Axogen, Inc. (AXGN)

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

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

Financial information for prior periods has been reclassified to reflect the retrospective application of voluntary changes in the Company’s accounting policy for shipping and handling costs and changes to certain allocated corporate costs, as discussed under “Note 2 – Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in this Form 10-K.

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

Overview

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

Product Portfolio

Our platform for peripheral nerve repair features a comprehensive portfolio of products, including:

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

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

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

•Axoguard HA+ Nerve Protector™, is comprised of a processed porcine submucosa ECM base layer with a hyaluronate-alginate gel coating designed to provide short- and long-term protection for peripheral nerve injuries. The gel layer facilitates enhanced nerve gliding to aid in minimizing soft tissue attachments, while the base layer is remodeled into a long-term protective tissue layer.

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

•Avive+ Soft Tissue Matrix™, a multi-layer amniotic membrane allograft used to protect and separate tissues in the surgical bed during the critical phase of tissue healing.

Our portfolio of products is currently available in the United States ("U.S."), and 19 other countries including Canada, Germany, United Kingdom, Spain and several other European, Asian and Latin American countries.

We derive substantially all of our revenues from sales of our nerve repair products to customers in the U.S.

On June 24, 2024, we announced the launch of Avive+ Soft Tissue Matrix. Avive+ Soft Tissue Matrix is processed and distributed in accordance with U.S. Food and Drug Administration ("FDA") requirements for Human Cellular and Tissue-based Products under the Code of Federal Regulations ("CFR") Title 21 Part 1271 regulations and U.S. Public Health Service Act regulations as a Section 361 human tissue product. Products regulated solely under Section 361 of the Public Health Service Act are a product category under close scrutiny by the FDA for compliance with the regulatory requirements and potentially

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subject to regulatory change in the future. Failure to comply with applicable regulatory requirements could expose us to potential compliance actions by the FDA or state regulators and could risk the commercial availability of the product.

Our strategy remains focused on deepening our presence in high-potential accounts, specifically Level 1 trauma centers and academic-affiliated hospitals with a high number of trained microsurgeons. We will drive growth in these accounts through targeted expansion of nerve repair indications and driving deeper adoption of our nerve repair algorithm across multiple surgical specialties.

Summary of Operational and Business Highlights

•We completed the Biologics License Application ("BLA") submission for Avance Nerve Graft on September 6, 2024. On November 1, 2024, the FDA informed us that they had accepted the BLA for filing and assigned a Prescription Drug User Fee Act goal date of September 5, 2025. The FDA further indicated that it does not currently plan to hold an advisory committee meeting for the application.

•Revenue was $187,338 for the year ended December 31, 2024, an increase of $28,326, or 17.8%, compared to the year ended December 31, 2023.

•Gross profit was $141,977 for the year ended December 31, 2024, an increase of $20,108, or 16.5%, compared to the year ended December 31, 2023.

Results of Operations

Comparison of the Years Ended December 31, 2024 and 2023

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

Revenues

Revenues for the year ended December 31, 2024 increased $28,326, or 17.8%, to $187,338, as compared to $159,012 for the year ended December 31, 2023. Revenue growth was driven by an increase in unit volume of approximately 9.0%, as well as the net impact of changes in product mix and price of approximately 5.5% and 3.3%, respectively.

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Gross Profit

Gross profit for the year ended December 31, 2024 increased $20,108, or 16.5%, to $141,977, as compared to $121,869 for the year ended December 31, 2023. Gross margin as a percentage of revenue decreased to 75.8% for the year ended December 31, 2024, as compared to 76.6% for the year ended December 31, 2023. The decrease in gross margin was due to the change in our product mix.

Costs and Expenses

Total costs and expenses increased $1,933, or 1.3%, to $145,264 for the year ended December 31, 2024, as compared to $143,331 for the year ended December 31, 2023. The increase in total operating costs was primarily attributable to the following: (i) $9,745 in compensation costs; (ii) $1,288 in professional services fees; and (iii) $308 in net other costs, partially offset by decreases of (i) $3,593 in research and development project costs; (ii) $3,114 in royalty expenses; (iii) $1,621 in marketing program costs; and (iv) $218 in travel costs.

Sales and marketing costs and expenses increased $881, or 1.1%, to $78,461 for the year ended December 31, 2024, as compared to $77,580 for the year ended December 31, 2023. The increase in sales and marketing costs and expenses was due to the following: (i) $6,028 in compensation costs and (ii) $311 in occupancy related costs, partially offset by decreases of (i) $3,114 in royalty expenses; (ii) $1,621 in marketing program costs; (iii) $173 in travel costs; (iv) $153 in professional services fees; and (v) $396 in net other costs.

Research and development costs and expenses increased $428, or 1.6%, to $27,767 for the year ended December 31, 2024, as compared to $27,339 for the year ended December 31, 2023. The increase was primarily due to product development and clinical expenses. Product development costs include spending for a number of specific programs, including the non-clinical expenses related to the BLA for Avance Nerve Graft. Product development costs and expenses represented approximately 53% and 60% of total research and development costs and expenses for the years ended December 31, 2024 and 2023, respectively. Clinical trial costs and expenses represented approximately 47% and 40% of total research and development costs and expenses for the years ended December 31, 2024 and 2023, respectively. The increase in research and development costs and expenses was due to the following: (i) $3,027 in compensation costs and (ii) $1,814 in professional services fees, partially offset by decreases of (i) $3,593 in research and development project costs; (ii) $414 in occupancy related costs; (iii) $173 in travel costs; and (iv) $97 in other costs to support these clinical and non-clinical expenses.

General and administrative costs and expenses increased $624, or 1.6%, to $39,036 for the year ended December 31, 2024, as compared to $38,412 for the year ended December 31, 2023. The increase was primarily due to (i) $921 in bad debt expense and (ii) $254 in occupancy related costs; partially offset by decreases of (i) $373 in professional services fees and (ii) $187 in compensation costs.

Other Expense

Total other expense increased $6,423, or 2528.7%, to $6,677 for the year ended December 31, 2024, as compared to $254 for the year ended December 31, 2023. The increase was primarily due to the increase in interest expense of $5,372 which was a result of no longer capitalizing interest due to the completion of the Axogen Processing Center facility (the "APC Facility") in 2023. In connection with our credit facility with Oberland Capital ("Credit Facility"), we recognized total interest charges of $8,101 and $8,083 for the years ended December 31, 2024 and 2023, respectively, and of the total interest charges, we capitalized to the construction of the APC Facility interest charges of $— and $5,285 for the years ended December 31, 2024 and 2023, respectively. The decrease in investment income was primarily related to the Federal Reserve decreasing interest rates 100 basis points throughout 2024.

Income Taxes

We had no federal income tax expense or benefit for the years ended December 31, 2024 and 2023 due to the incurrence of net operating losses in both years, the benefits of which have a full valuation allowance. From time to time, we receive notices of examination of prior tax filings from federal and state authorities. The Internal Revenue Service is currently examining the Company's 2021 federal income tax return. We do not believe that there are any additional tax expenses or benefits currently available.

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Comparison of the Years Ended December 31, 2023 and 2022

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

Revenues

Revenues for the year ended December 31, 2023 increased $20,428, or 14.7%, to $159,012, as compared to $138,584 for the year ended December 31, 2022. Revenue growth was driven by an increase in unit volume of approximately 8.6%, as well as the net impact of changes in price and product mix of approximately 3.7% and 2.5%, respectively. The unit volume increase was attributed to growth in our core and active accounts. As of December 31, 2023, we had 1,006 active accounts, an increase of 3.9% from 968 at December 31, 2022 and 376 core accounts, an increase of 13.3% from 332 at December 31, 2022.

Gross Profit

Gross profit for the year ended December 31, 2023 increased $13,060, or 12.0%, to $121,869, as compared to $108,809 for the year ended December 31, 2022. Gross margin as a percentage of revenue decreased to 76.6% for the year ended December 31, 2023, as compared to 78.5% for the year ended December 31, 2022.

Costs and Expenses

Total costs and expenses increased $4,815, or 3.5%, to $143,331 for the year ended December 31, 2023, as compared to $138,516 for the year ended December 31, 2022. The increase in total operating costs and expenses was due to the following: (i) $5,469 in compensation costs; (ii) $1,243 in marketing program costs; (iii) $1,156 in professional services fees; (iv) $852 in travel costs; and (v) $326 in occupancy related costs; partially offset by decreases of (i) $1,190 in research and development projects and (ii) $3,041 of other general business costs, including insurance expenses of $1,033, bad debt recovery of $883, merchant fees of $727, and other items administrative in nature of $398.

Sales and marketing costs and expenses increased $5,597, or 7.8%, to $77,580 for the year ended December 31, 2023, as compared to $71,983 for the year ended December 31, 2022. The increase in sales and marketing costs and expenses was due to the following: (i) $2,497 in compensation costs; (ii) $1,243 in marketing program costs; (iii) $831 in travel costs; (iv) $625 in professional services fees; (v) other items administrative in nature of $251 and (vi) $150 in occupancy related costs.

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Research and development costs and expenses increased $1,712, or 6.7%, to $27,339 for the year ended December 31, 2023, as compared to $25,627 for the year ended December 31, 2022. The increase in research and development costs and expenses was primarily due to product development and clinical expenses. Product development costs include spending for a number of specific programs, including the non-clinical expenses related to the BLA for Avance Nerve Graft. Product development costs and expenses represented approximately 60% and 52% of total research and development costs and expenses for the years ended December 31, 2023 and 2022, respectively. Clinical trial costs and expenses represented approximately 40% and 48% of total research and development costs and expenses for the years ended December 31, 2023 and 2022, respectively. The increase in research and development costs and expenses was due to the following: (i) $2,171 in compensation costs; (ii) $331 in professional services fees; (iii) $287 in occupancy related costs; and (iv) $98 in travel costs to support these clinical and non-clinical expenses, partially offset by a decrease of $1,190 in research and development projects.

General and administrative costs and expenses decreased $2,494, or 6.1%, to $38,412 for the year ended December 31, 2023, as compared to $40,906 for the year ended December 31, 2022. The decrease in general and administrative costs and expenses was primarily due to the following: (i) $1,033 in insurance expenses, (ii) $883 in bad debt recovery, (iii) $727 in merchant fees, (iv) $330 in other services, (v) $205 in licenses and fees; (vi) other items administrative in nature of $128; (vi) $112 in occupancy related costs; and (vii) $78 in travel costs, partially offset by increases of (i) $801 in compensation costs and (ii) $201 in professional services fees.

Other (Expense) Income

Total other expense increased $1,013, or 133.5%, to expense of $254 for the year ended December 31, 2023, as compared to income of $759 for the year ended December 31, 2022. The increase was primarily due to the increase in interest expense of $2,211 and other expenses of $208, partially offset by the increase in investment income of $918 and the fair value of the derivative liability of $488. In connection with the Credit Facility, we recognized total interest charges of $8,083 and $6,721 for the years ended December 31, 2023 and 2022, respectively, and of this interest we capitalized to the construction of the APC Facility, interest charges of $5,285 and $6,155 for the years ended December 31, 2023 and 2022, respectively. The increase in investment income was primarily related to the Federal Reserve raising interest rates 100 basis points throughout 2023.

Income Taxes

We had no federal income tax expense or benefit for the years ended December 31, 2023 and 2022 due to the incurrence of net operating losses in both years, the benefits of which have been fully reserved. We do not believe that there are any additional tax expenses or benefits currently available.

Liquidity and Capital Resources

As of December 31, 2024, our principal sources of liquidity were our cash and cash equivalents and investments totaling $33,482. Our cash equivalent is comprised of a money market mutual fund and our investments are comprised of U.S. Treasuries. Our cash and cash equivalents and investments increased $2,458 to $33,482 from $31,024 at December 31, 2023, due to a reduction in capital expenditures and general operating activities. On December 31, 2024 and 2023, our current assets exceeded our current assets liabilities by $68,607 and $57,574, respectively. Based on current estimates, we believe that our existing cash and cash equivalents and investments, as well as cash provided by sales of our products will allow us to fund our operations through at least the next twelve months from the date of issuance of the accompanying financial statements.

Cash Flow Information

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

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Net Cash Provided By (Used In) Operating Activities

Net cash provided by operating activities was $4,535 compared to net cash used in operating activities of $5,716 for the years ended December 31, 2024 and 2023, respectively. The favorable change in net cash provided by operating activities of $10,251 was due to the decrease in net loss of $11,751 and the favorable change in noncash accounts of $6,093, partially offset by an unfavorable change in working capital of $7,594.

A discussion of net cash used in operating activities during the year ended December 31, 2022 can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the Securities and Exchange Commission ("SEC") on March 5, 2024.

Net Cash (Used In) Provided By Investing Activities

Net cash used in investing activities was $10,297 compared to net cash provided by investing activities of $19,253 for the years ended December 31, 2024 and 2023, respectively. The unfavorable change in net cash used in investing activities of $29,550 was due to the decrease in proceeds from the sale of investments, net of investment purchases, totaling $39,944, partially offset by a net decrease in capital expenditures of $10,771, primarily related to the renovation of the APC Facility completed in 2023.

A discussion of net cash used in investing activities during the year ended December 31, 2022 can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 5, 2024.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $2,290 as compared to $1,954 for the years ended December 31, 2024 and 2023, respectively, an increase of $335, or 17%. The increase in net cash provided by financing activities was primarily due to an increase of $336 in proceeds from the exercise of stock options and Employee Stock Purchase Plan (“ESPP”) purchases year-over-year.

A discussion of net cash provided by financing activities during the year ended December 31, 2022 can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 5, 2024.

Sources of Capital

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

Credit Facilities

As of December 31, 2024, we had $50,000 outstanding in indebtedness under a credit facility; $35,000 maturing on June 30, 2027 and $15,000 maturing on June 30, 2028. Quarterly interest only and revenue participation payments are due through each of the maturity dates. Interest is calculated as 7.5% plus the greater of the forward-looking term rate based on the secured overnight financing rate as set by the Federal Reserve Bank of New York plus 0.10% ("Adjusted SOFR") or 2.0% (12.19% as of December 31, 2024). Revenue participation payments are calculated as a percentage of our net revenues, up to $70,000 in any given year, adding approximately 1.5% per year of additional interest payments on the outstanding indebtedness. Upon each maturity date or upon such date earlier repayment occurs, we will repay the principal balance and provide a make-whole payment calculated to generate an internal rate of return to the lender equal to 11.5%, less the total of all quarterly interest and revenue participation payments previously paid. See Note 9 - Long-Term Debt, Net of Debt Discount and Financing Fees and Note 15 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements Part II, Item 8 of this Form 10-K.

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Contractual Obligations and Commitments

(1) See Note 9 - Long-Term Debt, Net of Debt Discount and Financing Fees and Note 15 - Commitments and Contingencies in Part II, Item 8 of this Form 10-K.

(2) Calculated at 12.19%; the interest rate as of December 31, 2024.

(3) See Note 8 - Leases in Part II, Item 8 of this Form 10-K.

(4) Includes former CEO's 2024 bonus to be paid in March of 2025, senior advisory fees through May 2025, eighteen months of Consolidated Omnibus Budget Reconciliation Act ("COBRA") payments and related employer paid taxes. See Note 15 - Commitments and Contingencies in Part II, Item 8 of this Form 10-K.

(5) See Note 15 - Commitments and Contingencies in Part II, Item 8 of this Form 10-K.

(6) Includes severance, accrued paid time off, twenty-four months of COBRA payments and related employer paid taxes payable to a former employee. See Note 15 - Commitments and Contingencies in Part II, Item 8 of this Form 10-K.

See Note 8 - Leases, Note 9 - Long-Term Debt, Net of Debt Discount and Financing Fees, and Note 15 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K, for further information.

Critical Accounting Estimates

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

Inventories

Description

Inventories consist of purchased materials, direct labor and manufacturing overhead, and are stated at the lower of cost or net realizable value, as determined by the first-in, first-out method.

Judgments and Uncertainties

We maintain reserves for excess and obsolete inventory resulting from the potential inability to sell certain products in excess of current carrying cost. We make estimates regarding the future recoverability of the costs of these products and record provisions based on historical experience, expiration dates and expected future trends.

Sensitivity of Estimate to Change

As of December 31, 2024, we have reserved $1,630 for potential losses relating to inventory. If our actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write downs may be required, which could unfavorably affect future operating results.

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Derivative Instruments

Description

We review debt instruments to determine whether there are embedded derivative instruments, which are required to be bifurcated and accounted for separately as a derivative financial instrument. Embedded derivatives that are not clearly and closely related to the debt host are bifurcated and recognized at fair value on the Consolidated Balance Sheets with changes in fair value recognized as either a gain or loss on the Consolidated Statements of Operations for each reporting period.

Judgements and Uncertainties

The fair value of embedded derivatives is measured based on equity markets and interest rates, as well as an estimate of our nonperformance risk adjustment. This estimate includes an option adjusted spread and an estimate of our discount rate.

Sensitivity of Estimate to Change

As of December 31, 2024, we recorded a derivative liability of $2,400. However, if the discount rate were to change by 1%, it would have a less than $50 effect on our derivative liability fair value.

Stock-Based Compensation

Description

Stock-based compensation is in the form of stock options, restricted stock units ("RSU") and performance stock units ("PSU") granted to employees and directors. Stock-based compensation expense is based on the fair value of the stock options, RSUs and PSUs.

Judgments and Uncertainties

We estimate the grant date fair value of each stock option award on the date of grant using a multiple-point Black-Scholes option-pricing model. In addition, we estimate the grant date fair value of stock options granted to employees at a premium price based on market conditions, such as the trading price of our common stock, using a Monte Carlo simulation option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods.

The fair value of the PSU grants tied to revenue goals (the "Revenue PSUs") is determined based on the fair value of our common stock on the date of grant and our estimate of achieving the applicable revenue goals. Compensation expense for the Revenue PSUs is recorded as the milestones are achieved. The number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on the actual performance metrics as set forth in the applicable Revenue PSU award agreement. The amount actually awarded will be based upon achievement of the performance measures. Expectations related to the achievement of the revenue goals associated with the Revenue PSU grants is assessed at each reporting period and is used to determine whether any of the Revenue PSU grants are expected to vest. If the performance-based milestones related to the Revenue PSU grants are not met or not expected to be met, any compensation expense recognized associated with such grants is reversed.

The estimated grant date fair value of the Total Shareholder Return PSUs ("TSR PSUs") is calculated by using a Monte Carlo simulation. The number of TSR PSUs that will be earned is based upon the achievement of stock price targets ("Price Targets") over the measurement period. Compensation expense is recognized regardless if the Price Targets are satisfied. Compensation expense will be reversed if an employee's employment is terminated prior to satisfying the requisite service period.

We recognize compensation expense related to the ESPP based on the estimated fair value of the options on the date of grant. We estimate the grant date fair value using a Black-Scholes option pricing model for each purchase period. The grant date fair value is expensed on a straight-line basis over the offering period.

The determination of fair value using option-pricing models, as indicated above, is affected by our stock price, as well as assumptions regarding several subjective variables. These variables include, but are not limited to, our expected stock price volatility over the expected term of the awards. We determine the expected term of each award giving consideration to the contractual terms, vesting schedules, and post-vesting forfeitures. We use the risk-free interest rate on the implied yield available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected term of the award. The fair value of the Revenue PSUs also includes our estimates of achieving the applicable revenue goals. The value of the

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portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Operations. If factors change and different assumptions are used, stock-based compensation expense could be materially different in the future.

Sensitivity of Estimate of Change

As of December 31, 2024, if we determine that the unvested PSUs outstanding were in a pay-out range of 150%, our stock-based compensation expense would increase by $616.

Recent Accounting Pronouncements

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

ITEM 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.

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

Overview

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

Product Portfolio

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

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

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

•Axoguard HA+ Nerve Protector™, is comprised of a processed porcine submucosa ECM base layer with a hyaluronate-alginate gel coating designed to provide short- and long-term protection for peripheral nerve injuries. The gel layer facilitates enhanced nerve gliding to aid in minimizing soft tissue attachments, while the base layer is remodeled into a long-term protective tissue layer.

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

•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 United States "(U.S."), Canada, Germany, United Kingdom, 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®, Axoguard HA+ Nerve Protector™, and Axoguard Nerve Cap®, in the 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, to have discussions with the U.S. Food and Drug Administration ("FDA") about the appropriate regulatory classification and requirements for Avive. The reported safety or product performance issues or concerns with Avive. Based on preliminary feedback from FDA on the product classification and regulatory pathway, we have decided not to continue discussions with FDA and will not pursue regulatory approval for Avive. Therefore, we will not seek to return Avive to the market. We are working on developing a replacement product called Avive + that we believe would not require a BLA and would fall under the criteria set forth in 21 CFR 1271.10(a) for regulation solely under Section 361 of the Public Health Service Act and the regulations in 21 CFR Part 1271. We seek to launch Avive+ in the second quarter of 2024.

We have observed that surgeons initially are cautious adopters for peripheral nerve repair products. Surgeons typically start with a few cases and then wait and review the results of these initial cases. Active accounts are usually past this wait period and

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have developed some level of product reorder. These active accounts have typically gone through the Value Analysis 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, 2023, we had 1,006 active accounts, an increase of 3.9% from 968 one year ago. Active accounts are approximately 87% of our revenue. The top 10% of these active accounts continue to represent approximately 40% of our revenue.

Core accounts are defined as accounts that have purchased at least $100 in the past twelve months. As of December 31, 2023, we had 376 core accounts, an increase of 13.3% from 332 one year ago. These core accounts represented approximately 65% our revenue in 2023, which increased approximately 60% over the past two years.

Our business was originally anchored in emergent trauma and over the past several years we have introduced a number of new nerve repair applications that utilize our Avance and Axoguard product lines. These new applications share common characteristics that now lead us to think about our business along two primary categories, scheduled non-trauma (“Scheduled”) procedures, and emergent trauma (“Emergent”) procedures.

Scheduled procedures are generally characterized as procedures where a patient is seeking relief of a condition caused by a nerve defect or surgical procedure. These include breast reconstruction following a mastectomy, nerve reconstruction following the surgical removal of painful neuromas, oral and maxillofacial procedures, and nerve decompression.

The nature of Scheduled procedures affords patients the opportunity to actively search for treatment options and advocate for solutions that may improve quality of life following the procedure. For example, in breast reconstruction, this may include prioritizing neurotization as a part of their treatment plan. These procedures lend themselves to standardization of surgical techniques and more consistent nerve repair algorithms. In addition, these patients are likely to engage in extended follow-up evaluations with their physicians.

Emergent procedures generally result from injuries that initially present in an emergency room. These procedures are typically referred to and completed by a specialist either immediately or within a few days following the initial injury. Given the emergent and diverse nature of traumatic injuries, the required repair algorithm and procedure scheduling can be highly variable, and follow-up evaluations are generally inconsistent.

While the various applications can have unique surgeon customers, the procedures are often performed in the same accounts and use the same family of Axogen products. Scheduled procedures typically have a higher value of Axogen products used per procedure as compared to routine trauma; and, given the planned nature of these procedures, there is a higher level of predictability and are generally additive to our sales rep productivity.

Reporting by application has historically been challenging. However, we have recently developed improved analytical tools that we believe allow us to better monitor product utilization data within accounts and generate improved estimates of our revenue by application. We estimate revenue by application using the information received from hospitals and sales representatives based on assumptions regarding specific surgeon practice and account information. Accordingly, the accuracy of our estimates is subject to the limited data we receive and the accuracy of those assumptions.

We estimate that revenues from emergent trauma procedures represented approximately half of total revenues during the year ended December 31, 2023 and grew mid-single digits versus the year ended December 31, 2022.

Summary of Operational and Business Highlights

•Net revenue was $159,012 for the year ended December 31, 2023, an increase of $20,428 or 14.7% compared to the year ended December 31, 2022.

•Gross profit was $127,874 for the year ended December 31, 2023, an increase of $13,437 or 11.7% compared to the year ended December 31, 2022.

•In August 2023, we began processing tissue in the new, state-of-the-art APC facility, which provides for up to 3x the previous capacity and was designed for long-term growth and expansion.

•During 2023, we surpassed 100,000 Avance Nerve Graft implants since launch.

•We are continuing to expand our offering in the nerve protection market with the national launch of Axoguard HA+ Nerve Protector™ during 2023 and expect to launch Avive+ Soft Tissue Matrix™ second quarter of 2024.

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•We completed a Pre-BLA meeting with the FDA during the first quarter of 2024 where we aligned with the FDA on a rolling submission process and the content of the modules for the BLA submission for Avance® Nerve Graft. We anticipate completing the submission in the third quarter of 2024. Subject to ongoing engagement with the FDA, we believe this submission timetable will allow for a potential BLA approval in the middle of 2025.

•We have exceeded our initial goal of training 25 additional surgical teams on techniques in implant-based Resensation® and have more than 39 teams trained during the year ended December 31, 2023.

•Ended the year with 245 peer-reviewed clinical publications featuring Axogen’s nerve repair product portfolio.

•Ended the year with 116 direct sales representatives as compared to 115 for the year ended 2022.

Results of Operations

Comparison of the Years Ended December 31, 2023, and 2022

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

Revenues

Revenues for the year ended December 31, 2023, increased, $20,428 or 14.7%, to $159,012 as compared to $138,584 for the year ended December 31, 2022. Revenue growth was driven by an increase in unit volume of approximately 8.6%, as well as the net impact of changes in price and product mix of approximately 3.7% and 2.5%, respectively. The unit volume increase was attributed to growth in our core and active accounts. As of December 31, 2023, we had 1,006 active accounts, an increase of 3.9% from 968 from the prior year and 376 core accounts, an increase of 13.3% from 332 at December 31, 2022.

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Gross Profit

Gross profit for the year ended December 31, 2023, increased $13,437 or 11.7% to $127,874 as compared to $114,437 for the year ended December 31, 2022. Gross margin as a percentage of revenue decreased to 80.4% for the year ended December 31, 2023, as compared to 82.6% for the year ended December 31, 2022.

Costs and Expenses

Total costs and expenses increased, $5,192 or 3.6%, to $149,336 for the year ended December 31, 2023, as compared to $144,144 for the year ended December 31, 2022. The increase in total operating costs was primarily attributable to the following (i) $5,083 in compensation costs; (ii) $1,277 in professional services; (iii) $1,243 in marketing programs costs; (iv) $852 in travel; (v) $185 in occupancy related costs partially offset by decreases of (i) $1,190 in research and development projects; (ii) $2,257 of other general business costs including insurance expenses of $1,033, bad debt recovery of $883, merchant fees of $727, other items administrative in nature of $355 offset by increased packaging, shipping and handling expenses of $741.

Sales and marketing expenses increased $5,833, or 7.3%, to $86,060 for the year ended December 31, 2023, as compared to $80,228 for the year ended December 31, 2022. The increase in sales and marketing was due to the following: (i) compensation costs of $1,969; (ii) $1,243 in marketing programs;(iii) $831 in travel costs; (iv) $745 in professional services, and (v) $1,034 of other costs which included packing, shipping and handling costs of $741 and other items administrative in nature of $293.

Research and development expenses increased $1,175, or 4.3%, to $28,333 for the year ended December 31, 2023, as compared to $27,158 for the year ended December 31, 2022. The increase was primarily due to product development and clinical expenses. Product development costs include spending for a number of specific programs including the non-clinical expenses related to the BLA for Avance Nerve Graft. Product development expenses represented approximately 60% and 52% of total research and development expense for the years ended December 31, 2023, and 2022, respectively. Clinical trial expenses represented approximately 40% and 48% of total research and development expense for the years ended December 31, 2023, and 2022, respectively. The increase in research and development included increases in compensation costs of $1,635; $331 in professional fees; $287 in occupancy costs; and $98 in travel costs to support these clinical and non-clinical expenses.

General and administrative expenses decreased $1,816, or 4.9%, to $34,943 for the year ended December 31, 2023, as compared to $36,758 for the year ended December 31, 2022. The decrease was primarily due to $1,033 in insurance costs, $833 in bad debt recovery, $727 in merchant fees, $330 in other services, and $205 in licenses and fees partially offset by an increase in compensation costs of $1,479.

Other Income and Expense

Total other (expense) income decreased $1,013, or 133.5% to expense of $254 for the year ended December 31, 2023, as compared to income of $759 for the year ended December 31, 2022. The change was primarily due to the increase in interest expense of $2,211 and other expenses of $208, partially offset by the increase in investment income of $918 and the fair value of the derivative liability of $488. In connection with the Credit Facility, we recognized total interest charges of $8,083 and $6,721 for the years ended December 31, 2023, and 2022, respectively, and of this interest we capitalized to the construction of the APC Facility, interest charges of $5,285 and $6,155 for the years ended December 31, 2023, and 2022, respectively. The increase in investment income was primarily related to the Federal Reserve raising interest rates 100 basis points throughout 2023.

Income Taxes

We had no federal income tax expense or benefit for the years ended December 31, 2023, and 2022, due to the incurrence of net operating losses in both years, the benefits of which have been fully reserved. We do not believe that there are any additional tax expenses or benefits currently available.

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Liquidity and Capital Resources

As of December 31, 2023, our principal sources of liquidity were our cash and cash equivalents totaling $31,024. Our cash equivalents are comprised of a money market mutual fund and during the year ended December 31, 2022, we had investments comprised of short-term commercial paper and U.S. Treasuries. Our cash and cash equivalents and investments decreased $17,766 from $48,790 at December 31, 2022, primarily as a result of the renovations of our APC Facility, and general operating activities. On December 31, 2023,and 2022, our current assets exceeded our current assets liabilities by $57,574 and $74,322, 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:

Net Cash Used in Operating Activities

Net cash used in operating activities was $5,716 and $16,066 during the years ended December 31, 2023, and 2022, respectively. The favorable change in net cash used in operating activities of $10,350 or 64.4% was due to the following: (i) the net favorable change of $5,172 in working capital accounts and (ii) the decrease in net loss of $7,232.

A discussion of net cash used in operating activities during the year ended December 31, 2021, can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed on March 14, 2023.

Net Cash Provided by Investing Activities

Net cash provided by investing activities was $19,253 as compared to cash used in investing activities of $3,200 for the years ended December 31, 2023, and 2022, respectively, an increase of $22,453 or 702%. The change in net cash used in investing activities was due to the increase in the net purchase and proceeds of the sale of investments totaling $16,118 and net decrease in the capital expenditures, primarily related to the renovation of the APC Facility, of $6,206.

A discussion of net cash provided by investing activities during the year ended December 31, 2021, can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed on March 14, 2023.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $1,954 as compared to $1,794 for the years ended December 31, 2023, and 2022, respectively, an increase of $161 or 9%. The change in net cash provided by financing activities was primarily due to an increase of $159 in proceeds from the exercise of stock options and ESPP purchases year-over-year.

A discussion of net cash provided by financing activities during the year ended December 31, 2021, can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed on March 14, 2023.

Liquidity and Capital Resources

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.

Credit Facilities

As of December 31, 2023, 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 Adjusted SOFR or 2.0% (12.99% as of December 31, 2023). Revenue participation payments are calculated as a percentage of our net revenues, up to $70,000 in any given year, adding approximately 1.5% per year of additional interest payments on the outstanding indebtedness. Upon each maturity date or upon such date earlier repayment occurs, we will repay the principal balance and provide a make-whole payment calculated to generate an internal rate of return to the lender equal to 11.5%, less the total of all quarterly interest and revenue participation payments previously paid. See Note 9 - Long-Term Debt, Net of Debt Discount and Financing Fees and Note 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

(1) See Note 9. Long-term Debt and Note 14. Commitments and Contingencies in Part II, Item 8 of this Form 10-K.

(2) Calculated at 13.0%; the interest rate as of December 31, 2023.

(3) See Note 8. Leases in Part II, Item 8 of this Form 10-K.

(4) Includes CEO's 2023 bonus to be paid in March 2024, 2024 Salary, 2024 bonus to paid in March of 2025, accrued PTO through January 4, 2025, nine months of senior advisory fees, and eighteen months of COBRA payments. Actual timing of payments are subject to the determination of the end of CEO Term per the Transition and Separation Agreement. See Note 14 - Commitments and Contingencies in Part II, Item 8 of this Form 10-K.

See Note 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.

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Inventories

Description

Inventories consist 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.

Judgments and Uncertainties

We maintain reserves for excess and obsolete inventory resulting from the potential inability to sell certain products in excess of current carrying cost. We make estimates regarding the future recoverability of the costs of these products and record provisions based on historical experience, expiration dates and expected future trends.

Sensitivity of Estimate to Change

As of December 31, 2023, we have reserved $1,342 for potential losses relating to inventory. If our actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write downs may be required, which could unfavorably affect future operating results.

Derivative Instruments

Description

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

Judgements and Uncertainties

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 discount rate.

Sensitivity of Estimate to Change

As of December 31, 2023, we recorded a derivative liability of $2,987. However, if the discount rate were to change by 1%, it would have a less than $50 effect on our derivative liability.

Share-Based Compensation

Description

Share-based compensation is in the form of stock options, restricted stock units ("RSU") and performance stock units ("PSU"). The estimated grant date fair value of stock options held by employees is determined using a multiple-point Black-Scholes option valuation method. The fair value of RSUs and PSUs is determined based on the fair value of our common stock on the date of grant. The estimated fair value of the options related to the Employee Stock Purchase Plan are based on the Black-Scholes option pricing model.

Judgments and Uncertainties

We estimate the grant date fair value of each stock option award on the date of grant using a multiple-point Black-Scholes option-pricing model. In addition, we 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. Key assumptions in determining fair value include volatility, risk-free interest rate, dividend yield and expected term. As a result, if factors change and different assumptions are used, the stock-based compensation expense could be materially different in the future.

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 at 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.

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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.

Sensitivity of Estimate of Change

As of December 31, 2023, stock-based compensation expense for PSU's was $3,273, however, if we determined that the PSUs outstanding were 100% achievable, our stock-based compensation would have been $8,652.

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 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:

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

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:

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

See Note 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 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 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.

Our platform for peripheral nerve repair features a comprehensive portfolio of products, including Avance Nerve Graft, a biologically active off-the-shelf processed human nerve allograft for bridging severed peripheral nerves without the comorbidities associated with a second surgical site; Axoguard Nerve Connector, a porcine (pig) submucosa 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; Avive Soft Tissue Membrane, a processed human umbilical cord intended for surgical use as a resorbable soft tissue conduit; and Axotouch Two-Point Discriminator, used to measure the innervation density of any surface area of the skin. Our portfolio of products is available in the U.S., Canada, Germany, the UK, Spain, South Korea, and several other countries.

As previously announced, we suspended the market availability of Avive Soft Tissue Membrane ("Avive") effective June 1, 2021 and we continue discussions with the FDA to determine the appropriate regulatory classification and requirements for Avive. The suspension was not based on any safety or product 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. Avive has historically represented approximately 5% of our revenues through the second quarter of 2021, and no Avive revenue was recorded in the third and fourth quarters of 2021.

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

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, 2021, we had 951 active accounts, an increase of 6.5% from 893 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 $100,000 in the past 12 months. As of December 31, 2021, we had 294 core accounts, an increase of 9.3% from 269 one year ago. These core accounts represented approximately 60% of our revenue in 2021, which has remained consistent over the past two years.

COVID-19 Impact

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The global impact of COVID-19 has had a negative effect on the global economy, disrupting the financial markets and significantly impacting the medical industry. In response to COVID-19, our top priority has been the health and safety of those we serve, including healthcare professionals and their patients, as well as our employees, communities, and suppliers. We ensured employee compliance with state and local mandates as well as implemented certain cost mitigation initiatives in 2020 such as a reduction

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in pay levels, temporary suspension of tissue processing and deferral of certain projects, among other efforts. As economic activity began to normalize, we lifted these cost mitigation initiatives.

Although COVID-19 had a significant impact on our revenue growth in 2020, we were able to increase revenue in 2021 as compared to 2020. The rapid development and fluidity of the situation surrounding COVID-19 prevent any prediction as to the ultimate impact COVID-19 will have on our business as new variants continue to spread, causing global supply chain disruptions, labor shortages, and inflationary conditions.

Results of Operations

Comparison of the Years Ended December 31, 2021 and 2020

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

Revenues

Revenues for the year ended December 31, 2021 increased $15,058, or 13.4%, to $127,358 as compared to $112,300 for the year ended December 31, 2020. In 2021, our revenues continued to recover from the initial phases of the COVID-19 pandemic that began in 2020, however revenues in the second half of 2021 were negatively impacted by lower procedure volume due to the impact of COVID-19 variants and related hospital staffing challenges. Revenue growth was driven by an increase in unit volume of approximately 8%, as well as the net impact of changes in prices and product mix of approximately 5%. The unit volume increase was attributed to growth in our core and active accounts. As of December 31, 2021, we had 951 active accounts, an increase of 6.5% from 893 one year ago and we had 294 core accounts, an increase of 9.3% from 269 one year ago.

Gross Profit

Gross profit for the year ended December 31, 2021 increased $13,708, or 15.1%, to $104,427 as compared to $90,719 for the year ended December 31, 2020. Gross margin increased to 82.0% for the year ended December 31, 2021 as compared to 80.8% for the year ended December 31, 2020. 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. Gross margin was negatively impacted during 2020 due to lower revenue, idle facility charges and other increased period costs of

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approximately $2,000 in the second and third quarters resulting from our temporary suspension of tissue processing, as well as approximately $2,242 of inventory write-downs.

Costs and Expenses

Total costs and expenses increased $15,942, or 14.0%, to $129,843 for the year ended December 31, 2021 as compared to $113,901 for the year ended December 31, 2020. The increase in total costs and expenses over the prior year reflects a return to more normalized spending levels following the steep reduction in spend as a result of our cost mitigation initiatives enacted at the beginning of the COVID-19 pandemic, including increases of $4,129 in professional and consulting fees, $3,127 in occupancy-related expenses primarily attributable to our new lab and office facility in Tampa, $2,700 in general corporate expenses, $2,555 in marketing programs and travel as restrictions were lifted and access to hospitals and surgeons resumed and $1,462 in employee compensation where increases in salaries and non-cash stock compensation were partially offset by decreases in bonus' and commissions. As a percentage of total revenues, total costs and expenses increased slightly to 102.0% for the year ended December 31, 2021 as compared to 101.4% for the year ended December 31, 2020.

Sales and marketing expenses increased $3,669, or 5.3%, to $73,328 for the year ended December 31, 2021 as compared to $69,659 for the year ended December 31, 2020. This increase was primarily due to an increase of $2,459 in marketing programs and travel as restrictions were lifted and access to hospitals and surgeons resumed and an increase of $1,353 in occupancy-related expenses, partially offset by lower employee compensation of $667 primarily due to lower commissions. As a percentage of total revenues, sales and marketing expenses were 57.6% for the year ended December 31, 2021 as compared to 62.0% for the year ended December 31, 2020. We expect sales and marketing expenses will increase as pandemic-related restrictions in hospital access and travel normalize.

Research and development expenses increased $6,331, or 35.5%, to $24,177 for the year ended December 31, 2021 as compared to $17,846 for the year ended December 31, 2020. Product development expenses represented approximately 74% of total research and development expenses in the year ended December 31, 2021 as compared to 50% in the prior year. The increase in product development expenses reflect increased spending in specific programs, including our efforts related to the BLA for Avance Nerve Graft and a next generation Avance product. It is expected that costs associated with the BLA will continue to increase as we continue to invest in completing the license application. Additionally, we continue to conduct development efforts focused on both new peripheral nerve products and new peripheral nerve applications for our existing products. We pursue research grants to support research and early product development. Clinical trial expenses represented approximately 26% of research and development expenses in the year ended December 31, 2021 as compared to 50% in the prior year. As a percentage of total revenues, research and development expenses increased to 19.0% for the year ended December 31, 2021 as compared to 15.9% for the year ended December 31, 2020.

General and administrative expenses increased $5,942, or 22.5%, to $32,338 for the year ended December 31, 2021 as compared to $26,396 for the year ended December 31, 2020. The increase was primarily due to higher professional and consulting fees of $3,120, higher general corporate expenses of $2,057, and higher occupancy-related expenses of $585. Increases in salaries and non-cash stock compensation were partially offset by a decrease in incentive compensation. As a percentage of total revenues, general and administrative expenses increased to 25.4% for the year ended December 31, 2021 as compared to 23.5% for the year ended December 31, 2020.

Other Expense and Income

Total other expense increased $965, or 159.8%, to $1,569 for the year ended December 31, 2021 as compared to $604 for the year ended December 31, 2020. The increase in total other expense was primarily due to a decrease of $512 in investment income due to lower investment balances and falling yields and an increase of $302 in interest expense due to our Oberland debt facility, which began on June 30, 2020, with an additional borrowing on June 30, 2021. We capitalized interest of $4,277 and $997 during 2021 and 2020, respectively.

Income Taxes

We had no income tax expense or benefit for the years ended December 31, 2021 and 2020 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.

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Comparison of the Years Ended December 31, 2020 and 2019

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

Revenues

Revenues for the year ended December 31, 2020 increased $5,588, or 5.2%, to $112,300 as compared to $106,712 for the year ended December 31, 2019. During the on-set of COVID-19, certain hospitals and surgery centers discontinued elective surgeries and our sales force was not allowed to enter the hospitals. This significantly reduced our revenue growth. Once elective surgeries resumed, hospitals allowed our sales representatives to begin entering their facilities once again. As a result, we began to experience a return in revenues as these facilities began scheduling surgeries, although restrictions continued to limit our access in certain accounts as local communities addressed resurgences of COVID-19. Revenue growth was driven by an increase in unit volume of approximately 2%, as well as the net impact of changes in prices and product mix of approximately 3%. The growth in unit volume was primarily attributed to unit growth in our active accounts. In the fourth quarter of 2020, we had 893 active accounts, an increase of 12% from 797 at the end of 2019.

Gross Profit

Gross profit for the year ended December 31, 2020 increased $1,356, or 1.5%, to $90,719 as compared to $89,363 for the year ended December 31, 2019. Gross profit increased during 2020 due to an increase in revenue, offset by the impact of COVID-19. Gross profit margin in 2020 decreased to 80.8% as compared to 83.7% in 2019. Gross margin was negatively impacted during 2020 due to idle facility charges and other increased period costs of approximately $2,000 in the second and third quarters resulting from our temporary suspension of tissue processing, as well as approximately $2,242 of inventory write-downs.

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Costs and Expenses

Total costs and expenses decreased $6,868, or 5.7%, to $113,901 for the year ended December 31, 2020 as compared to $120,769 for the year ended December 31, 2019. The decrease in operating expenses was primarily attributable to the impact of our lower travel and in-person surgeon education programs of $9,807 as a result of restrictions associated with COVID-19, as well as decreased litigation expenses of $2,467 as a result of reaching deductible limits with respect to certain litigation matters. These decreases were slightly offset by higher sales commissions and other compensation-related costs of $5,519. As a percentage of revenues, total costs and expenses decreased to 101.4% in 2020 compared to 113.1% in 2019.

Sales and marketing expenses decreased $2,291, or 3.2%, to $69,659 for the year ended December 31, 2020 as compared to $71,950 for the year ended December 31, 2019. This decrease was driven by lower travel, surgeon education and conference expenses as we cancelled in-person education programs, and experienced restrictions in hospital access and travel directly related to the impact of COVID-19. The decrease in expenses was slightly offset by salaries and benefits from increased sales commissions. As a percentage of revenues, sales and marketing expenses were 62.0% for the year ended December 31, 2020 compared to 67.4% for the year ended December 31, 2019.

General and administrative expenses decreased $4,909, or 15.7%, to $26,396 for the year ended December 31, 2020 as compared to $31,305 for the year ended December 31, 2019. The decrease was primarily due to lower litigation expenses as a result of reaching deductible limits with respect to certain litigation matters as well as a decrease in stock compensation. As a percentage of revenues, general and administrative expenses decreased to 23.5% for the year ended December 31, 2020 compared to 29.3% for the year ended December 31, 2019.

Research and development expenses slightly increased to $17,846 for the year ended December 31, 2020 as compared to $17,514 for the year ended December 31, 2019. Research and development costs include our product development efforts as well as non-clinical spend in support of our BLA for Avance Nerve Graft, and clinical trials. Product development expenses represented approximately 50% of total research and development expense in the year ended December 31, 2020 as compared to 52% in the prior year period. Clinical trial expenses represented approximately 50% of research and development expense in the year ended December 31, 2020 as compared to 48% in the prior year period. COVID-19 negatively impacted certain of our clinical study programs as certain study sites restricted access and reallocated their resources to focus on COVID-19 related care. Included within clinical trial expenses are clinical trial costs associated with the BLA. Our continued efforts related to the BLA drove the slight increase in research and development expenses year over year. As a percentage of revenues, research and development expenses decreased to 15.9% in 2020 from 16.4% in 2019.

Other Expense and Income

Interest expense increased to $1,054 for the year ended December 31, 2020 as compared to $40 for the year ended December 31, 2019. The change is primarily due to interest expense from our Oberland debt facility, which began on June 30, 2020. We recognized total interest charges of $1,941 in connection with the Oberland debt facility in the current year, but $997 of this interest was capitalized to the construction costs of the APC Facility. For the year ended December 31, 2020, we recognized $605 of investment income from our asset management and cash investment sweep accounts as compared to $2,364 for the year ended December 31, 2019. The decrease is primarily due to lower investment income from our asset management program as a result of lower interest rates from COVID-19 and as we lowered investment balances and increased cash reserves.

Income Taxes

We had no income tax expense or benefit for 2020 or 2019 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.

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Liquidity and Capital Resources

General

As of December 31, 2021, our principal sources of liquidity were our cash and cash equivalents and investments totaling $84,086. 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 $19,880 from $103,966 at December 31, 2020 primarily as a result of renovating the APC Facility and increasing the inventory level, partially offset by cash flow from employee stock option exercises and ESPP stock purchases and sales of investments.

We had working capital of $102,756 and a current ratio of 5.2x at December 31, 2021, compared to working capital of $122,420 and a current ratio of 6.4x at December 31, 2020. The decrease in working capital at December 31, 2021 as compared to December 31, 2020, was primarily due to the decrease in cash and cash equivalents used to renovate the APC Facility, which is a non-current asset, and the year over year improvement in the cash collections cycle, as accounts receivable increased 2.2% with revenue growth of 13.4%. The decrease in the current ratio at December 31, 2021, as compared to December 31, 2020, was primarily due to a decrease in cash and cash equivalents.

As of December 31, 2021, total current liabilities were $24,293. Based on current estimates, we believe that our existing cash and cash equivalents and investments, as well as cash provided by sales of our products will allow us to fund our operations through at least the next 12 months. Our future capital requirements depend on a number of factors including, without limitation, our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the acquisition and/or development of new products and the cost of products. We could face increasing capital needs. Such capital needs could be substantial depending on the extent to which we are unable to increase revenue.

If we need additional capital in the future, we may raise additional funds through public or private equity offerings, debt financings or from other sources. The sale of additional equity would result in dilution to our shareholders. There is no assurance that we will be able to secure funding on terms acceptable to us, or at all. The increasing need for capital could also make it more difficult to obtain funding through either equity or debt. Should additional capital not become available to us as needed, we may be required to take certain actions, such as slowing sales and marketing expansion, delaying regulatory approvals, or reducing headcount.

Cash Flow Information

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

Net Cash Used in Operating Activities

Operating activities for the year ended December 31, 2021 used $13,405 of cash, as compared to $9,626 and $19,872 for the years ended December 31, 2020 and 2019, respectively. The increase in operating cash outflows in 2021 was primarily due to unfavorable changes in working capital, as well as an increase in the net loss year over year. Net cash used in operations decreased in 2020 as compared to 2019 due primarily to favorable changes in working capital as well as a decrease in the net loss year over year.

Net Cash Used in/Provided by Investing Activities

Investing activities for the year ended December 31, 2021 used $23,649 of cash, as compared to $16,963 for the year ended December 31, 2020 and providing $27,271 of cash for the year ended December 31, 2019. The increase in investing cash outflows in the current year as compared to 2020 is principally attributable to higher levels of capital expenditures related to the renovation of the APC Facility. The increase in investing cash outflows in 2020 as compared to 2019 primarily related to

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capital expenditures for the APC Facility and our Tampa facility, partially offset by higher proceeds from the sale of investments in the prior year.

Net Cash Provided by Financing Activities

Financing activities for the year ended December 31, 2021 provided $20,452 of cash as compared to $40,474 and $4,031 for the years ended December 31, 2020 and 2019, respectively. The decrease in financing cash inflows in the current year as compared to 2020 was primarily due to the drawdown of the $15,000 second tranche of the long-term debt facility in the second quarter of 2021, as compared to a $35,000 drawdown of the first tranche in the second quarter of 2020, as well as $3,500 of proceeds from the exercise of the stock options related to the long-term debt in 2020. The 2020 improvement over 2019 was primarily the result of long-term borrowings of $35,000 as well as $3,500 of proceeds from the exercise of the stock options related to the long-term debt, see "Note 10 - Long-Term Debt, Net of Financing Fees in the Notes to the Consolidated Financial Statements" for further discussion. Proceeds from the exercise of stock options and ESPP stock purchases, excluding the stock options exercised related to the long-term debt, provided $5,467, $3,300, and $4,002 of cash for the years ended December 31, 2021, 2020, and 2019, respectively.

Operating Cash Requirements

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 (See "Note 14 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements"). 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, plus projected capitalized interest of $11,300. We have recorded $40,544 to date related to this project, including capitalized interest of $5,274. We anticipate spending $19,300, including projected capitalized interest of $6,100 in 2022 and an additional $1,700 in 2023. We anticipate that this building will be completed in early 2022, followed by a year-long process to validate and certify the facility by early 2023. We anticipate commencing tissue processing in the facility upon completion of the validation and certification process.

Credit Facilities

On June 30, 2020, we entered into a seven-year financing agreement with Oberland Capital (the “Oberland Facility”) and obtained the first tranche of $35,000 at closing. On June 30, 2021, we drew down the second tranche of $15,000. The financing costs for this facility were $642 and were recorded as a contra liability to the debt facility. As of December 31, 2021, we have paid all of the financing costs.

The Oberland 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% (9.5% as of December 31, 2021). Each tranche of the Oberland 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 Oberland Facility, we entered into a revenue participation agreement with Oberland Capital, which provides that, among other things, a quarterly royalty payment as a percentage of our net revenues, up to $70 million in any given year, subject to certain limitations set forth therein, during the period commencing on the later of (i) April 1, 2021 and (ii) the date of funding of a tranche of the loan, and ending on the date upon which all amounts owed under the Oberland Facility have been paid in full (the “Revenue Participation Agreement”). Royalty payments commenced on September 30, 2021. This royalty structure results in approximately 1.0% per year of additional interest payments on the outstanding loan amount. Upon maturity or upon such earlier repayment of the Oberland Facility, we will repay the principal balance and provide a make-whole payment calculated to generate an internal rate of return to Oberland Capital equal to 11.5%, less the total of all quarterly interest and royalty payments previously paid to Oberland Capital.

Contractual Obligations and Commitments

See "Note 14 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements" for further information.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the U.S. (“US GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and

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reported amount of expenses during the period reported. Management bases its estimates and judgments on historical experience, observance of trends in the industry, information provided by outside sources and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We have described the critical accounting policies regarding inventory, derivative instruments and stock-based compensation and our significant accounting policies in Note 3 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in this Form 10-K.

Recent Accounting Pronouncements

See "Note 3 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements" for further information.