AXGN US Equity☆

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with our consolidated financial statements and the notes thereto contained in Item 8 of Part II in this Form 10-K, “Forward-Looking Statements” contained in Part 1 of this Form 10-K, “Risk Factors” contained in Item 1A of this Form 10-K, and the other information appearing elsewhere in, or incorporated by reference into, this Form 10-K. Dollar amounts referenced in this Item 7 are in thousands, except per share amounts.

Overview

We are the leading company focused specifically on the science, development, and commercialization of technologies for peripheral nerve regeneration and repair. We are passionate about providing the opportunity to restore nerve function and quality of life for patients with peripheral nerve injuries. We provide innovative, clinically proven, and economically effective repair solutions for surgeons and healthcare providers. Peripheral nerves provide the pathways for both motor and sensory signals throughout the body. Every day, people suffer traumatic injuries or undergo surgical procedures that impact the function of their peripheral nerves. Physical damage to a peripheral nerve or the inability to properly reconnect peripheral nerves can result in the loss of muscle or organ function, the loss of sensory feeling, or the initiation of pain.

Product Portfolio

•Avance® Nerve Graft, a biologically active off-the-shelf processed human nerve allograft for bridging severed peripheral nerves without the comorbidities associated with a second surgical site;

•Axoguard Nerve Connector®, a porcine (pig) submucosa extracellular matrix ("ECM") coaptation aid for tensionless repair of severed peripheral nerves;

•Axoguard Nerve Protector®, a porcine submucosa ECM product used to wrap and protect damaged peripheral nerves and reinforce the nerve reconstruction while preventing soft tissue attachments;

•Axoguard Nerve Cap®, a porcine submucosa ECM product used to protect a peripheral nerve end and separate the nerve from the surrounding environment to reduce the development of symptomatic or painful neuroma;

•Axotouch® Two-Point Discriminator, used to measure the innervation density of any surface area of the skin.

Our portfolio of products is currently available in the U.S., Canada, Germany, United Kingdom ("UK"), Spain and several other European, Asian and Latin American countries.

Revenue from the distribution of our nerve repair products, Avance® Nerve Graft, Axoguard Nerve Connector®, Axoguard Nerve Protector®, and Axoguard Nerve Cap®, in the United States ("U.S.") is the main contributor to our total reported sales and have been the key component of our growth to date.

As previously announced, we suspended the market availability of Avive® Soft Tissue Membrane ("Avive") on June 1, 2021 and we continue discussions with the U.S. Food and Drug Administration ("FDA") to determine the appropriate regulatory classification and requirements for Avive. The suspension was not based on any known or reported safety or product performance issues or concerns with Avive. We seek to return Avive to the market, although we are unable to estimate the timeframe or provide any assurances that a return to the market will be achievable.

We have experienced that surgeons initially are cautious adopters for peripheral nerve repair products. Surgeons typically start with a few cases and then wait and see 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 our portfolio and have ordered our products at least six times in the last twelve months. As of December 31, 2022, we had 968 active accounts, an increase of 2.9% from 941 one year ago. Active accounts are approximately 85% of our revenue. The top 10% of these active accounts continue to represent approximately 35% of our revenue. As our business continues to grow, we have transitioned to reporting a new account metric that we believe demonstrates the strength of adoption and potential revenue growth in accounts that have developed a more consistent use of our products in their nerve repair algorithm. We refer to these as core accounts which we define as accounts that have purchased at least $100 in the past 12 months. As of December 31, 2022, we had 332 core accounts, an increase of 17.7% from 282 one year ago. These core accounts represented approximately 60% of our revenue in 2022, which has remained consistent over the past two years.

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Summary of Operational and Business Highlights

•Net revenue excluding Avive was $138,584 for the year ended December 31, 2022, an increase of $15,301 or 12.4% compared to the year ended December 31, 2021.

•Gross profit was $114,437 for the year ended December 31, 2022, an increase of $10,010 or 9.6% compared to the year ended December 31, 2021.

•We ended the year with 115 direct sales representatives consistent with 2021. We also have independent sales agencies supplementing our direct sales team, and those agencies represent approximately 10% of our total revenue.

•During 2022, we surpassed 75,000 Avance Nerve Graft implants since launch.

•During 2022, we added an additional 26 peer-reviewed clinical publications bringing our total to 215 from 181 at the end of 2021, which included the following topics extremity trauma, breast, oral maxillofacial and pain.

•We continue to train approximately 75% of the U.S. hand- and micro-surgery fellows each year, a top priority for Axogen in support of improved nerve repair techniques.

•In May 2022, RECON Phase 3 Study of Avance met its primary endpoint. This study provided the first ever Level 1 clinical evidence in support of Avance Nerve Graft for peripheral nerve repairs. This data will be used to support our Biologics License Application ("BLA") submission.

•We anticipate submitting our BLA for Avance Nerve Graft by the end of 2023.

•We expect that the renovation and validation of our Axogen Processing Center facility ("APC Facility") will be complete in mid-2023 and anticipate transition to the new facility in mid-2023 This facility will be included in our BLA for Avance Nerve Graft and is expected to provide processing capacity that will meet our expected sales growth.

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Results of Operations

Comparison of the Years Ended December 31, 2022 and 2021

The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of total revenue:

Year Ended December 31,

% of % of

Amount Revenue Amount Revenue

(dollars in thousands)

Costs and expenses:

Other (expense) income:

Change in fair value of derivatives 1,044 0.8 % (28) — %

Total other (expense) income, net 759 0.5 % (1,569) (1.2) %

The following table sets forth, for the periods indicated, our revenues excluding the impact of Avive:

Year Ended December 31,

(dollars in thousands)

Revenues from Avive — (4,075)

Revenues

Revenues for the year ended December 31, 2022, increased, $11,226 or 8.8%, to $138,584 as compared to $127,358 for the year ended December 31, 2021. In 2022, our revenues continued to recover from the impact of the COVID-19 pandemic that began in early 2020 and negatively impacted hospital procedure volumes, as well as contributed to staffing and resources challenges. We saw improvements in revenues during 2022 as hospitals addressed resource and staffing challenges which improved the capacity and consistency of surgical procedure schedules.

Revenues excluding Avive for the year ended December 31, 2022, increased $15,300 or 12.4% to $138,584 as compared to $123,284, for the year ended December 31, 2021. Revenue growth, excluding the impact of Avive in 2021, was driven by an increase in unit volume of approximately 7.3%, as well as the net impact of changes in price and product mix of approximately 3.7%. and 1.7%, respectively. The unit volume increase was attributed to growth in our core and active accounts. As of

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December 31, 2022, we had 968 active accounts, an increase of 2.9% from 941 from the prior year and 332 core accounts, an increase of 17.7% from 282 at December 31, 2021, excluding the impact of revenues from Avive.

Gross Profit

Gross profit for the year ended December 31, 2022, increased $10,010 or 9.6% to $114,437 as compared to $104,427 for the year ended December 31, 2021. Gross margin as a percentage of revenue increased to 82.6% for the year ended December 31, 2022. as compared to 82.0% for the year ended December 31, 2021. In 2021, we recorded a $1,429 charge reflecting the write-down of inventory and related production costs due to the suspension of Avive, which resulted in a 1.1% decrease in our gross margin.

Costs and Expenses

Total costs and expenses increased, $14,301 or 11.0%, to $144,144 for the year ended December 31, 2022, as compared to $129,843 for the year ended December 31, 2021. The increase in total operating costs was primarily attributable to the following (i) $8,980 in compensation costs of which $4,627 was non-cash stock compensation; (ii) $1,877 in research and development costs; (iii) $1,602 in travel costs; and (iv) $1,475 in occupancy cost and certain other cost.

Sales and marketing expenses increased $6,900, or 9.4%, to $80,228 for the year ended December 31, 2022 as compared to $73,328 for the year ended December 31, 2021. The increase in sales and marketing was due to an increase in compensation costs of $4,694 and $1,118 in travel costs, due to resumed in office and hospital visits during 2022 as the pandemic related restrictions in hospital access were lifted and travel normalized .

Research and development expenses increased $2,981, or 12.3%, to $27,158 for the year ended December 31, 2022 as compared to $24,177 for the year ended December 31, 2021. The increase was primarily due to product development and clinical expenses. Product development costs include spending for a number of specific programs including the non-clinical expenses related to the BLA for Avance Nerve Graft, a next generation Avance product, as well as product and application innovations across our nerve repair portfolio. It is expected that costs associated with the BLA will continue to increase as we continue to invest in completing the license application. Product development expenses represented approximately 52% and 53% of total research and development expense for the years ended December 31, 2022, and 2021, respectively. Clinical trial expenses represented approximately 48% and 46% of total research and development expense for the years ended December 31, 2022, and 2021.

General and administrative expenses increased $4,420, or 13.7%, to 36,758 for the year ended December 31, 2022 as compared to $32,338 for the year ended December 31, 2021. The increase was primarily due to non-cash stock compensation of $4,475, $241 of travel costs and $463 of occupancy costs, partially offset by lower professional and consulting fees of $1,608.

Other Income and Expense

Total other income increased $2,328, or 148.3% to income of $759 for the year ended December 31, 2022, as compared to an expense of $1,569 for the year ended December 31, 2021. The change was primarily due to the decrease in the fair value of the derivative liability of $1,072, the increase in investment income of $476 and decrease in interest expense of $732. In connection with the Credit Facility, we recognized total interest charges of $6,721 and $5,503 for the year ended December 31, 2022, and 2021, respectively, and of this interest we capitalized to the construction of the APC Facility, interest charges of $6,155 and $4,277 for the year ended December 31, 2022, and 2021, respectively. The increase in interest charges related to the Credit Facility was primarily due to our additional borrowings of $15,000 under the Credit Facility in June of 2021 and the increase in investment income was primarily related to the Federal Reserve raising interest rates 425 basis points throughout 2022.

Income Taxes

We had no income tax expense or benefit for the years ended December 31, 2022, and 2021, due to the incurrence of net operating losses in both years, the benefits of which have been fully reserved. We do not believe that there are any additional tax expenses or benefits currently available.

Liquidity and Capital Resources

As of December 31, 2022, our principal sources of liquidity were our cash and cash equivalents and investments totaling $48,789. Our cash equivalents are comprised of a money market mutual fund and our investments are comprised of short-term commercial paper and U.S. Treasuries. Our cash and cash equivalents and investments decreased $35,297 from $84,086 at December 31, 2021, primarily as a result of continuing renovations of our APC Facility. On December 31, 2022 and 2021, our

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current assets exceeded our current assets liabilities by $74,322 and $102,756, respectively. Based on current estimates, we believe that our existing cash and cash equivalents and investments, as well as cash provided by sales of our products will allow us to fund our operations through at least through the next 12 months from the issuance of these financial statements.

Cash Flow Information

The following table presents a summary of our cash flows from operating, investing and financing activities:

Year Ended December 31,

Net cash (used in) provided by:

Net (decrease) increase in cash and cash equivalent $ (17,472) $ (16,602)

Net Cash Used in Operating Activities

Net cash used in operating activities was $16,066 and $13,405 during the years ended December 31, 2022 and 2021, respectively. The unfavorable change in net cash used in operating activities of $2,661 or 19.9% was due to the following: (i) the net unfavorable change of $3,282 in working capital accounts and (ii) the increase in net loss of $1,963.

A discussion of net cash used in operating activities during the year ended December 31, 2020 can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed on February 25, 2022.

Net Cash Used in Investing Activities

Net cash used in investing activities was $3,200 as compared to $23,649 of for the years ended December 31, 2022 and 2021, respectively, a decrease $20,449 or 86%. The change in net cash used in investing activities was due to the decrease in the net purchase and sale of investments totaling $14,252 and capital expenditures, primarily related to the renovation of the APC Facility, of $7,733. Capital expenditures was a significant use of cash in investing activities due to the renovation of the APC Facility, which we are scheduled to complete in the first half of 2023. Following the completion of the APC Facility renovation, we expect a decrease in capital expenditures, and thus in the cash used in investing activities.

A discussion of net cash provided by investing activities during the year ended December 31, 2020 can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed on February 25, 2022.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $1,794 as compared to $20,452 for the years ended December 31, 2022, and 2021, respectively, a decrease of $18,658 or 91%. The change in net cash provided by financing activities was primarily due to no additional proceeds from draws on the Credit Facility during 2022 compared to a $15,000 drawdown of the Credit Facility in the second quarter of in 2021, and a decrease of $3,661 in proceeds from the exercise of stock options year-over-year.

A discussion of net cash provided by financing activities during the year ended December 31, 2020 can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed on February 25, 2022.

Sources of Capital

Our expected future capital requirements may depend on many factors including expanding our customer base and sales force and timing and extent of spending in obtaining regulatory approval and introduction of new products. Additional sources of liquidity available to us include issuance of additional equity securities through public or private equity offerings, debt financings or from other sources. The sale of additional equity may result in dilution to our shareholders. There is no assurance that we will be able to secure funding on terms acceptable to us, or at all. The increasing need for capital could also make it more difficult to obtain funding through either equity or debt. Should additional capital not become available to us as needed,

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we may be required to take certain actions, such as slowing sales and marketing expansion, delaying regulatory approvals, or reducing headcount.

Contractual Obligations and Forward-Looking Cash Requirement

•On July 9, 2019, we 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 Facility. We anticipate spending between $3,500 and $4,500 in 2023. See Note 14 - Commitments and Contingencies. in the Notes to the Consolidated Financial Statements Part II, Item 8 of this Form 10-K.

•In addition to the APC capital expenditures, other capital expenditures on an annual basis generally range from $4,000 to $5,000 as a use of cash.

•We lease facilities in Florida, Ohio and Texas, as of December 31, 2022, our total remaining obligation related to operating and financing lease payments was $37,352, of which $3,519 is due in 2023. See Note 8 - Leases in the Notes to the Consolidated Financial Statements Part II, Item 8 of this Form 10-K.

Credit Facilities

As of December 31, 2022, we had $50,000 outstanding in indebtedness under a credit facility; $35,000 maturing on June 30, 2027 and $15,000 maturing on June 30, 2028. Quarterly interest only and revenue participation payments are due through each of the maturity dates. Interest is calculated as 7.5% plus the greater of the London Interbank Offered Rate ("LIBOR") or 2.0% (11.24% as of December 31, 2022). Revenue participation payments are calculated as a percentage of our net revenues, up to $70,000 in any given year, adding approximately 1.0% per year of additional interest payments on the outstanding indebtedness. Upon each maturity date or upon such date earlier repayment occurs, we will repay the principal balance and provide a make-whole payment calculated to generate an internal rate of return to the lender equal to 11.5%, less the total of all quarterly interest and revenue participation payments previously paid. See Note 9 - Long-Term Debt, Net of Debt Discount and Financing Fees and Note 14 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements Part II, Item 8 of this Form 10-K.

Contractual Obligations and Commitments

SeeNote 8 - Leases and Note 14 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements Part II, Item 8 of this Form 10-K, for further information.

Critical Accounting Estimates

In preparing our financial statements in accordance with generally accepted accounting principles, there are certain accounting policies, which may require substantial judgment or estimation in their application. We believe these accounting policies and the others set forth in Note 2 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements Part II Item 8 of this Form 10-K are critical to understanding our results of operations and financial condition. Actual results could differ from our estimates and assumptions, and any such differences could be material to our results of operations and financial condition.

Inventories

Inventories, consisting of purchased materials, direct labor and manufacturing overhead, are stated at the lower of cost or net realizable value, as determined by the first-in, first-out method. At each balance sheet date, we evaluate inventories for excess quantities, obsolescence or shelf-life. The evaluation includes analysis of historical sales levels by product, projection of future demand, general market conditions, a review of the shelf life based on the expiration dates for products. To the extent we determine there are excess or obsolete inventory or quantities with a shelf life that is too close its expiration for us to reasonably expect that we can sell those products prior to their expiration, we adjust the carrying value to the estimate net realizable value. While we believe the assumptions used to estimate the net realizable value are reasonable, there can be no assurance that the forecasted sales will be realized. As a result, additional reserves against inventories which would have been recognized in earlier periods may not be recognized until later periods if actual sales and net realizable values deviate unfavorably from forecasted sales estimates.

Derivative Instruments

We review debt instruments to determine whether there are embedded derivative instruments, which are required to be bifurcated and accounted for separately as a derivative financial instrument. Embedded derivatives that are not clearly and

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closely related to the debt host are bifurcated and are recognized at fair value on the consolidated balance sheet with changes in fair value recognized as either a gain or loss on the consolidated statement of operations each reporting period. The fair value of embedded derivatives are measured based on equity markets and interest rates, as well as an estimate of our nonperformance risk adjustment. This estimate includes an option adjusted spread and an estimate of our risk-free rate.

Share-Based Compensation

Share-based compensation is in the form of stock options, restricted stock units ("RSU"), performance stock units ("PSU"), and recognized at, or above, the fair market value of our common stock on the date of grant.

We estimate the fair value of each stock option award on the date of grant using a multiple-point Black-Scholes option-pricing model. In addition, we measure stock options granted to employees at a premium price based on market conditions, such as the trading price of our common stock, using a Monte Carlo Simulation option-pricing model in estimating the fair value at the grant date.

The fair value of the PSU grants is based on our closing stock price on the grant date. The number of PSU's that will ultimately be earned is based upon our performance as measured against specified targets over the measurement period. Expectations related to the achievement of performance goals associated with PSU grants is assessed as of each reporting period and is used to determine whether PSU grants are expected to vest. If performance-based milestones related to PSU grants are not met or not expected to be met, any compensation expense recognized associated with such grants will be reversed.

We recognize compensation expense related to the Employee Stock Purchase Plan (“ESPP”) based on the estimated fair value of the options on the date of grant. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option pricing model for each purchase period. The grant date fair value is expensed on a straight-line basis over the offering period.

The determination of fair value using option-pricing models, as indicated above, is affected by our stock price, as well as assumptions regarding several subjective variables. These variables include, but are not limited to, our expected stock price volatility over the expected term of the awards. We determine the expected term of each award giving consideration to the contractual terms, vesting schedules, and post-vesting forfeitures. We use the risk-free interest rate on the implied yield available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected term of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. Expense is reduced for forfeitures as they occur.

Recent Accounting Pronouncements

See Note 2 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements, Part II Item 8 of this Form 10-K for further information.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are subject to market risk from exposure to changes in interest rates based upon our investing and cash management activities. For our cash equivalents and investments, a change in interest rates affects the amount of interest income that can be earned.

We have not entered into derivative transactions related to cash and cash equivalents.We do not expect changes in interest rates to have a material adverse effect on our income or our cash flows in 2023. However, we give no assurance that interest rates will not significantly change in the future.

We also have interest rate exposure as a result of the Credit Facility. As of December 31, 2022, the outstanding principal amount of our loans under the Credit Facility was $50,000. Interest on our loans under the Credit Facility is payable quarterly during the term of the loans and is calculated as 7.5% plus the greater of LIBOR or 2.0% (11.24% as of December 31, 2022); provided that the interest rate shall never be less than 9.5%. Changes in the LIBOR rate may therefore affect our interest expense associated with the loans. An increase of 100 basis points in interest rates would increase expense by approximately $500 annually based on the amounts currently outstanding and would not materially affect our results of operations.

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Credit Risk

Financial instruments that potentially subject us to credit risk consist of cash and cash equivalent balances, investments in commercial paper and accounts receivable. Certain of our cash and cash equivalents balances exceed Federal Deposit Insurance Corporation ("FDIC") insured limits or are invested in money market accounts with investment banks that are not FDIC-insured. As of March 14, 2023, we have approximately $8.0 million of cash at SVB, which funds are available to us. On March 12, 2023 by the U.S. Treasury, Federal Reserve, and FDIC announced that SVB depositors will have access to all of their money starting March 13, 2023, including those funds exceeding the FDIC insured limits. Our investment portfolio currently does not contain any securities of SVB. As of December 31, 2022, $15,034 of the cash and cash equivalents balance was in excess of FDIC limits.

We invest our cash primarily in commercial paper, money market accounts, and U.S. government securities. Although we believe our cash is invested in a conservative manner, with cash preservation being the primary investment objective, the value of the commercial paper held will fluctuate with changes in the financial markets, including, among other things, changes in interest rates, credit quality and general volatility. This risk is managed by investing in high quality investment grade commercial paper with short-term maturities.

With respect to accounts receivable, we perform credit evaluations of our customers and do not require collateral. There have been no material losses on accounts receivable. Concentrations of credit risk with respect to accounts receivable are limited because a large number of geographically diverse customers make up our customer base, thus spreading the trade credit risk. We also control credit risk through credit approvals and monitoring procedures.

Foreign Currency Exchange Risk

The value of the U.S. dollar compared to the foreign currencies of the countries where we distribute our products has little to no effect on our financial results. In our international markets, we distribute our products and services to independent distributors who, in turn, distribute and market to medical clinics. The revenue from the distribution of our products in our international markets through independent distributors is denominated in U.S. dollars. As a result, we have minimal exposure related to foreign exchange rate fluctuations. Our portfolio of products is currently available in the U.S., Canada, Germany, United Kingdom ("UK"), Spain and several other European, Asian and Latin American countries.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONTENTS

Page

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID No, 34) 66

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2022 AND 2021 68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 73

SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS 103

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Axogen, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Axogen, Inc and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, shareholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes and the schedule listed in the Index at Item 15(a)(2) (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America, Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Inventory – Valuation Associated with Excess and Obsolete (E&O) Inventory — Refer to Notes 2 and 3 to the financial statements

Critical Audit Matter Description

Inventory is stated at the lower of cost or net realizable value. At each balance sheet date, the Company evaluates inventories for excess quantities, obsolescence or shelf-life.The Company monitors the shelf-life of its products and historical expiration and spoilage trends and writes down inventory based on the estimated amount of inventory that will not be distributed before expiration or spoilage. To estimate the amount of inventory that will expire prior to being distributed, the Company reviews inventory quantities on hand, historical and projected distribution levels, and historical expiration trends. The Company’s calculation of the amount of inventory that will expire prior to distribution has two components: 1) a demand or consumption-based component that compares projected distribution to inventory quantities on hand; and 2) an expiring inventory component that assesses the risk related to inventory that is near expiration by analyzing historical expiration trends to project inventory that will expire prior to being distributed. The Company’s model assumes that inventory will be distributed on a first-in-first-out basis. Due to the nature of the inventory (surgical implants with expiration dates) and the fact that a significant portion of the Company’s inventory is at medical facility consignment locations, estimating the amount of inventory that will expire and the amount of inventory that should be written down involves significant judgments and estimates.

Given the significant judgments associated with evaluating the valuation of E&O inventory, auditing the reasonableness of management’s estimates and assumptions involved especially subjective judgment and an increased extent of effort.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the Company’s valuation of E&O inventory included the following, among others:

•We tested the design, implementation and operating effectiveness of controls over the E&O inventory valuation. The controls we tested included those over the calculation and accuracy and completeness of underlying data used in the calculation.

•We performed procedures to evaluate management’s ability to accurately forecast by comparing the historical expiring inventory estimates to subsequent inventory destructions and expirations.

•We obtained the Company’s E&O calculation and tested the mathematical accuracy.

•We assessed the reasonableness of the assumptions used in the E&O calculation by developing an independent expectation and comparing our independent expectation to the results of the Company’s calculation.

•We tested the accuracy and completeness of the underlying data used in the calculation of the Company’s expiring inventory model.

•We made inquiries of the Company’s employees outside of the accounting department and evaluated other areas of the audit to identify business, product, or industry changes that may impact the inputs in the inventory valuation calculation.

/s/ Deloitte & Touche LLP

Miami, Florida

March 14, 2023

We have served as the Company's auditor since 2018.

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AXOGEN, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2022 and 2021

(In Thousands, Except Share and Per Share Amounts)

Assets

Current assets:

Liabilities and shareholders’ equity

Current liabilities:

Accounts payable and accrued expenses $ 22,443 $ 22,459

Current maturities of long-term lease obligations 1,310 1,834

Long-term debt, net of debt discount and financing fees 45,712 44,821

Commitments and contingencies - see Note 14

Shareholders’ equity:

Total liabilities and shareholders’ equity $ 195,387 $ 208,024

The accompanying notes are an integral part of these consolidated financial statements.

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AXOGEN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, 2022, 2021 and 2020

(In Thousands, Except Share and Per Share Amounts)

Costs and expenses:

Other (expense) income:

Change in fair value of derivatives 1,044 (28) (117)

Total other (expense) income, net 759 (1,569) (604)

Loss per common share — basic and diluted $ (0.69) $ (0.65) $ (0.60)

The accompanying notes are an integral part of these consolidated financial statements.

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AXOGEN, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Years ended December 31, 2022, 2021 and 2020

(In Thousands)

Shares Amount

Stock-based compensation — — 8,470 — 8,470

Issuance of restricted and performance stock units 249 2 (2) — —

Shares surrendered by employees to pay tax withholdings (40) — (670) — $ (670)

Exercise of stock options and employee stock purchase plan 572 6 3,294 — $ 3,300

Exercise of Credit Facility Option, net of settlement 248 2 3,680 — $ 3,682

Issuance of restricted and performance stock units 254 2 (2) — —

Exercise of stock options and employee stock purchase plan 864 9 5,458 — 5,467

Issuance of restricted and performance stock units 343 3 (3) — —

Exercise of stock options and employee stock purchase plan 365 4 1,802 — 1,806

The accompanying notes are an integral part of these consolidated financial statements.

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AXOGEN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2022, 2021 and 2020

(In Thousands)

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Amortization of debt discount and deferred financing fees 891 831 232

Loss on disposal of equipment — — 3

Investment losses (gains) (228) 68 (47)

Change in fair value of derivatives (1,044) 28 117

Change in operating assets and liabilities:

Accounts payable and accrued expenses 660 (270) 4,958

Cash paid for interest portion of finance leases (2) (2) (3)

Contract and other liabilities — (3) (12)

Cash flows from investing activities:

Economic development grant proceeds — 950 —

Cash payments for intangible assets (1,175) (589) (692)

Cash flows from financing activities:

Proceeds from issuance of long-term debt — 15,000 35,000

Proceeds from the paycheck protection program loan — — 7,820

Repayment of the paycheck protection program loan — — (7,820)

Proceeds from issuance of common stock — — 3,500

Payments for debt issuance costs — — (642)

Cash paid for debt portion of finance leases (12) (15) (14)

The accompanying notes are an integral part of these consolidated financial statements.

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AXOGEN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2022, 2021 and 2020

(In Thousands)

Supplemental disclosures of cash flow activity:

Cash paid for interest, net of capitalized interest $ — $ 495 $ 822

Supplemental disclosure of non-cash investing and financing activities:

Acquisition of leasehold asset $ — $ — $ 5,250

Embedded derivative associated with the long-term debt $ — $ 3,037 $ 2,563

Conversion of the Credit Facility option $ — $ — $ 182

The accompanying notes are an integral part of these consolidated financial statements.

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AXOGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022, 2021 and 2020

(In Thousands)

1.Nature of Business

Axogen, Inc. (together with its wholly-owned subsidiaries, the “Company”) was incorporated in Minnesota and is the leader in the science, development and commercialization of the technologies used for the peripheral nerve regeneration and repair. The Company's products include Avance® Nerve Graft, Axoguard Nerve Connector®, ,Axoguard Nerve Protector®,Axoguard Nerve Cap® and Axotouch® Two-Point Discriminator. The Company is headquartered in Florida. The Company has processing, warehousing, and distribution facilities in Texas and Ohio.

The Company manages its operations as a single operating segment. Substantially all of the Company's assets are maintained in the United States. The Company derives substantially all of its revenues from sales to customers in the United States.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The significant estimates affecting the amounts reported or disclosed in the consolidated financial statements include the realizable value of inventories, the valuation of stock-based compensation and the valuation of derivative instruments and the fair value of debt instruments. Other estimates that affect the amounts reported or disclosed in the consolidated financial statements include the allowance for doubtful accounts, the useful life and recoverability of long-lived assets, incremental borrowing rates for operating leases, accounting for income taxes including the realizability of deferred tax assets and the related valuation allowance. The Company bases its estimates on historical and anticipated results, trends, and various other assumptions that management believes are reasonable under the circumstances, including assumptions as to future events. Actual results may differ from those estimates.

Reclassifications

Certain prior year amounts have been reclassified for consistency with the current year presentation. Specifically, finance lease right-of-use assets which were presented separately in 2021, and are now included in property and equipment. In addition, the debt derivative liability was included in net operating loss carryforwards in deferred assets in 2021, it is presented separately as debt derivative liability in deferred tax assets. See Note 12 - Income Taxes.

Risk and Uncertainties

The outbreak of the COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020, and the virus has continued to spread through 2022. The related responses by public health and governmental authorities to contain and combat the outbreak and spread of the virus, have adversely impacted global commercial activity, hospital staffing, elective surgeries, supply chains and contributed to significant volatility in financial markets. The Company experienced a decrease in demand for its products and services during 2020 and 2021, due to the lack of access to hospitals and health care facilities and the reallocation of resources from surgical procedures to COVID-19 patient care as well as the related staffing shortages in health care had a material adverse effect on the Company's results of operations. This negative impact began to improve in 2022, particularly in the second half of the year; however, the inflationary pressure and the ensuing recession may have a negative effect on the demand for the Company's products, services and the Company's operating results.

The Company is dependent on its suppliers, including single source suppliers, and the inability of these suppliers to deliver necessary components of its products in a timely manner at prices, quality levels and volumes acceptable to the

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Company, or its inability to efficiently manage these components from these suppliers, could have a material adverse effect on its business, financial condition and operating results.

Cash and Cash Equivalents

Cash and cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less from the date of acquisition. Certain of the Company's cash and cash equivalents balances exceed Federal Deposit Insurance Corporation ("FDIC") insured limits or are invested in money market accounts with investment banks that are not FDIC-insured. The Company places its cash and cash equivalents in what they believe to be credit-worthy financial institutions. As of December 31, 2022, $15,034 of the cash and cash equivalents balance was in excess of FDIC limits.

Restricted Cash

Amounts included in restricted cash represent those required to be set aside to meet contractual terms of a lease agreement held by the Company.See Note 9 - Long-Term Debt, Net of Debt Discount and Financing Fees - Other Credit Facilities.

The following table provides a reconciliation of cash and cash equivalents, and restricted cash reported in the consolidated balance sheets that sum to the total of the same reported in the consolidated statements of cash flows:

Investments

Investments consist of commercial paper and U.S. government securities, are classified as available-for-sale and have maturities less than one year as of each balance sheet date. Investments are carried at fair value based upon quoted market prices. The Company elected the fair value option ("FVO") for all of its available-for-sale investments. The FVO election results in all changes in unrealized gains and losses being included in investment income in the consolidated statements of operations.

Accounts Receivable and Allowance for Doubtful Accounts

Account receivables are recorded at invoiced amounts and do not bear interest. The Company grants credit to customers in the normal course of business, but generally does not require collateral or other security to support its receivables.

An allowance for doubtful accounts is established for estimated uncollectible receivables based on the Company's assessment of the collectability of customer accounts and recognizes the provision in general and administrative on the consolidated statements of operations. In determining the amount of the allowance, the Company considers aging of account balances, historical credit losses, customer-specific information, the current economic environment, supportable forecasts, and other relevant factors. Uncollectible receivables are written off against the allowance for doubtful accounts when all attempts to collect the receivable have been exhausted. The provision for bad debts is recorded as a component of general and administrative expenses on the consolidated statement of operations.

Concentration Risk

Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, which are held at major financial institutions and trade receivables.

The Company's products are sold on an uncollateralized basis and on credit terms.

None of the Company's customers accounted for 10% or more of the consolidated revenues during the years ended December 31, 2022, 2021 and 2020.

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Inventory

Inventories, consisting of materials, direct labor and manufacturing overhead, are stated at the lower of cost or net realizable value. At each balance sheet date, the Company evaluates inventories for excess quantities, obsolescence or shelf-life.

The Company monitors the shelf life of its products and historical expiration and spoilage trends and writes down inventory based on the estimated amount of inventory that may not be distributed before expiration or spoilage. To estimate the amount of inventory that will expire prior to being distributed, the Company reviews inventory quantities on hand, historical and projected distribution levels, and historical expiration trends. The Company’s calculation of the amount of inventory that will expire prior to distribution has two components: 1) a demand or consumption-based component that compares projected distribution to inventory quantities on hand; and 2) an expiring inventory component that assesses the risk related to inventory that is near expiration by analyzing historical expiration trends to project inventory that will expire prior to being distributed. The Company’s model assumes that inventory will be distributed on a first-in, first-out basis. Due to the nature of the inventory (surgical implants with expiration dates) and the fact that significant portions of the Company’s inventory is at medical facility consignment locations, estimating the amount of inventory that will expire and the amount of inventory that should be written down involves significant judgments and estimates.

Property and Equipment, Net

Property and equipment, net are stated at historical cost less accumulated depreciation and amortization. Additions and improvements that extend the lives of the assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Leasehold improvements are amortized on a straight-line basis over the shorter of the asset’s estimated useful life or the remaining lease term. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets ranging from three to seven years.

Gains or losses on the disposition of property and equipment are recorded in the period incurred and recorded general and administrative expenses on the consolidated statement of operations.

Capitalized Interest

The interest cost on capital projects, including facilities build-outs, is capitalized and included in the cost of the project. Capitalization begins with the first expenditure for the project and continues until the project is substantially complete and ready for its intended use. For the years ended December 31, 2022, and 2021, the Company capitalized $6,155 and $4,277, respectively, of interest expense into property and equipment.

Impairment of Long-Lived Assets

The Company analyzes long-lived assets (asset groups), including property and equipment and definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company tests annually, in the third quarter, for impairments. An impairment is recognized when the estimated undiscounted cash flows generated by those assets is less than the carrying amounts of such assets. If it is determined that long-live asset (asset groups) is not recoverable, an impairment loss would be calculated based on the excess of the carrying value of the long-lived asset (asset groups) over the fair value of the long-lived asset (asset groups). There have been no impairments of long-lived assets during the years ended December 31, 2022, 2021, and 2020.

Indefinite-lived intangible assets are not subject to amortization, however, annually in the third quarter or whenever an event occurs or circumstances indicate that the indefinite-lived intangible assets may be impaired, the Company evaluates qualitative factors to determine whether it is more likely or not that the fair value of the indefinite lived asset is less than its carrying amount. The Company's qualitative evaluation includes an assessment of factors, including specific operating results as well as industry, market and general economic conditions. The Company may elect to bypass this qualitative evaluation and perform a quantitative test.

Intangible Assets, net

Intangible assets are recorded at cost and include patents and patent application costs, licenses, and trademarks. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives and reported net of accumulated

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amortization. Amortization expense is recorded in general and administrative expenses on the consolidated statements of operations. The useful lives of intangible assets are as follows:

•License agreements(1): 17 to 20 years

•Patents: up to 20 years.

•Trademarks: indefinite lived

(1) The Company pays royalty fees based on net sales of the licensed products, which are recorded in sales and marketing on the consolidated statements of operation.

Global Nerve Foundation

Periodically, the Company may make contributions to the Global Nerve Foundation ("GNF"), a related party, due to certain executives of the Company being members of GNF's board of directors. The GNF was incorporated in 2021 exclusively for charitable, educational, and scientific purposes and qualifies under IRC 501(c)(3) as an exempt private foundation. Under its charter, the GNF engages in activities that focus on improving the awareness and care of patients with peripheral nerve injuries through grants, contributions and other appropriate means. The GNF is a separate legal entity and is not a subsidiary of the Company; therefore, its results are not included in the accompanying consolidated financial statements. The Company contributed $700 to the GNF during the year ended December 31, 2022, no amounts were contributed previously. These contributions were recorded in sales and marketing expense on the consolidated statement of operations.

Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Cash equivalents, investments and derivative instruments are recorded at fair value on a recurring basis. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for classification and disclosure of fair value measurements as follows:

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

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

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

Derivative Instruments

The Company reviews its debt instruments in determining whether there are embedded derivative instruments, which are required to be bifurcated and accounted for separately as a derivative financial instrument. Embedded derivatives that are not clearly and closely related to the debt host are bifurcated and are recognized at fair value on the consolidated balance sheet with changes in fair value recognized as either a gain or loss on the consolidated statement of operations each reporting period. The fair value of embedded derivatives are measured based on equity markets and interest rates, as well as an estimate of the Company's nonperformance risk adjustment. This estimate includes an option adjusted spread and an estimate of the Company's risk-free rate.

Leases

The Company determines if a contract contains a lease at the inception date and determines the lease classification, recognition, and measurement at commencement date. All operating lease commitments with a lease term greater than 12 months are recognized as right-of-use assets and obligations on a discounted basis on the balance sheet. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet.

The Company classifies a lease based on whether the arrangement is effectively a purchase of the underlying asset. Leases that transfer the control of the underlying asset are classified as finance leases and all others are classified as operating leases. Interest and amortization expense are recognized for operating leases on a straight-line basis. If a change to the lease term leads

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to a reassessment of the lease classification and remeasurement, assumptions such as the discount rate and variable rents based on a rate or index will be updated as of the remeasurement date. If an arrangement is modified, the Company will reassess whether the arrangement contains a lease. Any subsequent changes in lease payments are recognized when incurred, unless the change requires a remeasurement of the lease liability.

Certain of the Company's leases include options for the Company to extend the lease term. The exercise of lease renewal option is generally at the Company's sole discretion. Certain of the Company's lease agreements include provisions for the Company to reimburse the lessor for common area maintenance, real estate taxes, and insurance, which the Company accounts for as variable lease costs. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Revenue Recognition

The Company enters into contracts to sell and distribute products and services to hospitals and surgical facilities for use in caring for patients with peripheral nerve damage or transection. Revenue is recognized when the Company transfers of control of the products and services to the Company’s customers when the product is shipped or when it is delivered to the customer depending on the agreement. Products are primarily transferred to customer at a point in time.

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

In the case of products or services sold to a customer under a distribution or purchase agreement, the customers are granted exclusive distribution rights to sell the implants internationally in a territory defined by the contract. These international distributor agreements contain provisions that allow the Company to terminate the distribution agreement with the distributor, and upon termination, the right to repurchase inventory from the distributor at the distributor’s cost. The Company has determined that its contractual rights to repurchase distributor inventory upon termination of the distributor agreement are not substantive and do not impact the timing of when control transfers; and therefore, the Company has determined it is appropriate to recognize revenue when: i) the product is shipped via common carrier; or ii) the product is delivered to the customer or distributor, depending on the terms of the agreement. Determining the timing of revenue recognition for such contracts is subject to judgment, because an evaluation must be made regarding the distributor’s ability to direct the use of, and obtain substantially all of the remaining benefits from, the implants received from the Company. Changes in these assessments could have an impact on the timing of revenue recognition from sales to distributors. The Company accounts for shipping and handling activities as a fulfillment cost rather than a separate performance obligation. Amounts billed to customers for shipping and handling are included as part of the transaction price and recognized as revenue when control of the underlying products is transferred to the customer.

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

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

Government Assistance

As there is no authoritative guidance under U.S. GAAP for accounting for grants to for-profit business entities, the Company accounts for the grants by analogy to International Accounting Standard ("IAS") 20 Accounting for Government Grants and Disclosures of Government Assistance ("IAS 20"). Government assistance and grants are recognized when there is reasonable assurance that the Company has met the requirements of the assistance and there is reasonable assurance that the grant will be received. The Company received government grants of $158, $1,164 and $628 during the years ended December 31, 2022, 2021 and 2020, respectively.

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Costs of Goods Sold

Cost of goods sold includes direct labor and materials costs related to each product sold or produced, including processing, quality assurance labor and scrap, inbound freight costs, as well as facility and warehousing overhead supporting the Company's manufacturing operations. All of the Company's manufacturing costs are included in cost of goods sold on the consolidated statements of operations.

Research and Development Costs

Research and development costs are charged to expense as incurred. Costs of research and development activities relate to product development, clinical trial expenses for the improvement of existing products, and technical support of products. Costs primarily consist of salaries, wages, consulting and depreciation and maintenance of research facilities and equipment. The Company received certain government grants totaling $158, $214, and $390 which were recorded as an offset to research and development in the consolidated statement of operations during the years ended December 31, 2022, 2021 and 2020, respectively

Shipping and Handling

All shipping and handling costs, including facility and warehousing overhead, directly related to bringing the Company’s products to their final selling destination are included in sales and marketing expenses on the consolidated statements of operations were $5,271, $4,883, and $3,912 for the December 31, 2022, 2021, and 2020, respectively.

Income Taxes

The Company uses the asset and liability method to account for income taxes in accordance with the authoritative guidance for income taxes. Under this method, deferred tax assets and liabilities are determined based on future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and tax loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

The Company identifies and evaluates uncertain tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the consolidated balance sheet. The Company has not recognized a liability for uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.

Share-Based Compensation

Share-based compensation is in the form of stock options, restricted stock units ("RSU"), performance stock units ("PSU"), and recognized at, or above, the fair market value of the Company's common stock on the date of grant.

The Company estimates the fair value of each stock option award on the date of grant using a multiple-point Black-Scholes option-pricing model. In addition, the Company measures stock options granted to employees at a premium price based on market conditions, such as the trading price of the Company’s common stock, using a Monte Carlo Simulation option-pricing model in estimating the fair value at the grant date.

The Company estimates the fair value of RSU grants based upon the grant date closing market price of the Company’s common stock.

The fair value of the PSU grants is based on the Company’s closing stock price on the grant date. The number of PSUs that will ultimately be earned is based upon the Company’s performance as measured against specified targets over the measurement period. Expectations related to the achievement of performance goals associated with PSU grants is assessed as of each reporting period and is used to determine whether PSU grants are expected to vest. If performance-based milestones

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related to PSU grants are not met or not expected to be met, any compensation expense recognized associated with such grants will be reversed.

The Company recognizes expense for all stock-based compensation awards, including stock options, RSUs, and PSUs granted to employees eligible for retirement, as defined within the award notice and allowing for continued vesting post-retirement, over the retirement notice period and continuously updates its estimate of expense over the notice period each reporting period if a retirement notice has not been provided.

The Company recognizes compensation expense related to the Employee Stock Purchase Plan (“ESPP”) based on the estimated fair value of the options on the date of grant. The Company estimates the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option pricing model for each purchase period. The grant date fair value is expensed on a straight-line basis over the offering period.

The determination of fair value using option-pricing models, as indicated above, is affected by the Company’s stock price, as well as assumptions regarding several subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the expected term of the awards. The Company determines the expected term of each award giving consideration to the contractual terms, vesting schedules, and post-vesting forfeitures. The Company uses the risk-free interest rate on the implied yield available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected term of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of operations. The expense is reduced for forfeitures as they occur.

Net Loss Per Share

Basic net loss per common share is computed by dividing reported net loss by the weighted average number of common shares outstanding during the period without consideration of potentially dilutive securities. Diluted net loss per share reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted into common stock of the Company. Diluted net loss per share is the same as basic net loss per common share for all periods presented, since the effect of the potentially dilutive securities are anti-dilutive. Potential dilutive common share equivalents consist of the incremental common shares issuable upon exercise of vested stock options, RSUs, and PSUs.

Recently Issued Accounting Pronouncements

In December 2022, the Financial Accounting Standards Board ("FASB") amended Accounting Standards Codification ("ASC") 848 Reference Rate Reform (issued under Accounting Standards Update ("ASU") 2020 - 4, Reference Rate Reform). The amendment in this update defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The Company has not yet assessed the impact of the deferral on its consolidated financial condition, results of operations and cash flows.

Recently Adopted Accounting Pronouncements

In November 2021, FASB amended ASC 832, Government Assistance (issued under ASU 2021-10, Disclosures by Business Entities about Government Assistance). This amendment requires annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy, including, (1) the types of transactions; (2) the financial statement line items affected by the transaction: and (3) significant terms and conditions associated with the transactions. The Company adopted the guidance on January 1, 2022, and the adoption of ASU 2021-10 had no impact on the Company's consolidated financial condition, results of operations and an immaterial impact on disclosures.

All other ASUs issued and not yet effective as of December 31, 2022, and through the date of this report, were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s current or future financial position or results of operations.

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3.Inventory

Inventory consists of the following:

The provision for inventory write-down is for the years ended as follows:

December 31,

The provision for inventory write-down for the year ended December 31, 2021, included the Avive write-down of $1,251. The Avive write-down resulted from the Company announcing on May 17, 2021, it was suspending market availability of Avive effective June 1, 2021.

4.Property and Equipment, Net

Property and equipment, net consist of the following:

Finance lease right-of-use assets 131 110

Less: accumulated depreciation and amortization (10,296) (7,614)

(1) Included in projects in process is a government grant received totaling $1,188 as of December 31, 2022 and December 31, 2021, which was recorded as an offset, and $11,429 and $5,274 of capitalized interest as of December 31, 2022 and 2021, respectively.

Depreciation expense is as follows for the years ended:

December 31,

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5.Intangible Assets, Net

Intangible assets consist of the following:

Amortizable intangible assets:

Unamortized intangible assets:

The amortization expense is as follows for the years ended:

December 31,

As of December 31, 2022, future amortization of patents and license agreements are as follows:

Year Ending December 31, (in thousands)

License Agreements

The Company has multiple license agreements with the University of Florida Research Foundation and the University of Texas at Austin (the "License Agreements") in which the Company acquired exclusive worldwide licenses for underlying technology used in repairing and regenerating nerves. The licensed technologies include the rights to issued patents and patents pending in the U.S. and international markets. The effective term of the License Agreements extends through the term of the related patents.

The Company pays royalty fees ranging from 1% to 3% under the License Agreements based on net sales of licensed products. Also, when the Company pays royalties to more than one licensor for sales of the same product, a royalty stack cap applies, capping total royalties at 3.75%.

Royalty fees included in sales and marketing on the consolidated statement of operations are as follows for the years ended:

December 31,

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6.Fair Value Measurement

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

(in thousands) Level 1 Level 2 Level 3 Total

Assets:

Liabilities:

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

Total liabilities $ — $ — $ 4,518 $ 4,518

December 31, 2021 Level 1 Level 2 Level 3 Total

Assets:

Liabilities:

Debt derivative liability $ — $ — $ 5,562 $ 5,562

Total liabilities $ — $ — $ 5,562 $ 5,562

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

(in thousands) Debt Derivative Liabilities

Change in fair value included in net loss 28

Change in fair value included in net loss (1,044)

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

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

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

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Note 9 - Long-Term Debt, Net of Debt Discount and Financing Fees ), is then discounted to present value using a discount rate that is derived based on the initial terms of the Credit Facility at issuance and corroborated utilizing a synthetic credit rating analysis.

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

Input

Remaining term (years) 4.5 5.5

Revenue participation payments Maximum each year Maximum each year

Probability of mandatory prepayment before 2024 5.0% 1 5.0% 1

Probability of mandatory prepayment 2024 or after 15.0% 1 15.0% 1

Probability of optional prepayment event 5.0% 1 5.0% 1

1 Represents a significant unobservable input.

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

Input

Remaining term (years) 5.5 6.5

Revenue participation payments Maximum each year Maximum each year

Probability of mandatory prepayment before 2024 5.0% 1 5.0% 1

Probability of mandatory prepayment 2024 or after 15.0% 1 15.0% 1

Probability of optional prepayment event 5.0% 1 5.0% 1

1 Represents a significant unobservable input.

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7.Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

Accounts payable and accrued expenses $ 22,443 $ 22,459

8.Leases

The Company leases administrative, manufacturing, research and distribution facilities through operating leases. Several leases include fixed payments including rent and non-lease components such as common-area or other maintenance costs.

The components of total lease expense for the years ended were as follows:

Years Ended December 31,

Finance lease costs

Amortization of right-of-use assets $ 20 $ 22 $ 22

Interest on lease obligations 2 2 3

Operating lease costs

Supplemental balance sheet information related to the operating and financing leases is as follows:

Operating Leases

Current maturities of long-term lease obligations $ 1,303 $ 1,825

Financing Leases

Right-of-use financing leases (1) $ 41 $ 42

Current maturities of long-term lease obligations $ 7 $ 9

Long-term lease obligations $ 18 $ 4

Weighted average operating lease term (in years): 11 12

Weighted average financing term (in years): 4 2

Weighted average discount rate operating leases 10.58 % 10.32 %

Weighted average discount rate financing leases 11.91 % 7.23 %

(1) Financing leases are included in property and equipment, net on the consolidated balance sheets.

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Future minimum lease payments under operating and financing leases as of December 31, 2022, were as follows:

(In thousands)

Year ending December 31,

Less: Imputed interest (15,637)

Total lease liability 21,715

Less: Current lease liability (1,310)

Long-term lease liability $ 20,405

Lease modifications

The Company accounts for lease revisions as a lease modification in accordance with ASC 842, Leases, when the modification effectively terminates the existing lease and creates a new lease.

On February 22, 2021, the Company entered into the Seventh Amendment to a License and Services Agreement ("Seventh Amendment") with Community Blood Center (doing business as Community Tissue Services) ("CTS"), with an effective date of February 22, 2021, pursuant to the original agreement dated August 6, 2015, as amended ("CTS Agreement"). The CTS Agreement is for processing of the Avance Nerve Graft in Dayton, Ohio. The Seventh Amendment extended the term of the agreement to December 31, 2023. 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. The Company valued the CTS Agreement using a 6.3% incremental borrowing rate and recorded a right-of-use asset and a lease liability of $272 as a result of this amendment.

On July 12, 2021, the Company entered into the First Amendment to Office Lease ("Heights Union First Amendment") with Cousins Heights Union, LLC (as successor in interest to Heights Union I, LLC), with an effective date of July 12, 2021, pursuant to the original lease dated September 20, 2018, as amended ("Heights Union Lease"). The Heights Union Lease is for the general office, medical laboratory, training, and meeting purposes located in Tampa, Florida. The Heights Union First Amendment revises the commencement date of the Heights Union Lease to mean October 30, 2020 and revises the termination date of the Heights Union Lease to be October 31, 2034. Pursuant to the Heights Union First Amendment, the Company was entitled to an additional 1.5 months of free rent. The Company valued the Height Union Lease using a 10.6% incremental borrowing rate and recorded a right-of-use asset and a lease liability of $299 as a result of this amendment.

On July 13, 2021, the Company entered into a Sixth Amendment to Lease ("Sixth Amendment") with Alachua Copeland Park Investments, LLC (as successor in interest to Ology Bioservices Holdings, LLC, who was successor in interest to SNH Medical Office Properties Trust), with an effective date of July 13, 2021, pursuant to the original lease agreement dated February 6, 2007, as amended ("Alachua Lease"). The Alachua Lease is for the Company's corporate headquarters in Alachua, Florida. The Sixth Amendment extended the term of the Alachua Lease to October 31, 2026. The Company valued the Alachua Lease using a 10.6% incremental borrowing rate and recorded a right-of-use asset of $1,335 and a lease liability of $1,370 as a result of this amendment.

On January 27, 2022, the Company entered into a Commercial Lease Amendment ("Amendment") with JA-Cole L.P., with an effective date of February 1, 2022, pursuant to the original Commercial Lease dated April 21, 2015, as amended (the "2015 JA-Cole Lease"). The 2015 JA-Cole Lease is for the office and warehouse facility located in Burleson, Texas. The Amendment revised the commencement date to May 1, 2022, and the expiration date to April 30, 2027. The Company valued the 2015 JA-Cole Lease using a 11.3% incremental borrowing rate and recorded a right-of-use asset and a lease liability of $641 as a result of this amendment.

On August 22, 2022, the Company entered into the First Amendment to Lease Agreement (the “First Amendment”) with JA-Cole, L.P. with an effective date of October 1, 2022, pursuant to the original Commercial Lease dated October 1, 2020, as amended (the "2020 JA-Cole Lease"). The 2020 JA-Cole Lease is for the office and warehouse facility located in Burleson,

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Texas. The First Amendment adds an additional 2,500 square feet to the Leased Premises, for a total of 5,000 square feet and revises the expiration date of the 2020 JA-Cole Lease to mean September 30, 2027. The Company valued the 2020 JA Cole Lease using a 12.8% incremental borrowing rate and recorded a right-of-use asset and a lease liability of $221 as a result of this amendment.

On December 31, 2022, the Company entered into the Second Amendment to Lease Agreement (the "Second Amendment") with SNH Medical Office Properties Trust n/k/a Nucleic Acids Licensing, LLC with an effective date of January 1, 2023, pursuant to the original lease agreement on November 19, 2018, as amended (the "2018 Nucleic Lease"). The 2018 Nucleic Lease is for medical laboratory space in Alachua, Florida. The Second Amendment extends the term of the 2018 Nucleic Lease one year; to December 31, 2023, with the option to extend the term for one additional year. The Company valued the 2018 Nucleic Lease using a 14.0% incremental borrowing rate and recorded a right-of-use asset and a lease liability of $75 as a result of this amendment.

9.Long-Term Debt, Net of Debt Discount and Financing Fees

Long-term debt, net of debt discount and financing fees consists of the following:

Less - unamortized debt discount and deferred financing fees (4,288) (5,179)

Long-term debt, net of debt discount and financing fees $ 45,712 $ 44,821

Credit Facility

On June 30, 2020, the Company entered into a seven-year financing agreement (the “Credit Facility”) with Oberland Capital and its affiliates TPC Investments II LP and Argo SA LLC (collectively, the "Lender") and obtained the first tranche of $35,000 at closing. On June 30, 2021, the second tranche of $15,000 was drawn down by the Company. The financing costs for this facility were $642 and were recorded as a contra liability to the long-term debt on the consolidated balance sheet. The financing costs were paid as of December 31, 2021.

Each tranche under the Credit Facility requires quarterly interest payments for seven years. Interest is calculated as 7.5% plus the greater of the London Interbank Offered Rate ("LIBOR") or 2.0% (11.24% as of December 31, 2022). Each tranche of the Credit Facility has a term of seven years from the date of issuance (with the first tranche issued on June 30, 2020, maturing on June 30, 2027, and the second tranche issued on June 30, 2021, maturing on June 30, 2028). In connection with the Credit Facility, the Company entered into a revenue participation agreement (the “Revenue Participation Agreement”) with the Lender, which provided that, among other things, a quarterly royalty payment as a percentage of the Company’s net revenues up to $70 million in any given year, after April 1, 2021, ending on the date upon which all amounts owed under the Credit Facility have been paid in full. This structure results in approximately 1.0% per year of additional interest payments on the outstanding loan amount. The Company recorded $756 and $646 as interest expense for this Revenue Participation Agreement for the years ended December 31, 2022, and 2021, respectively. The Company pays the quarterly debt interest on the last day of the quarter, and for the years ended December 31, 2022, and 2021, paid $5,074 and $4,103, respectively, to the Lender. The Company capitalized interest of $6,155 and $4,277 for the years ended December 31, 2022, and 2021, respectively, towards the costs to construct and retrofit its APC Facility in Vandalia, OH. See Note 14 - Commitments and Contingencies. To date, the Company has capitalized interest of $11,429 related to this project. The capitalized interest is recorded as part of property and equipment in the consolidated balance sheets.

Additionally, the Lender had the right to purchase up to $3,500 worth of the Company's common stock from the Company in one transaction at any time after closing of the Credit Facility until the later of (i) the date all amounts due under the Credit Facility are repaid and (ii) June 30, 2027 (the “Credit Facility Option”). The purchase price of the common stock was calculated based on the 45-day moving average of the closing stock price on the day prior to the purchase. On December 10, 2020, the Lender exercised in full its option under the Credit Facility Option. The exercise price was determined to be $14.13, resulting in gross proceeds to the Company of $3,500 and the issuance of 247,699 shares to a wholly owned subsidiary of the Lender. In conjunction with the issuance of the shares, the Lender received certain protective rights (including protection from down-round stock issuances) for a period of one year subsequent to the issuance. These rights expired on December 10, 2021.

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The amounts outstanding under the Credit Facility may be accelerated upon certain events, including: (a) required mandatory prepayments upon an asset sale; (b) in the event the Company is subject to (i) any litigation brought by a Governmental Authority (as defined in the Credit Facility) including intervention after litigation is commenced by a Person (as defined in the Credit Facility), or (ii) any final administrative action by a Governmental Authority, in each case arising out of or in connection with any of the Company’s registry studies, payments made to doctors or training activities with respect to healthcare professionals (excluding certain final administrative actions that have been fully and finally resolved by the parties pursuant to a settlement agreement) or (c) upon the occurrence of an event of default (either automatically or at the option of the Lender depending on the nature of the event). In addition, the Company has the right to prepay any amounts outstanding under the Credit Facility. Upon maturity or upon such earlier repayment of the Credit Facility, the Company will repay the principal balance and provide a make-whole payment calculated to generate an internal rate of return to the Lender equal to 11.5%, less the total of all quarterly interest and royalty payments previously paid to the Lender. See Note 14 - Commitments and Contingencies for further information related to the make-whole payment calculation.

Upon the occurrence of an event of default, the interest rate incurred on amounts outstanding under the Credit Facility will be increased by 4%. The Credit Facility includes a financial covenant requiring the Company to achieve certain revenue targets each quarter. As of December 31, 2022, the Company was in compliance with all the covenants. In the event of a failure to meet such covenant the Company may avoid a default by electing to be subject to a liquidity covenant and meeting all of the obligations required by such covenant. The borrowings under the Credit Facility are secured by substantially all of the assets of the Company.

The Company determined that Credit Facility included separable embedded features on a combined basis as a single derivative feature. The Company estimated the fair value of these features as $2,387 as of the date of issuance of the Credit Facility and recorded this value as a debt derivative liability. As a result of the second tranche draw on June 30, 2021, the Company recorded an additional derivative and estimated the fair value to be $1,961, along with an increase of $1,076 related to the first tranche derivative. See Note 6 - Fair Value Measurement.

The debt derivative liabilities are recorded at fair value, with the change in fair value reported in change in the fair value of the derivative on the consolidated statements of operations at each reporting date. See Note 6 - Fair Value Measurement.

Unamortized Debt Discount and Financing Fees

The unamortized debt discount consists of the remaining initial fair values of the embedded derivatives related to the Credit Facility.

The financing fees for the Credit Facility were $642 and were recorded as a contra liability to long-term debt on the consolidated balance sheet.

Amortization of debt discount and deferred financing fees for the years ended December 31, 2022, 2021 and 2020, was $891, $831 and $232, respectively, and recorded in interest expense using the effective interest rate method.

Other Credit Facilities

The Company had restricted cash of $6,251 and $6,251 at December 31, 2022, and 2021, respectively. The December 31, 2022, and 2021 balances both include $6,000, which represents collateral for an irrevocable standby letter of credit. In March 2021, the Company entered into an agreement which required an additional irrevocable standby letter of credit in the amount of $250.

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10.Basic and Diluted Loss per Common Share

The following reflects the net loss attributable to common shareholders and share data used in the basic and diluted earnings per share computations using the two-class method as of:

December 31,

Numerator:

Denominator:

Net loss per common share (Basic and Diluted) $ (0.69) $ (0.65) $ (0.60)

(1) These common equivalent shares are not included in the diluted per share calculations as they would be anti-dilutive if the Company was in a net income position.

11.Stock-Based Compensation

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

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

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

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

Stock Options

The options granted to employees prior to July 1, 2017, typically vest 25% one year after the grant date and 12.5% every six months thereafter for the remaining three-year period until fully vested after four years. The options granted to employees after July 1, 2017, typically vest 50% two years after the grant date and 12.5% every six months thereafter for the remaining two-year period until fully vested after four years. The options granted to directors and certain options granted from time to time to certain executive officers have vested ratably over three years or 25% per quarter over one year. Options typically have terms ranging from seven to ten years. The Company estimates the fair value of each option award on the date of grant using a multiple-point Black-Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of operations. The expense has been reduced for forfeitures as they occur. The value of the portion of the award that is ultimately expected to vest is recognized as

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expense over the requisite service periods in the Company’s consolidated statements of operations. The expense has been reduced for forfeitures as they occur.

The following weighted-average assumptions were used in the calculation of fair value for stock options granted for the following periods:

Year Ended December 31,

Expected dividends — % — % — %

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

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

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

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

Restricted Stock Units

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

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

Outstanding Restricted and Performance Stock Units

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

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

Performance Stock Units

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

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

Outstanding Restricted and Performance Stock Units

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

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

PSU Awards

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

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

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

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

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

2017 ESPP

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

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

Year Ended December 31,

Expected term (in years) 0.5 0.5 0.5

Risk-free interest rate 1.1 % 0.10 % 1.0 %

Expected dividends — % — % — %

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

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12.Income Taxes

Deferred income taxes are accounted for using the balance sheet approach, which requires recognition of deferred tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting basis and the tax basis of assets and liabilities, as measured by enacted state and federal tax rates. Deferred tax assets and deferred tax liabilities are as follows:

Deferred tax assets:

Interest limitation — 453

Allowance for doubtful accounts 169 70

Capitalized research and development costs 6,357 6

Debt derivative liability 1,174 (28)

Charitable contributions 203 —

Accrued bonus 1,010 —

Deferred tax liabilities:

Contract liabilities 4 (4)

Total deferred tax liabilities (4,740) (4,673)

A valuation allowance is provided to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more-likely-than-not that a portion or none of the deferred tax assets will be realized. As of December 31, 2022 and 2021, management assessed the realizability of deferred tax assets. After consideration of all the evidence, including reversal of deferred tax liabilities, future taxable income and other factors, management determined that a full valuation allowance was necessary as of December 31, 2022 and2021. The valuation allowance increased by $5,058 during 2022, primarily as a result of the increase in the capitalized research and development costs. The valuation allowance increased by $6,734 during 2021, primarily as a result of the increase in the net operating loss carryforward.

The Company adopted Section 174 of the Tax Cuts and Jobs Act of 2017 ("TCJA") which requires taxpayers to capitalize and amortize research and development expenditures for the tax years beginning after December 31, 2021. This rule became effective for the Company during 2022 and resulted in capitalized research and development costs of $6,357 being recorded to deferred tax assets as of December 31, 2022.

The difference between the financial statement income tax benefit and the income tax benefit using statutory rates is primarily due to the valuation allowance. The Company’s effective income tax rate differs from the statutory federal income tax rate for the years ended December 31, 2022, 2021, and 2020 as follows:

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Year Ended December 31,

State taxes - net of Federal benefit 4.1 5.1 7.3

Permanent items and other deductions (7.1) (1.6) (0.6)

Effective income tax rate — % — % — %

As of December 31, 2022, the Company had tax-effected net operating loss carryforwards of $42,716 to offset future taxable income. Net operating losses incurred in tax years beginning on or after January 1, 2018, are carried forward indefinitely. Net operating losses incurred in tax years prior to January 1, 2018, are subject to a twenty year carryforward before expiring. A portion of the net operating loss carryforwards may expire due to limitations imposed by Section 382 of the Internal Revenue Code. 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.

The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. In the normal course of business, the Company is subject to examination by taxing authorities throughout the U.S. These examinations could include examining the timing and amount of deductions, the allocation of income among various tax jurisdictions and compliance with federal, state, and local laws. The Company’s remaining open tax years subject to examination by federal tax authorities include the years ended December 31, 2019, through 2022. The Company's remaining open tax years subject to examination by state and foreign tax authorities include the years ended December 31, 2018, through 2022. However, for tax years 2004 through 2017, federal and state taxing authorities may examine and adjust loss carryforwards in the years in which those loss carryforwards are ultimately utilized.

Legislation enacted in 2018, titled the Tax Cuts and Jobs Act of 2017, subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only.The Company has elected to account for GILTI in the year the tax is incurred.

The Company has no recorded income tax expense or income tax benefit for the years ended December 31, 2022, 2021, and 2020 due to the generation of net operating losses, the benefits of which have been fully reserved. The Company does not believe there are any additional tax refund opportunities currently available.

13.Retirement Plan

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% on 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 were $1,409, $1,346, and $1,141 for the years ended December 31, 2022, 2021 and 2020, respectively.

14.Commitments and Contingencies

Service Agreements

The Company pays CTS a facility fee for the use of clean room/manufacturing, storage, and office space and for services in support of its product process including for routine sterilization of daily supplies, providing disposable supplies and microbial services, and office support. Pursuant to the CTS Agreement, the Company recorded expenses of $2,278, $2,466 and $1,739 for the years ended December 31, 2022, 2021, and 2020, respectively, in sales and marketing expenses. The CTS Agreement terminates December 31, 2023, subject to earlier termination by either party at any time for cause (subject to the non-terminating party’s right to cure, in certain circumstances), or without cause upon 6 months prior notice. We expect to reduce our utilization of CTS in the second half of 2023.

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In December 2011, the Company 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 the BLA for Avance Nerve Graft. Payments made under this agreement were $1,254, $1,100 and $1,136 for the years ended December 31, 2022, 2021 and 2020, respectively.

Distribution and Supply Agreements

In August 2008, the Company entered into an exclusive distribution agreement with Cook Biotech to distribute the Axoguard Nerve Connector and Axoguard Nerve Protector products worldwide 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 establishes a formula for the transfer cost of the Axoguard products and requires certain minimum purchases by the Company, although, through mutual agreement, the parties have not established such minimums; and, to date, have not enforced such provision. Under the Cook Biotech agreement, the Company provides purchase orders to Cook Biotech, and Cook Biotech fulfills the purchase orders. The agreement allows for termination provisions for both parties. The loss of the ability to sell the Axoguardproducts could have a material adverse effect on the Company's business until other replacement products would be available.

In June 2017, the Company entered into the Nerve End Cap Supply Agreement (the "Supply Agreement") with Cook Biotech whereby Cook Biotech is the exclusive contract manufacturer of the Axoguard Nerve Cap and both parties have provided the other party the necessary licenses to their technologies for operation of the Supply Agreement. The Supply Agreement expires on August 27, 2027. Under the Supply Agreement the Company provides purchase orders to Cook Biotech and Cook Biotech fulfills the purchase orders.

Axogen Processing Center Facility

The Company is highly dependent on the continued availability of its processing facilities at the Community Blood Center facility (“CTS”) in Dayton, Ohio and could be harmed if the physical infrastructure of this facility is unavailable for any prolonged period of time.

On July 31, 2018, the Company purchased the APC Facility in Vandalia, Ohio, located near the CTS processing facility where Avance Nerve Graft is currently processed. The APC Facility, when and if operational, will be the new processing facility for Avance Nerve Graft to provide continued capacity for growth and to support the transition of Avance Nerve Graft from a Human Cellular and Tissue-based Product pursuant to Section 361 of the Public Health Service Act (PHSA) to a biologic product under section 351 of the PHSA. The APC Facility is comprised of a 107,000 square foot building on approximately 8.6 acres of land. The Company paid $731 for the land and this is recorded as land within Property and equipment, net on the consolidated balance sheets. The Company paid $4,300 for the building and this is recorded in projects in process within Property and equipment, net on the consolidated balance sheets.

On July 9, 2019, the Company 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 Facility. The estimated cost pursuant to the Design-Build Agreement was $29,300. Additional costs associated with the renovation, validation and certification of the APC Facility are estimated to be $20,900. For the year ended December 31, 2022, the Company has recorded $10,938 related to renovations and design and build in projects in progress. The Company has recorded $46,354 to date related to this project. In addition to these project costs, the Company has capitalized interest of $6,155 for the year ended December 31, 2022. To date, the Company has capitalized interest of $11,429 related to this project. These items are recorded as projects in process in property and equipment, net on the consolidated balance sheet. The Company anticipates recording an additional $4,000 to $5,000 in 2023. The Company anticipates completion of construction, validation of systems and processes in the first half of 2023 and commence processing in mid- 2023.

The Company obtained 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 Facility. The economic development grants are subject to certain job creation milestones by 2023 and related contingencies. The Company received zero, $950 and $238 from these grants in the years ended December 31, 2022, 2021 and 2020, respectively. These grants have claw back clauses if the Company does not meet these job creation milestones by 2023, the Company has sent requests to the grant authorities for extensions of the job creation milestones; however, the Company has not yet received a decision from the grant authorities regarding whether extensions will be granted.

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Fair Value of the Debt Derivative Liabilities