2023, respectively. The unfavorable change in net cash used in investing activities of $29,550 was due to the decrease in proceeds from the sale of investments, net of investment purchases, totaling $39,944, partially offset by a net decrease in capital expenditures of $10,771, primarily related to the renovation of the APC Facility completed in 2023.
A discussion of net cash used in investing activities during the year ended December 31, 2022 can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 5, 2024.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $2,290 as compared to $1,954 for the years ended December 31, 2024 and 2023, respectively, an increase of $335, or 17%. The increase in net cash provided by financing activities was primarily due to an increase of $336 in proceeds from the exercise of stock options and Employee Stock Purchase Plan (“ESPP”) purchases year-over-year.
A discussion of net cash provided by financing activities during the year ended December 31, 2022 can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 5, 2024.
Sources of Capital
Our expected future capital requirements may depend on many factors including expanding our customer base and sales force and timing and extent of spending in obtaining regulatory approval and introduction of new products. Additional sources of liquidity available to us include issuance of additional equity securities through public or private equity offerings, debt financings or from other sources. The sale of additional equity may result in dilution to our shareholders. There is no assurance that we will be able to secure funding on terms acceptable to us, or at all. The increasing need for capital could also make it more difficult to obtain funding through either equity or debt. Should additional capital not become available to us as needed, we may be required to take certain actions, such as slowing sales and marketing expansion, delaying regulatory approvals, or reducing headcount.
Credit Facilities
As of December 31, 2024, we had $50,000 outstanding in indebtedness under a credit facility; $35,000 maturing on June 30, 2027 and $15,000 maturing on June 30, 2028. Quarterly interest only and revenue participation payments are due through each of the maturity dates. Interest is calculated as 7.5% plus the greater of the forward-looking term rate based on the secured overnight financing rate as set by the Federal Reserve Bank of New York plus 0.10% ("Adjusted SOFR") or 2.0% (12.19% as of December 31, 2024). Revenue participation payments are calculated as a percentage of our net revenues, up to $70,000 in any given year, adding approximately 1.5% per year of additional interest payments on the outstanding indebtedness. Upon each maturity date or upon such date earlier repayment occurs, we will repay the principal balance and provide a make-whole payment calculated to generate an internal rate of return to the lender equal to 11.5%, less the total of all quarterly interest and revenue participation payments previously paid. See Note 9 - Long-Term Debt, Net of Debt Discount and Financing Fees and Note 15 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements Part II, Item 8 of this Form 10-K.
P69
Table of Content
Contractual Obligations and Commitments
Transition and separation obligations to former CEO(4) 1,164 18 — — 1,182
Insurance financing agreement(5) 1,304 — — — 1,304
Separation obligation to former employee(6) 843 17 — — 860
(1) See Note 9 - Long-Term Debt, Net of Debt Discount and Financing Fees and Note 15 - Commitments and Contingencies in Part II, Item 8 of this Form 10-K.
(2) Calculated at 12.19%; the interest rate as of December 31, 2024.
(3) See Note 8 - Leases in Part II, Item 8 of this Form 10-K.
(4) Includes former CEO's 2024 bonus to be paid in March of 2025, senior advisory fees through May 2025, eighteen months of Consolidated Omnibus Budget Reconciliation Act ("COBRA") payments and related employer paid taxes. See Note 15 - Commitments and Contingencies in Part II, Item 8 of this Form 10-K.
(5) See Note 15 - Commitments and Contingencies in Part II, Item 8 of this Form 10-K.
(6) Includes severance, accrued paid time off, twenty-four months of COBRA payments and related employer paid taxes payable to a former employee. See Note 15 - Commitments and Contingencies in Part II, Item 8 of this Form 10-K.
SeeNote 8 - Leases, Note 9 - Long-Term Debt, Net of Debt Discount and Financing Fees, and Note 15 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K, for further information.
Critical Accounting Estimates
In preparing our financial statements in accordance with generally accepted accounting principles, there are certain accounting policies, which may require substantial judgment or estimation in their application. We believe these accounting policies and the others set forth in Note 2 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K are critical to understanding our results of operations and financial condition. Actual results could differ from our estimates and assumptions, and any such differences could be material to our results of operations and financial condition.
Inventories
Description
Inventories consist of purchased materials, direct labor and manufacturing overhead, and are stated at the lower of cost or net realizable value, as determined by the first-in, first-out method.
Judgments and Uncertainties
We maintain reserves for excess and obsolete inventory resulting from the potential inability to sell certain products in excess of current carrying cost. We make estimates regarding the future recoverability of the costs of these products and record provisions based on historical experience, expiration dates and expected future trends.
Sensitivity of Estimate to Change
As of December 31, 2024, we have reserved $1,630 for potential losses relating to inventory. If our actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write downs may be required, which could unfavorably affect future operating results.
P70
Table of Content
Derivative Instruments
Description
We review debt instruments to determine whether there are embedded derivative instruments, which are required to be bifurcated and accounted for separately as a derivative financial instrument. Embedded derivatives that are not clearly and closely related to the debt host are bifurcated and recognized at fair value on the Consolidated Balance Sheets with changes in fair value recognized as either a gain or loss on the Consolidated Statements of Operations for each reporting period.
Judgements and Uncertainties
The fair value of embedded derivatives is measured based on equity markets and interest rates, as well as an estimate of our nonperformance risk adjustment. This estimate includes an option adjusted spread and an estimate of our discount rate.
Sensitivity of Estimate to Change
As of December 31, 2024, we recorded a derivative liability of $2,400. However, if the discount rate were to change by 1%, it would have a less than $50 effect on our derivative liability fair value.
Stock-Based Compensation
Description
Stock-based compensation is in the form of stock options, restricted stock units ("RSU") and performance stock units ("PSU") granted to employees and directors. Stock-based compensation expense is based on the fair value of the stock options, RSUs and PSUs.
Judgments and Uncertainties
We estimate the grant date fair value of each stock option award on the date of grant using a multiple-point Black-Scholes option-pricing model. In addition, we estimate the grant date fair value of stock options granted to employees at a premium price based on market conditions, such as the trading price of our common stock, using a Monte Carlo simulation option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods.
The fair value of the PSU grants tied to revenue goals (the "Revenue PSUs") is determined based on the fair value of our common stock on the date of grant and our estimate of achieving the applicable revenue goals. Compensation expense for the Revenue PSUs is recorded as the milestones are achieved. 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 Revenue PSU award agreement. The amount actually awarded will be based upon achievement of the performance measures. Expectations related to the achievement of the revenue goals associated with the Revenue PSU grants is assessed at each reporting period and is used to determine whether any of the Revenue PSU grants are expected to vest. If the performance-based milestones related to the Revenue PSU grants are not met or not expected to be met, any compensation expense recognized associated with such grants is reversed.
The estimated grant date fair value of the Total Shareholder Return PSUs ("TSR PSUs") is calculated by using a Monte Carlo simulation. The number of TSR PSUs that will be earned is based upon the achievement of stock price targets ("Price Targets") over the measurement period. Compensation expense is recognized regardless if the Price Targets are satisfied. Compensation expense will be reversed if an employee's employment is terminated prior to satisfying the requisite service period.
We recognize compensation expense related to the ESPP based on the estimated fair value of the options on the date of grant. We estimate the grant date fair value using a Black-Scholes option pricing model for each purchase period. The grant date fair value is expensed on a straight-line basis over the offering period.
The determination of fair value using option-pricing models, as indicated above, is affected by our stock price, as well as assumptions regarding several subjective variables. These variables include, but are not limited to, our expected stock price volatility over the expected term of the awards. We determine the expected term of each award giving consideration to the contractual terms, vesting schedules, and post-vesting forfeitures. We use the risk-free interest rate on the implied yield available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected term of the award. The fair value of the Revenue PSUs also includes our estimates of achieving the applicable revenue goals. The value of the
P71
Table of Content
portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Operations. If factors change and different assumptions are used, stock-based compensation expense could be materially different in the future.
Sensitivity of Estimate of Change
As of December 31, 2024, if we determine that the unvested PSUs outstanding were in a pay-out range of 150%, our stock-based compensation expense would increase by $616.
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements, Part II Item 8 of this Form 10-K for further information.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are subject to interest rate risk from exposure to changes in interest rates based upon our investing and cash management activities. For our cash equivalents and investments, a change in interest rates affects the amount of interest income that can be earned.
We have not entered into derivative transactions related to cash and cash equivalents.We do not expect changes in interest rates to have a material adverse effect on our income or our cash flows in 2025. However, we give no assurance that interest rates will not significantly change in the future.
We also have interest rate exposure as a result of the Credit Facility. As of December 31, 2024, the outstanding principal amount of our loans under the Credit Facility was $50,000. Interest on our loans under the Credit Facility is payable quarterly during the term of the loans and is calculated as 7.5% plus the greater of Adjusted SOFR or 2.0% (12.19% as of December 31, 2024); provided that the interest rate shall never be less than 9.5%. Changes in the Adjusted SOFR rate may therefore affect our interest expense associated with the loans. An increase of 100 basis points in interest rates would increase expense by approximately $500 annually based on the amounts currently outstanding and would not materially affect our results of operations.
Credit Risk
Financial instruments that potentially subject us to credit risk consist of cash and cash equivalent balances, investments in U.S. Treasuries and accounts receivable. Certain of our cash and cash equivalents balances exceed Federal Deposit Insurance Corporation ("FDIC") insured limits or are invested in money market accounts with investment banks that are not FDIC-insured. As of December 31, 2024, $27,054 of the cash and cash equivalents balance was in excess of FDIC limits.
We invest our cash primarily in money market accounts and in U.S. Treasuries. We believe our cash is invested in a conservative manner, with cash preservation being the primary investment objective.
With respect to accounts receivable, we perform credit evaluations of our customers and do not require collateral. There have been no material losses on accounts receivable. Concentrations of credit risk with respect to accounts receivable are limited because a large number of geographically diverse customers make up our customer base, thus spreading the trade credit risk. We also control credit risk through credit approvals and monitoring procedures.
Foreign Currency Exchange Risk
The value of the U.S. dollar compared to the foreign currencies of the countries where we distribute our products has little to no effect on our financial results. In our international markets, we distribute our products and services to independent distributors who, in turn, distribute and market to medical clinics. The revenue from the distribution of our products in our international markets through independent distributors is denominated in U.S. dollars. As a result, we have minimal exposure related to foreign exchange rate fluctuations. Our portfolio of products is currently available in the U.S. and 19 other countries, including Canada, Germany, United Kingdom, Spain and several other European, Asian and Latin American countries.
P72
Table of Content
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID No. 34 ) 74
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2024 AND 2023 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 80
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS 103
P73
Table of Content
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Axogen, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Axogen, Inc and subsidiaries (the "Company") as of December 31, 2024 and 2023, the related consolidated statements of operations, shareholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2024, and the related notes and the schedule listed in the Index at Item 15(a) (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
P74
Table of Content
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Inventory – Excess and Obsolete (E&O) Inventory — Refer to Notes 2 and 3 to the financial statements
Critical Audit Matter Description
Inventories, consisting of materials, direct labor and manufacturing overhead, are stated at the lower of cost or net realizable value. At each balance sheet date, the Company evaluates inventories for excess quantities, obsolescence or shelf-life.
The Company monitors the shelf life of its products and historical expiration and spoilage trends, and reserves for inventory based on the estimated amount of inventory that will not be distributed before expiration or spoilage. To estimate the amount of inventory that will expire or spoil prior to being distributed, the Company reviews inventory quantities on hand, historical and projected distribution levels, historical expiration trends, and historical spoilage trends. The Company’s calculation of the amount of inventory that will expire prior to distribution has three components: 1) a spoilage-based component that compares historical spoilage rates to inventory quantities on hand 2) a demand or consumption-based component that compares projected distribution to inventory quantities on hand; and 3) an expiring inventory component that assesses the risk related to inventory that is near expiration.
Given the significant judgments associated with evaluating the valuation of E&O inventory, auditing the reasonableness of management’s estimates and assumptions involved especially subjective judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s valuation of E&O inventory included the following, among others:
•We tested the design, implementation and operating effectiveness of controls over the E&O inventory valuation.
•We evaluated management’s ability to accurately forecast E&O inventory by comparing the historical inventory reserve estimates to subsequent inventory destructions and expirations.
•We evaluated the reasonableness of the Company’s E&O valuation methodology and tested the mathematical accuracy of the calculation.
•We tested the accuracy and completeness of the underlying data used in the calculation of the Company’s expiring inventory and spoilage models.
•We made inquiries of the Company’s employees outside of the accounting department and evaluated other areas of the audit to identify business, product, or industry changes that may impact the inputs in the inventory valuation calculation.
/s/ Deloitte & Touche LLP
Tampa, Florida
February 26, 2025
We have served as the Company's auditor since 2018.
P75
Table of Content
AXOGEN, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2024 and 2023
(In Thousands, Except Share and Per Share Amounts)
Assets
Current assets:
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable and accrued expenses $ 28,641 $ 28,883
Current maturities of long-term lease obligations 1,969 1,547
Long-term debt, net of debt discount and financing fees 47,496 46,603
Other long-term liabilities 94 —
Commitments and contingencies - see Note 15
Shareholders’ equity:
Total liabilities and shareholders’ equity $ 203,728 $ 196,827
The accompanying notes are an integral part of these consolidated financial statements.
P76
Table of Content
AXOGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2024, 2023 and 2022
(In Thousands, Except Share and Per Share Amounts)
Costs and expenses:
Other (expense) income:
Total other (expense) income, net (6,677) (254) 759
Loss per common share — basic and diluted $ (0.23) $ (0.51) $ (0.69)
The accompanying notes are an integral part of these consolidated financial statements.
P77
Table of Content
AXOGEN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years ended December 31, 2024, 2023 and 2022
(In Thousands)
Shares Amount
Issuance of restricted and performance stock units 343 3 (3) — —
Exercise of stock options and employee stock purchase plan 365 4 1,802 — 1,806
Issuance of restricted and performance stock units 369 4 (4) — —
Exercise of stock options and employee stock purchase plan 310 3 1,961 — 1,964
Issuance of restricted and performance stock units 713 7 (7) — —
Exercise of stock options and employee stock purchase plan 312 3 2,297 — 2,300
The accompanying notes are an integral part of these consolidated financial statements.
P78
Table of Content
AXOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2024, 2023 and 2022
(In Thousands)
Cash flows from operating activities:
Amortization of debt discount and deferred financing fees 893 891 891
Loss on disposal of equipment — 56 —
Provision for (recovery of) bad debts 650 (271) 612
Change in fair value of derivatives (587) (1,531) (1,044)
Change in operating assets and liabilities:
Prepaid expenses and other 784 (867) (84)
Accounts payable and accrued expenses 125 6,509 660
Cash paid for interest portion of finance leases (4) (3) (2)
Contract and other liabilities 424 (14) —
Net cash provided by (used in) operating activities 4,535 (5,716) (16,066)
Cash flows from investing activities:
Net cash provided by (used in) investing activities (10,297) 19,253 (3,200)
Cash flows from financing activities:
Cash paid for debt portion of finance leases (10) (10) (12)
Supplemental disclosures of cash flow activity:
Cash paid for interest, net of capitalized interest $ 7,301 $ 1,944 $ —
Supplemental disclosure of non-cash investing and financing activities:
The accompanying notes are an integral part of these consolidated financial statements.
P79
Table of Content
AXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2024, 2023 and 2022
(In thousands. except shares and per share amounts)
1.Nature of Business
Axogen, Inc. (together with its wholly-owned subsidiaries, the “Company”) was incorporated in Minnesota. The Company's business is focused on the science, development and commercialization of the technologies used for peripheral nerve regeneration and repair. The Company's products include Avance® Nerve Graft, Axoguard Nerve Connector®,Axoguard Nerve Protector®,Axoguard HA+ Nerve ProtectorTM, Axoguard Nerve Cap®, andAvive+ Soft Tissue MatrixTM.The Company is headquartered in Florida. The Company has processing, warehousing, and distribution facilities in Ohio and Texas.
The Company manages its operations as a single operating segment. Substantially all of the Company's assets are maintained in the United States ("U.S."). The Company derives substantially all of its revenues from sales to customers in the U.S.
2.Summary of Significant Accounting Policies
Reclassifications
Certain reclassifications have been made to the prior period financial information to conform to the presentation used in the Consolidated Statement of Operations for the year ended December 31, 2024.
Effective in the first quarter of 2024, the Company voluntarily changed its accounting policy for shipping and handling costs. Under the new accounting policy, these costs are included in Cost of goods sold, whereas they were previously included in Sales and marketing costs and expenses. Including these expenses in Cost of goods sold better aligns these costs with the related revenue in the gross profit calculation. Although the prior method of accounting continues to be an accepted alternative, the new accounting policy is more widely used in the industry and provides improved comparability of the Company's financial statements to its peers. This change in accounting policy has been applied retrospectively. The Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 have been reclassified to reflect this change in accounting policy. The impact of this reclassification was an increase of $5,632 and $5,549 to Cost of goods sold for the years ended December 31, 2023 and 2022, respectively, and a corresponding decrease to Sales and marketing costs and expenses in the same periods.
Effective in the first quarter of 2024, the Company also ceased allocating certain costs to and from certain departments. Previously such costs had been allocated based on the Company’s estimate of the proportionate share of total expense to Cost of goods sold, Sales and marketing costs and expenses, Research and development costs and expenses, and General and administrative costs and expenses. The Company determined that these changes would better reflect industry practice and provide more meaningful information, as well as increased transparency of its operations. This change in presentation has been applied retrospectively. The Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 have been reclassified to reflect this change. Accordingly, $3,470 and $4,148were reclassified to General and administrative costs and expenses and $374 and $79 were reclassified to Cost of goods sold, of which $2,849 and $2,696 were previously included in Sales and marketing costs and expenses and $995 and $1,531 were previously included in Research and development costs and expenses for the years ended December 31, 2023 and 2022, respectively, on the Consolidated Statements of Operations.
These reclassifications had no impact on net revenue, loss from operations, net loss, or loss per common share for prior periods and do not represent a restatement of the Company's previously issued consolidated financial statements.
Basis of Presentation
The accompanying consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The significant estimates affecting the amounts reported or disclosed in the consolidated financial statements include the realizable value of inventories, the valuation of stock-based compensation, the valuation of derivative instruments, and the fair
P80
Table of Content
value of debt instruments. Other estimates that affect the amounts reported or disclosed in the consolidated financial statements include the allowance for doubtful accounts, the useful life and recoverability of long-lived assets, incremental borrowing rates for operating leases, and accounting for income taxes, including the realizability of deferred tax assets and the related valuation allowance. The Company bases its estimates on historical and anticipated results, trends, and various other assumptions that management believes are reasonable under the circumstances, including assumptions as to future events. Actual results may differ from those estimates.
Risk and Uncertainties
The Company is dependent on its suppliers, including single source suppliers, some of which are outside of the U.S., and the inability of these suppliers to deliver necessary components of their products in a timely manner at prices, quality levels and volumes acceptable to the Company, or the Company's inability to effectively manage these components from its suppliers, could have a material adverse effect on the Company's business, financial condition and operating results.
Cash and Cash Equivalents
Cash and cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less from the date of acquisition. Certain of the Company's cash and cash equivalents balances exceed Federal Deposit Insurance Corporation ("FDIC") insured limits or are invested in money market accounts with investment banks that are not FDIC-insured. The Company places its cash and cash equivalents in what they believe to be credit-worthy financial institutions. As of December 31, 2024, $27,054 of the cash and cash equivalents balance was in excess of FDIC limits.
Restricted Cash
Amounts included in restricted cash represent those required to be set aside to meet contractual terms of a lease agreement held by the Company. See Note 9 - Long-Term Debt, Net of Debt Discount and Financing Fees- Other Credit Facilities.
The following table provides a reconciliation of cash and cash equivalents, and restricted cash reported on the Consolidated Balance Sheets that sum to the total of the same reported on the Consolidated Statements of Cash Flows:
Investments
Investments, consisting of U.S. Treasuries, are classified as available-for-sale and have maturities less than one year as of December 31, 2024. Investments are carried at fair value based upon quoted market prices. The Company elected the fair value option ("FVO") for all of its available-for-sale investments. The FVO election results in all changes in unrealized gains and losses being included in Investment income on the Consolidated Statements of Operations.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at invoiced amounts and do not bear interest. The Company grants credit to customers in the normal course of business, but generally does not require collateral or other security to support its receivables.
An allowance for doubtful accounts is established for estimated uncollectible receivables based on the Company's assessment of the collectability of customer accounts. The Company recognizes the provision in General and administrative costs and expenses on the Consolidated Statements of Operations. In determining the amount of the allowance, the Company considers aging of account balances, historical credit losses, customer-specific information, the current economic environment, supportable forecasts, and other relevant factors. Uncollectible receivables are written off against the allowance for doubtful accounts when all attempts to collect the receivable have been exhausted.
P81
Table of Content
Concentration Risk
Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, which are held at major financial institutions, and trade receivables.
The Company's products are sold on an uncollateralized basis and on credit terms.
None of the Company's customers accounted for 10% or more of the consolidated revenues or accounts receivable during the years ended December 31, 2024, 2023 and 2022.
Inventory
Inventory, consisting of materials, direct labor, and manufacturing overhead, are stated at the lower of cost or net realizable value. At each balance sheet date, the Company evaluates inventory for excess quantities, obsolescence or shelf life.
The Company monitors the shelf life of its products and historical expiration and spoilage trends, and reserves for inventory based on the estimated amount of inventory that will not be distributed before expiration or spoilage. To estimate the amount of inventory that will expire or spoil prior to being distributed, the Company reviews inventory quantities on hand, historical and projected distribution levels, historical expiration trends, and historical spoilage trends. The Company’s calculation of the amount of inventory that will expire prior to distribution has three components: (i) a spoilage-based component that compares historical spoilage rates to inventory quantities on hand, (ii) a demand or consumption-based component that compares projected distribution to inventory quantities on hand; and (iii) an expiring inventory component that assesses the risk related to inventory that is near expiration. The Company’s model assumes that inventory will be distributed on a first-in-first-out basis. Due to the nature of the inventory (surgical implants with expiration dates) and the fact that a significant portion of the Company’s inventory is at medical facility consignment locations, estimating the amount of spoilage, the amount of inventory that will expire, and the amount of inventory that should be reserved for involves significant judgments and estimates.
Property and Equipment, Net
Property and equipment, net are stated at historical cost less accumulated depreciation and amortization. Additions and improvements that extend the lives of the assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Leasehold improvements are amortized on a straight-line basis over the shorter of the asset’s estimated useful life or the remaining lease term. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets ranging from three to thirty-nine years.
Gains or losses on the disposition of property and equipment are recorded in the period incurred and recorded in General and administrative costs and expenses on the Consolidated Statements of Operations.
Capitalized Interest
The interest cost on capital projects, including facility build-outs, is capitalized and included in the cost of the project. Capitalization begins with the first expenditure for the project and continues until the project is substantially complete and ready for its intended use. For the years ended December 31, 2024 and 2023, the Company capitalized $— and $5,285, respectively, of interest expense into property and equipment.
Impairment of Long-Lived Assets
The Company analyzes long-lived assets (asset groups), including property and equipment and definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment is recognized when the estimated undiscounted cash flows generated by those assets is less than the carrying amounts of such assets. If it is determined that a long-lived asset (asset groups) is not recoverable, an impairment loss would be calculated based on the excess of the carrying value of the long-lived asset (asset groups) over the fair value of the long-lived asset (asset groups). There have been no impairments of long-lived assets during the years ended December 31, 2024, 2023 and 2022.
Indefinite-lived intangible assets are not subject to amortization, however, annually in the third quarter or whenever an event occurs or circumstances indicate that the indefinite-lived intangible assets may be impaired, the Company evaluates qualitative factors to determine whether it is more likely or not that the fair value of the indefinite lived asset is less than its
P82
Table of Content
carrying amount. The Company's qualitative evaluation includes an assessment of factors, including specific operating results as well as industry, market and general economic conditions. The Company may elect to bypass this qualitative evaluation and perform a quantitative test.
Intangible Assets, Net
Intangible assets are recorded at cost and include patents and patent application costs, licenses, and trademarks. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives and reported net of accumulated amortization. Amortization expense is recorded in General and administrative costs and expenses on the Consolidated Statements of Operations. The useful lives of intangible assets are as follows:
•License agreements(1): 17 to 20 years
•Patents: up to 20 years
•Trademarks: indefinite lived
(1) The Company pays royalty fees based on net sales of the licensed products, which are recorded in Sales and marketing costs and expenses on the Consolidated Statements of Operations. The license agreements expired during 2023. See Note 5 - Intangible Assets, Net.
Global Nerve Foundation
Periodically, the Company may make contributions to the Global Nerve Foundation ("GNF"), a related party, due to certain executives of the Company being members of GNF's board of directors. The GNF was incorporated in 2021 exclusively for charitable, educational, and scientific purposes and qualifies under Internal Revenue Code 501(c)(3) as an exempt private foundation. Under its charter, the GNF engages in activities that focus on improving the awareness and care of patients with peripheral nerve injuries through grants, contributions and other appropriate means. The GNF is a separate legal entity and is not a subsidiary of the Company; therefore, its results are not included in the accompanying consolidated financial statements.
On July 20, 2024, the Company entered into a Qualified Founding Partner Agreement ("Agreement") which grants certain benefits to the Company related to the GNF's programming and marketing. The Agreement terminates on December 31, 2031. The Company may terminate the Agreement early by giving notice of termination between January 2 and January 31 in any calendar year; however, if the Company terminates the Agreement early, it will be required to makethe next two payments per the payment schedule in a total amount not to exceed $100. Per the terms of the Agreement, the Company contributed $100, $— and $700 to the GNF during the years ended December 31, 2024, 2023 and 2022, respectively, and will contribute $175 in 2025. These contributions were recorded in Sales and marketing costs and expenses on the Consolidated Statements of Operations.
Fair Value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Cash equivalents, investments, and derivative instruments are recorded at fair value on a recurring basis. 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.
Derivative Instruments
The Company reviews its debt instruments in determining whether there are embedded derivative instruments, which are required to be bifurcated and accounted for separately as a derivative financial instrument. Embedded derivatives that are not
P83
Table of Content
clearly and closely related to the debt host are bifurcated and recognized at fair value on the Consolidated Balance Sheets with changes in fair value recognized as either a gain or loss on the Consolidated Statement of Operations for each reporting period. The fair value of embedded derivatives is measured based on equity markets and interest rates, as well as an estimate of the Company's nonperformance risk adjustment. This estimate includes an option adjusted spread and an estimate of the Company's risk-free rate.
Leases
The Company determines if a contract contains a lease at the inception date and determines the lease classification, recognition, and measurement at commencement date. All operating lease commitments with a lease term greater than twelve months are recognized as right-of-use assets and obligations on a discounted basis on the Consolidated Balance Sheets. Leases with an initial term of twelve months or less are not recorded on the Consolidated Balance Sheets.
The Company classifies a lease based on whether the arrangement is effectively a purchase of the underlying asset. Leases that transfer the control of the underlying asset are classified as finance leases and all others are classified as operating leases. Interest and amortization expense are recognized for operating leases on a straight-line basis. If a change to the lease term leads to a reassessment of the lease classification and remeasurement, assumptions such as the discount rate and variable rents based on a rate or index will be updated as of the remeasurement date. If an arrangement is modified, the Company will reassess whether the arrangement contains a lease. Any subsequent changes in lease payments are recognized when incurred, unless the change requires a remeasurement of the lease liability.
Certain of the Company's leases include options for the Company to extend the lease term. The exercise of a lease renewal option is generally at the Company's sole discretion. Certain of the Company's 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. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company accounts for its sublease income on a net basis, recording the sublease income with the operating lease expense on its Consolidated Statements of Operations.
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 transfers control of the products and services to the Company’s customers when the product is shipped or when it is delivered to the customer depending on the agreement. Products are primarily transferred to customer at a point in time.
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.
In the case of products or services sold to a customer under a distribution or purchase agreement, the customers are granted exclusive distribution rights to sell the implants internationally in a 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 distributor inventory upon termination of the 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 judgment because an evaluation must be made regarding the 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 an impact on the timing of revenue recognition from sales to distributors. The Company accounts 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 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.
P84
Table of Content
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 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 that 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, which totaled $1,271, $1,056 and $856 for the years ended December 31, 2024, 2023 and 2022, respectively.
Government Assistance
As there is no authoritative guidance under U.S. GAAP for accounting for grants to for-profit business entities, the Company accounts for the grants by analogy to International Accounting Standards 20 Accounting for Government Grants and Disclosure of Government Assistance. Government assistance and grants are recognized when there is reasonable assurance that the Company has met the requirements of the assistance and there is reasonable assurance that the grant will be received. The Company received government grants of $717, $393 and $158 during the years ended December 31, 2024, 2023 and 2022, respectively.
Government grants totaling $300, $393 and $158 were recorded as an offset to Research and development costs and expenses on the Consolidated Statements of Operations during the years ended December 31, 2024, 2023 and 2022, respectively. Government assistance totaling $87 was recorded as an offset to General and administrative costs and expenses on the Consolidated Statement of Operations during the year ended December 31, 2024 and none were offset in 2023 and 2022. Deferred grants totaling $330 were recorded in Accounts payable and accrued expenses as of December 31, 2024 on the Consolidated Balance Sheet.
Cost of Goods Sold
Cost of goods sold includes materials, direct labor, and manufacturing overhead costs related to each product sold or produced, including processing, quality assurance labor, scrap, and inbound freight costs, as well as facility, warehousing and overhead supporting the Company's manufacturing operations. All of the Company's manufacturing costs are included in Cost of goods sold on the Consolidated Statements of Operations.
Research and Development Costs and Expenses
Research and development costs and expenses are charged to expense as incurred. Costs of research and development activities relate to product development, clinical trial expenses, and technical support of products. Costs primarily consist of salaries, wages, consulting fees, and depreciation and maintenance of research facilities and equipment.
Shipping and Handling
All shipping and handling costs, including facility and warehousing overhead, directly related to bringing the Company’s products to their final selling destination are included in Cost of goods sold on the Consolidated Statements of Operations. The Company has elected to account for shipping and handling costs for products shipped to customers as a fulfillment activity as the costs are incurred as part of the transfer of the goods to the customer in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 606. See Reclassifications above.
Income Taxes
The Company uses the asset and liability method to account for income taxes in accordance with the authoritative guidance for income taxes. Under this method, deferred tax assets and liabilities are determined based on future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and tax loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
P85
Table of Content
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 Consolidated 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.
Stock-Based Compensation
Stock-based compensation is in the form of stock options, restricted stock units ("RSU"), and performance stock units ("PSU") granted to employees and directors. Stock-based compensation expense is based on the fair value of the stock options, RSUs and PSUs.
The Company estimates the fair value of each stock option award on the date of grant using a multiple-point Black-Scholes option-pricing model. In addition, the Company estimates the grant date fair value of stock options granted to employees at a premium price based on market conditions, such as the trading price of the Company’s common stock, using a Monte Carlo simulation option-pricing model.
The Company estimates the fair value of RSU grants based upon the grant date closing market price of the Company’s common stock.
The fair value of the PSU grants is based on the Company’s closing stock price on the grant date and its estimate of achieving the applicable performance target goals. The number of PSUs that will ultimately be earned is based upon the Company’s performance as measured against specified targets over the measurement period. Expectations related to the achievement of performance goals associated with PSU grants is assessed as of each reporting period and is used to determine whether PSU grants are expected to vest. If performance-based milestones related to PSU grants are not met or not expected to be met, any compensation expense recognized associated with such grants is reversed.
The grant date fair value of the Total Shareholder Return PSU ("TSR PSU") grants is calculated using a Monte Carlo simulation. The number of PSUs that will be earned is based upon the achievement of stock price hurdles ("Price Targets") over the measurement period. Compensation expense is recognized regardless if the Price Targets are satisfied. Compensation expense is reversed if an employee's employment is terminated prior to satisfying the requisite service period.
The Company recognizes expense for all stock-based compensation awards, including stock options, RSUs, and PSUs granted to employees eligible for retirement, as defined within the award notice and allowing for continued vesting post-retirement, over the retirement notice period and continuously updates its estimate of expense over the notice period each reporting period if a retirement notice has not been provided.
The Company recognizes compensation expense related to the Employee Stock Purchase Plan (“ESPP”) based on the estimated fair value of the options on the date of grant. The Company estimates the grant date fair value, and the resulting stock-based compensation expense, using a Black-Scholes option pricing model for each purchase period. The grant date fair value is expensed on a straight-line basis over the offering period.
The determination of fair value using option-pricing models, as indicated above, is affected by the Company’s stock price, as well as assumptions regarding several subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the expected term of the awards. The Company determines the expected term 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 available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected term of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statements of Operations. The expense is reduced for forfeitures as they occur.
Net Loss Per Share
Basic net loss per common share is computed by dividing reported net loss by the weighted average number of common shares outstanding during the period without consideration of potentially dilutive securities. Diluted net loss per share reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted into common stock of the Company. Diluted net loss per share is the same as basic net loss per common share for all periods presented, since the effect of the potentially dilutive securities are anti-dilutive. Potential dilutive common share equivalents consist of the incremental common shares issuable upon exercise of vested stock options, RSUs, and PSUs.
P86
Table of Content
Recently Issued Accounting Pronouncements
In December 2023, the FASB issued Accounting Standards Update 2023-09 — Income Taxes (Topic 740) — Improvements to Income Tax Disclosures ("ASU 2023-09"). The new guidance provides for disclosure on an annual basis of the following: (i) specific categories in the rate reconciliation and (ii) additional information for reconciling items that meet a quantitative threshold of greater than 5% of the amount computed by multiplying pretax income (or loss) by the applicable statutory income tax rate. The amendment in ASU 2023-09 is effective for annual periods beginning after December 15, 2024, and early adoption is permitted. The Company expects to enhance annual income tax reporting disclosures based on the new requirements.
In November 2024, the FASB issued Accounting Standards Update 2024-03 — Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40) — Disaggregation of Income Statement Expenses ("ASU 2024-03"), and in January 2025, the FASB issued Accounting Standards Update No. 2025-01, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date ("ASU 2025-01"). ASU 2024-03 requires additional disclosure of the nature of expenses included in the income statement as well as disclosures about specific types of expenses included in the expense captions presented in the income statement. ASU 2024-03, as clarified by ASU 2025-01, is effective for annual periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027. Both early adoption and retrospective application are permitted. The Company expects to enhance annual expense disclosures based on the new requirements.
Recently Adopted Accounting Pronouncements
In November 2023, the FASB issued Accounting Standards Update 2023-07 — Segment Reporting (Topic 280):Improvements to Reportable Segment Disclosures ("ASU 2023-07"). The new guidance requires disclosure on an annual and interim basis of the following: (i) significant segment expenses regularly provided to the chief operating decision maker ("CODM") and a measure of segment profit or loss; (ii) an amount for other segment items by reportable segment and a description of its composition; (iii) all annual disclosures about a reportable segment's profit and loss and assets as currently required by Topic 280; (iv) clarify if the CODM uses more than one measure of a segment's profit or loss in assessing segment performance and deciding how to allocate resources; and (v) disclose title and position of the CODM and how the CODM uses the reported measures. Public entities with a single reportable segment are required to provide all the disclosures required by this amendment. The Company adopted ASU 2023-07 effective December 31, 2024 and the adoption of this accounting standard did not have an impact on the Company's consolidated financial statements. See Note 13 - Segments.
All other Accounting Standards Updates issued and not yet effective as of December 31, 2024, and through the date of this report, were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s current or future financial position or results of operations.
3.Inventory
Inventory consists of the following:
The provision for inventory write-down is as follows for the years ended:
December 31,
As of December 31, 2024 and 2023, the Company reserved $1,630 and $1,342, respectively, for potential losses relating to inventory.
P87
Table of Content
4.Property and Equipment, Net
Property and equipment, net consist of the following:
Finance lease right-of-use assets 159 138
Less: accumulated depreciation and amortization (19,911) (13,697)
Depreciation expense is as follows for the years ended:
December 31,
5.Intangible Assets, Net
Intangible assets consist of the following:
Amortizable intangible assets:
Unamortized intangible assets:
The amortization expense is as follows for the years ended:
December 31,
P84
Table of Content
As of December 31, 2024, future amortization of patents and license agreements is as follows:
Year Ending December 31, (in thousands)
License Agreements
The Company had multiple license agreements with the University of Florida Research Foundation and the University of Texas at Austin (the "License Agreements") in which the Company acquired exclusive worldwide licenses for underlying technology used in repairing and regenerating nerves. The licensed technologies included the rights to issue patents and patents pending in the U.S. and international markets. The License Agreement with the University of Texas expired in September 2023 and the royalty obligations associated with the License Agreement with the University of Florida Research Foundation expired in December 2023.
The Company paid royalty fees ranging from 1% to 3% under the License Agreements based on net sales of licensed products. Also, when the Company paid royalties to more than one licensor for sales of the same product, a royalty stack cap applied, capping total royalties at 3.75%.
Royalty fees included in Sales and marketing costs and expenses on the Consolidated Statements of Operations are as follows for the years ended:
December 31,
P85
Table of Content
6.Fair Value Measurement
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, 2024 and 2023:
(in thousands) Level 1 Level 2 Level 3 Total
Assets:
Liabilities:
Debt derivative liabilities $ — $ — $ 2,400 $ 2,400
Total liabilities $ — $ — $ 2,400 $ 2,400
December 31, 2023 Level 1 Level 2 Level 3 Total
Assets:
Liabilities:
Debt derivative liabilities $ — $ — $ 2,987 $ 2,987
Total liabilities $ — $ — $ 2,987 $ 2,987
The changes in Level 3 liabilities measured at fair value on a recurring basis are as follows:
(in thousands) Debt Derivative Liabilities
Change in fair value included in net loss (1,531)
Change in fair value included in net loss (587)
There were no changes in the levels or methodology of the measurement of financial assets or liabilities during the years ended December 31, 2024 and 2023.
The fair value of cash, restricted cash, accounts receivable, and 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 the Company has with Oberland Capital ("Credit Facility") were $47,496 and $51,307 at December 31, 2024, respectively, and $46,603 and $51,486 at December 31, 2023, 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.
P86
Table of Content
The significant inputs that are included in the valuation of the debt derivative liability - first tranche include:
Input
Remaining term (years) 2.5 years 3.5 years
Revenue participation payments Maximum each year Maximum each year
Probability of mandatory prepayment after 2024 15.0% 1 15.0% 1
Probability of optional prepayment event 5.0% 1 5.0% 1
Probability of note held-to-maturity 2 80.0% 1 80.0% 1
1 Represents a significant unobservable input.
2 See Maturity date in table.
The significant inputs that are included in the valuation of the debt derivative liability - second tranche include:
Input
Remaining term (years) 3.5 years 4.5 years
Revenue participation payments Maximum each year Maximum each year
Probability of mandatory prepayment after 2024 15.0% 1 15.0% 1
Probability of optional prepayment event 5.0% 1 5.0% 1
Probability of note held-to-maturity2 80.0 % 1 80.0 % 1
1 Represents a significant unobservable input.
2 See Maturity date in table.
7.Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
Accounts payable and accrued expenses $ 28,641 $ 28,883
P87
Table of Content
8.Leases
The Company leases administrative, manufacturing, research, and distribution facilities through operating leases. Several leases include fixed payments including rent and non-lease components such as common-area or other maintenance costs.
The components of total lease expense are as follows for the years ended:
December 31,
Finance lease costs
Amortization of right-of-use assets $ 6 $ 4 $ 20
Interest on lease obligations 4 3 2
Operating lease costs
Supplemental balance sheet information related to the operating and financing leases is as follows:
Operating Leases
Current maturities of long-term lease obligations $ 1,960 $ 1,541
Financing Leases
Right-of-use financing leases (1) $ 37 $ 28
Current maturities of long-term lease obligations $ 9 $ 6
Long-term lease obligations $ 30 $ 19
Weighted average operating lease term (in years): 8.8 9.6
Weighted average financing term (in years): 3.6 6.5
Weighted average discount rate - operating leases 10.95 % 10.99 %
Weighted average discount rate - financing leases 14.06 % 13.22 %
(1) Financing leases are included in Property and equipment, net on the Consolidated Balance Sheets.
P88
Table of Content
Future minimum lease payments under operating and financing leases as of December 31, 2024 are as follows:
(In thousands)
Year ending December 31,
Less: Imputed interest (12,053)
Total lease liability 21,190
Less: Current lease liability (1,969)
Long-term lease liability $ 19,221
Lease modifications
The Company accounts for lease revisions as a lease modification in accordance with FASB ASC 842, Leases, when the modification effectively terminates the existing lease and creates a new lease. No lease modifications were recorded during the years ended December 31, 2024 and 2023.
Sublease Agreement
On May 31, 2024, the Company entered into a sublease agreement to sublease a portion of its headquarters in Tampa, Florida expiring on October 31, 2031. The Company or the sublessor can terminate the sublease agreement after sixty-three months with twelve months written notice. There is no option to extend the sublease agreement. The Company accounts for this sublease in accordance with FASB ASC 842, Leases.
9.Long-Term Debt, Net of Debt Discount and Financing Fees
Long-term debt, net of debt discount and financing fees consists of the following:
Less - unamortized debt discount and deferred financing fees (2,504) (3,397)
Long-term debt, net of debt discount and financing fees $ 47,496 $ 46,603
Credit Facility
On June 29, 2023, the Company amended its Credit Facility with Oberland Capital and its affiliates, TPC Investments II LP and Argo LLC (collectively, the "Lender"), to transition the base interest rate from three-month LIBOR to the forward looking term rate based on the secured overnight financing rate as set by the Federal Reserve Bank of New York plus 0.10% ("Adjusted SOFR"). The Company obtained the first tranche of $35,000 at closing on June 30, 2020. On June 30, 2021, the second tranche of $15,000 was drawn down by the Company.
Each tranche under the Credit Facility requires quarterly interest payments for seven years. Interest is calculated as 7.5% plus the greater of Adjusted SOFR or 2.0% (12.19% as of December 31, 2024); provided that the interest rate shall never be less than 9.5%. Each tranche of the Credit Facility has a term of seven years from the date of issuance (with the first tranche issued on June 30, 2020, maturing on June 30, 2027, and the second tranche issued on June 30, 2021, maturing on June 30, 2028). In connection with the Credit Facility, the Company entered into a revenue participation agreement (the “Revenue Participation Agreement”) with the Lender, which provided that, among other things, a quarterly royalty payment as a percentage of the Company’s net revenues up to $70 million in any given year, after April 1, 2021, ending on the date upon
P89
Table of Content
which all amounts owed under the Credit Facility have been paid in full. This structure results in approximately 1.5% per year of additional interest payments on the outstanding loan amount. The Company recorded interest expense for this Revenue Participation Agreement of $756 for each of the years ended December 31, 2024, 2023 and 2022, respectively. The Company pays the quarterly debt interest on the last day of the quarter, and for the years ended December 31, 2024 and 2023, paid $6,475 and $6,436, respectively, to the Lender. The Company capitalized interest of $—and $5,285 for the years ended December 31, 2024 and 2023, respectively, towards the costs to construct and retrofit its Axogen Processing Center facility (the "APC Facility") in Vandalia, Ohio, which was completed during 2023.
The amounts outstanding under the Credit Facility may be accelerated upon certain events, including: (a) required mandatory prepayments upon an asset sale; (b) in the event the Company is subject to (i) any litigation brought by a Governmental Authority (as defined in the Credit Facility) including intervention after litigation is commenced by a Person (as defined in the Credit Facility), or (ii) any final administrative action by a Governmental Authority, in each case arising out of or in connection with any of the Company’s registry studies, payments made to doctors or training activities with respect to healthcare professionals (excluding certain final administrative actions that have been fully and finally resolved by the parties pursuant to a settlement agreement) or (c) upon the occurrence of an event of default (either automatically or at the option of the Lender depending on the nature of the event). In addition, the Company has the right to prepay any amounts outstanding under the Credit Facility. Upon maturity or upon such earlier repayment of the Credit Facility, the Company will repay the principal balance and provide a make-whole payment calculated to generate an internal rate of return to the Lender equal to 11.5%, less the total of all quarterly interest and royalty payments previously paid to the Lender. See Note 15 - Commitments and Contingencies for further information related to the make-whole payment calculation.
Upon the occurrence of an event of default, the interest rate incurred on amounts outstanding under the Credit Facility will be increased by 4%. The Credit Facility includes a financial covenant requiring the Company to achieve certain revenue targets each quarter. As of December 31, 2024, the Company was in compliance with all the covenants. In the event of a failure to meet such covenants, the Company may avoid a default by electing to be subject to a liquidity covenant and meeting all of the obligations required by such covenant. The borrowings under the Credit Facility are secured by substantially all of the assets of the Company.
The debt derivative liabilities are recorded at fair value, with the change in fair value reported in Change in fair value of derivatives on the Consolidated Statements of Operations at each reporting date. See Note 6 - Fair Value Measurement.
Unamortized Debt Discount and Financing Fees
The unamortized debt discount consists of the remaining initial fair values of the embedded derivatives related to the Credit Facility.
The financing fees for the Credit Facility were $642 and recorded as a contra liability to Long-term debt on the Consolidated Balance Sheets.
Amortization of debt discount and deferred financing fees for the years ended December 31, 2024, 2023 and 2022 was $893, $891 and $891, respectively, and recorded in interest expense using the effective interest rate method.
Other Credit Facilities
The Company had restricted cash of $6,000 and $6,002 at December 31, 2024 and 2023, respectively. The December 31, 2024 and 2023 balances both include $6,000, which represents collateral for an irrevocable standby letter of credit.
P90
Table of Content
10.Basic and Diluted Loss per Common Share
The following reflects the net loss attributable to common shareholders and share data used in the basic and diluted earnings per share computations using the two-class method as of:
December 31,
(in thousands, except share and per share amounts) 2024 2023 2022
Numerator:
Denominator:
Net loss per common share (basic and diluted) $ (0.23) $ (0.51) $ (0.69)
(1) These common equivalent shares are not included in the diluted per share calculations as they would be dilutive if the Company was in a net income position.
11.Stock-Based Compensation
The Company maintains two stock-based incentive plans: (i) The Axogen, Inc. Third Amended and Restated 2019 Long-Term Incentive Plan ("2019 Plan") 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 and (ii) The Axogen 2017 Employee Stock Purchase Plan (“2017 ESPP”).
At the June 5, 2024 Annual Shareholder Meeting, approval was received to increase the number of shares available under the 2019 Plan from 8,000,000 to 10,500,000.
As of December 31, 2024, there were2,949,495 shares of common stock available for future grant under the 2019 Plan. Additionally, the Company issued 18,700 options, 330,000 RSUs and 600,000 PSUs as inducement grants to certain employees in accordance with Nasdaq Listing Rule 5635(c)(4).
Stock-based compensation expense is included in the following line items on the accompanying Consolidated Statements of Operations for the years ended:
December 31,
Stock Options
Stock options granted to employees 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. Stock options granted to directors and certain options granted from time to time to certain executive officers vest 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 option-pricing model. In addition, the Company estimates the grant date fair value of stock options granted to employees at a premium price based on market conditions, such as the trading price of the Company’s common stock, using a Monte Carlo simulation option-pricing model. The value of the portion of the award that is
P91
Table of Content
ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statements of Operations. The expense is 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,
Expected dividends — % — % — %
The following table summarizes the Company's stock option activity for the year ended December 31, 2024:
(1) Options granted include 18,700inducement shares in accordance with Nasdaq Listing Rule 5635(c)(4).
(2) Options forfeited include 65,800inducement shares in accordance with Nasdaq Listing Rule 5635(c)(4).
The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2024, 2023 and 2022 was $4.33, $4.72 and $4.65, respectively.
The total intrinsic value of options exercised for the years ended December 31, 2024, 2023 and 2022 was $2,031, $1,710and $2,643, respectively.
As of December 31, 2024, there was approximately $2,365 of total unrecognized compensation costs related to unvested stock options. These costs are expected to be recognized over a weighted-average period of 1.5 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 and vice presidents have a requisite service period of three years, while certain of these RSUs have a requisite service period of one year. The Company estimates the fair value of RSU grants based upon the grant date closing market price of the Company’s common stock. The Company expenses the fair value of RSUs on a straight-line basis over the requisite service period.
P92
Table of Content
The following table summarizes the activity for RSUs for the year ended December 31, 2024:
Outstanding Restricted Stock Units
(1) RSUs granted include330,000 inducement shares in accordance with Nasdaq Listing Rule 5635(c)(4).
(2) RSUs forfeited include37,500 inducement shares in accordance with Nasdaq Listing Rule 5635(c)(4).
The weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2024, 2023 and 2022 was $8.79, $8.10 and $8.40, respectively.
As of December 31, 2024, there was approximately $11,576of total unrecognized compensation costs related to unvested restricted stock. These costs are expected to be recognized over a weighted-average period of 2.2 years.
Performance Stock Units
The Company estimates the fair value of PSUs based on its closing stock price at the time of grant and its estimate of achieving the applicable performance target goals and records compensation expense as the milestones are achieved. 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 Company's TSR PSUs generally have a requisite service period of three years and are subject to graded vesting conditions based on goals defined within the award. The grant date fair value of the TSR PSUs is calculated using a Monte Carlo simulation. 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.
PSUs issued in 2017 and 2019 tied to the achievement of certain milestones have performance periods through December 31, 2025 and a requisite service period of one year after the milestone achievement date but not sooner than one year after the grant date. PSUs issued in 2018 tied to the achievement of certain milestones have performance periods through January 1, 2025 and a requisite service period of one year after the milestone achievement date but not sooner than one year after the grant date.
PSUs issued in 2024 tied to the achievement of certain milestones have performance periods through December 31, 2025 and requisite service periods through the date of the milestone achievement but not sooner than one year after the grant date. The Company expenses the fair value upon the achievement of such milestone and subsequent requisite period.
P93
Table of Content
The following table summarizes the activity for PSUs for the year ended December 31, 2024:
Outstanding Performance Stock Units
(1) PSUs granted include 600,000 inducement shares in accordance with Nasdaq Listing Rule 5635(c)(4).
The weighted-average grant-date fair value of PSUs granted during the years ended December 31, 2024, 2023 and 2022 was $9.11, $8.29 and $8.23, respectively.
As of December 31, 2024, there was approximately $8,826 of total unrecognized compensation costs related to unvested PSU awards, excluding the PSU awards for milestones not achieved described in the paragraph below. These costs are expected to be recognized over a weighted-average period of 1.7 years.
During 2017, 2018 and 2019, the Company issued PSU awards to certain employees related to their work on the Company’s Biologics License Application ("BLA"). The number of shares was allocated to certain milestones related to the BLA submission to and approval by the FDA.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. As of December 31, 2024, 10% of the awards issued related to achieving the BLA submission milestone; 5% vested upon submission of the BLA during the third quarter of 2024 and 5% will vest in the third quarter of 2025. During 2024, the Company issued PSU awards to certain officers and employees related to their work on the Company’s BLA. The number of shares was allocated to certain milestones related to the BLA submission to and approval by the FDA.The performance measure is based upon achieving each of the specific milestones and will vest upon achieving each of the milestones but not sooner than one year after the grant date. As of December 31, 2024, 10% of the awards issued related to achieving the BLA submission milestone and will vest one year after the respective grant dates. The Company recognizes expense on these milestones upon the achievement. As of December 31, 2024, there was approximately$10,187 of total unrecognized compensation costs related to unvested milestones.
During 2022, the Company issued PSU awards to certain officers and employees tied to revenue from 2022 to 2024 with a pay-out range from 0% to 150% upon achievement of specific revenue targets. These awards were achieved at 99.2%, vested in the fourth quarter of 2024 and will be released in the first quarter of 2025.
During 2023, the Company issued PSU awards to certain officers and employees tied to revenue from 2023 to 2025 with a pay-out range from 0% to 150% upon achievement of specific revenue targets.
During 2024, the Company issued TSR PSU awards to certain officers and employees tied to the Company's share price targets with a pay-out range from 0% to 200% upon achievement of specific average share prices over a 30 day trading period immediately preceding the end of a performance period of February 2, 2024 through February 22, 2027.
Employee Stock Purchase Plan
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. The Company estimates the grant date fair value, and the resulting stock-based compensation expense, using a Black-Scholes option pricing model for each purchase period. Stock-based compensation expense related to the 2017 ESPP, included in total stock-based compensation expense, was $371, $333 and $844 for the years ended December 31, 2024, 2023 and 2022, respectively.
P94
Table of Content
The following are the weighted average assumptions used in the valuation of ESPP options for the years ended December 31:
December 31,
Expected term (in years) 0.5 0.5 0.5
Risk-free interest rate 5.3% 5.1% 1.1%
Expected dividends —% —% —%
The weighted-average grant-date fair value of ESPP options during the years ended December 31, 2024, 2023 and 2022 was $2.34, $2.84 and $2.87, respectively.
12.Income Taxes
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, as measured by enacted state and federal tax rates. Deferred tax assets and deferred tax liabilities are as follows:
Deferred tax assets:
Allowance for doubtful accounts 204 87
Capitalized research and development costs 14,785 11,530
Debt derivative liabilities 622 772
Charitable contributions 31 3
Accrued compensation 49 56
Deferred tax liabilities:
Amortization (99) (51)
Contract liabilities (86) —
Total deferred tax liabilities (4,842) (5,060)
A valuation allowance is provided to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more-likely-than-not that a portion or none of the deferred tax assets will be realized. As of December 31, 2024 and 2023, management assessed the realizability of deferred tax assets. After consideration of all the evidence, including reversal of deferred tax liabilities, future taxable income and other factors, management determined that a full valuation allowance was necessary as of December 31, 2024 and 2023. The valuation allowance increased by $315 and $2,831 during 2024 and 2023, respectively, primarily as a result of the increase in capitalized research and development costs for tax purposes.
The Company adopted Section 174 of the Tax Cuts and Jobs Act of 2017 ("TCJA") which requires taxpayers to capitalize and amortize research and development expenditures for the tax years beginning after December 31, 2021. This rule became
P95
Table of Content
effective for the Company during 2022 and resulted in capitalized research and development costs of $3,255 being recorded to deferred tax assets as of December 31, 2024.
The difference between the financial statement income tax benefit and the income tax benefit using statutory rates is primarily due to the valuation allowance and non-deductible permanent items such as meals, entertainment and equity compensation. The Company’s effective income tax rate differs from the statutory federal income tax rate as follows:
December 31,
State taxes - net of Federal benefit 1.0 1.5 4.1
Permanent items and other deductions (16.1) (8.7) (7.1)
Effective income tax rate — % — % — %