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xbrli:shares

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​

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

​

FORM 10-Q

​

(Mark One)

​

​ | ​
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

​

For the quarterly period ended September 30, 2019

​

OR

​

​ | ​
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

​

For the transition period from ____________ to______________

​

Commission file number: 001-36046

​

Axogen, Inc.

(Exact Name of Registrant as Specified in Its Charter)

​

​

Minnesota | ​ | 41-1301878
(State or Other Jurisdiction of | ​ | (I.R.S. Employer
Incorporation or Organization) | ​ | Identification No.)
​ | ​ | ​
13631 Progress Blvd., Suite 400, Alachua, FL | ​ | 32615
(Address of Principal Executive Offices) | ​ | (Zip Code)

​

386-462-6800

(Registrant’s Telephone Number, Including Area Code)

​

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

​

Securities registered pursuant to Section 12(b) of the Act:

Title of each class | Trading Symbol | Name of each exchange on which registered
Common Stock, $0.01 par value | AXGN | The Nasdaq Stock Market

​

​

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ⌧ NO ◻

​

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ⌧ NO ◻

​

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

​

​ | ​ | ​
Large accelerated filer ⌧ | ​ | Accelerated filer ◻
​ | ​ | ​
Non-accelerated filer ◻ | ​ | Smaller reporting company ☐
​ | ​ | ​
​ | ​ | Emerging growth company ☐

​

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

​

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ⌧

​

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

​

​

Table of Contents

Table of Contents

​

​ | ​ | ​
Part I - Financial Information
Item 1. | Financial Statements | 3
​ | ​ | ​
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 22
​ | ​ | ​
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 28
​ | ​ | ​
Item 4. | Controls and Procedures | 29
​ | ​ | ​
​ | ​ | ​
Part II - Other Information
​ | ​ | ​
Item 1. | Legal Proceedings | 30
​ | ​ | ​
Item 1A. | Risk Factors | 31
​ | ​ | ​
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 32
​ | ​ | ​
Item 3. | Defaults Upon Senior Securities | 32
​ | ​ | ​
Item 4. | Mine Safety Disclosures | 32
​ | ​ | ​
Item 5. | Other Information | 32
​ | ​ | ​
Item 6. | Exhibits | 33
​ | ​ | ​
​ | Signature Page | 34

​

​

​

1

Table of Contents

Forward-Looking Statements

​

From time to time, in reports filed with the U.S. Securities and Exchange Commission (the “SEC”) (including this Form 10-Q), in press releases, and in other communications to shareholders or the investment community, Axogen, Inc. (including Axogen, Inc.’s wholly owned subsidiaries, Axogen Corporation, Axogen Processing Corporation and Axogen Europe GmbH, the “Company”, “Axogen”, “we” or “our”) may provide forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, concerning possible or anticipated future results of operations or business developments. These statements are based on management’s current expectations or predictions of future conditions, events or results based on various assumptions and management’s estimates of trends and economic factors in the markets in which we are active, as well as our business plans. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "projects", "forecasts", "continue", "may", "should", "will", “goals”, variations of such words and similar expressions are intended to identify such forward-looking statements. The forward-looking statements may include, without limitation, statements regarding assessment of our internal controls over financial reporting, our growth, our 2019 guidance, product development, product potential, financial performance, sales growth, product adoption, market awareness of our products, data validation, and our visibility at and sponsorship of conferences and educational events. The forward-looking statements are and will be subject to risks and uncertainties, which may cause actual results to differ materially from those expressed or implied in such forward-looking statements. Forward-looking statements contained in this Form 10-Q should be evaluated together with the many uncertainties that affect the Company’s business and its market, particularly those discussed in the risk factors and cautionary statements set forth in the Company’s filings with the SEC, including as described in “Risk Factors” included in Item 1A of our Annual Filing on Form 10-K. Forward-looking statements are not guarantees of future performance, and actual results may differ materially from those projected. The forward-looking statements are representative only as of the date they are made, and, except as required by applicable law, the Company assumes no responsibility to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or otherwise.

​

2

Table of Contents

PART 1 — FINANCIAL INFORMATION

​

ITEM 1 —FINANCIAL STATEMENTS

​

Axogen, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(In Thousands, Except Share and Per Share Amounts)

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ |  | ​ |
​ | ​ | September 30, | ​ | December 31, | ​
​ | ​ | 2019 | ​ | 2018 | ​
Assets | ​ | ​ | ​ | ​ | ​ | ​ | ​
Current assets: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash and cash equivalents | ​ | $ | 24,555 | ​ | $ | 24,294 | ​
Restricted cash | ​ | ​ | 6,000 | ​ | ​ | 6,000 | ​
Investments | ​ | ​ | 75,511 | ​ | ​ | 92,311 | ​
Accounts receivable, net of allowance for doubtful accounts of $967 and $1,117, respectively | ​ |  | 15,451 | ​ |  | 15,321 | ​
Inventory | ​ |  | 13,682 | ​ |  | 11,982 | ​
Prepaid expenses and other | ​ |  | 2,144 | ​ |  | 1,045 | ​
Total current assets | ​ |  | 137,343 | ​ |  | 150,953 | ​
Property and equipment, net | ​ |  | 11,673 | ​ |  | 8,039 | ​
Operating lease right-of-use assets | ​ | ​ | 3,595 | ​ | ​ | — | ​
Finance lease right-of-use assets | ​ | ​ | 93 | ​ | ​ | — | ​
Intangible assets | ​ |  | 1,488 | ​ |  | 1,181 | ​
Total assets | ​ | $ | 154,192 | ​ | $ | 160,173 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Liabilities and Shareholders’ Equity | ​ | ​ | ​ | ​ | ​ | ​ | ​
Current liabilities: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Accounts payable and accrued expenses | ​ | ​ | 14,970 | ​ | ​ | 12,998 | ​
Current maturities of long term obligations | ​ | ​ | 1,773 | ​ | ​ | 28 | ​
Contract liabilities, current | ​ |  | 14 | ​ |  | 18 | ​
Total current liabilities | ​ |  | 16,757 | ​ |  | 13,044 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Long Term Obligations, net of current maturities | ​ | ​ | 2,002 | ​ | ​ | 35 | ​
Other long-term liabilities | ​ | ​ | — | ​ | ​ | 70 | ​
Contract liabilities | ​ |  | 22 | ​ |  | 42 | ​
Total liabilities | ​ |  | 18,781 | ​ |  | 13,191 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commitments and contingencies - see Note 12 | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Shareholders’ equity: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Common stock, $0.01 par value per share; 100,000,000 shares authorized; 39,461,318 and 38,900,875 shares issued and outstanding | ​ |  | 395 | ​ |  | 389 | ​
Additional paid-in capital | ​ |  | 307,839 | ​ |  | 297,319 | ​
Accumulated deficit | ​ |  | (172,823) | ​ |  | (150,726) | ​
Total shareholders’ equity | ​ |  | 135,411 | ​ |  | 146,982 | ​
Total liabilities and shareholders’ equity | ​ | $ | 154,192 | ​ | $ | 160,173 | ​

​

See notes to condensed consolidated financial statements.

​

3

Table of Contents

Axogen, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(In Thousands, Except Share and Per Share Amounts)

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Three Months Ended | ​ | Nine Months Ended | ​
​ | ​ | September 30, | ​ | September 30, | ​ | September 30, | ​ | September 30, | ​
​ |  | 2019 |  | 2018 |  | 2019 |  | 2018 |
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Revenues | ​ | $ | 28,564 | ​ | $ | 22,660 | ​ | $ | 78,550 | ​ | $ | 60,504 | ​
Cost of goods sold | ​ |  | 4,510 | ​ |  | 3,464 | ​ |  | 12,468 | ​ |  | 9,282 | ​
Gross profit | ​ |  | 24,054 | ​ |  | 19,196 | ​ |  | 66,082 | ​ |  | 51,222 | ​
Costs and expenses: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Sales and marketing | ​ |  | 18,245 | ​ |  | 14,653 | ​ |  | 53,146 | ​ |  | 41,149 | ​
Research and development | ​ |  | 4,181 | ​ |  | 3,307 | ​ |  | 12,602 | ​ |  | 7,967 | ​
General and administrative | ​ |  | 7,740 | ​ |  | 6,071 | ​ |  | 24,321 | ​ |  | 16,751 | ​
Total costs and expenses | ​ |  | 30,166 | ​ |  | 24,031 | ​ |  | 90,069 | ​ |  | 65,867 | ​
Loss from operations | ​ |  | (6,112) | ​ |  | (4,835) | ​ |  | (23,987) | ​ |  | (14,645) | ​
Other income (expense): | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Investment income | ​ | ​ | 555 | ​ | ​ | 727 | ​ | ​ | 1,925 | ​ | ​ | 884 | ​
Interest expense | ​ |  | (7) | ​ |  | 6 | ​ |  | (32) | ​ |  | (1,124) | ​
Interest expense — deferred financing costs | ​ |  | — | ​ |  | — | ​ |  | — | ​ |  | (81) | ​
Loss on extinguishment of debt | ​ | ​ | — | ​ | ​ | — | ​ | ​ | — | ​ | ​ | (2,186) | ​
Other expense | ​ |  | (7) | ​ |  | — | ​ |  | (3) | ​ |  | (16) | ​
Total other income (expense), net | ​ |  | 541 | ​ |  | 733 | ​ |  | 1,890 | ​ |  | (2,523) | ​
Net Loss | ​ | $ | (5,571) | ​ | $ | (4,102) | ​ | $ | (22,097) | ​ | $ | (17,168) | ​
Weighted average common shares outstanding — basic and diluted | ​ |  | 39,340,492 | ​ |  | 38,504,810 | ​ |  | 39,151,218 | ​ |  | 36,582,261 | ​
Loss per common share — basic and diluted | ​ | $ | (0.14) | ​ | $ | (0.11) | ​ | $ | (0.56) | ​ | $ | (0.47) | ​

​

See notes to condensed consolidated financial statements.

​

4

Table of Contents

Axogen, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In Thousands)

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Nine Months Ended | ​
​ | ​ | September 30, | ​ | September 30, | ​
​ |  | 2019 |  | 2018 |
Cash flows from operating activities: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Net loss | ​ | $ | (22,097) | ​ | $ | (17,168) | ​
Adjustments to reconcile net loss to net cash used in operating activities: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Depreciation | ​ |  | 631 | ​ |  | 575 | ​
Amortization of right-of-use assets | ​ | ​ | 1,352 | ​ | ​ | — | ​
Amortization of intangible assets | ​ |  | 89 | ​ |  | 59 | ​
Amortization of deferred financing costs | ​ |  | — | ​ |  | 81 | ​
Loss on extinguishment of debt | ​ | ​ | — | ​ | ​ | 2,186 | ​
Provision for bad debt | ​ | ​ | (150) | ​ | ​ | 298 | ​
Provision for inventory writedown | ​ | ​ | (44) | ​ | ​ | 877 | ​
Changes in investment gains and losses | ​ | ​ | (957) | ​ |  | (375) | ​
Share-based compensation | ​ |  | 7,384 | ​ |  | 5,981 | ​
Change in operating assets and liabilities: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Short term investments | ​ | ​ | — | ​ | ​ | — | ​
Accounts receivable | ​ |  | 20 | ​ |  | (3,223) | ​
Inventory | ​ |  | (1,657) | ​ |  | (4,510) | ​
Prepaid expenses and other | ​ |  | (1,099) | ​ |  | (624) | ​
Accounts payable and accrued expenses | ​ |  | 1,288 | ​ |  | 3,005 | ​
Operating lease obligations | ​ | ​ | (1,276) | ​ | ​ | — | ​
Cash paid for interest portion of finance leases | ​ | ​ | (3) | ​ | ​ | — | ​
Contract and other liabilities | ​ |  | (23) | ​ |  | (48) | ​
Net cash used in operating activities | ​ |  | (16,542) | ​ |  | (12,886) | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash flows from investing activities: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Purchase of property and equipment | ​ |  | (3,676) | ​ |  | (6,052) | ​
Purchase of investments | ​ | ​ | (104,314) | ​ | ​ | (103,865) | ​
Proceeds from sale of investments | ​ | ​ | 122,071 | ​ | ​ | 3,500 | ​
Cash payments for intangible assets | ​ |  | (396) | ​ |  | (320) | ​
Net cash provided by / (used for) investing activities | ​ |  | 13,685 | ​ |  | (106,737) | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash flows from financing activities: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Proceeds from issuance of common stock | ​ | ​ | — | ​ | ​ | 132,963 | ​
Cash paid for equity offering | ​ | ​ | — | ​ | ​ | (257) | ​
Borrowing on revolving loan | ​ | ​ | — | ​ | ​ | 26,253 | ​
Payments on revolving loan and prepayment penalties | ​ | ​ | — | ​ | ​ | (30,489) | ​
Repayments of long-term debt and prepayment penalties | ​ | ​ | — | ​ | ​ | (22,503) | ​
Cash paid for debt portion of finance leases | ​ | ​ | (24) | ​ | ​ | — | ​
Proceeds from exercise of stock options |  | ​ | 3,142 |  | ​ | 2,778 | ​
Net cash provided by financing activities | ​ |  | 3,118 | ​ |  | 108,745 | ​
Net increase in cash, cash equivalents, and restricted cash | ​ |  | 261 | ​ |  | (10,878) | ​
Cash, cash equivalents, and restricted cash, beginning of period | ​ |  | 30,294 | ​ |  | 36,507 | ​
Cash, cash equivalents and restricted cash, end of period | ​ | $ | 30,555 | ​ | $ | 25,629 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Supplemental disclosures of cash flow activity: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash paid for interest | ​ | $ | 31 | ​ | $ | 1,322 | ​
Supplemental disclosure of non-cash investing and financing activities: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Acquisition of fixed assets in accounts payable and accrued expenses | ​ | $ | 684 | ​ | $ | — | ​
Right-of-use asset and operating lease liability | ​ | $ | 26 | ​ | $ | — | ​

​

See notes to condensed consolidated financial statements.

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Axogen, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(unaudited)

(In Thousands)

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | Common Stock |  | Additional Paid-in Capital |  | Accumulated Deficit |  | Total Shareholders' Equity
Three Months Ended September 30, 2019 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Balance at June 30, 2019 | ​ | $ | 393 | ​ | $ | 304,820 | ​ | $ | (167,252) | ​ | $ | 137,960
Net Loss | ​ | ​ | — | ​ | ​ | — | ​ | ​ | (5,571) | ​ | ​ | (5,571)
Stock-based compensation | ​ | ​ | — | ​ | ​ | 2,397 | ​ | ​ | — | ​ | ​ | 2,397
Exercise of stock options | ​ | ​ | 2 | ​ | ​ | 623 | ​ | ​ | — | ​ | ​ | 625
Balance at September 30, 2019 | ​ | $ | 395 | ​ | $ | 307,839 | ​ | $ | (172,823) | ​ | $ | 135,411
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Nine Months Ended September 30, 2019 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Balance at December 31, 2018 | ​ | $ | 389 | ​ | $ | 297,319 | ​ | $ | (150,726) | ​ | $ | 146,982
Net Loss | ​ | ​ | - | ​ | ​ | - | ​ | ​ | (22,097) | ​ | ​ | (22,097)
Stock-based compensation | ​ | ​ | - | ​ | ​ | 7,384 | ​ | ​ | - | ​ | ​ | 7,384
Exercise of stock options and employee stock purchase plan | ​ | ​ | 6 | ​ | ​ | 3,136 | ​ | ​ | - | ​ | ​ | 3,142
Balance at September 30, 2019 | ​ | $ | 395 | ​ | $ | 307,839 | ​ | $ | (172,823) | ​ | $ | 135,411
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Three Months Ended September 30, 2018 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Balance at June 30, 2018 | ​ | $ | 383 | ​ | $ | 291,515 | ​ | $ | (141,395) | ​ | $ | 150,503
Net Loss | ​ | ​ | — | ​ | ​ | — | ​ | ​ | (4,102) | ​ | ​ | (4,102)
Issuance of common stock | ​ | ​ | — | ​ | ​ | — | ​ | ​ | — | ​ | ​ | —
Stock-based compensation | ​ | ​ | — | ​ | ​ | 2,211 | ​ | ​ | — | ​ | ​ | 2,211
Exercise of stock options | ​ | ​ | 4 | ​ | ​ | 863 | ​ | ​ | — | ​ | ​ | 867
Balance at September 30, 2018 | ​ | $ | 387 | ​ | $ | 294,589 | ​ | $ | (145,497) | ​ | $ | 149,479
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Nine Months Ended September 30, 2018 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Balance at December 31, 2017 | ​ | $ | 343 | ​ | $ | 153,168 | ​ | $ | (128,329) | ​ | $ | 25,182
Net Loss | ​ | ​ | - | ​ | ​ | - | ​ | ​ | (17,168) | ​ | ​ | (17,168)
Issuance of common stock | ​ | ​ | 35 | ​ | ​ | 132,671 | ​ | ​ | - | ​ | ​ | 132,706
Stock-based compensation | ​ | ​ | - | ​ | ​ | 5,981 | ​ | ​ | - | ​ | ​ | 5,981
Exercise of stock options and employee stock purchase plan | ​ | ​ | 9 | ​ | ​ | 2,769 | ​ | ​ | - | ​ | ​ | 2,778
Balance at September 30, 2018 | ​ | $ | 387 | ​ | $ | 294,589 | ​ | $ | (145,497) | ​ | $ | 149,479
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​

​

​

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Axogen, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(In Thousands, Except Per Share Amounts)

​

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

​

1. | Basis of Presentation

​

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company as of September 30, 2019 and December 31, 2018 and for the three and nine-month periods ended September 30, 2019 and 2018. The Company’s condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and therefore, do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2018, which are included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2018. The interim condensed consolidated financial statements are unaudited and in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results for the periods presented. Results for interim periods are not necessarily indicative of results for the full year. All intercompany accounts and transactions have been eliminated in consolidation.

​

​

2. | Summary of Significant Accounting Policies

​

Leases

​

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

​

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

​

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

​

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

​

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Share Based Payment Arrangements

​

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

​

Revenue Recognition

​

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

​

The Company enters into contracts to sell and distribute products and services to hospitals and surgical facilities for use in caring for patients with peripheral nerve damage or transection. Revenue is recognized when the Company has met its performance obligations pursuant to its contracts with its customers in an amount that the Company expects to be entitled to in exchange for the transfer of control of the products and services to the Company’s customers. In the case of products or services sold to a customer under a distribution or purchase agreement, the Company has no further performance obligations and revenue is recognized at the point control transfers which occurs either when: i) the product is shipped via common carrier; or ii) the product is delivered to the customer or distributor, in accordance with the terms of the agreement.

​

A portion of the Company's product revenue is generated from consigned inventory maintained at hospitals and independent sales agencies, and also from inventory physically held by field sales representatives. For these types of product sales, the Company retains control until the product has been used or implanted, at which time revenue is recognized.

​

The Company elected to account for shipping and handling activities as a fulfillment cost rather than a separate performance obligation. Amounts billed to customers for shipping and handling are included as part of the transaction price and recognized as revenue when control of the underlying products is transferred to the customer. The related shipping and freight charges incurred by the Company are included in the cost of sales.

​

The Company operates in a single reportable segment of peripheral nerve repair, offers similar products to its customers, and enters into consistently structured arrangements with similar types of customers. As such, the Company does not disaggregate revenue from contracts with customers as the nature, amount, timing and uncertainty of revenue and cash flows does not materially differ within and among the contracts with customers.

​

The contract with the customer states the final terms of the sale, including the description, quantity, and price of each implant distributed. The payment terms and conditions in the Company’s contracts vary; however, as a common business practice, payment terms are typically due in full within 30 to 60 days of delivery. Since the customer agrees to a stated price in the contract that does not vary over the contract term, the contracts do not contain any material types of variable consideration, and contractual rights of return are not material. The Company has several contracts with distributors in international markets which include consideration paid to the customer in exchange for distinct marketing and other services. The Company records such consideration paid to the customer as a reduction to revenue from the contracts with those distributor customers.

​

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​

In connection with the Acroval® Neurosensory and Motor Testing System, the Company sold extended warranty and service packages to some of its customers who purchased this evaluation and measurement tool, and the prepayment of these extended warranties represent contract liabilities until the performance obligations are satisfied ratably over the term of the contract. The sale of the aforementioned extended warranty represents the only performance obligation the Company satisfies over time and creates the contract liability disclosed below.

​

The opening and closing balances of the Company’s contract receivables and liabilities are as follows:

​

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Contract Balances | ​ | ​ | ​
​ | ​ | Net Receivables | ​ | Contract Liabilities, Current | ​ | Contract Liabilities, Long-Term
Opening, January 1, 2018 | ​ | $ | 11,065 | ​ | ​ | 31 | ​ | ​ | 68
Closing, September 30, 2018 | ​ | ​ | 13,990 | ​ | ​ | 23 | ​ | ​ | 49
Increase (decrease) | ​ | ​ | 2,925 | ​ | ​ | (8) | ​ | ​ | (19)
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Opening, January 1, 2019 | ​ | $ | 15,321 | ​ | ​ | 18 | ​ | ​ | 42
Closing, September 30, 2019 | ​ | ​ | 15,451 | ​ | ​ | 14 | ​ | ​ | 22
Increase (decrease) | ​ | ​ | 130 | ​ | ​ | (4) | ​ | ​ | (20)
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​

​

Loss Per Share of Common Stock

​

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

​

​

​

​

​

3.Recently Issued Standards to be Adopted

​

Fair Value Measurements

​

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

​

​

Financial Instruments – Credit Losses

​

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

​

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

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

​

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

​

The Company’s management has reviewed and considered all other recent accounting pronouncements and believe there are none that could potentially have a material impact on the Company’s consolidated financial condition, results of operations, or disclosures.

​

​

4.Inventories

​

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

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | September 30, |  | December 31, |
​ | ​ | 2019 | ​ | 2018 | ​
​ | ​ | ​ | ​ | ​ | ​
Finished goods | ​ | $ | 10,338 | ​ | $ | 9,194 | ​
Work in process | ​ |  | 796 | ​ |  | 454 | ​
Raw materials | ​ | ​ | 2,548 | ​ |  | 2,334 | ​
Inventories | ​ | $ | 13,682 | ​ | $ | 11,982 | ​

​

The Company monitors the shelf life of its products and historical expiration and spoilage trends and writes-down inventory based on the estimated amount of inventory that may not be distributed before expiration or spoilage. For the three months ended September 30, 2019 and 2018, the Company had inventory write-downs of $51 and $295, respectively. For the nine months ended September 30, 2019 and 2018, the Company adjusted the provision for inventory write downs by ($44) and $877 respectively.

​

​

5. | Fair Value of Investments

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

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

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

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

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The Company classifies cash equivalents and investments according to the hierarchy of techniques used to determine fair value based on the types of inputs.

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

​

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | (Level 1) | ​ | (Level 2) | ​ | (Level 3) | ​ | Total
September 30, 2019 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Assets: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Money market funds | ​ | $ | 16,602 | ​ | $ | — | ​ | $ | — | ​ | $ | 16,602
U.S. government securities | ​ | ​ | 9,985 | ​ | ​ | — | ​ | ​ | — | ​ | ​ | 9,985
Corporate bonds | ​ | ​ | — | ​ | ​ | 17,791 | ​ | ​ | — | ​ | ​ | 17,791
Commercial paper | ​ | ​ | — | ​ | ​ | 31,437 | ​ | ​ | — | ​ | ​ | 31,437
Asset-backed securities | ​ | ​ | — | ​ | ​ | 16,299 | ​ | ​ | — | ​ | ​ | 16,299
Total assets | ​ | $ | 26,587 | ​ | $ | 65,527 | ​ | $ | — | ​ | $ | 92,114
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | (Level 1) | ​ | (Level 2) | ​ | (Level 3) | ​ | Total
December 31, 2018 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Assets: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Money market funds | ​ | $ | 12,947 | ​ | $ | — | ​ | $ | — | ​ | $ | 12,947
U.S. government securities | ​ | ​ | 15,923 | ​ | ​ | — | ​ | ​ | — | ​ | ​ | 15,923
Corporate bonds | ​ | ​ | — | ​ | ​ | 31,495 | ​ | ​ | — | ​ | ​ | 31,495
Commercial paper | ​ | ​ | — | ​ | ​ | 27,869 | ​ | ​ | — | ​ | ​ | 27,869
Asset-backed securities | ​ | ​ | — | ​ | ​ | 17,025 | ​ | ​ | — | ​ | ​ | 17,025
Total assets | ​ | $ | 28,870 | ​ | $ | 76,389 | ​ | $ | — | ​ | $ | 105,259

​

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

​

​

​

6. Prepaid and Other Assets

​

Prepaid and other assets consist of the following:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | September 30, |  | December 31, |
​ | ​ | 2019 | ​ | 2018 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Prepaid Insurance | ​ | $ | 465 | ​ | $ | 85 | ​
Prepaid events | ​ | ​ | 389 | ​ | ​ | 132 | ​
Prepaid software license | ​ | ​ | 160 | ​ | ​ | 5 | ​
Prepaid professional fees | ​ | ​ | 126 | ​ | ​ | 35 | ​
Litigation receivable | ​ | ​ | 98 | ​ | ​ | — | ​
Other Prepaid items | ​ | ​ | 906 | ​ |  | 788 | ​
Prepaid and Other Assets | ​ | $ | 2,144 | ​ | $ | 1,045 | ​

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​

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

​

7. | Property and Equipment

​

Property and equipment consist of the following:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | September 30, |  | December 31, |
​ | ​ | 2019 | ​ | 2018 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​
Furniture and equipment | ​ | $ | 2,026 | ​ | $ | 1,763 | ​
Leasehold improvements | ​ |  | 1,331 | ​ |  | 1,151 | ​
Processing equipment | ​ |  | 2,718 | ​ |  | 2,349 | ​
Land | ​ | ​ | 731 | ​ | ​ | 731 | ​
Projects in process | ​ | ​ | 8,358 | ​ | ​ | 4,906 | ​
Property and equipment, at cost | ​ | ​ | 15,164 | ​ | ​ | 10,900 | ​
Less: accumulated depreciation and amortization | ​ |  | (3,491) | ​ |  | (2,861) | ​
Property and equipment, net | ​ | $ | 11,673 | ​ | $ | 8,039 | ​

​

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

​

​

​

​

8. | Intangible Assets

​

The Company’s intangible assets consist of the following:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | September 30, |  | December 31, |
​ | ​ | 2019 | ​ | 2018 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​
License agreements | ​ | $ | 1,067 | ​ | $ | 1,034 | ​
Less: accumulated amortization | ​ | ​ | (624) | ​ | ​ | (553) | ​
License agreements, net | ​ | $ | 443 | ​ | $ | 481 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Patents | ​ | ​ | 1,118 | ​ | ​ | 755 | ​
Less: accumulated amortization | ​ |  | (73) | ​ |  | (55) | ​
Patents, net | ​ | $ | 1,045 | ​ | $ | 700 | ​
Intangible assets, net | ​ | $ | 1,488 | ​ | $ | 1,181 | ​

​

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

​

License Agreements

​

The Company has entered into multiple license agreements (together, the “License Agreements”) with the University of Florida Research Foundation and the University of Texas at Austin. Under the terms of the License Agreements, the Company acquired exclusive worldwide licenses for underlying technology used in repairing and regenerating nerves. The licensed technologies include the rights to issued patents and patents pending in the United States and international markets. The effective term of the License Agreements extends through the term of the related patents and the agreements may be terminated by the Company with 60 days’ prior written notice. Additionally, in the

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event of default, licensors may terminate an agreement if the Company fails to cure a breach after written notice. The License Agreements contain the key terms listed below:

​

| ● | Axogen pays royalty fees ranging from 1% to 3% under the License Agreements based on net sales of licensed products. One of the agreements also contains a minimum royalty of $12.5 per quarter, which may include a credit in future quarters in the same calendar year for the amount the minimum royalty exceeds the royalty fees. Also, when Axogen pays royalties to more than one licensor for sales of the same product, a royalty stack cap applies, capping total royalties at 3.75%;

​

| ● | If Axogen sublicenses technologies covered by the License Agreements to third parties, Axogen would pay a percentage of sublicense fees received from the third party to the licensor. Currently, Axogen does not sublicense any technologies covered by License Agreements. The Company is not considered a sub-licensee under the License Agreements and does not owe any sub-licensee fees for its own use of the technologies;

​

| ● | Axogen reimburses the licensors for certain legal expenses incurred for patent prosecution and defense of the technologies covered by the License Agreements; and

​

| ● | Currently, under the University of Texas at Austin’s agreement, Axogen would owe a milestone fee of $15 upon receiving a Phase II Small Business Innovation Research or Phase II Small Business Technology Transfer grant involving the licensed technology. The Company has not received either grant and does not owe such a milestone fee. A milestone fee to the University of Florida Research Foundation of $125 is due if Axogen receives FDA approval of its Avance Nerve Graft, a milestone fee of $25 is due upon the first commercial use of certain licensed technology to provide services to manufacture products for third parties and a milestone fee of $10 is due upon the first use to manufacture products that utilize certain technology that is not currently incorporated into Axogen products.

​

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

​

9. | Accounts Payable and Accrued Expenses

​

Accounts payable and accrued expenses consist of the following:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | September 30, |  | December 31, |
​ | ​ | 2019 | ​ | 2018 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Accounts payable | ​ | $ | 3,787 | ​ | $ | 4,517 | ​
Accrued expenses | ​ | ​ | 3,247 | ​ | ​ | 2,004 | ​
Accrued compensation | ​ | ​ | 7,936 | ​ |  | 6,477 | ​
Accounts Payable and Accrued Expenses | ​ | $ | 14,970 | ​ | $ | 12,998 | ​

​

​

​

10. | Long Term Obligations

​

Long Term Obligations consist of the following:

​

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | September 30, |  | December 31, |
​ | ​ | 2019 | ​ | 2018 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Term Loan Agreement | ​ | $ | — | ​ | $ | — | ​
Revolving Loan Agreement | ​ | ​ | — | ​ | ​ | — | ​
Capital Lease Obligations | ​ | ​ | — | ​ | ​ | 63 | ​
Operating & Finance Lease Obligations | ​ | ​ | 3,775 | ​ | ​ | — | ​
Total | ​ | ​ | 3,775 | ​ | ​ | 63 | ​
Less current maturities of long-term obligations | ​ | ​ | (1,773) | ​ | ​ | (28) | ​
Long-term portion | ​ | $ | 2,002 | ​ | $ | 35 | ​

​

​

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​

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

​

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

​

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

​

​

11. | Stock Incentive Plan

​

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

​

At the 2019 Annual Meeting of Shareholders held on August 14, 2019, the shareholders approved the Axogen 2019 Long-Term Incentive Plan (the “New Axogen Plan”), which allows for issuance of incentive stock options, non-qualified stock options, performance stock units (“PSUs”) and restricted stock units (“RSUs”) to employees, directors and consultants at exercise prices not less than the fair market value at the date of grant. The number of shares of common stock authorized for issuance under the New Axogen Plan is (A) 3,385,482 shares, comprised of (i) 3,000,000 new authorized shares and (ii) 385,482 unallocated shares of common stock available for issuance as of August 14, 2019 pursuant to the Company’s 2010 Stock Incentive Plan, as amended and restated (the “Prior Axogen Plan”), that were not then subject to outstanding awards; plus (B) shares under the Prior Axogen Plan and the New Axogen Plan that are cancelled, forfeited, expired, unearned or settled in cash, in any such case that does not result in the issuance of common stock. Following shareholder approval of the New Axogen Plan, no future awards will be made under the Prior Axogen Plan. As of September 30, 2019, 3,308,699 shares of common stock were available for issuance under the New Axogen Plan.

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The options granted to employees prior to July 1, 2017 typically vest 25% one year after the grant date and 12.5% every six months thereafter for the remaining three-year period until fully vested after four years. The options granted to employees after July 1, 2017 typically vest 50% two years after the grant date and 12.5% every six months thereafter for the remaining two-year period until fully vested after four years. The options granted to directors and certain options granted from time to time to certain executive officers have vested ratably over three years, 25% per quarter over one year or had no vesting period. Options typically have terms ranging from seven to ten years.

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

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The Company estimates the fair value of each option award issued under such plans on the date of grant using a Multiple Point Black-Scholes option-pricing model which uses a weighted average of historical volatility and peer company volatility. The Company determines the expected life of each award giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. The Company uses the risk-free interest rate on the implied yield

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

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

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​ | ​ | ​ | ​ | ​ | ​
Nine months ended September 30, |  | 2019 | ​ | 2018 |
​ | ​ | ​
Expected term (in years) |  | 5.76 | ​ | 6.22 | ​
Expected volatility |  | 56.03 | % | 49.73 | %
Risk free rate |  | 1.54 | % | 2.69 | %
Expected dividends |  | — | % | — | %

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

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

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12. Income Taxes

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

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

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13. Commitments and Contingencies

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Leases

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

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

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

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

​ | ​ | ​ | ​
​ | ​ | Amount
For the Three months Ended September 30, 2019: | ​ | ​ | ​
Finance lease costs | ​ | ​ | ​
Amortization of right-to-use assets | ​ | $ | 6
Interest on lease liabilities | ​ |  | 1
Operating lease costs | ​ | ​ | 483
Short term lease costs | ​ | ​ | 12
Variable lease costs | ​ | ​ | 1
Total lease cost | ​ | $ | 501
​ | ​ | ​ | ​
For the Nine Months Ended September 30, 2019: | ​ | ​ | ​
Finance lease costs | ​ | ​ | ​
Amortization of right-to-use assets | ​ | $ | 16
Interest on lease liabilities | ​ |  | 3
Operating lease costs | ​ | ​ | 1,447
Short term lease costs | ​ | ​ | 28
Variable lease costs | ​ | ​ | 16
Total lease cost | ​ | $ | 1,510

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

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

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​ | ​ | ​ | ​
​ | ​ | Amount
Operating Leases | ​ | ​ | ​
Operating lease right-of-use assets | ​ | $ | 3,595
Current maturities of long-term obligations | ​ | $ | 1,750
Long term obligations | ​ | $ | 1,974
Finance Leases | ​ | ​ | ​
Finance lease right-of-use assets | ​ | $ | 93
Current maturities of long-term obligations | ​ | $ | 23
Long term obligations | ​ | $ | 28

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Other information related to leases was as follows:

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​ | ​ | ​ | ​
​ | ​ | Amount
Cash paid for amounts included in the measurement of operating lease liabilities | ​ | $ | 1,314
Right-to-use assets obtained in exchange for new finance lease liabilities | ​ | $ | 16
Weighted-average remaining lease term - finance leases | ​ | ​ | 3.18 Yrs
Weighted-average remaining lease term - operating leases | ​ | ​ | 2.09 Yrs
Weighted-average discount rate - finance leases | ​ | ​ | 7.28%
Weighted-average discount rate - operating leases | ​ | ​ | 6.28%

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

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

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​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | Operating |  | Finance
Year Ending December 31, | ​ | Leases | ​ | Leases
2019 (excluding nine months ended September 30, 2019) | ​ | $ | 494 | ​ | $ | 5
2020 | ​ | ​ | 2,664 | ​ | ​ | 19
2021 | ​ | ​ | 4,007 | ​ |  | 19
2022 | ​ | ​ | 2,573 | ​ | ​ | 10
2023 | ​ | ​ | 2,581 | ​ | ​ | 3
2024 | ​ | ​ | 2,644 | ​ | ​ | —
Thereafter | ​ | ​ | 27,251 | ​ | ​ | —
Total Future Minimum Lease Payments | ​ | $ | 42,213 | ​ | $ | 57
Less future payments for leases that have not yet commenced | ​ | ​ | (38,245) | ​ | ​ | —
Less imputed interest on commenced leases | ​ | ​ | (244) | ​ | ​ | (6)
Total Lease Liability | ​ | $ | 3,724 | ​ | $ | 51

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

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

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​ | ​ | ​ | ​ | ​ | ​ | ​
Year Ending December 31, | ​ | Operating |  | Capital
2019 | ​ |  | 1,866 | ​ |  | 28
2020 | ​ |  | 2,540 | ​ |  | 13
2021 | ​ | ​ | 3,970 | ​ | ​ | 15
2022 | ​ | ​ | 2,518 | ​ | ​ | 7
2023 | ​ | ​ | 2,574 | ​ | ​ | —
Thereafter | ​ | ​ | 30,111 | ​ | ​ | —
Total | ​ | $ | 43,579 | ​ | $ | 63

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

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Service Agreements

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On August 6, 2015, the Company entered into a License and Services Agreement (the “CTS Agreement”) with Community Blood Center (d/b/a Community Tissue Services) (“CTS”), Dayton, Ohio, an FDA registered tissue establishment. Processing of the Avance Nerve Graft pursuant to the CTS Agreement began in February 2016. The CTS Agreement initially had a five-year term ending August 31, 2020. On February 22, 2019, the agreement was amended to extend the term through December 31, 2021. The amendment also gives the Company the right to terminate the agreement on or after March 1, 2021 with six-months advance notice. Under the CTS Agreement, the Company pays CTS a facility fee for use of clean room/manufacturing, storage and office space, which the Company accounts for as an embedded lease in accordance with ASC 842, “Leases”. The Company also pays CTS for services in support of its manufacturing process such as for routine sterilization of daily supplies, providing disposable supplies, microbial services and office support. During the three months ended September 30, 2019 and 2018, the Company paid fees to CTS of approximately $566 and $553, respectively, and during the nine months ended September 30, 2019 and 2018, approximately $1,624 and $1,426, respectively, and are included in cost of goods sold on the accompanying condensed consolidated statements of operations.

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In August 2008, the Company entered into an agreement with Cook Biotech to distribute the Axoguard products worldwide in the field of peripheral nerve repair, and the parties subsequently amended the agreement on February 26, 2018. Pursuant to the February 2018 amendment, the agreement expires on June 30, 2027. The Cook Biotech agreement requires certain minimum purchases, although, through mutual agreement, the parties have not established such minimums; and, to date, have not enforced such provision, and establishes a formula for the transfer cost of the Axoguard products. Under the agreement, Axogen provides purchase orders to Cook Biotech, and Cook Biotech fulfills the purchase orders.

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In December 2011, the Company also entered into a Master Services Agreement for Clinical Research and Related Services. The Company was required to pay $151 upon execution of this agreement and the remainder monthly based on activities associated with the execution of Axogen’s phase 3 pivotal clinical trial to support a biologics license application (“BLA”) for Avance Nerve Graft. In September 2019, the Company entered into an amendment to this agreement. The amendment extends the end of the study timeline from December 2019 to December 2021. It also increases the total number of subjects enrolled and the number of sites used in the studies. Payments made under this agreement were $196 and $212 for the three months ended September 30, 2019 and 2018, respectively. Payments made under this agreement were $337 and $372 for the nine months ended September 30, 2019 and 2018, respectively.

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Certain executive officers of the Company are parties to employment contracts. Such contracts have severance payments for certain conditions including change of control.

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Concentrations

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Vendor

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Substantially all of Axogen’s revenue is currently derived from four products, Avance Nerve Graft, Axoguard Nerve Protector, Axoguard Nerve Connector and Avive Soft Tissue Membrane. Axogen has an exclusive distribution agreement with Cook Biotech for the purchase of Axoguard which expires June 30, 2027. The agreement with Cook Biotech requires certain minimum purchases by Axogen, although, through mutual agreement, the parties have not established such minimums and to date have not enforced such provision and establishes a formula for the transfer cost of the Axoguard products.

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The agreement allows for termination provisions for both parties. Although there are products that Axogen believes it could develop or obtain that would replace the Axoguard products, the loss of the ability to sell the Axoguard products could have a material adverse effect on Axogen’s business until other replacement products would be available.

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Processor

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Axogen is highly dependent on the continued availability of its processing facilities at CTS in Dayton Ohio and could be harmed if the physical infrastructure of this facility is unavailable for any prolonged period of time. In addition, disruptions could lead to significant costs and reductions in revenues, as well as a potential harm to Axogen’s business reputation and financial results. In the event of disruption, Axogen believes it can find and make operational a new leased facility in less than six months, but the regulatory process for approval of facilities is time-consuming and unpredictable. Axogen’s ability to rebuild or find acceptable lease facilities could take a considerable amount of time and expense and could cause a significant disruption in service to its customers. Although Axogen has business interruption insurance, which would cover certain costs, it may not cover all costs nor help to regain Axogen’s standing in the market.

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In July 2018, Axogen purchased a facility (the “APC”) in Vandalia, Ohio, located near the CTS processing facility where Avance Nerve Graft and Avive Soft Tissue Membrane are currently processed. The APC, when and if operational, will be the new processing facility for Avance Nerve Graft and Avive Soft Tissue Membrane to provide

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continued capacity for growth and to support the transition of Avance Nerve Graft from a 361 HCT/P tissue product to a biologic product. The APC is comprised of a 70,000 square foot building on approximately 8.6 acres of land. The Company paid $731 for the land and is recorded as Land within our property and equipment account on our balance sheet. The Company paid $4,300 for the building and this is recorded as projects in process as part of the property and equipment on the balance sheet.

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On July 9, 2019, Axogen entered into a Standard Form of Agreement Between Owner and Design-Builder (the “Design-Build Agreement”) with CRB Builders, L.L.C., a Missouri limited liability company (“CRB”), pursuant to which CRB will renovate and retrofit the APC. The Design-Build Agreement contains several design phase milestones that began in July 2019 and sets the date for Substantial Completion (as defined in the Design-Build Agreement) in the third quarter of 2020, subject to adjustment in accordance with the terms of the Design-Build Agreement. The estimated cost pursuant to the Design-Build Agreement is $29,000. Additional costs associated with the renovation, purchasing of furniture and equipment, validation and certification of the APC are estimated to be $13,000. These capital expenditure costs will be incurred as they arise until the anticipated full transition of material processing to the APC by early 2022. As of September 30, 2019, the Company has recorded $2,632 related to renovations and design build. These items are recorded as projects in process as part of the property and equipment on the balance sheet.

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Axogen expects to receive certain economic development grants from state and local authorities totaling up to $2,685 including $1,250 of cash grants to offset costs to acquire and develop the APC. The economic development grants are subject to certain job creation milestones by 2023 and related contingencies.

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As previously disclosed the Company previously entered into an agreement with Heights Union, LLC, a Florida limited liability company (“Heights Union”), for the lease of seventy-five thousand square feet of office space. Pursuant to the Heights Union lease, the Company will use the Heights Union Premises for general office, medical laboratory, training and meeting purposes. The Company anticipates occupying the premises by the second quarter of 2020. Associated with the lease, the Company anticipates spending up to $10,240 for leasehold improvements, equipment and furniture and fixtures. As of September 30, 2019, the Company has recorded $292 of leasehold improvements to the new facility.

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Litigation

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On January 9, 2019, Plaintiff Neil Einhorn, on behalf of himself and others similarly situated, filed a putative class action complaint in the United Stated District Court for the Middle District of Florida alleging violations of the federal securities laws against Axogen, Inc., certain of its directors and officers (“Individual Defendants”), and Axogen’s 2017 Offering Underwriters and 2018 Offering Underwriters (collectively, with the Individual Defendants, the “Defendants”), captioned Einhorn v. Axogen, Inc., et al., No. 8:19-cv-00069 (M.D. Fla.). Plaintiff asserts that Defendants made false or misleading statements in connection with the Company’s November 2017 registration statement issued regarding its secondary public offering in November 2017 and May 2018 registration statement issued regarding its secondary public offering in May 2018, and during a class period of August 7, 2017 to December 18, 2018. In particular, Plaintiff asserts that Defendants issued false and misleading statements and failed to disclose to investors: (1) that the Company aggressively increased prices to mask lower sales; (2) that the Company’s pricing alienated customers and threatened the Company’s future growth; (3) that ambulatory surgery centers form a significant part of the market for the Company’s products; (4) that such centers were especially sensitive to price increases; (5) that the Company was dependent on a small number of surgeons whom the Company paid to generate sales; (6) that the Company’s consignment model for inventory was reasonably likely to lead to channel stuffing; (7) that the Company offered purchase incentives to sales representatives to encourage channel stuffing; (8) that the Company’s sales representatives were encouraged to backdate revenue to artificially inflate metrics; (9) that the Company lacked adequate internal controls to prevent such channel stuffing and backdating of revenue; (10) that the Company’s key operating metrics, such as number of active accounts, were overstated; and (11) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects, were materially misleading and/or lacked a reasonable basis. Plaintiff seeks an order (a) declaring the action a proper class action pursuant to Rule 23 of the Federal Rules of Civil Procedures; (b) awarding Police and Fire Retirement System of the City of Detroit (“Lead Plaintiff”) and the prospective class compensatory damages against all Defendants in an amount to be proven at trial; (c) awarding Lead

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Plaintiff and the prospective class extraordinary equitable and/or injunctive relief as permitted by the law (including but not limited to rescission); (d) awarding Lead Plaintiff and the prospective class their costs and expenses incurred in the action, including reasonable attorneys’ fees and expert fees; (e) all such other relief that may be just and proper. Axogen was served on January 15, 2019. On February 4, 2019, the court granted the parties’ stipulated motion which provided that Axogen is not required to file a response to the complaint until thirty days after Plaintiff files a consolidated amended complaint. On June 19, 2019, Plaintiff filed an Amended Class Action Complaint, and on July 22, 2019, Defendants filed a motion to dismiss. Plaintiff filed opposing papers on August 12, 2019. The Court held a status hearing on September 11, 2019 and stayed all deadlines regarding the parties’ obligations to file a case management report. The Court scheduled oral argument for the motion to dismiss for December 4, 2019. The Company and Individual Defendants dispute the allegations and intend to vigorously defend against the complaint.

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On February 4, 2019, a complaint in Jerry Espinoza, Jr., et al. v. Megan M. Hess, et al. (2019-cv-30016) was filed in the District Court, Montrose County, Colorado. Plaintiffs, who are relatives of decedents, allege that Axogen purchased specimens from a vendor who failed to obtain consent before procuring the specimen from four decedents. Against Axogen, Plaintiffs allege claims of: (1) outrageous conduct; (2) unjust enrichment; (3) negligence; (4) negligence per se; (5) aiding and abetting; (6) civil conspiracy; and (7) violation of the Colorado Organized Crime Control Act. Plaintiffs seek compensatory damages for emotional distress and anxiety. Axogen was served with the complaint on February 13, 2019. A motion to dismiss has been filed and awaits the Court’s ruling. The Court has scheduled a conference on December 17, 2019, at 10:30 a.m. to discuss the pending motions to dismiss in this case and Wabel, a nearly identical case filed by the same Plaintiffs’ attorneys in June 2019. The Company intends to vigorously defend this matter. This amount of loss, if any, cannot be reasonably estimated at this time.

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On June 30, 2019, the law firm representing Plaintiffs in the Jerry Espinoza, Jr. matter filed a nearly identical complaint on behalf of additional Plaintiffs in the same Montrose County, Colorado District Court. That action is captioned, Lisa Wabel, et al. v. Megan M. Hess, et al. (2019-cv-30071). The claims alleged against Axogen in the Wabel complaint are nearly identical to the claims alleged in the Espinoza matter. Plaintiffs seek compensatory damages for emotional distress and anxiety. Plaintiffs also seek compensation to the extent Axogen was unjustly enriched, and attorneys’ fees and costs. Axogen was served with the complaint effective on July 17, 2019. A motion to dismiss has been filed, but the Court has granted Plaintiffs a stay on filing their opposition to this motion until the December conference. As discussed above, this case, in addition to Espinoza, will be discussed at the court conference set for December 17, 2019. The Company disputes the allegations and intends to vigorously defend against the complaint. This amount of loss, if any, cannot be reasonably estimated at this time.

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On August 12, 2019, Plaintiff Harvey Jackson, derivatively on behalf of Axogen, filed a verified shareholder derivative complaint in the United Stated District Court for the Middle District of Florida for violations of securities laws, breach of fiduciary duty, waste of corporate assets and unjust enrichment against Quentin S. Blackford, Gregory G. Freitag, Mark Gold, Jamie M. Grooms, Alan M. Levine, Peter J. Mariani, Guido Neels, Robert J. Rudelius, Amy Wendell, and Karen Zaderej (the “Individual Defendants”) and Nominal Defendant Axogen, Inc. (“Axogen”) (collectively, “Defendants”). Plaintiff asserts that the Individual Defendants, who are current or former Axogen officers or directors, issued a false proxy statement for the election of directors in violation of Section 14(a) of the Securities Exchange Act of 1934, breached their fiduciary duties, wasted corporate assets and were unjustly enriched by allowing Axogen to make false public statements to investors based on the same claims in the report issued December 18, 2018 by Seligman Investments (the same allegations that form the basis for the Einhorn matter and the Bussey shareholder demand). Plaintiff demands judgment in the Company’s favor against all Individual Defendants as follows: (A) declaring that Plaintiff may maintain this action on behalf of Axogen and that Plaintiff is an adequate representative of Company; (B) declaring that the Individual Defendants have breached and/or aided and abetted the breach of their fiduciary duties to Axogen; (C) determining and awarding to Axogen the damages sustained by it because of the violations set forth above from each of the Individual Defendants, jointly and severally, together with pre- and post-judgment interest thereon; (D) directing Axogen and the Individual Defendants to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable laws and protect Axogen and its shareholders from a repeat of the damaging events described therein, including but not limited to putting forward for shareholder vote the following resolutions for amendments to the Company’s Bylaws or Articles of Incorporation and the following actions as may be necessary to ensure proper corporate governance policies: (i) a proposal to strengthen the Board’s supervision of operations and develop and implement procedures for greater shareholder input into the policies

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and guidelines of the Board; (ii) a provision to permit the shareholders of Axogen to nominate at least six candidates for election to the Board and (iii) a proposal to ensure the establishment of effective oversight of compliance with applicable laws, rules, and regulations; (E) awarding Axogen restitution form Individual Defendants, and each of them; (F) awarding Plaintiff the costs and disbursements of this actions, including reasonable attorneys’ and expert fees, costs, and expenses; and (G) granting such other and further relief as the Court may deem just and proper. The Defendants filed a motion to dismiss on October 22, 2019. Plaintiff’s opposition to the motion to dismiss was due on November 5, 2019. On November 5, 2019, Plaintiff filed an unopposed motion to voluntarily dismiss the complaint without prejudice to his right to make a demand upon the board of directors of Axogen, Inc. concerning the subject matter of his complaint. On November 5, 2019, the Court granted the unopposed motion, thereby dismissing the complaint without prejudice. We have taken the position with our insurer that since this claim arises out of the same allegations as in the Einhorn matter, the claim and any expenses with respect thereto should be subject to the same coverage policy and self-insured retention as in Einhorn, and we await the insurer’s formal reply.

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14. Retirement Plan

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Axogen 401(k) Plan

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The Company sponsors the Axogen 401(k) plan (the “401(k) Plan”), a defined contribution plan covering substantially all employees of the Company. All full-time employees who have attained the age of 18 are eligible to participate in the 401(k) Plan. Eligibility is immediate upon employment and enrollment is available any time during employment. Participating employees may make annual pretax contributions to their accounts up to a maximum amount as limited by law. The 401(k) Plan requires the Company to make matching contributions of 3% on the first 3% of the employee’s annual salary and 1% of the next 2% of the employee’s annual salary as long as the employee participates in the 401(k) Plan. Both employee contributions and Company contributions vest immediately. Employer contributions to the 401(k) Plan for the three months ended September 30, 2019 and 2018 were approximately $231 and $157, respectively, and for the nine months ended September 30, 2019 and 2018 were approximately $706 and $467, respectively.

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, and Axogen Europe 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 helping to restore peripheral nerve function and quality of life to patients with physical damage or transection to peripheral nerves providing innovative, clinically proven and economically effective repair solutions for surgeons and health care 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.

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Axogen’s 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 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 injured peripheral nerves and reinforce the nerve reconstruction while preventing soft tissue attachments and Avive Soft Tissue Membrane, a minimally processed human umbilical cord membrane that may be used as a resorbable soft tissue covering to separate tissue layers. Along with these core surgical products, we also offer the Axotouch® Two-Point Discriminator. This evaluation and measurement tools assist healthcare professionals in detecting changes in sensation, assessing return of sensory function, evaluating effective treatment interventions, and providing feedback to patients on peripheral nerve function. Our portfolio of products is available in the United States, Canada, the United Kingdom and several European and other international countries.

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Revenue from the distribution of Axogen’s nerve repair products, the Avance Nerve Graft, Axoguard Nerve Connector, Axoguard Nerve Protector and Avive Soft Tissue Membrane, in the United States is the main contributor to Axogen’s total reported sales and has been the key component of our growth to date. Axogen revenues increased in the first nine months of 2019 compared to the same period of 2018 primarily as a result of continuing revenue growth through product penetration in, and increases of the number of, active accounts, and to a lesser extent, the development and growth of new accounts.

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We have experienced that surgeons initially are cautious adopters for nerve repair products. Surgeons typically start with a few cases and then wait and review the results of these initial cases. Active accounts are usually past this wait period and have developed some level of product reorder. These active accounts have typically gone through the committee approval process, have at least one surgeon who has converted a portion of his or her treatment algorithms of peripheral nerve repair to the Axogen portfolio and have ordered Axogen products at least six times in the last 12 months. The number of active accounts at the end of the third quarter of 2019 was approximately 791, representing an increase of 17% compared to 679 at the end of the third quarter of 2018.

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As such, revenue growth primarily occurs from increased purchasing from active accounts, followed by revenue growth from new accounts. Each new period of measurement is thus benefited from growth in active accounts which may include those that were new accounts in the prior measurement period. Axogen continues to broaden its sales and marketing focus, which is expected to have a positive contribution to its revenue growth in the long term and invest in the development of our commercial team, infrastructure capabilities, clinical studies, product development and research, as well as surgeon education. As a result, the growth in these expenses outpaced our revenue growth.

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There have been no significant changes to our critical accounting policies from those disclosed in our 2018 Annual Report on Form 10-K except for the adoption of the new standard related to Leases, as described in Note 2.

Results of Operations

Comparison of the Three Months Ended September 30, 2019 and 2018

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Three Months Ended September 30,
​ | ​ | 2019 | ​ | 2018
​ | ​ | ​ | ​ | ​ | % of | ​ | ​ | ​ | ​ | % of
​ | ​ | Amount | ​ | Revenue | ​ | Amount | ​ | Revenue
​ | ​ | (dollars in thousands) | ​
Revenues | ​ | $ | 28,564 | ​ | ​ | 100.0 | % | ​ | $ | 22,660 | ​ | ​ | 100.0 | %
Cost of goods sold | ​ | ​ | 4,510 | ​ | ​ | 15.8 | ​ | ​ | ​ | 3,464 | ​ | ​ | 15.3 | ​
Gross Profit | ​ | ​ | 24,054 | ​ | ​ | 84.2 | ​ | ​ | ​ | 19,196 | ​ | ​ | 84.7 | ​
Cost and expenses | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Sales and marketing | ​ | ​ | 18,245 | ​ | ​ | 63.9 | ​ | ​ | ​ | 14,653 | ​ | ​ | 64.7 | ​
Research and development | ​ | ​ | 4,181 | ​ | ​ | 14.6 | ​ | ​ | ​ | 3,307 | ​ | ​ | 14.6 | ​
General and administrative | ​ | ​ | 7,740 | ​ | ​ | 27.1 | ​ | ​ | ​ | 6,071 | ​ | ​ | 26.8 | ​
Total costs and expenses | ​ | ​ | 30,166 | ​ | ​ | 105.6 | ​ | ​ | ​ | 24,031 | ​ | ​ | 106.1 | ​
Loss from operations | ​ | ​ | (6,112) | ​ | ​ | (21.4) | ​ | ​ | ​ | (4,835) | ​ | ​ | (21.3) | ​
Other income (expense): | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Investment income | ​ | ​ | 555 | ​ | ​ | 1.9 | ​ | ​ | ​ | 727 | ​ | ​ | 3.2 | ​
Interest expense | ​ | ​ | (7) | ​ | ​ | - | ​ | ​ | ​ | 6 | ​ | ​ | - | ​
Interest expense - deferred financing costs | ​ | ​ | — | ​ | ​ | - | ​ | ​ | ​ | — | ​ | ​ | - | ​
loss on extinguishment of debt | ​ | ​ | — | ​ | ​ | - | ​ | ​ | ​ | — | ​ | ​ | - | ​
Other expense | ​ | ​ | (7) | ​ | ​ | - | ​ | ​ | ​ | — | ​ | ​ | - | ​
Total other income (expense) | ​ | ​ | 541 | ​ | ​ | 1.9 | ​ | ​ | ​ | 733 | ​ | ​ | 3.2 | ​
Net Loss | ​ | $ | (5,571) | ​ | ​ | (19.5) | % | ​ | $ | (4,102) | ​ | ​ | (18.1) | %

​

Revenues

Revenues for the three months ended September 30, 2019 increased 26.1% to $28,564 as compared to $22,660 for the three months ended September 30, 2018. This increase was primarily a result of an increase in unit volume, as well as the net impact of increased prices and changes in product mix.

Gross Profit

Gross profit for the three months ended September 30, 2019 increased 25.3% to $24,054 as compared to $19,196 for the three months ended September 30, 2018. This increase was primarily attributable to the increased revenues. Gross margin was 84.2% for the three months ended September 30, 2019, as compared to 84.7% for the same period in 2018.

Costs and Expenses

Total costs and expenses increased 25.5% to $30,166 for the three months ended September 30, 2019, as compared to $24,031 for the three months ended September 30, 2018, primarily due to increased sales activity, costs associated with increases in personnel to support our growth, as well as increases in research and development, which includes product development and clinical trial costs. As a percentage of total revenues, total costs and expenses decreased to 105.6% for the three months ended September 30, 2019, as compared to 106.1% for the three months ended September 30, 2018, primarily as a result of the increase in total revenue outpacing the increase in total costs as we have gained some efficiency while continuing to invest in the expansion of our commercial team, research and development and scaling infrastructure. Total costs and expenses for the three months ended September 30, 2019 includes $532 related to the Company’s activity in connection with the ongoing litigation described in Legal Proceedings (the “Litigation”).

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Sales and marketing expenses increased 24.5% to $18,245 for the three months ended September 30, 2019, as compared to $14,653 for the three months ended September 30, 2018. This increase was primarily due to increased compensation expenses related to our direct sales force as a result of continued hiring of additional personnel, increased commissions as a result of increased revenue and distribution, and market development activities. As a percentage of total revenues, sales and marketing expenses decreased to 63.9% for the three months ended September 30, 2019 as compared to 64.7% for the three months ended September 30, 2018.

General and administrative expenses increased 27.5% to $7,740 for the three months ended September 30, 2019, as compared to $6,071 for the three months ended September 30, 2018, primarily as the result of increased compensation related to our continuing efforts to expand our resources to support our growth. As a percentage of total revenues, general and administrative expenses had a modest increase to 27.1% for the three months ended September 30, 2019 as compared to 26.8% for the three months ended September 30, 2018.

Research and development expenses increased 26.4% to $4,181 for the three months ended September 30, 2019, as compared to $3,307 for the three months ended September 30, 2018. Research and development costs include our product and application development and clinical efforts substantially focused on our Biologics License Application, or BLA, for the Avance Nerve Graft, and development of new products and product applications. The increase in expenses for the third quarter of 2019 related to increased expenditures to support both clinical activities and new product and application development efforts. As a percentage of total revenues, research and development expenses was 14.6% for each of the three months ended September 30, 2019 and 2018.

Other Income and Expenses

For the three months ended September 30, 2019 and 2018, we recognized $555 and $727, respectively, of investment income from our asset management and cash investment sweep accounts. The decrease is primarily from the lower average investments balances in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018.

Income Taxes

We had no income tax expenses or income tax benefit for each of the three months ended September 30, 2019 and 2018, due to the incurrence of net operating losses in each of these periods, the benefits of which have been fully reserved. We do not believe that there are any additional tax expenses or benefits currently available.

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Comparison of the Nine Months Ended September 30, 2019 and 2018

​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Nine Months Ended September 30,
​ | ​ | 2019 | ​ | 2018
​ | ​ | ​ | ​ | ​ | % of | ​ | ​ | ​ | ​ | % of
​ | ​ | Amount | ​ | Revenue | ​ | Amount | ​ | Revenue
​ | ​ | (dollars in thousands) | ​
Revenues | ​ | $ | 78,550 | ​ | ​ | 100.0 | % | ​ | $ | 60,504 | ​ | ​ | 100.0 | %
Cost of goods sold | ​ | ​ | 12,468 | ​ | ​ | 15.9 | ​ | ​ | ​ | 9,282 | ​ | ​ | 15.3 | ​
Gross Profit | ​ | ​ | 66,082 | ​ | ​ | 84.1 | ​ | ​ | ​ | 51,222 | ​ | ​ | 84.7 | ​
Cost and expenses | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Sales and marketing | ​ | ​ | 53,146 | ​ | ​ | 67.7 | ​ | ​ | ​ | 41,149 | ​ | ​ | 68.0 | ​
Research and development | ​ | ​ | 12,602 | ​ | ​ | 16.0 | ​ | ​ | ​ | 7,967 | ​ | ​ | 13.2 | ​
General and administrative | ​ | ​ | 24,321 | ​ | ​ | 31.0 | ​ | ​ | ​ | 16,751 | ​ | ​ | 27.7 | ​
Total costs and expenses | ​ | ​ | 90,069 | ​ | ​ | 114.7 | ​ | ​ | ​ | 65,867 | ​ | ​ | 108.9 | ​
Loss from operations | ​ | ​ | (23,987) | ​ | ​ | (30.5) | ​ | ​ | ​ | (14,645) | ​ | ​ | (24.2) | ​
Other income (expense): | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Investment income | ​ | ​ | 1,925 | ​ | ​ | 2.4 | ​ | ​ | ​ | 884 | ​ | ​ | 1.5 | ​
Interest expense | ​ | ​ | (32) | ​ | ​ | - | ​ | ​ | ​ | (1,124) | ​ | ​ | (1.9) | ​
Interest expense - deferred financing costs | ​ | ​ | — | ​ | ​ | - | ​ | ​ | ​ | (81) | ​ | ​ | - | ​
loss on extinguishment of debt | ​ | ​ | — | ​ | ​ | - | ​ | ​ | ​ | (2,186) | ​ | ​ | (3.6) | ​
Other expense | ​ | ​ | (3) | ​ | ​ | - | ​ | ​ | ​ | (16) | ​ | ​ | - | ​
Total other income (expense) | ​ | ​ | 1,890 | ​ | ​ | 2.4 | ​ | ​ | ​ | (2,523) | ​ | ​ | (4.2) | ​
Net Loss | ​ | $ | (22,097) | ​ | ​ | (28.1) | % | ​ | $ | (17,168) | ​ | ​ | (28.4) | %

​

Revenues

Revenues for the nine months ended September 30, 2019, increased 29.8% to $78,550 as compared to $60,504 for the nine months ended September 30, 2018. The increase was primarily a result of continuing growth from our core trauma applications, including an increase in the number of active accounts.

Gross Profit

Gross profit for the nine months ended September 30, 2019, increased 29.0% to $66,082 as compared to $51,222 for the nine months ended September 30, 2018. This increase was primarily attributable to the increased revenues. Gross margin remained consistent decreased to 84.1% for the nine months ended September 30, 2019, as compared to 84.7% for the same period in 2018.

Costs and Expenses

Total costs and expenses increased 36.7% to $90,069 for the nine months ended September 30, 2019, as compared to $65,867 for the nine months ended September 30, 2018, due primarily to increased sales activity, expansion of our commercial team and surgeon education programs, increased costs associated with increases in personnel to support our growth, including non-cash stock compensation, as well as increases in research and development, which includes product development and clinical trial costs. As a percentage of total revenues, total cost and expenses increased to 114.7% for the nine months ended September 30, 2019, as compared to 108.9% for the nine months ended September 30, 2018, primarily as a result of the increase in total costs outpacing the increase in total revenues as we have continued to invest in the expansion of our commercial team, research and development activities, and infrastructure. Total costs and expenses for the nine months ended September 30, 2019 includes $2,327 related to the Company’s activity in connection with the Litigation.

Sales and marketing expenses increased 29.2% to $53,146 for the nine months ended September 30, 2019, as compared to $41,149 for the nine months ended September 30, 2018. This increase was primarily due to increased compensation expenses related to our direct sales force as a result of continued hiring of additional personnel and the

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expansion of the Company’s surgeon education program and continued investment in market development activities. As a percentage of total revenues, sales and marketing expenses decreased to 67.7% for the nine months ended September 30, 2019 as compared to 68.0% for the nine months ended September 30, 2018.

General and administrative expenses increased 45.2% to $24,321 for the nine months ended September 30, 2019 as compared to $16,751 for the nine months ended September 30, 2018, primarily as the result of increased compensation related to our continuing efforts to expand our resources to support our growth and professional fees related to the Litigation. As a percentage of total revenues, general and administrative expenses were 31.0% for the nine months ended September 30, 2019 as compared to 27.7% for the nine months ended September 30, 2018.

Research and development expenses increased 58.2% to $12,602 for the nine months ended September 30, 2019 as compared to $7,967 for the nine months ended September 30, 2018. The increase in expenses for the nine months ended September 30, 2019 related to increased compensation from the hiring of additional personnel to support both clinical and new product and application development efforts. As a percentage of total revenues, research and development expenses for the nine months ended September 30, 2019 were 16.0% as compared to 13.2% for the nine months ended September 30, 2018.

Other Income and Expenses

For the nine months ended September 30, 2019 and 2018, we recognized $1,925 and $884 of investment income from our asset management and cash investment sweep accounts. These accounts were originally opened during the second quarter of 2018 and therefore 2019 includes five more months of investment income. During the prior year period, the Company incurred a loss on extinguishment of debt of $2,186 for prepayment fees and $81 from the amortization of deferred financing costs in connection with the prepayment in full of the Term Loan and Revolving Loan with MidCap. The Company did not incur similar losses or costs for the period in 2019. For the nine months ended September 30, 2019 and 2018, the Company incurred $32 and $1,124 of interest expense.

Income Taxes

We had no income tax expenses or income tax benefit for each of the nine months ended September 30, 2019 and 2018, due to the incurrence of net operating losses in each of these periods, the benefits of which have been fully reserved. We do not believe that there are any additional tax expenses or benefits currently available.

Effect of Inflation

Inflation did not have a significant impact on the Company’s net sales, revenues or income from continuing operations during the nine months ended September 30, 2019 and 2018.

Liquidity and Capital Resources

Cash Flow Information

As of September 30, 2019, the Company had cash, cash equivalents, and restricted cash of $30,555, an increase of $261 from $30,294 at December 31, 2018, primarily as a result of net maturities of short-term investments of $17,757 and proceeds from stock option exercises of $3,142 offset by the funds used in operating activities of $16,542 and purchases of property and equipment of $3,676.

The Company had working capital of $120,586 and a current ratio of 8.2 at September 30, 2019, compared to working capital of $137,909 and a current ratio of 11.6 at December 31, 2018. The decrease in working capital and the current ratio at September 30, 2019, as compared to December 31, 2018, was primarily due to the use of working capital to fund operations, including increased compensation from hiring additional personnel to support the business, the payment in 2019 of the 2018 performance bonus, 2018 annual sales awards and related costs. The Company believes it has sufficient cash resources to meet its liquidity requirements for at least the next 12 months based on its expected level of operations.

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Axogen’s future capital requirements depend on a number of factors including, without limitation, revenue increases consistent with its business plan, cost of products and acquisition and/or development of new products. Axogen could face increasing capital needs. Such capital needs could be substantial depending on the extent to which Axogen is unable to increase revenue.

If Axogen needs additional capital in the future, it may raise additional funds through public or private equity offerings, debt financings or from other sources. The sale of additional equity would result in dilution to Axogen’s shareholders. There is no assurance that Axogen will be able to secure funding on terms acceptable to it, 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 Axogen as needed, Axogen may be required to take certain actions, such as slowing sales and marketing expansion, delaying regulatory approvals or reducing headcount.

The Company’s principal sources and uses of funds are explained below:

Cash used in operating activities

Operating activities for the nine months ended September 30, 2019 used $16,542 of cash as compared to using $12,886 of cash for operating activities for the nine months ended September 30, 2018. This increase in cash used for operating activities of approximately $3,656 was primarily attributable to higher net losses in 2019 after adjusting for higher non-cash expenses, including stock-based compensation and depreciation, as compared to 2018.

Cash provided by investing activities

Investing activities for the nine months ended September 30, 2019 provided $13,685 of cash as compared to using $106,737 of cash for the nine months ended September 30, 2018. This increase in cash provided by investing activities was principally attributable to the redemption of short-term investments, partially offset by ongoing investment in the renovation of the APC in Vandalia Ohio.

Cash provided by financing activities

Financing activities for the nine months ended September 30, 2019 provided $3,118 of cash as compared to providing $108,745 of cash for the nine months ended September 30, 2018. The decrease in cash provided by financing activities was primarily the result of the net proceeds of $132,706 from the public stock offering, offset by 26,253 of payments on the Company’s debt, including prepayment fees in the prior year period. Proceeds from the exercise of stock options provided $3,142 and $2,778 of cash for the nine months ended September 30, 2019 and 2018, respectively.

Operating Cash Requirements

​

On July 9, 2019, Axogen entered into a Standard Form of Agreement Between Owner and Design-Builder (the “Design-Build Agreement”) with CRB Builders, L.L.C., a Missouri limited liability company (“CRB”), pursuant to which CRB will renovate and retrofit the APC (See Footnote 12 Commitment and Contingencies in the Notes to the Condensed Financial Statements). The Company anticipates spending up to approximately $33,500 for renovations, equipment and furniture over the next twelve months and up to $37,600 over the next 18 months.

​

As previously disclosed the Company previously entered into an agreement with Heights Union, LLC, a Florida limited liability company (“Heights Union”), for the lease of seventy-five thousand square feet of office space. Pursuant to the Heights Union lease, the Company will use the Heights Union Premises for general office, medical laboratory, training and meeting purposes. The Company anticipates occupying the premises by the second quarter of 2020. Associated with the lease, the Company anticipates spending up to $10,000 for leasehold improvements, equipment and furniture and fixtures over the next twelve months.

​

As of September 30, 2019, we had cash, cash equivalents and investments totaling $106,066 million and total current liabilities of $16,757. Based on current estimates, we believe that our existing cash, cash equivalents and investments will allow us to fund our operations through at least the next 12 months.

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Credit Facilities

On October 25, 2016, the Company entered into Term Loan and a Revolving Loan with MidCap Financial Trust (“MidCap”) maturing on May 1, 2021.

​

The Company had the option at any time to prepay the Term Loan in whole or in part, subject to payment of a prepayment fee and an exit fee. On May 22, 2018, the Company exercised its option and paid $22,500 to prepay the Term Loan in full, which included exit and pre-payment fees totaling $1,500. In addition, on May 22, 2018, the Company charged to interest expense the unamortized deferred financing costs associated with the Term Loan of $473.

​

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

​

Material Commitments

As previously disclosed in footnote 12, the Company purchased a 70,000 square foot facility on approximately 8.6 acres of land in Vandalia, Ohio.

​

On July 9, 2019, the Company entered into the Design-Build Agreement with CRB, pursuant to which CRB will renovate and retrofit the property. Once completed, the Company will use the property for material processing, medical laboratory, general office, training and meeting purposes. The Design-Build Agreement contains several design phase milestones beginning in July 2019 and sets the date for Substantial Completion (as defined in the Design-Build Agreement) in the third quarter of 2020, subject to adjustment in accordance with the terms of the Design-Build Agreement. The estimated cost pursuant to the Design-Build Agreement is $29,000. Additional costs associated with the renovation, purchasing of furniture and equipment, validation and certification of the property are estimated to be $13,000. These capital expenditure costs will be incurred as they arise until the anticipated full transition of material processing to the property by early 2022.

​

The Company expects to receive certain economic development grants from state and local authorities totaling up to $2,685 including $1,250 of cash grants to offset costs to acquire and develop the property. The economic development grants are subject to certain job creation milestones by 2023 and related contingencies.

​

Off-Balance Sheet Arrangements

Axogen does not have any off-balance sheet arrangements.

​

​

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion about our exposure to market risk of financial instruments contains forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those described due to a number of factors, including uncertainties associated with general economic conditions and conditions impacting our industry.

We are exposed to certain market risks in the ordinary course of business.

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivables. We maintain our accounts for cash and cash equivalents principally at one major bank and one investment firm in the United States. We have not experienced any losses on our deposits of our cash and cash equivalents.

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 receivables. Concentrations of credit risk with respect to accounts receivable are limited because a large number of geographically diverse customers make up the Company’s customer

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base, thus spreading the trade credit risk. The Company also controls credit risk through credit approvals and monitoring procedures.

We are subject to market risk from exposure to changes in interest rates based upon our investing and cash management activities. Changes in interest rates affect interest income earned on cash and cash equivalents. 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 2019. However, we can give no assurance that interest rates will not significantly change in the future.

The value of the U.S. dollar compared to the Euro has little to no effect on our financial results. International business transactions are currently invoiced in U.S. dollars. As a result, the Company has minimal exposure related to exchange rate fluctuations.

In the United States, we sell our products directly to hospitals and clinics in the local currency. Revenue is recognized as disclosed in Note 2 - Summary of Significant Accounting Policies - Revenue Recognition in our Notes to the Unaudited Condensed Consolidated Financial Statements.

In all 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 these countries through independent distributors is denominated in United States dollars.

We do not believe our operations are currently subject to significant market risks for foreign currency exchange rates, commodity prices or other relevant market price risks of a material nature.

​

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, and Board of Directors, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2019 and concluded that our disclosure controls and procedures were effective.

Changes in Internal Controls Over Financial Reporting

There have not been any changes in our internal control over financial reporting identified in management’s

Evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the three months ended September 30, 2019 that materially affected, or reasonably likely to materially affect, our internal control over financial reporting.

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PART II –OTHER INFORMATION

​

ITEM 1 – LEGAL PROCEEDINGS

​

From time to time, we may be a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business, some of which relate to some or all of certain of our patents. While it is not possible to determine the outcome of these matters, management does not expect that the ultimate costs to resolve these matters will materially adversely affect our business, financial position, or results of operations.

​

Except as provided below, Axogen and its subsidiaries are not a party to any material litigation as of June 30, 2019:

​

1. | On January 9, 2019, Plaintiff Neil Einhorn, on behalf of himself and others similarly situated, filed a putative class action complaint in the United Stated District Court for the Middle District of Florida alleging violations of the federal securities laws against Axogen, Inc., certain of its directors and officers (“Individual Defendants”), and Axogen’s 2017 Offering Underwriters and 2018 Offering Underwriters (collectively, with the Individual Defendants, the “Defendants”), captioned Einhorn v. Axogen, Inc., et al., No. 8:19-cv-00069 (M.D. Fla.). Plaintiff asserts that Defendants made false or misleading statements in connection with the Company’s November 2017 registration statement issued regarding its secondary public offering in November 2017 and May 2018 registration statement issued regarding its secondary public offering in May 2018, and during a class period of August 7, 2017 to December 18, 2018. In particular, Plaintiff asserts that Defendants issued false and misleading statements and failed to disclose to investors: (1) that the Company aggressively increased prices to mask lower sales; (2) that the Company’s pricing alienated customers and threatened the Company’s future growth; (3) that ambulatory surgery centers form a significant part of the market for the Company’s products; (4) that such centers were especially sensitive to price increases; (5) that the Company was dependent on a small number of surgeons whom the Company paid to generate sales; (6) that the Company’s consignment model for inventory was reasonably likely to lead to channel stuffing; (7) that the Company offered purchase incentives to sales representatives to encourage channel stuffing; (8) that the Company’s sales representatives were encouraged to backdate revenue to artificially inflate metrics; (9) that the Company lacked adequate internal controls to prevent such channel stuffing and backdating of revenue; (10) that the Company’s key operating metrics, such as number of active accounts, were overstated; and (11) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects, were materially misleading and/or lacked a reasonable basis. Plaintiff seeks an order (a) declaring the action a proper class action pursuant to Rule 23 of the Federal Rules of Civil Procedures; (b) awarding Police and Fire Retirement System of the City of Detroit (“Lead Plaintiff”) and the prospective class compensatory damages against all Defendants in an amount to be proven at trial; (c) awarding Lead Plaintiff and the prospective class extraordinary equitable and/or injunctive relief as permitted by the law (including but not limited to rescission); (d) awarding Lead Plaintiff and the prospective class their costs and expenses incurred in the action, including reasonable attorneys’ fees and expert fees; (e) all such other relief that may be just and proper. Axogen was served on January 15, 2019. On February 4, 2019, the court granted the parties’ stipulated motion which provided that Axogen is not required to file a response to the complaint until thirty days after Plaintiff files a consolidated amended complaint. On June 19, 2019, Plaintiff filed an Amended Class Action Complaint, and on July 22, 2019, Defendants filed a motion to dismiss. Plaintiff filed opposing papers on August 12, 2019. The Court held a status hearing on September 11, 2019 and stayed all deadlines regarding the parties’ obligations to file a case management report. The Court scheduled oral argument for the motion to dismiss for December 4, 2019. The Company and Individual Defendants dispute the allegations and intend to vigorously defend against the complaint.

​

2. | On February 4, 2019, a complaint in Jerry Espinoza, Jr., et al. v. Megan M. Hess, et al. (2019-cv-30016) was filed in the District Court, Montrose County, Colorado. Plaintiffs, who are relatives of decedents, allege that Axogen purchased specimens from a vendor who failed to obtain consent before procuring the specimen from four decedents. Against Axogen, Plaintiffs allege claims of: (1) outrageous conduct; (2) unjust enrichment; (3) negligence; (4) negligence per se; (5) aiding and abetting; (6) civil conspiracy; and (7) violation of the Colorado Organized Crime Control Act. Plaintiffs seek compensatory damages for emotional distress and anxiety. Axogen was served with the complaint on February 13, 2019. A motion to dismiss has been filed, and awaits the Court’s ruling. The Court has scheduled a conference on December 17, 2019, at 10:30 a.m. to discuss the pending motions to dismiss in this case and Wabel, a nearly identical case filed by the same Plaintiffs’ attorneys in June 2019. The

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| Company intends to vigorously defend this matter. This amount of loss, if any, cannot be reasonably estimated at this time.

​

3. | On June 30, 2019, the law firm representing Plaintiffs in the Jerry Espinoza, Jr. matter filed a nearly identical complaint on behalf of additional Plaintiffs in the same Montrose County, Colorado District Court. That action is captioned, Lisa Wabel, et al. v. Megan M. Hess, et al. (2019-cv-30071). The claims alleged against Axogen in the Wabel complaint are nearly identical to the claims alleged in the Espinoza matter. Plaintiffs seek compensatory damages for emotional distress and anxiety. Plaintiffs also seek compensation to the extent Axogen was unjustly enriched, and attorneys’ fees and costs. Axogen was served with the complaint effective on July 17, 2019. A motion to dismiss has been filed, but the Court has granted Plaintiffs a stay on filing their opposition to this motion until the December conference. As discussed above, this case, in addition to Espinoza, will be discussed at the court conference set for December 17, 2019. The Company intends to vigorously defend this matter. This amount of loss, if any, cannot be reasonably estimated at this time.

​

4. | On August 12, 2019, Plaintiff Harvey Jackson, derivatively on behalf of Axogen, filed a verified shareholder derivative complaint in the United Stated District Court for the Middle District of Florida for violations of securities laws, breach of fiduciary duty, waste of corporate assets and unjust enrichment against Quentin S. Blackford, Gregory G. Freitag, Mark Gold, Jamie M. Grooms, Alan M. Levine, Peter J. Mariani, Guido Neels, Robert J. Rudelius, Amy Wendell, and Karen Zaderej (the “Individual Defendants”) and Nominal Defendant Axogen, Inc. (“Axogen”) (collectively, “Defendants”). Plaintiff asserts that the Individual Defendants, who are current or former Axogen officers or directors, issued a false proxy statement for the election of directors in violation of Section 14(a) of the Securities Exchange Act of 1934, breached their fiduciary duties, wasted corporate assets and were unjustly enriched by allowing Axogen to make false public statements to investors based on the same claims in the report issued December 18, 2018 by Seligman Investments (the same allegations that form the basis for the Einhorn matter and the Bussey shareholder demand). Plaintiff demands judgment in the Company’s favor against all Individual Defendants as follows: (A) declaring that Plaintiff may maintain this action on behalf of Axogen, and that Plaintiff is an adequate representative of the Company; (B) declaring that the Individual Defendants have breached and/or aided and abetted the breach of their fiduciary duties to Axogen; (C) determining and awarding to Axogen the damages sustained by it because of the violations set forth above from each of the Individual Defendants, jointly and severally, together with pre- and post-judgment interest thereon; (D) ) directing Axogen and the Individual Defendants to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable laws and protect Axogen and its shareholders from a repeat of the damaging events described therein, including but not limited to putting forward for shareholder vote the following resolutions for amendments to the Company’s Bylaws or Articles of Incorporation and the following actions as may be necessary to ensure proper corporate governance policies: (i) a proposal to strengthen the Board’s supervision of operations and develop and implement procedures for greater shareholder input into the policies and guidelines of the Board; (ii) a provision to permit the shareholders of Axogen to nominate at least six candidates for election to the Board and (iii) a proposal to ensure the establishment of effective oversight of compliance with applicable laws, rules, and regulations; (E) awarding Axogen restitution form Individual Defendants, and each of them; (F) awarding Plaintiff the costs and disbursements of this actions, including reasonable attorneys’ and expert fees, costs, and expenses; and (G) granting such other and further relief as the Court may deem just and proper. The Defendants filed a motion to dismiss on October 22, 2019. Plaintiff’s opposition to the motion to dismiss was due on November 5, 2019. On November 5, 2019, Plaintiff filed an unopposed motion to voluntarily dismiss the complaint without prejudice to his right to make a demand upon the board of directors of Axogen, Inc. concerning the subject matter of his complaint. We have taken the position with our insurer that since this claim arises out of the same allegations as in the Einhorn matter, the claim and any expenses with respect thereto should be subject to the same coverage policy and self-insured retention as in Einhorn, and we await the insurer’s formal reply.

​

​

ITEM 1A - RISK FACTORS

​

The Company faces a number of risks and uncertainties. In addition to the other information in this report and the Company’s other filings with the SEC, readers should consider carefully the risk factors discussed in Part I “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. If any of these

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risks actually occur, the Company’s business, results of operations or financial condition could be materially adversely affected. There have been no material changes to these risk factors since the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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None.

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ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

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None.

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ITEM 4 - MINE SAFETY DISCLOSURES

​

Not Applicable.

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ITEM 5 - OTHER INFORMATION

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None

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​

ITEM 6 - EXHIBITS

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​ | ​ | ​
Exhibit Number | ​ | Description
​ 3.1† | ​ | ​ Amended and Restated Articles of Incorporation of Axogen, Inc.
​ | ​ | ​
10.2† | ​ | Axogen Inc. 2019 Long-Term Incentive Plan and forms of award notices and agreements thereunder.
​ | ​ | ​
31.1† | ​ | Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
​ | ​ | ​
31.2† | ​ | Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
​ | ​ | ​
32†† | ​ | Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
​ | ​ | ​
101.INS† | ​ | XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
​ | ​ | ​
101.SCH† | ​ | XBRL Taxonomy Extension Schema Document.
​ | ​ | ​
101.CAL† | ​ | XBRL Taxonomy Extension Calculation Linkbase Document.
​ | ​ | ​
101.DEF† | ​ | XBRL Taxonomy Extension Definition Linkbase Document.
​ | ​ | ​
101.LAB† | ​ | XBRL Extension Labels Linkbase.
​ | ​ | ​
101.PRE† | ​ | XBRL Taxonomy Extension Presentation Linkbase Document. ​
​ | ​ | ​
104† | ​ | Cover Page Interactive Data File – The cover pages does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
​ | ​ | ​

​

​

† Filed herewith.

​

†† Furnished herewith.

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​

​

SIGNATURES

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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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​ | ​ | ​
​ | ​ | AXOGEN, INC.
​ | ​ | ​
​ | ​ | ​
Dated: November 6, 2019 | ​ | /s/ Karen Zaderej
​ | ​ | Karen Zaderej
​ | ​ | Chief Executive Officer and President
​ | ​ | (Principal Executive Officer)
​ | ​ | ​
​ | ​ | ​
Dated: November 6, 2019 | ​ | /s/ Peter J. Mariani
​ | ​ | Peter J. Mariani
​ | ​ | Chief Financial Officer
​ | ​ | (Principal Financial and Accounting Officer)

​

​

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