AxoGen
Annual Report 2018

Plain-text annual report

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 2018 Or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from TO Commission File Number: 001-36046 AXOGEN, INC. (Exact name of registrant as specified in its charter) MINNESOTA (State or other jurisdiction of incorporation or organization) 13631 Progress Blvd., Suite 400 Alachua, FL (Address of principal executive offices) 41-1301878 (I.R.S. Employer Identification No.) 32615 (Zip Code) Registrant’s telephone number, including area code: (386)462-6800 Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of class) None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☒ Non-accelerated filer ☐ Accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ As of June 30, 2018, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $1,498,135,561 based upon the last reported sale price of our common stock on the Nasdaq Capital Market. The number of shares outstanding of the Registrant’s common stock as of February 22, 2019 was 38,945,029 shares. Portions of the Registrant’s definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant’s fiscal year are incorporated by reference into Part III of this Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE  Table of Contents Business Item 1. Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Item 3. Item 4. Properties Legal Proceedings Mine Safety Disclosures TABLE OF CONTENTS PART I PART II Item 5. Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 6. Item 7. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Item 8. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Item 13. Item 14. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services PART IV Item 15. Item 16. Exhibits, Financial Statement Schedules Form 10-K Summary Exhibit Index Signatures 2 Page 4 42 62 62 64 64 65 67 68 78 79 108 108 109 110 110 110 110 110 111 117 119 126 Table of Contents FORWARD-LOOKING STATEMENTS From time to time, in reports filed with the U.S. Securities and Exchange Commission (including this Form 10-K), in press releases, and in other communications to shareholders or the investment community, Axogen, Inc. (including Axogen, Inc.’s wholly owned subsidiaries, Axogen Corporation, Axogen Processing Corporation and Axogen Europe GmbH, the “Company”, “Axogen”, “we”, “our”, or “us”) may provide forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, concerning possible or anticipated future results of operations or business developments. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "projects", "forecasts", "continue", "may", "should", "will", “goals,” variations of such words and similar expressions are intended to identify such forward-looking statements. The forward-looking statements may include, without limitation, statements regarding our assessment of our internal controls over financial reporting, our growth, our 2019 guidance, product development, product potential, financial performance, sales growth, product adoption, market awareness of our products, data validation, and our visibility at and sponsorship of, conferences and educational events. The forward-looking statements are and will be subject to risks and uncertainties, which may cause actual results to differ materially from those expressed or implied in such forward-looking statements. Forward-looking statements contained in this Form 10-K should be evaluated together with the many uncertainties that affect the Company’s business and its market, particularly those discussed in the risk factors and cautionary statements set forth in the Company’s filings with the U.S. Securities and Exchange Commission, including as described in “Risk Factors” included in Item 1A of this Form 10-K. Forward- looking statements are not guarantees of future performance, and actual results may differ materially from those projected. The forward-looking statements are representative only as of the date they are made and, except as required by applicable law, the Company assumes no responsibility to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or otherwise. 3 Table of Contents PART I ITEM 1. BUSINESS General Axogen is the leading company focused specifically on the science, development and commercialization of technologies for peripheral nerve regeneration and repair. We are passionate about helping to restore peripheral nerve function and quality of life to patients with physical damage or transection to peripheral nerves by providing innovative, clinically proven and economically effective repair solutions for surgeons and health care providers. Peripheral nerves provide the pathways for both motor and sensory signals throughout the body. Every day, people suffer traumatic injuries or undergo surgical procedures that impact the function of their peripheral nerves. Physical damage to a peripheral nerve, or the inability to properly reconnect peripheral nerves, can result in the loss of muscle or organ function, the loss of sensory feeling, or the initiation of pain. ® ® ® Axogen's platform for peripheral nerve repair features a comprehensive portfolio of products, including Avance Nerve Graft, a biologically active off-the-shelf processed human nerve allograft for bridging severed peripheral nerves without the comorbidities associated with a second surgical site; Axoguard Nerve Connector, a porcine submucosa extracellular matrix (“ECM”) coaptation aid for tensionless repair of severed peripheral nerves; Axoguard Nerve Protector, a porcine submucosa ECM product used to wrap and protect damaged peripheral nerves and reinforce the nerve reconstruction while preventing soft tissue attachments; and Avive Soft Tissue Membrane, a minimally processed human umbilical cord membrane that may be used as a resorbable soft tissue covering to separate tissue layers and modulate inflammation in the surgical bed. Along with these core surgical products, Axogen also offers Axotouch Two-Point Discriminator, used to measure the innervation density of any surface area of the skin, and Acroval Neurosensory & Motor Testing System, an evaluation and measurement tool to assist health care professionals in detecting changes in sensation, assessing return of sensory, grip, and pinch function, evaluating effective treatment interventions, and providing feedback to patients on peripheral nerve function. The Axogen portfolio of products is available in the United States, Canada, the United Kingdom, and several other European and international countries. ® ® ® Nerves can be damaged in a number of ways. When a nerve is cut due to a traumatic injury or surgery, functionality of the nerve may be compromised, causing the nerve to no longer carry the signals to and from the brain to the muscles and skin and reducing or eliminating functionality. Nerve damage or transection of this type generally requires a surgical repair. Traditionally, the standard has been to either suture the nerve ends together directly without tension or to bridge the gap between the nerve ends with a less important nerve surgically removed from elsewhere in the patient’s own body, referred to as nerve autograft. Nerves that are not repaired or heal abnormally can form a complication called a neuroma which may send altered signals to the brain resulting in the sensation of pain. This abnormal section of nerve can, under certain circumstances, be surgically cut out and the resulting gap repaired. In addition, compression on a nerve, blunt force trauma or other physical irritations to a nerve can cause nerve damage that may alter the signal conduction of the nerve, result in pain, and may in some instances require surgical intervention to address the resulting nerve compression and inflammation. Finally, when a woman undergoes a mastectomy due to breast cancer or prophylactically due to a genetic predisposition for breast cancer, the nerves are cut to allow the removal of the breast tissue. This can result in a loss of sensation and the potential risk of a symptomatic neuroma. When a women chooses an autologous breast reconstruction after a mastectomy, sensation can, in certain cases, be returned through surgical intervention. In order to improve the options available for the surgical repair and regeneration of peripheral nerves, Axogen has developed and licensed regenerative medicine technologies. Axogen’s innovative approach to regenerative medicine has resulted in first-in-class products that it believes are redefining the peripheral nerve repair market. Axogen’s products are used by surgeons during surgical interventions to repair a wide variety of physical nerve damage or transection throughout the body, which can range from a simple laceration of a finger to a complex brachial plexus injury (an injury to the network of nerves that originate in the neck) as well as nerve injuries caused by dental, orthopedic and other surgical procedures. Avance Nerve Graft provides surgeons an implant with the micro-architecture of a human nerve. This structure is essential and allows for bridging nerve gaps or transections up to 70mm in length. Additionally, Avance Nerve Graft has product and distribution synergies with Axoguard Nerve Protector, Axoguard Nerve Connector and Avive Soft Tissue Membrane. Axoguard products provide the unique features of pliability, suturability, ® ® ® ® ® ® 4 Table of Contents and translucence for visualization of the underlying nerve, while also allowing the extracellular matrix to remodel utilizing the patient’s own cells. Avive Soft Tissue Membrane is minimally processed human umbilical cord membrane that may be used as a resorbable soft tissue covering to separate tissues and modulate inflammation in the surgical bed. ® Regenerative Medical Products Industry Regenerative medical products enable the repair, restoration, replacement or regeneration of tissue or organ systems of the body. Regenerative medical products are becoming common in various medical arenas because they have been shown to be effective repairing injured or defective tissues, such as bone, tendons, dermis and other tissues of the body. Surgeons utilize regenerative medical products because they can provide the complex structure required for implant integration and regeneration in the body. Axogen believes the primary driver of sustained growth in the regenerative medical product market is continued favorable efficacy as compared to autograft tissue and synthetic medical products, and a wider understanding of this advantage by practitioners. Repair with nerve autograft requires a secondary recovery procedure to remove tissue from another location of the patient’s body to repair the injured area and results in loss of function at the site of donation. Further, nerve autograft may also be costly and time consuming and may result in complications at the second surgical site such as infection. In addition to processed nerve allograft (Avance Nerve Graft), alternatives to nerve autograft include hollow-tube synthetic or collagen- based medical products that are designed to provide some restoration of function but may be limited by mechanisms of nerve healing and/or biocompatibility with the body. Regenerative medical products often provide more desirable conditions for reconstruction and regeneration of tissue, creating a superior solution for patients and physicians. Axogen follows this trend, providing regenerative medical products for peripheral nerve repair. ® Regenerative medicine products typically consist of and rely on: i. A scaffold or ECM to support the cells and/or provide the architecture of the tissue; and/or ii. Cells to regenerate or remodel the scaffold. Axogen’s Avance Nerve Graft, Axoguard Nerve Protector and Axoguard Nerve Connector are ECM ® ® ® scaffolds, and utilize the patients’ own cells to remodel or regenerate these scaffolds. Avive Soft Tissue Membrane is a resorbable soft tissue covering to separate tissues and modulate inflammation in the surgical bed. ® Peripheral Nerves and Their Regeneration The peripheral nervous system, or PNS, consists of nerves that either extend outside of, or reside outside of, the central nervous system (primarily the brain and spinal cord). Peripheral nerves provide the pathway for signals between the central nervous system and target organs, regulating movement (motor nerves) and touch (sensory nerves). Therefore, if a peripheral nerve is crushed, severed, or otherwise physically damaged, its ability to deliver signals to or from the target organs is eliminated, or significantly reduced, and could result in a loss of sensation and/or motor functionality. The axon portion of the nerve cell, consisting of cell cytoplasm and resembling a hair-like fiber, carries signals between the cell body and the target organ. Axons can be quite long, even exceeding one meter, but are only a few micrometers in diameter. A typical nerve consists of hundreds of axons that lie within long, thin tubes (endoneurial tubes). Analogous to a wiring cable, these endoneurial tubes are bundled together in groups called fascicles, and each nerve may contain numerous fascicles. This sheath structure provides protection for the axons and support for regeneration in the event of damage or transection. Nerve damage or transection occurs when a sufficient number of axons have been crushed or transected (severed), thereby disrupting signals to or from the target motor or sensory organ. Given the right conditions, peripheral nerves have the ability to regenerate. Regenerating axons require the proper environmental conditions including structure and guidance of axons in a tension and compression free environment. In an untreated severe crush injury or transected nerve, errant axons that are not guided by the nerve sheath structure, or other mechanism, can form painful and ineffective nerve proliferation (neuromas). This condition can require revision surgery to relieve pain or bring back sensory and/or motor functionality. Therefore, the surgical treatment of peripheral 5 Table of Contents nerves due to damage or transection is typically focused on restoring nerve functionality by providing structural guidance to regenerating axons, minimizing the formation of neuromas and protecting the nerve to alleviate compression. Inflammation can impair tissue regeneration and result in irritation and compression of the nerve. Trauma and surgical interventions can trigger the body’s repair response which can result in inflammation in the surgical arena (nerve and/or surrounding tissue). When this occurs it can compromise the surgical outcomes of nerve repair. Avive Soft Tissue Membrane is a resorbable soft tissue covering to separate tissues and modulates inflammation in the surgical bed. ® Peripheral Nerve Regeneration Market Overview Peripheral nerve injury (“PNI”) through damage or transection is a major source of physical disability impairing the ability to move muscles or to feel normal sensations. Failure to treat peripheral nerve damage or transection can, in severe cases, lead to full loss of sensation and/or function, pain and, sometimes, amputation. Many peripheral nerve patients who receive treatment do not optimally recover. They may suffer from both reduced, or no, muscle strength, and reduced, or no, sensitivity and pain. Every day patients suffer traumatic bodily injuries resulting in damage or transection to peripheral nerves severe enough to require surgical treatment, including injuries from motor vehicle accidents, power tool injuries, gunshot wounds, dislocations, fractures, lacerations, or other forms of penetrating trauma. The peripheral nerves commonly damaged or transected from these traumas include the digital, median, ulnar, radial, facial, spinal accessory and brachial plexus nerves. The “Trauma” portion of the Total Addressable Market (as defined below) encompasses the traumatic PNI described above but excludes the OMF, Upper Extremity Compressions and Breast (as such terms are defined below) portions of the Total Addressable Market. Beyond the physical damage or transection to peripheral nerves resulting from traumatic bodily injuries described above, peripheral nerve damage or transection also occurs due to surgical intervention. Nerve damage or transection can occur during dental and oral surgery procedures such as third molar extractions, placement of dental implants, removal of tumors, orthognathic surgery and mandibular resection during which one or more sections of the trigeminal nerve can be damaged or transected (“OMF”). This can result in numbness in certain areas of the face and mouth. Breast reconstruction neurotization (“Breast”) is another portion of the Total Addressable Market. Currently, when a woman undergoes autologous breast reconstruction after a mastectomy, she receives the shape of a natural breast, but oftentimes without experiencing any return of sensory feeling. This forfeiture of sensation can have a profound effect on the woman’s quality of life. In certain cases, sensation can be returned to the breast area with the use of the Company’s products through an innovative surgical technique we call ReSensation℠. The Company believes that the ideal breast reconstruction should restore breast Size, Shape, Symmetry, Softness as well as Sensation – without the potential risks and co-morbidity associated with autograft. The Company believes the ReSensation℠ technique incorporates a patients’ desire for the opportunity to return sensation in their breasts with a reproducible and efficient surgical approach for reconstructive plastic surgeons. Finally, peripheral nerves are also damaged due to compression injuries. For instance, severe and recurrent carpal and cubital tunnel cases may result in complications and damage to the peripheral nerve that requires surgical intervention and protection of the peripheral nerve. PNI caused by recurrent carpal tunnel syndrome and cubital tunnel syndrome constitutes the “Upper Extremity Compression” portion of the Total Addressable Market. In the cases where a peripheral nerve is severed and the gap between its two ends is extremely small, the surgeon may be able to reconnect the peripheral nerve without tension through direct suturing as a coaptation aid (“Primary Repair”). When the gap in the nerve tissue is more than a few millimeters in length, the surgeon typically needs to use material to bridge the gap between the peripheral nerve ends to ensure a tension-free repair (“Gap Repair”). Historically for a Gap Repair surgeons have relied on a nerve autotransplantation (autologous nerve grafting or nerve autograft). In nerve autograft procedures, surgeons remove peripheral nerve from another part of the patient’s body, frequently the sural nerve from the back of the lower leg, to repair the damaged nerve. Nerve autografting is often effective in 6 Table of Contents repairing a damaged peripheral nerve, but it presents a tradeoff — the surgeon can attempt to fix the damaged nerve but must create an additional nerve deficit at another location in the body. For example, a patient may opt to get movement and feeling back in their finger while losing some sensation in their foot. Additionally, Axogen believes the secondary surgery to obtain the needed nerve autograft also: (1) increases operating time, in a hospital by potentially as much as 30 to 90 minutes (Intra-Service times based on median intra-service times for CPT codes (64885-6, 64890-93, 64895-98, 64910-64911) provided by CMS, Physician Fee Schedule, http://my.clevelandclinic.org/ccf/media/files/Patients/cleveland-clinic-main-charges.pdf and Capek L, Clarke H M, Zuker R M. Endoscopic sural nerve harvest in the pediatric patient. Plast Reconstr Surg. 1996 Oct; 98(5): 884–888), and thus medical expenses, we estimate by $3,200 to $9,500 per procedure (2018 MS-DRG relative weight multiplied by 2-18 rate per IPPS Final Rule, as calculated by MCRA, payment rate will vary by facility. Calculation includes labor, related, non related and capital payment rates), and (2) may result in a 27% (Rappaport WD, Valente J, Hunter GC, Rance NE,et al. Clinical utilization and complications of sural nerve biopsy. Am J Surg. 1993 Sep; 166(3): 252-256) complication rate due to surgical site infection, wound healing and chronic pain. In the case of extreme trauma where multiple peripheral nerves need to be repaired, it may not be possible to recover enough nerve from the patient to complete the Gap Repair. Further, nerve autograft tissue may not provide an appropriate diameter match with the diameter of the injured nerve stump, an important factor in a successful repair outcome. Drawbacks of repair with autograft nerve eventually led to the development of hollow tube conduits, or hollow tube nerve cuffs for Primary Repair and Gap Repair made of, for instance, bovine collagen or polyglycolic acid. The hollow tube nerve cuff is typically an absorbable hollow tube that, unlike natural peripheral nerve, does not have internal microarchitecture and endoneurial tubes to support regenerating axons; as a result, it is deficient in the qualities that natural peripheral nerve possesses to support nerve regeneration across a gap. Hollow-tubes may also lack pliability and structural integrity needed when used around joints and may be difficult to use in a confined space. Clinical data has demonstrated that hollow tubes are most effective when used in very short gaps, what Axogen defines as Primary Repair, and the reliability of successful nerve recovery diminishes as gap length increases with a 34% to 57% failure rate for hollow tube conduits in repairs with a greater than 5mm gap (Weber RA, Breidenbach WC, Brown RE, Jabaley ME, Mass DP. A randomized prospective study of polyglycolic acid conduits for digital nerve reconstruction in humans. Plast Reconstr Surg. 2000 Oct;106(5):1036-45; discussion 1046-8 and Wangensteen KJ, Kalliainen LK. Collagen tube conduits in peripheral nerve repair: a retrospective analysis. Hand (N Y). 2010 Sep;5(3):273-7. doi: 10.1007/s11552-009-9245-0. Epub 2009 Nov 24). Conduits filled with an inner matrix have been announced by competitors. Such filled tube conduits are not currently available for purchase in the United States and the date of such future availability is unknown. These filled conduits are purported to have greater ability to regenerate after peripheral nerve injury than a hollow tube conduit, but there is very limited data supporting this position. See - “Competition”. The shortcomings of hollow-tubes for peripheral nerve repair limit where they may be used effectively. Thus, Axogen believes the peripheral nerve repair market needs an alternative off-the-shelf product that offers other features such as a natural ECM scaffold and three-dimensional structure of a typical nerve for bridging nerve transections without the comorbidities of an additional surgical site required for harvest of autograft nerve tissue. Axogen believes its Avance Nerve Graft and Axoguard Nerve Connector products address the market needs for both Gap Repair and Primary Repair. ® ® Compression on a peripheral nerve or blunt force trauma can also cause nerve damage that may require surgical intervention. In these cases, the peripheral nerve is not severed and thus does not create the need for a Primary Repair or Gap Repair. However, the surgeon may want to protect and isolate the peripheral nerve during the healing process. In these situations peripheral nerve protection is provided by wrapping the nerve (“Nerve Protection”). Axoguard Nerve Protector is a porcine submucosa extracellular matrix used for Nerve Protection. Other ® Nerve Protection products are usually made from bovine collagen or polyglycolic acid and are typically absorbable. Axoguard Nerve Protector provides the unique features of pliability, suturability, and translucence for visualization of the underlying peripheral nerve, while also allowing the patient’s own cells to incorporate into the extracellular matrix to remodel and separate the peripheral nerve from the surrounding tissue. ® 7 Table of Contents Inflammation can impair tissue regeneration and result in irritation and compression of the peripheral nerve. Trauma and surgical interventions can trigger the body’s repair response which can result in inflammation in the peripheral nerve and/or the surrounding tissue. When this occurs it can compromise the surgical outcomes of peripheral nerve repair. Avive Soft Tissue Membrane can be proactively used in these surgical applications (“Proaction”). Avive Soft Tissue Membrane has been specifically designed as a soft tissue covering to modulate inflammation, provide a longer resorption profile to separate the tissue layers for at least 16 weeks and to provide the handling and suturability features the Company believes is favored by peripheral nerve surgeons. ® ® We estimate the United States PNI has a potential total addressable market for our current product portfolio for Trauma, OMF, Breast and Upper Extremity Compression of $2.7 billion (the “Total Addressable Market”). Estimating the Total Addressable Market for nerve repair is challenging as there is not a simple data source for the incidence of peripheral nerve issues. This is further complicated by the fact that nerves can be injured in many traumatic and surgical injuries and can be impacted from the head to the toe of a patient. In addition, we believe nerves are often one of many structures injured in a trauma (i.e. amputation) or in surgery and the incidence of these nerve injuries are often not coded or tracked. Quantifying the procedures involving nerve repair may also be challenging. While selected trauma and surgical procedures are dedicated to the repair of nerves (i.e. a pediatric brachial plexus procedure), most of the incidence of nerve repair is a step in a larger trauma (i.e. digital replant) or surgical procedure (i.e. mandible reconstruction). CPT codes exist for surgeons to code for nerve repair, however, we believe the data substantially underestimates the total number of nerves repaired. Physicians are encouraged to document all steps of procedures; however, payment guidelines can vary widely across payors, plans and state regulations thus often limiting surgeon payment to a select number of codes per procedure (for example, five codes or less is not uncommon). Open trauma often involves many surgical steps including wound debridement, skin closure and one or more repairs of tendons, bone or joints, nerves, veins and arteries. CPT codes are often reported by a hierarchy of reimbursement rates with the highest reimbursable procedures getting listed and subsequent codes often being left out of the procedure coding. As a result, we believe CPT coding underrepresents the total number of nerve repairs performed in trauma. Because we believe CPT claims are not fully representative of the true volumes of nerve repair surgery, we follow an “empirical” methodology to estimate the Total Addressable Market – using published clinical literature and procedure databases to make what we believe are the most objective assumptions. We estimate that the Trauma portion of the Total Addressable Market is approximately $1.9 billion based upon epidemiological studies regarding the general number of trauma patients, clinical literature review reporting PNI incidence and physician interviews. There are almost 137 million emergency department visits in the U.S. each year of which approximately 30 million are related to traumatic injuries (2015 National Hospital Ambulatory Medical Care Survey, Publication of U.S. Department of Health & Human Services). We believe that this injury population includes more than 1.4 million patients suffering damage or transection to peripheral nerves resulting in over 700,000 nerve repair procedures (Noble, et al. J of Trauma Injury Infection and Critical Care 1998; Portincasa et al: Microsurgery 27:455-462, 2007). We have estimated the portion of these nerve repair procedures due to trauma that would require Gap Repair, Primary Repair and/or Nerve Protection and applied, as we believed was appropriate in each procedure segment, the number of units and average sales price of Avance Nerve Graft and the average market price for nerve connectors, nerve protectors and soft tissue membrane products to determine the probable Total Addressable Market. ® We estimate that the OMF portion of the Total Addressable Market is approximately $300 million, based upon research indicating that approximately 56,000 PNI occur in the U.S. each year related to third molar surgeries, anesthetic injections, dental implants, orthognathic surgery and mandibular resection procedures. (Shih-Yun Wu et al: Systematic Review and Meta-Analysis on Incidence of Altered Sensation of Mandibular Implant Surgery - PLoS ONE 11(4): e0154082; Souheil Hussaini, Procedure frequency in the jaws related to implant location, Dent Oral Craniofac Res, 2016 Volume 2(2): 230-233; Nguyen. Et al: Risk Factors for Permanent Injury of Inferior Alveolar and Lingual Nerves During Third Molar Surgery; J Oral Maxillofac Surg. 2014 Dec;72(12); Cheung LK, Leung YY, Chow LK, et al. Incidence of neurosensory deficits and recovery after lower third molar surgery: a prospective clinical study of 4338 cases. Int J Oral Maxillofac Surg 2010;39:320–6.; Transparency Market Research: Dental Implant Market - Global Industry Analysis and Forecast 2016 – 2024; Cha et al, Maxillofacial Plastic and Reconstructive surgery (2016) 38:19 - Frequency of bone graft in implant surgery; Miloro ed. 2012: Text Book on trigeminal nerve injuries; Pogrel et al: J Am Dent Assoc. 2000 Jul;131(7):901-7: Permanent nerve involvement resulting from inferior alveolar nerve blocks; Agbaje et al: Int. J. Oral Maxillofac. Surg. 2015; 44: 447-451, J.O Systematic review of the incidence of inferior 8 Table of Contents alveolar nerve injury in bilateral sagittal split osteotomy (BSSO) and the assessment of neurosensory disturbance). We have applied the average sales price of the Avance Nerve Graft, Axoguard Nerve Connector and Axoguard Nerve Protector that address such PNI in order to derive the OMF portion of the Total Addressable Market. ® ® ® In 2017, there were 106,295 breast reconstruction procedures in the US as reported in the 2017 plastic surgery statistic report published by the American Society of Plastic Surgery. The report details 19,316 of these reconstructions procedures were autologous flap reconstruction, and that 66.2% of the reconstructions were bilateral. Removing those procedures that are not appropriate for neurotization, and based upon the Company’s assumption that approximately 50% of women may elect to have a dual neurotization for each flap, we estimate that the Breast portion of the Total Addressable Market is approximately $250 million. (2017 ASPS Plastic Surgery Statistics Reports, Includes TRAM, DIEP, and "Other Flaps", Distribution based on 2017 ASPS Data). We estimate that the Upper Extremity Compression portion of the Total Addressable Market is approximately $270 million, or 130,000 procedures. Extrapolating the 2016 Medicare National HCPCS Aggregate Summary Table to the total US population, we estimate that there are approximately 488,000 primary carpal tunnel and 95,000 primary cubital tunnel relief surgeries performed annually in the U.S. For carpal tunnel, we believe that our addressable procedure is the estimated 20% of carpal tunnel surgeries that require a revision procedure to address the recurrence of symptoms (Sotereanos et al, Techniques in hand and Upper extremity surgery 1(1):35-40,1997). From the 95,000 primary cubital tunnel surgeries, we estimate that our addressable procedure potential comprise a small proportion of primary interventions and all revisions (J Seradge et al, Hand Surg 1998; 23A:483-491; Papatheodorou et al, J Hand Surg Am. 2015;40(5):987e992). As a result, we estimate that approximately 97,500 carpal tunnel revision surgeries and 32,400 total cubital tunnel procedures are addressable each year in the U.S. to mitigate the recurrence of symptoms. These revision and primary surgeries are required due to compression of the peripheral nerve associated with soft tissue attachments from the surrounding tissue or tissue infiltration entrapping the nerve. To prevent additional recurrences, surgeons will opt for a Nerve Protection which includes a product such as the Axoguard Nerve Protector. In order to derive the Upper Extremity Compression portion of the Total Addressable Market, we multiplied the average market sales price of Axoguard Nerve Protectors by the number of estimated procedures. ® ® Although distribution and sales of products in the Trauma, OMF, Breast and Extremity Compression portions of the Total Addressable Market constitute our primary revenue sources today, market expansion opportunities in lower extremity surgery, head and neck surgery, urology and the surgical treatment for pain offer us new and expanded revenue opportunities. The Company has announced a planned future expansion into the surgical treatment of pain with an initial focus on traumatic injuries including amputation and orthopedic surgeries such as total hip arthroplasty, total knee arthroplasty, knee arthroscopy, Morton’s neuroma, foot and ankle procedures and wrist arthroscopy. The Company estimates that the incidence of painful injuries in these applications is over 370,000 patients annually. One of the causes of neuropathic pain is called a neuroma-a tangled mass of disorganized nerve and fibrous tissue resulting in aberrant nerve signals which the brain interprets as pain. Traditionally these neuromas have been treated using pain management methods including pharmacological agents which do not address the anatomical cause of the pain. The surgical treatment of such pain involves a procedure to remove the painful neuroma and, subsequently, repair the resulting Nerve Gap or appropriately terminate the nerve end. Axogen developed the Axoguard Nerve Cap to protect a peripheral nerve end and separate the nerve end from the surrounding environment to reduce the development of asymptomatic or painful neuromas (“Neuroma Management”). An example application for Axoguard Nerve Cap is in a digital amputation whereby the severed nerves may form a neuroma if the nerve end is not properly terminated or capped. We are currently conducting user evaluations of Axoguard Nerve Cap and a post-market clinical study of neuroma revision using Axoguard Nerve Cap. ® ® ® ® Axogen’s Product Portfolio Overview of Axogen’s Products The Axogen surgical solution product portfolio provides surgeons off-the-shelf products for a wide variety of peripheral nerve damage or transection. The Company’s proprietary products and technologies are designed to overcome fundamental challenges in peripheral nerve repair. Axogen’s Avance Nerve Graft is the alternative to ® 9 Table of Contents ® autografts and other off-the-shelf peripheral nerve repair products for nerve gaps up to 70mm in length. Axoguard Nerve Connector is a coaptation aid for transected peripheral nerve. Axoguard Nerve Protector is a protective wrap for peripheral nerves damaged by compression, or where the surgeon wants to protect and isolate the peripheral nerve during the healing process after surgery. Avive Soft Tissue Membrane provides a resorbable covering to keep tissue structures apart while providing the beneficial properties of a placental membrane. ® ® Functional measurements play an important role in the evaluation of peripheral nerve function by assisting the healthcare professionals in detecting changes in sensation or muscle strength, assessing return of sensory or motor function, establishing effective treatment interventions, and providing feedback to the patients. Standardized evaluation and measurement of peripheral nerve function is also an important part of identifying nerve damage or transection and determining treatment outcomes. Axogen’s functional measurement products include the Acroval Neurosensory and Motor Testing System (for sensory and motor function) and the Axotouch Two-Point Discriminator tool (for sensory function). ® ® Avance Nerve Graft ® ® ® Avance Nerve Graft is a biologically active nerve therapy with more than ten years of comprehensive clinical evidence intended for the surgical repair of peripheral nerve transections to support regeneration across the defect (a gap created when the nerve is severed). It is intended to act as a bridge in order to guide and support axonal regeneration across a peripheral nerve gap caused by traumatic injury or surgical intervention. Avance Nerve Graft is decellularized and sterile processed human peripheral nerve tissue. Axogen developed the Avance Nerve Graft by following the guiding principle that the human body created the optimal peripheral nerve structure. Axogen, through its licensing efforts and research, developed the Avance process, a proprietary method for processing recovered human peripheral nerve tissue in a manner that preserves the essential structure of the ECM while cleansing away cellular and noncellular debris. Avance Nerve Graft provides the natural peripheral nerve structure of a nerve including the native laminin to guide the regenerating nerve fibers. The nerve ECM is additionally processed to remove a natural inhibitor to regeneration called chondroitin sulphate proteoglycan (“CSPG”). ® ® ® ® ® Axogen believes that Avance Nerve Graft is the first off-the-shelf human nerve allograft for bridging nerve transections. Avance Nerve Graft is comprised of bundles of small diameter endoneurial tubes that are held together by an outer sheath called the epineurium. Avance Nerve Graft has been processed to remove cellular and noncellular factors such as cells, fat, blood, and axonal debris, while preserving the three- dimensional laminin lined tubular bioscaffold (i.e. microarchitecture), epineurium and microvasculature of the peripheral nerve. After processing, Avance Nerve Graft is flexible and pliable, and its epineurium can be sutured in place allowing for tension-free approximation of the proximal and distal peripheral nerve stumps. The design results in a product that has clean and clear pathways for the regenerating axons to grow through. During the healing process, the body revascularizes and gradually remodels the graft into the patient’s own tissue while allowing the processed peripheral nerve allograft to physically support axonal regeneration across the peripheral nerve transection. ® ® With lengths up to 70 mm and diameters up to 5 mm, Avance Nerve Graft allows surgeons to choose and ® trim the implant to the correct length for repairing the relevant peripheral nerve gap, as well as to match the diameter to the proximal and distal end of the severed peripheral nerve. Avance Nerve Graft is stored frozen and utilizes packaging that maintains the graft in a sterile condition. The packaging is typical for medical products so the surgical staff is familiar with opening the package for transfer of Avance Nerve Graft into the sterile surgical field. Such packaging also provides protection during shipment and storage and a reservoir for the addition of sterile fluid to aid in thawing the product. Avance Nerve Graft thaws in less than 10 minutes, and once thawed, it is ready for implantation. ® ® ® Avance Nerve Graft provides the following key advantages: ® · A three-dimensional bioscaffold for bridging a peripheral nerve gap; · A biologically active nerve therapy with more than 10 years of comprehensive clinical · evidence; No patient donor-nerve surgery, therefore no comorbidities associated with a secondary surgical site; · Available in a variety of diameters up to 5mm to meet a range of anatomical needs; · Available in a variety of lengths up to 70mm, to meet a range of gap lengths; 10 Table of Contents · Decellularized and cleansed extracellular matrix that remodels into patient’s own tissue; Structurally supports the body’s own regeneration process; · · Handles similar to an autograft, and is flexible and pliable; · Alleviates tension at the repair site; · · Three-year shelf life; and Supplied sterile. Axoguard Nerve Connector ® Axoguard Nerve Connector is a coaptation aid used to align and connect severed peripheral nerve ends in ® ® a tensionless repair. The product is in a tubular shape with an open lumen on each end where the severed peripheral nerve ends are placed. It is typically used when the gap between the peripheral nerve ends is 5mm or less in length. Axoguard Nerve Connector is made from a minimally processed porcine ECM which allows the body’s natural healing process to repair the peripheral nerve while its tube shape isolates and protects the transected nerves during the healing process. During healing, the patient’s own cells incorporate into the extracellular matrix product to remodel and form a tissue similar to the outermost layer of the peripheral nerve (nerve epineurium). Axoguard Nerve Connector is provided sterile, for single use only, and in a variety of sizes to meet the surgeon’s needs. ® Axoguard Nerve Connector can be used: ® · As an alternative to direct suture repair; · As a peripheral nerve coaptation; Connector Assisted Repair™; · · To aid coaptation in direct repair, grafting, or cable grafting repairs; and To reinforce the coaptation site. Axoguard Nerve Connector has the following advantages: ® · Minimally processed porcine submucosa extra-cellular matrix product used to repair severed peripheral nerve tissue; · Alleviates tension at the repair site; · · Remodels into the patient’s own tissue instead of degrading; Reduces the number of required sutures (versus direct repair with suture) (Boechstyns, Jhand Surg. 2013;38:2405-2411); · Moves location of sutures away from the coaptation face; · · · Reduces potential for fascicular mismatch; Allows visualization of underlying peripheral nerve ends; Provides a physical barrier preventing infiltration of surrounding tissues into the coaptation site and the potential for axonal sprouting outside the coaptation site; · Available in seven different diameters and two different lengths to address a variety of nerve repair situations; Strong and flexible, easy to suture; and Stored at room temperature with a minimum of 18-month shelf life. · · Axoguard Nerve Protector ® Axoguard Nerve Protector is a product used to protect and wrap damaged peripheral nerves and reinforce ® reconstructed nerve gaps while preventing soft tissue attachments. It is designed to protect and isolate the peripheral nerve during the healing process after surgery by creating a barrier between the nerve tissue and the surrounding tissue bed. The product is delivered in a slit tube format allowing it to be wrapped around peripheral nerve structures. Axoguard Nerve Protector is made from a minimally processed porcine ECM. During healing, the ECM remodels allowing the protector to separate the peripheral nerve from the surrounding tissue. Axoguard Nerve Protector competes against off-the-shelf biomaterials such as reconstituted collagen as well as the use of the patient’s own tissue ® ® 11 Table of Contents such as vein and hypothenar fat pad wrapping. Axoguard Nerve Protector is provided sterile, for single use only, and in a variety of sizes to meet the surgeon’s needs. ® Axoguard Nerve Protector can be used to: ® Protect damaged peripheral nerves or nerve repair sites from surrounding tissue; · · Minimize risk of soft tissue attachments and entrapment in compressed peripheral nerves; · · Protect peripheral nerves in a traumatized wound bed; and Reinforce a coaptation site. Axoguard Nerve Protector has the following advantages: ® · Minimally processed porcine submucosa bioscaffold used to reinforce a coaptation site, · wrap a partially severed peripheral nerve or protect peripheral nerve tissue; Creates a protective layer that isolates and protects the peripheral nerve in a traumatized wound bed; Remodels into the patient’s own tissue instead of degrading; Easily conforms and provides 360 degree wrapping of damaged peripheral nerve tissue; Supports the body’s own natural wound healing; · · · · Minimizes the potential for soft tissue attachments and peripheral nerve entrapment by physically isolating the nerve during the healing process; · Allows peripheral nerve gliding; · · Strong and flexible, plus easy to suture; Is available in five different widths and two different lengths to address a variety of peripheral nerve repair situations; and Stored at room temperature with a minimum of 18-month shelf life. · Avive Soft Tissue Membrane ® Avive Soft Tissue Membrane is minimally processed human umbilical cord membrane that may be used ® as a resorbable soft tissue covering to separate tissues and modulate inflammation in the surgical bed. Inflammation can impair tissue regeneration and result in irritation and compression of the nerve. Trauma and surgical interventions can trigger the body’s repair response which can result in inflammation in the surgical arena (peripheral nerve and/or surrounding tissue). When this occurs it can compromise the surgical outcomes of peripheral nerve repair. We believe, the medical community has for decades realized the beneficial qualities of human amniotic membrane and continues to utilize this natural tissue in applications across the body. Avive Soft Tissue Membrane offers a resorbable anatomical covering to keep tissue surfaces apart. Avive Soft Tissue Membrane is provided sterile and in a variety of sizes to meet the surgeon’s surgical needs. ® ® Avive Soft Tissue Membrane: ® Serves as a permeable membrane to separate tissues in the surgical bed; and · · Modulates inflammation in the surgical bed. Avive Soft Tissue Membrane has the following advantages: ® · Amniotic membrane that is naturally resorbable; · · Minimally processed to preserve the natural properties of umbilical cord amniotic Is non-immunogenic; membrane; Comprised of umbilical cord amniotic membrane which is up to eight times thicker than amniotic membrane alone; Long lasting (in animal studies, stays in place for at least 16 weeks); Easy to handle, suture or secure during a surgical procedure; · · · 12 Table of Contents · · · Conforms and stays in place at the application site; Chorion free (reducing the likelihood of immune response); and Room temperature storage with a two-year shelf life. Acroval Neurosensory and Motor Testing System ® Acroval Neurosensory and Motor Testing System is a device for evaluating patients with peripheral nerve ® conditions. We believe that an important step for improving patient outcomes is to support the standardized evaluation and measurement of peripheral nerve function. Today there is little consistency of measurement protocols. With the Acroval system examiners will have digital, less subjective results for their patients with conditions like peripheral neuropathy, peripheral nerve compression syndromes, and transected peripheral nerves. Ultimately, we believe that standardization of evaluation and measurement techniques will facilitate comparison and interpretation of clinical results leading to better understanding and care for patients with peripheral nerve conditions. ® Dr. A. Lee Dellon, a world-renowned peripheral nerve expert, developed the peripheral nerve functional evaluation and measurement system over 25 years ago. We acquired the rights to his device in 2015 and launched the product in March 2016. Acroval consists of three different devices designed to evaluate hand strength and neurosensory function: ® ® · Acrogrip - hand grip strength measurement; · Acropinch – pinch strength measurement; and · ® ® Pressure-Specified Sensory Device (PSSD) – somatosensory evaluation and measurement device. Acroval can be used to assist healthcare professionals: ® In detecting changes in sensation, pinch strength or grip strength; · · Assessing return of sensory or motor function; · · Establishing effective treatment interventions; and Providing feedback to patients. Acroval has the following advantages: ® Flexible format to allow for additional measurement devices; · Quantitative, electronic pre and post-intervention results; · · Assessment of severity of nerve entrapment syndromes; · Noninvasive; and · Reference database to provide baseline standards and support patient education. Axotouch Two Point Discriminator ® The Axotouch Two-Point Discriminator tool can be used to measure the innervation density of any ® surface area of the skin. The discs are useful for determining sensation after damage to a peripheral nerve, following the progression of a repaired peripheral nerve, and during the evaluation of a person with possible peripheral nerve damage, such as compression. The Axotouch Two-Point Discriminator tool is a set of two aluminum discs each containing a series of ® prongs spaced between two to 15 millimeters apart. Additionally, 20 and 25 millimeter spacing is provided. A circular depression on either side of the disc allows ease of rotation. The discs can be rotated between a single prong for testing one-point and any of the other spaced prongs for testing two-point intervals. Axotouch Two-Point Discriminator has the following advantages: ® · Capable of measuring the innervation density of any skin surface; 13 Table of Contents · · · · · Portable and easy to use; Strong aluminum design is resistant to bending; Bright colors allow for clear discrimination between discs; Clear numbering allows users to interpret results; and Reusable carry case protects discs. Tissue Recovery and Processing for Avance Nerve Graft and Avive Soft Tissue Membrane ® ® Avance Nerve Graft Processing Overview ® ® Axogen has developed the Avance Process, an advanced and proprietary technique to process Avance ® Nerve Graft from donated human peripheral nerve tissue. The Avance Process requires special training over several months for each manufacturing associate who processes Avance Nerve Grafts. The processing and manufacturing system for Avance Nerve Graft has required significant capital investment, and we seek to continually improve our manufacturing and quality assurance processes and systems. Axogen’s Avance ® Process is depicted as follows: ® ® ® Avance Nerve Graft and Avive Soft Tissue Membrane Processing ® ® Axogen’s Avance Process and SMART processing of Avive Soft Tissue Membrane consists of several ® ® ® ® ® steps, including peripheral nerve tissue, in the case of Avance , and umbilical cord, in case of Avive , recovery/acquisition and testing, donor medical review and release, processing, packaging, and sterilization to meet or exceed all applicable U.S. Food and Drug Administration (the “FDA”), state, and international regulations and American Association of Tissue Banks (“AATB”) standards. We have a number of contracts with recovery and acquisition agencies to supply peripheral nerve tissue and umbilical cord and believe these contracts, and the ability to enter into additional contracts, will provide us with the tissues we require for our Avance and Avive implants. As an FDA registered tissue establishment, Axogen utilizes both its own personnel and a variety of subcontractors for recovery/acquisition, storage, testing, processing and sterilization of the donated peripheral nerve and umbilical cord tissue. Additionally, independent certified laboratories have been contracted by Axogen and its subcontractors to perform testing. The safety of Avance Nerve Graft and Avive Soft Tissue Membrane is supported by donor screening, process validation, process controls, and validated terminal sterilization methods. The Axogen Quality System has built in redundancies that are meant to control the release of each product for implantation only after such product meets our stringent quality control and product requirements. ® ® ® Avance Nerve Graft and Avive Soft Tissue Membrane Tissue Recovery/Acquisition and Processing ® ® Facility Axogen partners with other FDA registered tissue establishments and AATB accredited recovery/acquisition agencies or recovery/acquisition agencies in compliance with AATB standards for human tissue recovery. After consent for donation is obtained, donations are screened and tested in detail for safety in compliance with the federal regulations and AATB standards on communicable disease transmission. Axogen processes and packages Avance Nerve Graft and Avive Soft Tissue Membrane using its employees and equipment pursuant to a License and Services Agreement, ® ® 14 Table of Contents as amended (the “CTS Agreement”) with Community Blood Center (d/b/a Community Tissue Services) (“CTS”), Dayton, Ohio. CTS is an FDA registered tissue establishment. The CTS Agreement terminates December 31, 2021, subject to earlier termination by either party at any time for cause (subject to the non-terminating party’s right to cure, in certain circumstances), or without cause upon 6 months prior notice whereby notice cannot be provided prior to March 1, 2021. Under the CTS Agreement Axogen pays CTS a facility fee for clean room/manufacturing, storage and office space. CTS also provides services in support of Axogen’s manufacturing such as routine sterilization of daily supplies, providing disposable supplies, microbial services and office support. The service fee is based on a per donor batch rate. The CTS facility provides a cost effective, quality controlled and licensed facility. Axogen’s processing methods and process controls have been developed and validated to ensure product uniformity and quality. Pursuant to the CTS Agreement, Axogen pays license fees on a monthly basis to CTS (See – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements - Footnote 14. Commitments and Contingencies - Service Agreements). Axogen acquired property which is located near the CTS facility which is comprised of a 70,000 square foot building on approximately 8.6 acres of land. It is expected that renovations will be completed by the termination date of the CTS Agreement to provide a new processing facility that can be included in our Biologics License Application (“BLA”) for Avance Nerve Graft. The capacity of the property once ® operational, along with the ability for expansion, is expected to provide processing capabilities that will meet our intended sales growth. Axogen believes it can obtain certain economic incentives from state and local authorities associated with the renovations and additional employment at the facility; such incentives are not expected to be a material offset to the cost of the project as a whole. Avance Nerve Graft and Avive Soft Tissue Membrane Packaging ® ® After processing, each Avance Nerve Graft and Avive Soft Tissue Membrane graft is visually inspected and organized by size into finished product codes. It is then packaged in primary packaging. The outer pouch is the primary sterility and moisture barrier. The packaging operation is performed in a controlled environment at CTS. ® ® Avance Nerve Graft and Avive Soft Tissue Membrane Sterilization and Labeling ® ® After being processed and packaged, Avance Nerve Graft and Avive Soft Tissue Membrane are then ® ® terminally sterilized and shipped to Axogen’s Burleson, Texas distribution facility (the “Distribution Facility”). There the products receive their final labels and are released following a final stringent technical and quality review. Orders for Avance Nerve Graft and Avive Soft Tissue Membrane are placed with Axogen’s customer care team and the products are packaged and shipped from the Distribution Facility. ® ® Avance Nerve Graft and Avive Soft Tissue Membrane Product Release ® ® The Axogen Quality System meets the requirements set forth under 21 CFR Part 1271 for Human Cells, Tissues and Cellular and Tissue-Based Products, including Good Tissue Practices (“GTP”) and is compliant with the 21 CFR Part 820 Quality System Regulations (“QSR”). Axogen has established quality procedures for review of tissue recovery, relevant donor medical record review and release to processing that meet or exceed FDA requirements as defined in 21 CFR Part 1271, state regulations, international regulations and AATB standards. Furthermore, Axogen utilizes validated processes for the handling of raw material components, environmental control, processing, packaging and terminal sterilization. In addition to ongoing monitoring activities for product conformity to specifications and sterility, shipping methods have been validated in accordance with applicable industry standards. Manufacturing of Axogen Products Other Than Avance Nerve Graft and Avive Soft Tissue Membrane ® ® Manufacturing for the Axoguard Product Line ® Axoguard is manufactured by Cook Biotech Incorporated, West Lafayette, Indiana (“Cook Biotech”), ® which was established in 1995 to develop and manufacture tissue grafts utilizing porcine extracellular matrix technology. Axogen decided to expand its portfolio of products and felt that the unique ECM material offered by Cook Biotech provided the 15 Table of Contents combination of properties needed in nerve reconstruction. Cook Biotech’s ECM material is pliable, capable of being sutured, translucent and allows the patient’s own cells to incorporate into the extracellular matrix to remodel and form a tissue similar to the nerve’s epineurium. Cook has its own source of the raw material for the ECM material and manufactures Axoguard products from such sources. In August 2008, Cook Biotech entered into an agreement, amended in March 2012, with Axogen to distribute its product worldwide in the field of the peripheral and central nervous system, but excluding use of the Axoguard product in the oral cavity for endodontic and periodontal applications and OMF surgery solely as they relate to dental, soft or hard tissue repair or reconstruction. We believe the exclusion does not limit our identified OMF market, but expansion into certain additional OMF market areas could be limited to the Avance Nerve Graft. ® ® ® The Cook Biotech agreement was amended on February 26, 2018 to run through June 30, 2027. It requires certain minimum purchases, although through mutual agreement the parties have not established such minimums and to date have not enforced such provision, and establishes a formula for the transfer cost of the Axoguard products. Under the agreement, Axogen provides purchase orders to Cook Biotech, and Cook Biotech fulfills the purchase orders. ® Manufacturing for the Acroval Neurosensory and Motor Testing System and Axotouch Two Point ® ® Discriminator ® The Acroval Neurosensory and Motor Testing System and Axotouch Two Point Discriminator are contract manufactured by Viron Technologies, doing business as Cybernetics Research Laboratories (“CRL”), Tucson, Arizona. CRL provides Acroval to the Company’s Distribution Facility and Axogen performs final inspection and packaging for customer shipment. CRL provides warranty service on behalf of the Company for the Acroval and maintains certain levels of spare parts inventory for manufacturing and fulfillment of warranty work. CRL supplies Axotouch unpackaged and it is packaged at the Distribution Facility. ® ® ® We believe CRL has capacity to support any future volumes of Acroval and Axotouch . ® ® Sales and Marketing Overview Axogen is focused on the developing market of peripheral nerve repair and regeneration, is committed to improving awareness of new surgical peripheral nerve repair options and is advancing evaluation capabilities for nerve issues, as well as building additional scientific and clinical data to assist surgeons and patients in making informed choices with respect to treatment of peripheral nerve injuries. Axogen believes that there is an opportunity to rethink current approaches to peripheral nerve repair and that its approach will solidify its position as a leader in the field of peripheral nerve repair products. The following provides the key elements of Axogen’s sales and marketing strategy. Increase Awareness of Axogen’s Products Prior to the introduction of Axogen’s portfolio of peripheral nerve repair products, surgeons had a limited number of options available for the surgical repair of damaged or transected peripheral nerves. Axogen entered the market to improve the standard of care for patients. Axogen intends to increase market share by improving awareness and adoption of nerve repair techniques and Axogen’s products through the continued use of educational conferences and presentations, surgical resident and fellow training, scientific publications, and a knowledgeable and professional sales team. Axogen works to increase usage within active accounts as well as expand the overall customer base by adding new active accounts. Axogen defines an “active account” as an account that has typically gone through the committee approval process, has at least one surgeon who has converted a portion of his or her treatment algorithms of peripheral nerve repair to the Axogen portfolio and has ordered Axogen products at least six times in the last 12 months. Axogen is focused on plastic reconstructive surgeons and orthopedic and plastic hand surgeons who perform surgeries on patients suffering traumatic nerve damage or transection and who perform hand reconstructive surgeries, certain OMF surgeons who repair damaged oral nerves and certain plastic reconstructive surgeons who perform autologous flap breast reconstruction. 16 Table of Contents Expand Clinical and Scientific Data Regarding the Performance of Axogen Products Generating clinical data is an important component of Axogen’s marketing strategy. To date Axogen has ® ® ® ® ® ® seventy-seven peer reviewed clinical papers. Sixty-six of such clinical papers relate to our Avance Nerve Graft and thirty-one to our Axoguard Nerve Protector and Axoguard Nerve Connector products. Certain of these publications contain data on multiple products. Axogen will continue to accept patients, for which there are more than 1,600 Avance nerve repairs enrolled to date, in its RANGER clinical study (defined below in “Government Regulations”), a utilization registry of Avance Nerve Graft. An additional arm of the registry study has been initiated tracking neurotization outcomes in breast reconstruction (Sensation-NOW).Five of the above mentioned publications and more than 60 scientific conference presentations have been generated to date from the registry. A multicenter prospective randomized comparative pilot study of hollow tube conduits and Avance Nerve Graft has completed subject enrollment and outcome follow-up and has been published (Means et al). Case series in digital nerve repair have been published from the Mayo Clinic, Georgetown University Medical Center and Philadelphia Hand Center and a case series in OMF have been published from UT Southwestern and University of Illinois-Chicago. A number of additional investigator initiated case reports, studies and publications have been completed including breast neurotization, compressive neuropathies and the surgical treatment of pain. Case series in brachial plexus, neurotization of breast reconstruction and the surgical treatment of pain are also being developed. Axogen also supports outside research and will continue to work with investigators working on grants with a translational focus. ® Commitment to the Education of Best Practices in Peripheral Nerve Repair Axogen has established educational conferences and presentations and surgical resident and fellow training that we believe has positioned us as a leader in providing peripheral nerve repair best practices. In 2018, we trained two-thirds of hand surgeon fellows through such courses and training. The Company provides education on peripheral nerve repair through its “Best Practices in Nerve Repair” national programs (“National Programs”) as well as local and regional educational events. In calendar years 2016, 2017 and 2018, we conducted 13, 15, and 18 National Programs, respectively, and we expect to conduct 25 National Programs in 2019. These are supported by on-line tools and discussion forums such as Nerve Matters, an on-line community of peripheral nerve surgeons where the surgeons can ask questions, present cases and share findings in the area of peripheral nerve repair. Execute the Sales Process and Expand the Axogen Sales Team Axogen provides full sales and distribution services through both a direct sales force and a team of independent sales agencies. As of December 31, 2018, Axogen had 85 direct sales professionals and 17 independent sales agencies in the U.S. By the end of 2019, Axogen anticipates the number of direct sales professionals in the U.S. will be more than 115. Axogen’s product portfolio is available in ten countries outside the U.S. through nine independent distributors. Axogen provides support and resources for independent agencies and distributors both within and outside the United States and is increasing its direct sales force in selected United States territories. Axogen provides its products to hospitals, surgery centers and military hospitals, calling on plastic reconstructive surgeons and orthopedic and plastic hand surgeons and certain OMF surgeons to review the benefits of the Axogen products. While surgeons make the decision to implant the products in appropriate patients, hospitals make the decision to buy the products from Axogen. In today’s budget constrained environment, hospital committees review new technologies for cost effectiveness as well as quality. Axogen believes that it has been successful in meeting the needs of these hospital committees by demonstrating the cost/benefit of its products and providing a fair value to the hospital. Expand the Product Pipeline and Applications in Peripheral Nerve Repair Axogen has developed line extensions and additional products to support surgeons in their needs for repairing damaged or transected peripheral nerves. Axogen believes additional opportunities exist to develop or acquire complementary products in peripheral nerve repair. In addition, there exists opportunities to expand the existing portfolio of products in new applications of peripheral nerve repair in lower extremity surgery, head and neck surgery, urology and the surgical treatment for pain. 17 Table of Contents Axogen Strengths Axogen believes that it has the following strengths in the field of peripheral nerve repair and regeneration: Established Peripheral Nerve Repair Expertise Axogen has made a significant investment in understanding peripheral nerve anatomy and surgical peripheral nerve repair and regeneration. This has been accomplished through interaction with leading academic centers throughout the United States and by striving to build an outstanding internal team of technical and clinical experts. Commitment to the Promotion and Education of Best Practices in Peripheral Nerve Repair Axogen has established educational conferences and presentations and surgical resident and fellow training that we believe is positioning us as a leader in providing peripheral nerve repair best practices. Axogen has developed the programs and speakers to train surgeons currently in practice as well as surgical fellows. Clinical Date Axogen is developing a body of clinical evidence of its implants in real world situations surgeons face when diagnosing and treating their patients with peripheral nerve injuries. This data provides support for surgeons in their clinical decision making and providing treatment options to their patients. A pivotal multicenter prospective randomized comparative study (RECON) of hollow tube conduits and ® ® Avance Nerve Graft to support the transition to a biological product is in process (See “Government Regulations – Clinical Trials”). A multicenter, prospective, randomized and subject blinded study of Axoguard Nerve Cap as compared to neurectomy for the treatment of symptomatic neuroma (REPOSE) and a registry study of Avive Soft Tissue Membrane in acute trauma have been initiated and are enrolling. Finally, a pilot study on the repair of the cavernous nerves in prostate cancer patients has completed enrollment, follow- up and data analysis. ® Surgical Implant Commercialization Experience The Axogen commercialization team consists of sales, marketing, and customer care professionals with backgrounds in the medical device and biotechnology industries. The team has strong experience in the introduction of technologies and has been instrumental in beginning to establish Avance Nerve Graft, Avive Soft Tissue Membrane and the Axoguard product lines as a new standard of care for the surgical treatment of peripheral nerve damage or transections in our core markets. Axogen believes it can leverage these capabilities in expanding the commercial success of the current Axogen products, future peripheral nerve products and opportunities in new peripheral nerve surgical applications. ® ® ® Avance Nerve Graft Performance ® Axogen has worked with leading institutions, researchers and surgeons to support innovation in the field of ® ® surgical peripheral nerve repair. We believe Axogen’s RANGER study (defined below in the section entitled “Government Regulations”) is the largest multi-center clinical study conducted in peripheral nerve gap repair. Axogen is also conducting a Multicenter, Prospective, Randomized, Subject and Evaluator Blinded Comparative Study of Nerve Cuffs and Avance Nerve Graft Evaluating Recovery Outcomes for the Repair of Nerve Discontinuities (“RECON”). This study is the phase 3 trial to support its BLA for the Avance Nerve Graft (See “Government Regulations”). The January, 2012 edition of Microsurgery and November 2012 edition of The Journal of Hand Surgery, June 2015 edition of Journal of Reconstructive Microsurgery and January 2017 edition of HAND each contain an article summarizing the RANGER study results. The Brooks et al. publication reported on 55 Avance Nerve Graft nerve repairs and resulted in meaningful motor and sensory recovery in 87% of nerve transections between 5 and 50 mm. Additionally, no implant related adverse events were reported. (Brooks, D. N., Weber, R. V., Chao, J. D., Rinker, B. D., Zoldos, J., Robichaux, M. R., Ruggeri, S. B., Anderson, K. A., Bonatz, E. E., Wisotsky, S. M., Cho, M. S., Wilson, C., Cooper, E. O., Ingari, J. V., Safa, B., Parrett, B. M. and Buncke, G. M. (2012), Processed nerve allografts for peripheral nerve reconstruction: A ® ® ® 18 Table of Contents multicenter study of utilization and outcomes in sensory, mixed, and motor nerve reconstructions. Microsurgery, 32: 1—14. doi: 10.1002/micr.20975 and Cho, et al. 2012, J Hand Surg Am 37(11):2340-9). A meta-analysis of available clinical outcomes data from published papers on the leading synthetic collagen conduit showed meaningful improvement in only 40-74% of cases bridging a gap in the nerve. This data was further verified in a review of autograft alternative in the 2016 edition of Hand Clinics. A similar meta- analysis for nerve autograft reported meaningful improvement in 60-88% of nerve repairs. Finally, the Company has expanded RANGER to include an additional study arm called Sensation-NOW™ for breast neurotization. ® International Opportunity for Revenue Axogen currently focuses on the U.S. market, with additional foreign distribution and sales in Canada, United Kingdom and certain other countries. The need for the surgical repair of damaged or transected nerves is a global issue. Through its ex-U.S. revenue, Axogen has demonstrated the capability to take its current peripheral nerve repair product offering into new geographical markets. Axogen does not currently have European Union (“E.U.”) wide approval for Avance Nerve Graft as human tissue is approved in each ® individual country. Cook Biotech is currently renewing the Axoguard product CE Mark and until such renewal Axogen is able to sell only those Axoguard products that are currently in inventory in the E.U., which © inventory may not be sufficient to satisfy all product sales prior to obtaining the renewal. Avive Soft Tissue Membrane, Acroval Neurosensory and Motor Testing System and Axotouch Two Point Discriminator are only available in the United States, but Axogen is taking action to introduce them internationally, which introduction is subject to meeting the appropriate regulatory standards of a particular country and any appropriate E.U. wide regulation or directive. To date, revenue from international distribution and sales have not been material, there are no material risks associated with foreign operations and we do not have dependencies as to international revenue. See Risk Factors - Axogen’s operations must comply with FDA and other governmental requirements. ® ® ® Research and Development Axogen believes it provides the most extensive product portfolio for peripheral nerve repair available. Our current development focus is to expand clinical data in both traumatic peripheral nerve repair and other surgical applications. Additional product line extensions of the Avance and Axoguard products and other peripheral nerve repair products may be developed. In this regard, Axogen introduced: (1) an Axoguard Connector line extension in winter 2014 by providing a new longer 15mm product; (2) Axotouch in the fall of 2014; (3) Acroval in March 2016; (4) Avive Soft Tissue Membrane launched in November 2016; and(5) Axoguard Nerve Cap which has been developed has its 510(k) premarket clearance from the FDA and is currently available in select locations for clinical and user preference evaluations. ® ® ® ® ® ® ® Axogen works with academic institutions in the expansion of treatments for peripheral nerve and is involved in a number of grants from government agencies related to nerve repair or use of our products and/or technologies. For the years ended December 31, 2018, 2017, and 2016, Axogen recognized grant revenue of approximately $195,000, $56,000 and $290,000, respectively. For the years ended December 31, 2018, 2017, and 2016, Axogen spent approximately $11.8 million, $6.7 million, and $4.2 million, respectively, on total research and development expenses for product and clinical development. Competition The medical device and biotechnology industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. As such, Axogen cannot predict what products may be offered in the future that may compete with Axogen’s products. With regard to peripheral nerve function evaluation and measurement there are a number of methods and techniques with little consistency of measurement protocols. Currently as to peripheral nerve repair products, Axogen competes primarily against all transected and non-transected peripheral nerve repair approaches including direct suture repair, autograft and hollow-tube nerve conduits and materials used to wrap and protect damaged peripheral nerve tissue. Finally, there are numerous companies that offer amnion products in a variety of formats, primarily in the area of wound care, which could be competitive with Axogen’s Avive product. ® 19 Table of Contents Because the requirements of the biomaterials used in peripheral nerve repair can vary based on the severity and location of the damaged nerve, the size and function of the nerve, surgical technique and patient preference, Axogen’s peripheral nerve repair products compete against both autograft materials (nerve in the case of a bridging repair and vein or fat in the case of a nerve protection repair), and a limited number of off- the-shelf alternatives for grafting and protecting. Competitive aspects of our products focus on the overall value proposition of our products and their suitability for specific applications and can include composition and structure of the material, ease of use, clinical evidence, handling, and price. Axogen’s major competitors for off-the-shelf repair options in hollow-tube conduits and bio-absorbable wraps are the following companies: · · · ® ® ® TM Integra LifeSciences Holding Corporation (Nasdaq: IART) (“Integra”). Integra offers NeuraGen , a hollow tube product made from reconstituted bovine collagen and NeuraWrap , a reconstituted bovine collagen biomaterial used for nerve wrapping and has announced they will launch NeuraGen 3D Nerve Guide Matrix we believe is the NeuraGen hollow tube collagen conduit filled with a porous inner matrix comprised of collagen and glycosaminoglycan (chondroitin-6-sulfate); Baxter International, Inc. (NYSE: BAX) (“Baxter”). Baxter acquired Synovis which offers Neurotube, a hollow tube made of polyglycolic acid and announced distribution of Nerbridge, a hollow tube filled with porous collagen that according to “A Clinical Multi-Center Registry Study On Digital Nerve Repair Using A Biodegradable Nerve Conduit Of PGA With External And Internal Collagen Scaffolding Hirohisa Kusuhara, Md, Phd; Yu Sueyoshi, Md; Noritaka Isogai, Md, Phd Kindai University, Osaka-Sayama, Japan” the conduit and inner collagen had the greater ability to regenerate after peripheral nerve injury than hollow Nerbridge ”. In 2018, Synovis licensed Neurocap Nerve Capping Device and Vivosorb Polymer Film from Polyganics; and Stryker Corporation (NYSE: SYK) (“Stryker”). Stryker offers the NeuroMatrix and Neuroflex products, both of which are hollow tubes derived from reconstituted bovine collagen and NeuroMend, a reconstituted bovine collagen biomaterial used for nerve wrapping. All of these products are manufactured by Collagen Matrix Inc. ® Axogen believes that surgeons use Avance Nerve Graft because it provides them with the natural three- ® ® dimensional structure and familiar handling characteristics of a typical peripheral nerve for bridging peripheral nerve transections (severed peripheral nerves) without the comorbidities and additional surgical site of an autograft as well as confidence in the performance of the product as a result of the growing body of clinical literature. Axoguard Nerve Protector and Axoguard Nerve Connector provide the unique features of pliability, suturability and translucence for visualization of the underlying nerve while also allowing the patient’s own cells to incorporate into the extracellular matrix to remodel. Avive Soft Tissue Membrane has what Axogen believes are favorable handling and absorption properties and is a resorbable soft tissue covering to separate tissues and modulate inflammation in the surgical bed. Acroval Neurosensory and Motor Testing System is a continuation of Axogen’s commitment to improving patient outcomes. Axogen believes that the standardization of evaluation and measurement techniques will facilitate comparison and interpretation of clinical results leading to better understanding and care for patients with peripheral nerve damage. ® ® ® ® Axogen believes any current or future competitors face the following important barriers to entry as it relates to the market for its peripheral nerve repair products. Axogen’s intellectual property (“IP”), and that of its partners, including patents, patents-pending, trade secrets and know how, is believed to be an important barrier for its Avance Nerve Graft and Axoguard products. Axogen has developed knowledge and experience in understanding and meeting FDA regulatory requirements for Avance Nerve Graft, including having made a substantial investment in conducting the preclinical and clinical testing necessary to support a submission for a FDA BLA. Additionally, Axogen believes the ability to offer a portfolio of products focused on peripheral nerve repair and evaluation provides a unique competitive position as to other entities that do not have this breadth of product offering. However, due to its limited resources, its smaller size and its relatively early stage, Axogen believes it may face competitive challenges from larger entities and market factors that could negatively impact Axogen’s growth, including competitors’ introduction of new products and competitors’ bundling of products to achieve pricing benefits. ® ® 20 Table of Contents Intellectual Property Overview Axogen protects its IP through a combination of patents, trademarks, trade secrets, and copyrights. In addition, Axogen safeguards its trade secrets and other confidential know-how, and carefully protects these and other IP rights when engaging with third parties. For example, Axogen requires vendors, contract organizations, consultants, advisors and employees to execute confidentiality and nondisclosure agreements, and to appropriately protect any information disclosed to them by Axogen so as to preserve its confidential and/or trade secret status. Axogen also requires consultants, advisors and employees to assign to Axogen their rights to any IP arising out of their relationship with Axogen. License Agreements Axogen has entered into license agreements with University of Florida Research Foundation (the “UFRF”) and the University of Texas at Austin (“UTA”). Under the terms of these license agreements, Axogen holds exclusive worldwide licenses to underlying technologies used by Axogen in its Avance Nerve ® Graft. The license agreements include both the right to issued patents and patents pending in the U.S. and international markets. The effective term of the license agreements extends through the term of the related patents. In the event of default, licensors may also terminate an agreement (after written notice) if Axogen fails to cure a breach. The license agreements contain the following key terms: · · Payment of annual license maintenance fees, some of which may be credited against future royalty payments; Payment of royalty fees of 1%-3% based on net revenue of the licensed products, the level depending on the agreement, which may include a minimum quarterly royalty payment with discounts off royalty rates when royalty stacking applies; Payment of a percentage of sublicense fees received; Reimbursement of certain legal expenses incurred for patent prosecution and defense; and · · · Other payments of various amounts based on achieving certain milestones. Currently, Axogen pays royalties to UFRF and UTA specific to the licensed technologies related to the Avance Nerve Graft. ® Patents As of the date of this Form 10-K, Axogen owns or is the exclusive licensee of fifteen issued U.S. patents, about fifteen pending U.S. patent applications (including those for which Axogen has received a notice of allowance) and numerous international patents and patent applications with regard to its peripheral nerve products. The granted European Patent No. EP1425390 has been validated in France, Germany, Italy, Spain, Sweden, Switzerland, and the United Kingdom. The following table identifies the issued U.S. patents owned or licensed by Axogen with regard to its peripheral nerve products, including the patent number, the title of each patent, and the estimated expiration date of each patent. 21 Table of Contents Patent No. US 6,972,168 Title Estimated expiration date Materials and Methods for Nerve Grafting, Selection of Nerve Grafts, and in vitro Nerve Tissue Culture August 2022 US 7,402,319 Cell Free Tissue Replacement for Tissue Engineering September 2023 US 7,732,200 US 6,696,575 Materials and Methods for Nerve Grafting, Selection of Nerve Grafts, and in vitro Nerve Tissue Culture December 2023 Biodegradable, electrically conducting polymer for tissue engineering applications March 2022 US 7,851,447 Materials and Methods for Nerve Repair November 2023 US 8,545,485 Nerve Elevator and Method of Use May 2032 US 8,758,794 Cell Free Tissue Replacement for Tissue Engineering September 2023 US 8,986,733 Materials and Methods for Nerve Repair August 2022 US D777,917 Two Point Discriminator Sensory Measurement Device January 2032 US 9,690,975 Quantitative Structural Assay of a Nerve Graft July 2035 US 9,572,911 Method for Decellularization of Tissue Grafts March 2034 US 9,629,997 Materials and Methods for Protecting Against Neuromas December 2033 US 9,996,729 Quantitative Structural Assay of a Nerve Graft May 2035 US 9,597,429 Cell-Free Tissue Replacement for Tissue Engineering September 2023 US 9,402,868 Materials and Methods for Nerve Grafting August 2022 With respect to our Avance Nerve Graft we have patent protection through at least September 2023 in the ® United States. In addition we also expect Avance Nerve Graft will receive Biosimilar Protection that would provide 12 years of data exclusivity. Finally, Axogen has Enforcement Discretion from FDA allowing continued distribution under controls applicable to Human Cellular and Tissue-based Products (“HCT/P”) with an agreed transition plan to a Biologic Product under a BLA. We believe a competitive processed peripheral nerve allograft would need to successfully complete BLA Phase I, II and III clinical studies prior to clinical release, the completion of which we believe would take at least 8 years. ® Additionally, Axogen entered into an exclusive distribution agreement with Cook Biotech in August 2008, as subsequently amended in February 2018, to distribute Cook’s ECM technology in the form of the Surgisis Nerve Cuff, the form of a nerve wrap or patch, or the form of any other mutually agreed to configuration in the field of peripheral nervous system and central nervous system use, but excluding use of the Axoguard product in the oral cavity for endodontic and periodontal applications and OMF surgery solely as they relate to dental, soft or hard, tissue repair or reconstruction. Axogen has subsequently rebranded the Surgisis products under the Axoguard name. Cook Biotech believes it has know-how and trade secrets with respect to the ECM technology that provides certain competitive obstacles. ® ® ® 22 Table of Contents Because of the length of time and expense associated with bringing new products through development and the governmental approval process, medical technology companies have traditionally placed considerable importance on obtaining and maintaining patent protection for significant new technologies, products and processes. Axogen’s policy is to seek patent protection for, or where strategically preferable, maintain as trade secret, the inventions that it considers important to its products and the development of its business. Axogen has sought and will continue to seek patent protection for select proprietary technologies and other inventions emanating from its R&D, including with respect to uses, methods, and compositions, in an effort to further fortify its IP stronghold in areas of import to the company and its growing product portfolio. In instances that patent protection is not possible, product value to Axogen’s portfolio can still be derived. Trademarks, Trade Secrets and Copyrights Axogen holds more than one hundred registered trademarks and has filed more than sixty additional trademark applications worldwide to protect its brand. This allows Axogen to prevent competitors from, for example, using the same or a confusingly similar company name, or the same or confusingly similar product names which could otherwise wrongfully allow such competitors to capitalize on the Axogen brand, reputation and goodwill, and thereby improperly bolster their sales or reputations through, for example, consumer confusion, a false indication of Axogen’s endorsement, or of a false indication of corporate or contractual relationship with Axogen. Axogen polices and enforces its marks. Axogen possesses trade secrets and material know-how in the following general subject matters: nerve and tissue processing, nerve repair, product testing methods, and pre-clinical and clinical expertise. Axogen has registered copyrights for training tools and artistic renderings. Government Regulations U.S. Government Regulation Overview Axogen’s products are subject to regulation by the FDA, as well as other federal and state regulatory bodies in the U.S. and comparable authorities in other countries. In addition, its Avance Nerve Graft and Avive Soft Tissue Membrane must comply with the standards of the tissue bank industry’s accrediting organization, the AATB. ® ® Axogen distributes for Cook Biotech the Axoguard product line. Cook Biotech is responsible for the ® ® ® regulatory compliance of the Axoguard product line. Axoguard products are regulated as medical devices and subject to premarket notification requirements under section 510(k) of the Federal Food, Drug, and Cosmetic Act (the “FD&C Act”), 21 CFR Part 820 (“Quality System Regulation”) and related laws and regulations. Cook Biotech has obtained a 510(k) premarket clearance for Axoguard Nerve Connector from the FDA for the use of porcine (pig) small intestine submucosa for the repair of peripheral nerve transections where gap closure can be achieved by flexion of the extremity. Cook Biotech has also obtained a 510(k) premarket clearance for Axoguard Nerve Protector for the repair of peripheral nerve damage in which there is no gap or where a gap closure is achieved by flexion of the extremity. We sell the 510(k) cleared device under the trade name Axoguard Nerve Protector and Axoguard Nerve Connector. ® ® ® ® Axogen is responsible for the regulatory compliance of Avive Soft Tissue Membrane. Avive Soft Tissue ® ® Membrane is processed and distributed in accordance with FDA requirements for Human Cellular and Tissue- based Products (361 HCT/P) under 21 CFR Part 1271 regulations, US State regulations and the guidelines of the AATB. Axogen also distributes Axotouch Two-Point Discriminator. This device is manufactured for Axogen and ® distributed from the Burleson Facility is a Class I device (general controls) that is exempt from premarket notification and the Quality System Regulation requirements except for the Recordkeeping and Complaint file requirements. It is classified by FDA under 21 CFR 882.1200 (Two-point discriminator, product code: GWI). ® ® The Acroval line of devices is manufactured for Axogen and distributed from the Burleson Facility. The Acroval devices are regulated as medical devices and in 2018, the FDA changed the notification requirements to be exempt under Section 510(k) of the FD&C Act. The Acroval line of devices includes the Acrogrip , ® Acropinch and PSSD , all of ® ® ® 23 Table of Contents which received 510(k) clearance by the FDA in the 1990’s. Acrogrip was cleared under the name Digi-Grip Sensor, Acropinch was cleared as Pinch Sensor and PSSD as the NK Pressure-Specified Sensory Device. ® ® ® ® In 2007, Axogen began to process and distribute its Avance Nerve Graft pursuant to Section 361 of the PHS Act and 21 CFR Part 1271 Human Cells, Tissues, and Cellular and Tissue Based Products controls. Such action was based on Axogen’s good faith belief that Avance Nerve Graft product was an HCT/P tissue product regulated solely under Section 361. From October 2008 through early 2010, Axogen was in communication with the FDA concerning the regulatory status of the Avance Nerve Graft product. In April 2010, in response to a Request For Designation filed by Axogen, the FDA determined that Avance ® Nerve Graft was a biologic product that would be reviewed and regulated by the U.S. FDA Center for Biologics Evaluation and Research (“CBER”) under the requirements of Section 351 of the PHS Act. Section 351 requires, among other things, an approved license to market a biological product. ® ® Axogen met with CBER in July 2010 and, between July 2010 and November 2010, provided information to CBER that resulted in the FDA issuing a letter stating the agency’s intent to exercise enforcement discretion with respect to the continued introduction or delivery for introduction into interstate commerce of Avance Nerve Graft assuming that certain conditions are met relating to the transition of Avance Nerve Graft from regulation as an HCT/P under Section 361 to a biological product under section 351 of the PHS Act. Specifically, the FDA is permitting Avance Nerve Graft to be distributed, subject to FDA enforcement discretion, provided that: ® ® ® · Axogen transitions to compliance with Section 501(a)(2)(B) of the FD&C Act, the current Good Manufacturing Practice, or cGMP, regulations in 21 CFR Parts 210 and 211 and the applicable regulations and standards in 21 CFR Parts 600-610 prior to initiation of a phase 3 clinical trial; designed to demonstrate the safety, purity, and potency of Avance Nerve Graft. ® o Axogen has performed several gap analyses of its quality system for compliance with 21 CFR Parts 210/211 and 600-610 regulations. The gap analyses have identified areas in which our quality system could improve with respect to compliance to the regulations. The transition is in process and we periodically review the 21 CFR Parts 210/211 and 600-610 regulations to ensure that we create and implement appropriate changes, including new quality procedures. Through our internal auditing process, we periodically assess our compliance to the regulations. As Axogen completes the phase 3 clinical trial and eventual BLA submission, we will retain an external audit firm with experience in auditing to 21 CFR Parts 210/211 and 600-610 regulations to verify quality system compliance to the regulations. The associated costs for these activities are not material and the Company believes it can appropriately implement all necessary changes. · Axogen conducts a phase 3 clinical trial to demonstrate safety, purity and potency of Avance Nerve Graft under a Special Protocol Assessment (“SPA”). ® o Axogen and the FDA agreed to the SPA in August 2011 and in accordance with FDA regulations in 21 CFR § Part 312, Axogen submitted an Investigational New Drug Application (“IND”) to the FDA in April 2013. The IND was approved and became effective in March 2015 and the phase 3 clinical trial was initiated in the second quarter of 2015. The study completed initial enrollment in January 2019. As required by the SPA and agreed to by FDA and Axogen, an independent statistical analysis was conducted to determine if greater study enrollment is appropriate to maintain the planned statistical power of the trial. Axogen is working with the FDA to review the interim analysis findings and obtain agreement on whether the study enrollment is concluded or the study should remain open for further enrollment. · Axogen continues to comply with the regulations and standards under 21 CFR Part 1271. o Axogen was audited by the FDA at its processing facility in March 2013, March 2015 and October 2016 and its Distribution Facility in October 2015. The quality system was found to be in compliance with 21 CFR Part 1271 and no FDA Form 483 observations were issued. 24 Table of Contents o o In February 2018. Axogen was audited by the FDA with respect to its Medical Device Quality System under 21 CFR Part 820 and its Human Tissue Quality System under 21 CFR Part 1271. Such audit resulted in two Form 483 observations on general procedures on the Medical Device regulations and no Form 483 observations as to the Human Tissue Quality System. Axogen has taken corrective action to correct these observations and the FDA has accepted the corrective action plan. In November 2018, Axogen was audited by the FDA with respect to its Human Tissue Quality System under 21 CFR Part 1271. Such audit resulted in one Form 483 observation on tissue tracking. Axogen has taken corrective action to correct this observation and the FDA has accepted the corrective action plan. · Axogen continues to exercise due diligence in executing its requirements under the transition program. Axogen is working to ensure compliance with the applicable regulations through ongoing discussions with the FDA regarding the transition of the quality system to 21 CFR Parts 210/211 and 600-610 compliance with the FDA and through audits for compliance to 21 CFR Part 1271 and amendments to the IND providing updates to the phase III clinical trial. The final determination of regulatory compliance will be made by the FDA during the pre-license inspection as part of the BLA review. If the FDA does not find Axogen to be in compliance, or if Axogen is unable to meet the required standards for preclinical studies, clinical studies and Chemistry, Manufacturing, and Controls, the approval of the BLA would be delayed or denied. The FDA will end the period of enforcement discretion upon a final determination of Axogen’s future BLA submission or if prior to the BLA submission, the FDA finds that Axogen does not meet the conditions for the transition plan, or is not exercising due diligence in executing the transition (e.g., study completion, or BLA submission is neither timely nor adequate). If final action on the BLA is negative or Axogen is found to not meet the conditions for the transition plan or its execution, Axogen will not be able to continue to distribute the Avance Nerve Graft. Axogen continues to work diligently to execute the transition plan, including maintaining regular communication with the FDA, and, in this context, continues to distribute Avance Nerve Graft. ® ® The BLA application of Avance Nerve Graft, if approved, will require a potentially substantial user fee payment to the FDA, although certain exemptions, waivers and discounts of the user fees may apply, including certain waivers or discounts for small businesses. ® The Food and Drug Administration Safety and Innovation Act, referred to herein as FDASIA (Public Law 112-144), which was signed into law on July 9, 2012, amended the FD&C Act. FDASIA includes the Prescription Drug User Fee Amendments of 2012 which authorizes the FDA to continue to collect the following user fees from applicants who submit certain new drug and biological product applications and supplements: · · Application Fee: Each new BLA has a fee required upon submission. For Axogen fiscal year 2019, this fee for a BLA requiring clinical data is $2.6 million. The fee is adjusted each year so we cannot provide an accurate estimate of what our fee will be upon submission of our BLA. For small companies (fewer than 500 employees and no other approved biologic product on the market) submitting its first application, a waiver of the application fee is available. Axogen Program Fee: A program fee is assessed for each strength or potency in which the approved (non-revoked, non-suspended) product is manufactured in final dosage form. The program fee is based on an estimate of the number of products that would be subject to, and for which the companies would pay, program fees. The program fee is determined by dividing the adjusted total fee revenue from program fees by the number of estimated products (based on previous year’s program fees) subject to the program fee (excluding program fee waivers and reductions granted by the FDA). For Axogen fiscal year 2019, the program fee has been established at $310,000. Axogen may have to pay a program fee after BLA approval. 25 Table of Contents In September 2018 the FDA granted a Regenerative Medicine Advanced Therapy (RMAT) designation for ® Avance Nerve Graft. A regenerative medicine therapy is eligible for the designation if it is intended to treat, modify, reverse or cure a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the product has the potential to address unmet medical needs for such a disease or condition. The RMAT designation provides access to a streamlined approval process for regenerative medicine technologies and ensures continued informal meetings with the FDA in support of the BLA for Avance Nerve Graft. ® The Company believes that any future, competitive peripheral nerve allograft would be required to follow the standard pathway for biologic licensing, which typically entails multiple clinical trials and takes many years. The FDA provided updated guidance in December 2017 which made clear that any processing that alters the biological characteristics of peripheral nerve tissue would be considered more than minimal manipulation, and therefore require a BLA prior to marketing. The Company has maintained a collaborative dialogue with the FDA and will continue to work closely with the FDA as it progresses towards its BLA submission. Upon BLA approval, Avance Nerve Graft we believe we will have 12 years of data exclusivity with regard to potential biosimilars. ® FDA — General FDA regulations govern nearly all the activities that Axogen performs, or that are performed on its behalf, to ensure that medical products distributed domestically or exported internationally are safe and effective for their intended uses. The activities the FDA regulates include the following: · · · · · · · · · · · product design, development and manufacture; product safety, testing, labeling and storage; pre-clinical testing in animals and in the laboratory; clinical investigations in humans; premarketing clearance, approval, or licensing; record-keeping and document-retention procedures; advertising and promotion; the import and export of products; product marketing, sales and distribution; post-marketing surveillance and medical device reporting, including reporting of deaths, serious injuries, communicable diseases, device malfunctions or other adverse events; and corrective actions, removals and recalls. Failure to comply with applicable FDA regulatory requirements may subject Axogen to a variety of administrative or judicially-imposed penalties or sanctions and/or prevent it from obtaining or maintaining required approvals, clearances or licenses to manufacture and market its products. Such failure to comply with the applicable FDA requirements may subject Axogen to stringent administrative or judicial actions or sanctions, such as agency refusal to approve pending applications, warning letters, product recalls, product seizures, total or partial suspension of production or distribution of products, injunctions, or civil or criminal prosecution. 26 Table of Contents FDA’s Premarket Clearance and Approval Requirements - Medical Devices Unless an exemption applies, each medical device distributed commercially in the U.S. requires either a 510(k) premarket notification submission or a Pre-Market Approval (“PMA”) Application to the FDA. Medical devices are classified into one of three classes—Class I, Class II, or Class III—depending on the degree of risk, the level of control necessary to assure the safety and effectiveness of each medical device and how much is known about the type of device. For devices first intended for marketing after May 28, 1976, pre- market review and clearance by the FDA for Class I and II medical devices is accomplished through the 510(k) pre-market notification procedure by finding a device substantially equivalent to a legally marketed Class I or II device, unless the device is exempt. The majority of Class I medical devices are exempt from the 510(k) premarket notification requirement. Devices deemed by the FDA to pose the greatest risk, such as life- sustaining, life-supporting or implantable devices for which Class II controls are inadequate to assure safety or effectiveness, and novel devices, including devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in Class III. Class III devices generally require an approved PMA prior to marketing. A PMA must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction, the safety and effectiveness of the device. FDA’s Premarket Approval Requirements - Biologic Products Biological Product License Application (BLA) Pathway Biological products subject to BLA requirements are approved under the Public Health Service Act. Biological products require FDA approval of a BLA to be marketed. In order to be approved, a BLA must demonstrate the safety, purity and potency of the product candidate based on results of preclinical studies and clinical trials. A BLA must also contain extensive CMC and other manufacturing information, and the applicant must pass an FDA pre-approval inspection of the manufacturing facility or facilities at which the biologic product is produced to assess compliance with the FDA’s cGMP. Satisfaction of FDA approval requirements for biologics typically takes several years and the actual time required may vary substantially based on the type, complexity and novelty of the product. Axogen cannot be certain that any BLA approvals for its products will be granted on a timely basis, or at all. The steps for obtaining FDA approval of a BLA to market a biologic product in the U.S. include: · · · · · · · · completion of preclinical laboratory tests, animal studies and formulation studies under the FDA’s good laboratory practices regulations; submission to the FDA of an IND, for human clinical testing, which must become effective before human clinical trials may begin and which must include independent Institutional Review Board, or IRB, approval at each clinical site before the trials may be initiated; performance of an adequate and well-controlled clinical trial in accordance with Good Clinical Practices to establish the safety and efficacy of the product for each indication; submission to the FDA of a BLA, which contains detailed information about the CMC for the product, reports of the outcomes and full data sets of the clinical trials, and proposed labeling and packaging for the product; satisfactory review of the contents of the BLA by the FDA, including the satisfactory resolution of any questions raised during the review; satisfactory completion of an FDA Advisory Committee review, if applicable; satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with cGMP regulations, to assure that the facilities, methods and controls are adequate to ensure the product’s identity, strength, quality and purity; and FDA approval of the BLA including agreement on post-marketing commitments, if applicable. Preclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND. Some preclinical testing may continue after the IND is submitted. The 27 Table of Contents IND must become effective before human clinical trials may begin. An IND will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions about issues such as the conduct of the trials and or supporting preclinical data as outlined in the IND. In that case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. In other words, submission of an IND may not result in the FDA allowing clinical trials to commence. Biosimilar Biological Products A regulatory approval pathway for biosimilars was established by The Biologics Price Competition and Innovation Act (“BPCIA”), as part of the Patient Protection and Affordable Care Act of 2010. An important component of the legislation specified that a manufacturer of a reference biological product would be granted 12 years of non-patent data exclusivity before a biosimilar could be approved for marketing in the US. An application for a biosimilar product may not be submitted to FDA until four years after the approval date of the BLA for the reference biological product. BPCIA provides for an abbreviated licensure process for a biosimilar, i.e., a biological product that is highly similar to an FDA-approved biological product, known as a reference product, and has no clinically meaningful differences compared to the reference product in terms of safety, purity and potency. At its discretion, the FDA can waive a requirement for any required element in an application for a biosimilar product. In addition, the legislation distinguished approval of a biosimilar from approval of such a product as a substitute for the reference biological products. Where a product is approved as a biosimilar and additionally approved as a substitute for the reference biologic, it is considered an interchangeable product. Approval as interchangeable requires that the product is biosimilar and can be expected to produce the same clinical results as the reference product in any given patient, and if intended for repeat dosing, a demonstration that the risk in terms of safety or diminished efficacy of alternating or switching between the use of the interchangeable and reference product is not greater than the risk of using the reference product without such alternating or switching. Interchangeable products can be substituted for a reference product without intervention of the prescribing healthcare provider. Most states have enacted or are considering laws that regulate the use and substitution of biosimilar and interchangeable products. For example, Virginia requires licensure as interchangeable by the FDA for a pharmacist to dispense a biosimilar in place of a prescribed biological product (Virginia § 54.1-3408.04). FDA’s Pre-Approval and Pre-Licensing Requirements Before approving a BLA, the FDA generally inspects the facility or the facilities at which the product is manufactured. The FDA will not approve the product if it finds that the facility does not appear to be in cGMP compliance. If the FDA determines the application, manufacturing process or manufacturing facilities are not acceptable, it will either not approve the application or issue a complete response letter to indicate that the review cycle for an application is complete and that the application is not ready for approval. The letter will describe specific deficiencies and, when possible, will outline recommended actions the applicant might take to get the application ready for approval. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. The testing and approval process requires substantial time, effort and financial resources, and each may take several years to complete. Data obtained from clinical activities are not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The FDA may not grant approval on a timely basis, or at all. Axogen may encounter difficulties or unanticipated costs in its efforts to secure necessary governmental approvals, which could delay or preclude it from marketing its products. The FDA may limit the indications for use or place other conditions on any approvals that could restrict the commercial application of the products. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval. Post-Approval Requirements After regulatory approval of a product is obtained, Axogen will be required to comply with a number of post-approval requirements. For example, as a condition of approval of a BLA, the FDA may require post marketing testing and surveillance to monitor the product’s continued safety or efficacy. In addition, holders of an approved BLA are required to keep extensive records, to report certain adverse reactions and production problems such as biologic 28 Table of Contents deviation reports to the FDA, to provide updated safety and efficacy information and to comply with requirements concerning advertising and promotional labeling for their products. Also, quality control and manufacturing procedures must continue to conform to cGMP regulations as well as the manufacturing conditions of approval set forth in the BLA. The FDA periodically inspects manufacturing facilities to assess compliance with cGMP regulations, which impose certain procedural, substantive and recordkeeping requirements. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance. Future FDA inspections may identify compliance issues at Axogen’s facilities or at the facilities of its contract manufacturers that may disrupt production or distribution, or require substantial resources to correct and prevent recurrence of any deficiencies. In addition, discovery of problems with a product or the failure to comply with applicable requirements may result in restrictions on a product, manufacturer or holder of an approved BLA, including withdrawal or recall of the product from the market or other voluntary, FDA- initiated or judicial action that could delay or prohibit further marketing. Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications. Finally, new government requirements, including those resulting from new legislation, may be established that could delay or prevent regulatory approval of Axogen products that are currently under development or regulatory activity. The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that Axogen failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, such as issuing a FDA Form 483 notice of inspectional observations, warning letter, or untitled letter, imposing civil money penalties, suspending or delaying issuance of approvals, requiring product recall, imposing a total or partial shutdown of production, withdrawal of approvals or clearances already granted, and pursuing product seizures, consent decrees or other injunctive relief, and criminal prosecution through the U.S. Department of Justice (the “DOJ”). The FDA can also require Axogen to repair, replace or refund the cost of devices that it manufactured or distributed. If any of these events were to occur, it could materially adversely affect Axogen’s business. Clinical Trials Clinical trials are required to support a BLA or PMA and are sometimes required for 510(k) clearance. Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators. Clinical trials are conducted under strict requirements to ensure the protection of human subjects participating in the trial and under protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring and safety, and the effectiveness criteria to be evaluated. Clinical trials for biological products require the submission and FDA acceptance of an IND and clinical trials for medical devices require the submission and FDA approval of an Investigational Device Exemption application, or IDE, unless the device regulations provide for an exemption from the IDE requirement. Clinical trials for significant risk devices may not begin until the IDE is approved by the FDA and the Institutional Review Board (IRB) overseeing the particular clinical trial. If the product is considered a non-significant risk device under FDA regulations, the trial must only be approved by an IRB prior to its initiation. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND or IDE, for significant risk devices. In addition, for these studies, an IRB at each site at which the study is conducted must approve the protocol, subject consent form and any amendments for each site at which the study is conducted. All research subjects must be informed, among other things, about the risks and benefits of the investigational product and provide their informed consent in writing. Clinical trials under an IND typically are conducted in three sequential phases, but the phases may overlap or be combined. In Axogen’s case, Axogen believes that the Phase 3 clinical trial study for the Avance Nerve Graft represents the only new clinical data that will be required to evaluate safety and effectiveness. Phase 1 clinical trials usually involve the initial introduction of the investigational product into a small group of healthy volunteers (e.g., 10 to 20) to evaluate the product’s safety (dosage tolerance and pharmacokinetics if a biologic product) and, if possible, to gain an early indication of its effectiveness. Phase 2 clinical trials usually involve controlled trials in a larger but limited patient population (e.g., a few hundred) to: ® · evaluate dosage tolerance and appropriate dosage; 29 Table of Contents · · identify possible adverse effects and safety risks; and provide a preliminary evaluation of the efficacy of the product for specific indications. Phase 3 clinical trials usually further evaluate clinical efficacy and test further for safety in an expanded patient population (e.g., a hundred to several thousand). Phase 3 clinical trials usually involve comparison with placebo, standard treatments or other comparators. Usually at least one well-controlled large Phase 3 or pivotal clinical trial demonstrating safety and efficacy is required to support a BLA. These trials are intended to establish the overall risk-benefit profile of the product and provide an adequate basis for physician labeling. Phase 3 trials are almost always larger, more time consuming, complex and costly than Phase 1 and Phase 2 clinical trials. Phase 1, Phase 2 and Phase 3 clinical testing may not be completed successfully within any specified period, if at all. Furthermore, the FDA or Axogen may suspend or terminate clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk, have experienced a serious and unexpected adverse event, or that continued use in an investigational setting may be unethical. Similarly, an IRB can suspend or terminate approval of research if the research is not being conducted in accordance with the IRB’s requirements or if the research has been associated with unexpected serious harm to patients. Investigational New Drug Application For a biologic product, an IND must be submitted prior to the initiation of the clinical study. The IND application must contain information in three broad areas: · Animal Pharmacology and Toxicology Studies - Preclinical data to permit an assessment as to whether the product is reasonably safe for initial testing in humans. Also included are any previous experiences with the product in humans (often foreign use). · · Manufacturing Information - Information pertaining to the composition, manufacturer, stability, and controls used for manufacturing of the drug substance and the drug product. This information is assessed to ensure that the company can adequately produce and supply consistent batches of the drug. Clinical Protocols and Investigator Information - Detailed protocols for proposed clinical studies to assess whether the initial-phase trials will expose subjects to unnecessary risks. Also, information on the qualifications of clinical investigators—professionals (generally physicians) who oversee the administration of the experimental compound—to assess whether they are qualified to fulfill their clinical trial duties. Finally, commitments to obtain informed consent from the research subjects, to obtain review of the study by an IRB, and to adhere to the investigational new drug regulations. Once the IND is submitted, the sponsor must wait 30 calendar days before initiating any clinical trials. During this time, the FDA has an opportunity to review the IND for safety to assure that research subjects will not be subjected to unreasonable risk. Axogen Clinical Trials Axogen has an active clinical research program to gather data on Avance Nerve Graft. Axogen has ® ® completed two clinical studies and is performing two ongoing clinical studies. The ongoing studies are “A Multicenter Retrospective Study of Avance Nerve Graft Utilization, Evaluations and Outcomes in Peripheral Nerve Injury Repair (“RANGER ”)” and “A Multicenter, Prospective, Randomized, Patient and Evaluator Blinded Comparative Study of Nerve Cuffs and Avance Nerve Graft Evaluating Recovery Outcomes for the Repair of Nerve Discontinuities (“RECON”)”. Completed studies are “A Multicenter, Prospective, Randomized, Comparative Study of Hollow Nerve Conduit and Avance Nerve Graft Evaluation Recovery Outcomes of the Nerve Repair in the Hand (“CHANGE”)” and a pilot study to evaluate the use of Avance ® Nerve Graft in the reconstruction of nerves following prostatectomy. ® ® ® Axogen will continue to accept patients in the RANGER clinical study, a utilization registry of Avance Nerve Graft. Five publications and more than 60 scientific conference presentations have been generated to date from the registry. The RANGER Study is an observational study in current enrollment. It is designed to allow enrollment of up to a total of 5,000 subjects over the next several years. The follow-up for the RANGER Study is standard of care with a target of up to 36 months post peripheral nerve repair. At the time of the BLA submission, Axogen will submit an ® ® ® ® 30 Table of Contents interim report in the BLA for the enrolled subjects. In 2013, a Matched Autograft and Tube Conduit Case Control Cohort Arm of RANGER (“MATCH”) comparative arm was added. Subjects treated with Avance Nerve Graft were matched to the peripheral nerve autograft or tube conduit treated groups based on size of gap length. We anticipate having approximately 300 subjects treated with peripheral nerve autograft and/or tube conduit in the comparative arm. ® ® Axogen created an additional RANGER Study arm called Sensation Neurotization Outcomes for ® Women (“Sensation-NOW”). This registry cohort is designed to assess breast sensation following reconstruction with or without neurotization. The study is currently enrolling and is designed to enroll up to 2,000 subjects who have undergone mastectomy and breast reconstruction. Axogen has worked with leading institutions, researchers and surgeons to support innovation in the field of ® ® ® surgical peripheral nerve repair. Axogen believes that RANGER is currently the largest multi-center observational clinical study conducted in peripheral nerve gap repair. Axogen’s ongoing RECON study will also continue our clinical work, providing a new multi-center, prospective, randomized, clinical study on Avance Nerve Graft. The January 2012 edition of Microsurgery, November 2012 edition of The Journal of Hand Surgery June 2015 edition of Journal of Reconstructive Microsurgery and the January 2017 edition of HAND, each contain an article summarizing RANGER study results (Brooks, et al. Processed nerve allografts ® for peripheral nerve reconstruction: A multicenter study of utilization and outcomes in sensory, mixed, and motor nerve reconstructions. Microsurgery, 2012 Jan; 32(1): 1-14; and Cho, et al. Functional outcome following nerve repair in the upper extremity using processed nerve allograft. J Hand Surg Am 2012 Nov; 37(11):2340-9 and Rinker, et al. Outcomes of short-gap sensory nerve injuries reconstructed with processed nerve allografts from a multicenter registry study. J Reconstr Microsurg 2015 Jun; 31(5):384-90). Brooks et al. reported on 55 Avance Nerve Graft nerve repairs and resulted in meaningful motor and sensory recovery in 87% of nerve transections between 5 and 50 mm. Cho et al. showed that Avance Nerve Graft provided 89% meaningful recovery for digital nerve injuries, and 80% meaningful recovery for motor function in mixed and motor nerve injuries. An expanded data milestone was presented at the 5th Vienna Symposium on Surgery of Peripheral Nerves in June 2014 and such expanded RANGER data provides that of the injuries repaired with the Avance Nerve Graft 90%, 80% and 87% achieved meaningful recovery for gap lengths of 5-14 mm, 15-29 mm and 30-65 mm, respectively. Rinker et al. reported on a subgroup from the RANGER registry on sensory recovery of short-gap digital nerve repairs between 5-15 mm using Avance Nerve Graft. The study cohort included 24 subjects with 37 digital nerve repairs. Outcomes analysis demonstrated meaningful levels of sensory recovery. No implant related adverse experiences were reported in any of such reports. In a second publication, Rinker et al. reported on a subgroup from RANGER with nerve gaps >25 mm. They found that in the population of 28 subjects, meaningful sensory recovery was reported in 86% of the repairs. Isaacs and Safa reported on a subgroup of subjects with large diameter nerve injuries repaired with Avance Nerve Graft. The study included 15 nerve repairs with 4-5 mm diameter Avance Nerve Grafts. Outcomes analysis found that meaningful levels of sensory and motor function were achieved and no safety concerns were reported. ® ® ® ® ® ® ® ® The following describes available clinical outcomes data from published papers on the leading synthetic and collagen conduit. Published papers on the leading synthetic collagen conduit by Weber, et al., 2000 and Wangensteen and Kalliainen, 2009, showed meaningful improvement: 74% in sensory nerves and 43% in sensory, mixed and motor nerves, respectively, of cases bridging a gap in the particular type of nerve. A paper published by Haug, et al., 2013 on the leading synthetic and collagen conduit showed meaningful improvement in 40% sensory nerves using the static 2-point discrimination test. Autograft studies where autograft and direct repair or direct suture were tested by Weber, et al., 2000, Kim and Kline 2001-2006, Frykman and Gramyk, 1991, Frykman and Gramyk, 1991 and Kallio, 1993, as interpreted by Brooks et al. 2012, reported meaningful recovery: 86% in sensory nerves, 67-86% in sensory and mixed nerves, 80% in sensory nerves, 75-78% mixed nerves and 70% sensory nerves, respectively, of cases bridging a gap in the particular type of nerve. Published papers by Kim and Kline 2001-2006 and Frykman and Gramyk, 1991 reported successful recovery in 75% and 78% of mixed and motor nerves, respectively. A study by Kallio et al., 1993 showed recovery in 67% of mixed and motor nerves where recovery was defined as results indicating a classification of useful or better motor and sensory recovery. 31 Table of Contents ® The RECON study is a prospective, randomized, controlled, patient and evaluator blinded, comparative study of Avance Nerve Graft and Collagen Nerve Cuffs in the repair of peripheral nerve transections. The study is a non-inferiority study designed to assess the outcome of peripheral nerve repair originally in approximately 170 subjects in up to 20 centers. Subjects will be followed over the course of 12 months to assess safety and efficacy outcomes with assessments being performed at various defined intervals up to 12 months. The study completed initial subject enrollment in January 2019. No outcome data is available at this time. As required by the SPA and agreed to by FDA and Axogen, an independent statistical analysis was conducted to determine if greater study enrollment is appropriate to maintain the planned statistical power of the study. Axogen is working with the FDA to review the interim analysis findings and obtain agreement on the next phase of the study. See Risk Factors - Clinical trials can be long, expensive and results are ultimately uncertain, which could jeopardize Axogen’s ability to obtain regulatory approval and continue to market its Avance Nerve Graft product. ® ® CHANGE was a prospective randomized controlled pilot study of nerve cuffs and Avance Nerve Graft for the reconstruction of peripheral nerve transections in male and female subjects that sustained injury to at least one nerve in the hand, distal to the superficial palmar arch that after resection resulted in a nerve gap of >5 mm and ≤20 mm. The study results were published by Means et al in the June 2016 edition of HAND. The authors randomized 23 participants with 31 digital nerve injuries. Sixteen participants with 20 repairs had at least six months of follow-up while 12-month follow-up was available for 15 repairs. There were no significant differences in participant and baseline characteristics between treatment groups. The average static two point discrimination (s2PD) for the Avance Nerve Graft was 5 ± 1 mm (n = 6) compared with 8 ± 5 mm (n = 9) for hollow conduits. All injuries randomized to processed nerve allograft returned some degree of s2PD as compared with 75% of the repairs in the conduit group. The authors concluded that in this pilot study, patients whose digital nerve reconstructions were performed with processed nerve allografts had significantly improved and more consistent functional sensory outcomes compared with hollow conduits. ® A pilot study on the repair of the cavernous nerves in prostate cancer patients at Vanderbilt with 24 month follow-up has been completed. A total of 12 subjects were enrolled in this single center study. The primary objective of this study was to assess the technical feasibility of using Avance Nerve Graft for neurovascular bundle (NVB) reconstruction during Robotic Assisted Laparoscopic Prostatectomy (RALP). The secondary objective of the study was to assess the long term safety and efficacy of NVB reconstruction by assessing quality of life and erectile function through validated questionnaires 24 months post-repair. ® ASM-CP-001 is a registry study to evaluate the role of Avive Soft Tissue Membrane in the management ® of nerve injury following acute trauma. The study is designed to collect safety, functional and healthcare economic outcomes data in a select set of acute trauma injuries. The study is currently designed to enroll up to 200 subjects. Axogen is conducting REPOSE™, a two-phase study comparing standard neurectomy to Axoguard Nerve ® Cap, a porcine small intestine submucosa-based nerve termination cap which leverages Axogen’s patented chambered technology to aid in the management of symptomatic or painful neuroma. The first phase will include approximately 15 subjects in a non-randomized pilot, while the second phase is a prospective, randomized controlled study planned to enroll up to 101 subjects, with approximately 15 in the open pilot phase followed by 86 in the randomized phase. The study will assess pain scores, quality of life and health outcomes over a 12-month follow-up period. Enrollment has been initiated. In addition to these clinical research programs, Axogen is developing additional clinical trials in peripheral nerve repair, mixed and motor nerve repair, breast neurotization and pain. Clinical trials are subject to extensive recordkeeping and reporting requirements. Axogen’s clinical trials must be conducted under the oversight of an IRB for the relevant clinical trial sites and must comply with FDA regulations, including but not limited to those relating to good clinical practices. Axogen is also required to obtain the patients’ written informed consent in form and substance that complies with both FDA requirements and state and federal privacy and human subject protection regulations. Axogen, the FDA or the IRB may suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the biological 32 Table of Contents product or device, or may otherwise not be sufficient to obtain FDA approval to market the product in the U.S. Similarly, in Europe, the clinical study for a medicine product must be authorized by the Competent Authority in each Member State in which the clinical trial is to be conducted, and must receive a favorable opinion from an ethics committee. Pervasive and Continuing Regulation There are numerous regulatory requirements that apply after a product is cleared or approved. For medical devices, these include, but are not limited to: the FDA’s regulations for device labeling (21 CFR Part 801), medical device reporting (21 CFR Part 803), reporting of corrections and removals (21 CFR Part 806), establishment registration and device listing requirements (21 C.F.R. Part 807); and compliance with the Quality System Regulation (“QSR”) per 21 CFR Part 820. Distribution of medical devices is also subject to license/registration requirements in some states. For tissue and biologic products, the regulatory requirements include: the FDA’s registration and listing requirements, donor eligibility requirements and compliance with Good Tissue Practices (“GTP”) in 21 CFR Part 1271 for human tissue products, compliance with the FDA’s cGMP in 21 CFR Parts 210, 211, and 600 for licensed biological products, and postmarket BLA requirements (21 CFR Part 601). Among other things, these regulations require manufacturers, including third party manufacturers to: · · · · · · · follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; comply with labeling regulations and FDA prohibitions against the false or misleading promotion or the promotion of products for uncleared, unapproved or off-label uses or indications; comply with requirements to obtain clearance or approval for certain changes affecting the product, including changes to the product’s manufacturing, labeling, or intended use; report to the FDA certain adverse events, adverse reactions and deviations: (a) for medical devices, a report to FDA is required if the device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur; (b) for biologics, a deviation from current GMP or an unexpected or unforeseeable event that may affect the safety, purity, or potency of the product must be reported; and (c) for human tissue products, FDA requires reporting of certain adverse reactions involving a communicable disease related to an HCT/P that the company made available for distribution; comply with post-approval restrictions or conditions, including post-approval study commitments and post-market safety and annual reporting requirements; follow post-market surveillance regulations that may apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; and follow requirements to issue notices of correction or removal, or conduct market withdrawals or recalls where quality or other issues arise. Axogen has not received any reports of adverse events concerning the Avance Nerve Graft or Avive Soft ® ® Tissue Membrane products. Six adverse events have been reported for the Axoguard products (one each in 2013, 2014, 2015 and 2016 and two in 2017). Axogen reported two (2) biological deviations in 2018 for quality system issues related to human tissue distribution (no patient safety issues were involved). Axogen has not had to submit any Medical Device Reports (“MDRs”) or tissue adverse reaction reports to the FDA. Cook Biotech submitted a MDR for the Axoguard adverse events in 2013, 2014, 2015, 2016 and 2017. Although Axogen’s Axoguard products have had just six adverse events reported to date, there may have been other incidents, including patient deaths, which may have occurred during procedures utilizing Axogen’s products without Axogen being aware of any such incidents. In addition, there can be no assurance that in the future Axogen’s products will not cause or contribute to an adverse event that would require Axogen to submit MDRs, biological deviation reports, or tissue adverse reaction reports to the FDA. ® ® ® The advertising and promotion of medical products are also regulated by the Federal Trade Commission and by state regulatory and enforcement authorities. Recently, some promotional activities for FDA-regulated products have been the subject of enforcement action brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the Federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. 33 Table of Contents Axogen is registered with the FDA as a tissue establishment for the Avance Nerve Graft and Avive Soft Tissue Membrane. The FDA has broad post-market and regulatory enforcement powers. Axogen is subject to unannounced inspections by the FDA to determine compliance with the GTP, GMP and other regulations, and these inspections may also include the manufacturing facilities of suppliers. ® ® Failure by Axogen or by Axogen’s suppliers to comply with applicable regulatory requirements can result in enforcement action by the FDA or other federal or state authorities, which may include any of the following sanctions, among others: · warning letters, fines, injunctions, consent decrees and civil penalties; · · · · customer notifications, repair, replacement, refunds, recall or seizure of our products; operating restrictions, partial suspension or total shutdown of production; suspension or termination of our clinical trials; refusing our PMA or BLA for new products, new intended uses or modifications to existing products; · withdrawing or spending premarket approvals that have already been granted; and · criminal prosecution. Education Grants, U.S. Anti-kickback, False Claims and Other Healthcare Fraud and Abuse Laws Educational Grants A medical product manufacturer may provide financial support, including support by way of grants, to third-parties for the purpose of conducting medical educational activities. If these funded activities are considered by the FDA to be independent of the manufacturer, then the activities fall outside the FDA restrictions on promotion to which the manufacturer is subject. The FDA considers several factors in determining whether an educational event or activity is independent from the substantive influence of the product manufacturer and therefore non-promotional, including, but not limited to, the following: · whether the intent of the funded activity is to present clearly defined educational content, free from commercial influence or bias; · whether the third-party grant recipient and not the manufacturer has maintained control over selecting the faculty, speakers, audience, program content and materials; · whether the program focuses on a single product of the manufacturer without a discussion of other relevant existing competitive products or treatment options; · whether there was meaningful disclosure to the audience, at the time of the program, regarding the manufacturer’s funding of the program, any significant relationships between the provider, presenters, or speakers and the supporting manufacturer; whether any unapproved uses will be discussed; · whether there are legal, business, or other relationships between the supporting manufacturer and provider or its employees that could permit the supporting manufacturer to exert influence over the content of the program; · whether the individuals employed by the provider and involved in designing or conducting the educational activities are also involved in advising or assisting the company with respect to sales or marketing; · whether the information about the company’s products is further disseminated after the initial program, by or at the direction of the company, other than in response to an unsolicited request or through an independent provider; and · whether the provider is compliant with standards for independence, balance, objectivity, and scientific rigor when putting on ostensibly independent educational programs. 34 Table of Contents Axogen seeks to ensure that the activities it supports pursuant to educational grants program are in accordance with these criteria for independent educational activities. However, Axogen cannot provide assurance that the FDA or other government authorities would view the programs supported as being independent. Fraud, Abuse and False Claims Axogen is directly and indirectly subject to various federal and state laws governing relationships with healthcare providers and pertaining to healthcare fraud and abuse, including anti-kickback laws. In particular, the U.S. Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for or recommending a good or service for which payment may be made in whole or part under federal healthcare programs, such as the Medicare and Medicaid programs. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. In implementing the statute, the Office of Inspector General of the U.S. Department of Health and Human Services (“OIG”) has issued a series of regulations, known as “safe harbors.” These safe harbors set forth provisions that, if all their applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute for activities that fit within a safe harbor. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable element of a safe harbor may result in increased scrutiny by government enforcement authorities, such as the OIG, and are at risk activities unless a favorable advisory opinion is obtained from the OIG. The Federal False Claims Act (“FCA”) imposes civil liability on any person or entity that submits, or causes the submission of, a false or fraudulent claim to the U.S. government. Damages under the FCA can be significant and consist of the imposition of fines and penalties. The FCA also allows a private individual or entity with knowledge of past or present fraud against the federal government to sue on behalf of the government to recover the civil penalties and treble damages. The DOJ has previously alleged that the marketing and promotional practices of pharmaceutical and medical device manufacturers included the off- label promotion of products or the payment of prohibited kickbacks to doctors violated the FCA resulting in the submission of improper claims to federal and state healthcare entitlement programs such as Medicaid. In certain cases, manufacturers have entered into criminal and civil settlements with the federal government under which they entered into plea agreements, paid substantial monetary amounts and entered into corporate integrity agreements that require, among other things, substantial reporting and remedial actions going forward. AdvaMed is one of the primary voluntary U.S. trade associations for medical device manufacturers. This association has established guidelines and protocols for medical device manufacturers in their relationships with healthcare professionals on matters including research and development, product training and education, grants and charitable contributions, support of third party educational conferences, and consulting arrangements. Adoption of the AdvaMed Code by a medical device manufacturer is voluntary, and while the OIG and other federal and state healthcare regulatory agencies encourage its adoption and may look to the AdvaMed Code, they do not view adoption of the AdvaMed Code as proof of compliance with applicable laws. Axogen has incorporated the principles of the AdvaMed Code in its standard operating procedures, sales force training programs, and relationships with doctors. Key to the underlying principles of the AdvaMed Code is the need to focus the relationships between manufacturers and healthcare professionals on matters of training, education and scientific research, and limit payments between manufacturers and healthcare professionals to fair market value for legitimate services provided and payment of modest meal, travel and other expenses for a healthcare professional under limited circumstances. Axogen has incorporated these principles into its relationships with healthcare professionals under its consulting agreements, payment of travel and lodging expenses, research and educational grant procedures and sponsorship of third party conferences. In addition, Axogen has conducted and will continue to conduct training sessions on these principles. Finally, the Sunshine act, as defined below, imposes additional reporting and disclosure requirements on Axogen for any “transfer of value” made or distributed to physicians and teaching hospitals, as well as reporting of certain physician ownership interests. Axogen cannot provide any assurance that regulatory or enforcement authorities will view its relationships with physicians or policies as being in compliance with applicable regulations and laws. 35 Table of Contents Regulation Outside of the United States Distribution and sales of medical products outside of the U.S. are subject to foreign governmental regulations that vary substantially from country to country. The time required to obtain certification or approval by a foreign country may be longer or shorter than that required for FDA clearance or approval and the requirements may be different. There are restrictions under U.S. law on the export from the U.S. of medical devices and biological product that cannot be legally distributed in the U.S. If a Class I or Class II device does not have 510(k) clearance and the manufacturer reasonably believes that the device could obtain 510(k) clearance in the U.S., then the device can be exported to a foreign country for commercial marketing without the submission of any type of export request or prior FDA approval if (i) the device is not sold or offered for sale in the U.S., (ii) is labeled for export only and (iii) satisfies certain criteria relating primarily to specifications of the foreign purchaser and compliance with the laws of the country to which it is being exported, known as Importing Country Criteria. An unapproved Class III device can be exported if it (i) complies with the criteria discussed above for devices that could obtain 510(k) clearance, (ii) meets certain other quality and labeling requirements, and (iii) has a valid marketing authorization from one of a list of countries listed in the FD&C Act. If an unapproved Class III device does not have a valid marketing authorization from one of the listed countries, an export permit from the FDA is required in order to export it. An unapproved biological product can be exported without submitting an export request to FDA if the product has received a marketing authorization in one of a list of countries listed in the FD&C Act and it meets applicable requirements of the FD&C Act and the laws of the country to which it is exported. An investigational biological product may also be exported under an IND if a listed investigator is in a foreign country and certain requirements specified in FDA’s regulations are met. Axogen currently believes it complies with applicable regulations when exporting its products and Axogen intends to continue such compliance in the event there are any regulatory changes regarding its products in the United States. The primary regulatory body in Europe is the E.U. which has adopted numerous directives and promulgated voluntary standards regulating the design, manufacture and labeling of, and clinical trials and adverse event reporting for, medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear CE marking, indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout the member states of the E.U. and other countries that comply with these directives. The method for assessing conformity varies depending on the type and class of the device, but normally involves an assessment by the manufacturer and a third-party assessment by a notified body, an independent and neutral institution appointed by a country to conduct the conformity assessment. This third-party assessment may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s device. Such an assessment is required for a manufacturer to commercially distribute the product throughout these countries. In the second quarter of 2014, Axogen’s Quality System became registered to ISO 13485 for Receipt, Handling, Storage and Distribution of Medical Devices related to nerve repair. ® ® Cook Biotech is responsible for all regulatory filings for the Axoguard Connector and Protector products including international registrations. Axogen works with Cook Biotech by providing the countries for Cook to register or get approval for these Axoguard products. Cook Biotech prepares the product filing documentation and submits this documentation to the Ministry of Health (“MOH”) for the country. Each country or region has its own regulations and the documentation required for submission varies. It typically takes less than nine months from the initiation of the project to obtain clearance in a given country or region. To date, the Axoguard Connector and Protector product lines were registered in May 2013 in Canada for distribution and in April 2013 the product lines were awarded the CE Mark allowing distribution into the E.U. and other countries that accept the CE Mark. However, Cook Biotech is currently renewing the Axoguard products CE Mark and until such renewal, Axogen is able to sell only those Axoguard products that are currently in inventory in the E.U., which inventory may not be sufficient to satisfy all product sales prior to obtaining the renewal. ® ® ® The British and E.U. negotiators have reached a draft agreement concerning the UK’s transition from its current E.U. membership which ends on December 31, 2020. During such time, E.U. Law will remain applicable thus the placement on the market of medical devices may continue uninterrupted on both sides of the English Channel and the notified body certificates will remain valid. Axogen registers its human tissue products in each individual E.U. country 36 Table of Contents and each distributor in the UK has import authority for Axogen’s human tissue product. In the event of a no deal or deal Brexit, it is expected that a licensed UK establishments that import or export tissues or cells will need written agreements with the relevant E.U. licensed establishments to continue importing and exporting with the E.U. As Axogen ships directly to the UK from the U.S., we would expect no delay in shipment of human tissue products into the UK. Further, the RANGER clinical trial being performed at select hospitals in the UK would not be affected by Brexit as long as the products come directly from the U.S. ® Tissue products are not currently regulated under the CE Mark Axogen is responsible for all regulatory filings for Avance Nerve Graft and Avive Soft Tissue ® ® Membrane including international registrations. To obtain approvals Axogen will prepare the product filing documentation and submit this documentation to the Ministry of Health (“MOH”) for a country. Although some standards of harmonization exist, each country in which Axogen conducts business has its ® ® ® own specific regulatory requirements. Axogen procures and processes its tissue for the Avance Nerve Graft and Avive Soft Tissue Membrane in the U.S., and markets the Avance Nerve Graft in Canada, United Kingdom, and certain other countries under compliance with the individual country regulations. These requirements are dynamic in nature and, as such, are continually changing. New regulations may be promulgated at any time and with limited notice. Axogen will review the regulations at the time of submission of the product dossier for regulatory review. This review involves reviewing the appropriate MOH regulations, discussion with in-country distributors and use of consultants. It typically takes less than nine months from the initiation of the product to develop a product dossier (specific for that country), submission of the documentation and MOH review of the product filing. While Axogen believes that it is in compliance with all existing pertinent international and domestic laws and regulations, there can be no assurance that changes in governmental administrations and regulations will not negatively impact Axogen’s operations. Avive Soft Tissue Membrane is currently available in the U.S. and has received regulatory registration allowing for distribution in both Canada and Austria. ® The FDA and international regulatory bodies conduct periodic compliance inspections of Axogen’s U.S. processing facilities. Axogen’s operations are registered with CBER, as a tissue establishment. Axogen is also accredited by the AATB and is licensed in the states of Florida, New York, California, Maryland, Delaware, Oregon and Illinois. Axogen believes that worldwide regulation of tissue products is likely to intensify as the international regulatory community focuses on the growing demand for these implant products and the attendant safety and efficacy issues of recipients. Changes in governing laws and regulations could have a material adverse effect on Axogen’s financial condition and results of operations. Axogen management further believes that it can help to mitigate this exposure by continuing to work closely with government and industry regulators. Environmental Axogen’s products, as well as the chemicals used in processing, are handled and disposed of in accordance with country-specific, federal, state and local environmental regulations. Since 2007, Axogen has used outside third parties to perform all biohazard waste disposal. Axogen contracts with independent, third parties to perform sterilization of its allografts. In view of the engagement of a third party to perform irradiation services, the requirements for compliance with radiation hazardous waste do not apply, and therefore Axogen does not anticipate that this engagement will have any material adverse effect upon its capital expenditures, results of operations or financial condition. However, Axogen is responsible for assuring that the service is being performed in accordance with applicable regulations. Although Axogen believes it is in compliance with all applicable environmental regulations, the failure to fully comply with any such regulations could result in the imposition of penalties, fines and/or sanctions which could have a material adverse effect on Axogen’s business. 37 Table of Contents Corporate History On September 30, 2011, Axogen Corporation (“AC”), a Delaware corporation, completed its business combination with LecTec Corporation (“LecTec”), a Minnesota corporation, in accordance with the terms of an Agreement and Plan of Merger, dated as of May 31, 2011, by and among LecTec, Nerve Merger Sub Corp., a subsidiary of LecTec (“Merger Sub”), and AC, which the parties amended on August 9, 2011 and September 30, 2011 (as amended, the “Merger Agreement”). Pursuant to the Merger Agreement, Merger Sub merged with and into AC, with AC continuing after the merger as the surviving corporation and a wholly owned subsidiary of LecTec (the “Merger”). Immediately following the Merger, LecTec changed its name to Axogen, Inc. In October 2011, Axogen Inc. moved its corporate headquarter facilities (principal executive office) from Texarkana, Texas to Alachua, Florida. LecTec was organized in 1977 as a Minnesota corporation and went public in December 1986. Prior to the Merger, LecTec was an intellectual property licensing and holding company. LecTec held multiple domestic and international patents based on its original hydrogel patch technology and filed patent applications on a hand sanitizer patch. LecTec also had a licensing agreement with Novartis Consumer Health, Inc. LecTec took legal action to protect its IP and settled all of its litigation prior to the Merger and Axogen, subsequent to the Merger, continued to hold LecTec IP until it expired. Our website address is http://www.Axogeninc.com. We have included our website address as an inactive textual reference only. We make available, free of charge through our website, our annual reports on Form 10- K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material, or furnish it to the SEC. We also similarly make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. We are not including the information contained at http://www.Axogeninc.com, or at any other website. Employees At December 31, 2018, Axogen had 297 total employees, including 19 part-time employees and 278 full- time employees. Of the full-time employees, 27 employees work in administration, information technology and finance, 54 employees work in manufacturing and quality control, 39 employees work in research and development and regulatory and 158 employees work in sales and marketing. As of the date of this annual report on Form 10-K Axogen has not had a work stoppage and no employees are represented by a labor union. Axogen believes its relationship with its employees is satisfactory. 38 Table of Contents Executive Officers of the Registrant The following table lists the names and positions of the individuals who are, as of February 28, 2019, executive officers of Axogen: Title Chairman, Chief Executive Officer and President Chief Financial Officer Name Karen Zaderej Peter J. Mariani Gregory G. Freitag, JD, CPA General Counsel and Director Eric A. Sandberg Mark Friedman, Ph.D. David Hansen Maria Martinez Isabelle Billet Erick DeVinney Mike Donovan Angelo G. Scopelianos, Chief Commercial Officer Vice President of Regulatory Affairs and Quality Assurance Vice President of Finance and Treasurer Chief Human Resources Officer Chief Strategy and Business Development Officer Vice President of Clinical and Translational Sciences Vice President of Operations Vice President of Research and Development Ph.D. Biographical information for each of our executive officers is included below. Karen Zaderej, Chairman, Chief Executive Officer and President (Age 57) Ms. Zaderej has served as Axogen’s President, Chief Executive Officer, a member of our board of directors (the “Board of Directors”) since September 2011 and became the Chairman of our Board of Directors in May 2018. She has served as the Chief Executive Officer of Axogen, and a member of Axogen’s board of directors since May 2010. Ms. Zaderej joined Axogen in May 2006 and served as Vice President of Marketing and Sales from May 2006 to October 2007 and as Chief Operating Officer from October 2007 to May 2010. From October 2004 to May 2006, Ms. Zaderej worked for Zaderej Medical Consulting, a consulting firm she founded, which assisted medical device companies in building and executing successful commercialization plans. From 1987 to 2004, Ms. Zaderej worked at Ethicon, Inc., a Johnson & Johnson company, where she held senior positions in marketing, business development, and research & development, as well as ran a manufacturing business. Ms. Zaderej is a Director of Viveve Medical, Inc., a public women's intimate health company and SEBio, a non-profit supporting the life science industry in the southeastern United States. Ms. Zaderej has a MBA from the Kellogg Graduate School of Business and a BS in Chemical Engineering from Purdue University. Peter Mariani, Chief Financial Officer (Age 55) Mr. Mariani, has been Axogen’s Chief Financial Officer since March of 2016. Prior to joining Axogen, he served as Chief Financial Officer of Lensar, Inc, a privately held laser refractive cataract surgery company, from July 2014 through January 2016, which was sold in December 2015. From June 2011 to June 2014 Mr. Mariani served as Chief Financial Officer of Hansen Medical, a publicly traded medical device company developing robotic solutions for intravascular procedures. From 2007 through 2010 Mr. Mariani served as Chief Financial Officer for two privately held companies: Harlan Laboratories (2007 – 2009); and BMW Constructors (2009 – 2010). From 1994 through 2006 Mr. Mariani served in various senior financial roles with Guidant Corporation, a publicly traded leader in the development and sale of medical devices for the treatment of cardiovascular disease. Mr. Mariani began his career with Guidant Corporation as Director of Corporate Financial Reporting where he supported the initial public offering of Guidant Corporation and ultimately served as Vice President, Controller and Chief Accounting Officer. Mr. Mariani’s experience at Guidant Corporation included two years as Director of Financial Reporting, Guidant Vascular Intervention in Santa Clara, California, and four years in Tokyo, Japan, mostly as Vice President Finance and Administration where he helped to facilitate the conversion and scale of the Japan business from a distributor network to a direct sales and marketing organization. Following the 2006 sale of Guidant Corporation to Boston Scientific Corporation, Mr. Mariani co-led the initial integration of the two companies. From 1987 to 1994, Mr. Mariani worked with Ernst and Young, 39 Table of Contents LLP, where he served a diverse client base as a Certified Public Accountant. Mr. Mariani received a Bachelor of Science Degree in Accounting from Indiana University. Gregory G. Freitag, JD, CPA, General Counsel and Director (Age 57) Mr. Freitag, JD, CPA, has been Axogen’s General Counsel and a member of our Board of Directors since September 2011. He was Axogen’s Chief Financial Officer from September 2011 to May 2014 and August 2015 to March 2016, and its Senior Vice President Business Development from May 2014 to October 2018. He was Chief Executive Officer, Chief Financial Officer and a board member of LecTec Corporation, an IP licensing and holding company that merged with Axogen in September 2011, from June 2010 through September 2011. From May 2009 to the present, Mr. Freitag has been a principal of FreiMc, LLC, a healthcare and life science consulting and advisory firm he founded that provides strategic guidance and business development advisory services. Prior to founding FreiMc, LLC, Mr. Freitag was a Director of Business Development at Pfizer Health Solutions, a former subsidiary of Pfizer, Inc., from January 2006 to May 2009. From July 2005 to January 2006, Mr. Freitag worked for Guidant Corporation in its business development group. Prior to Guidant Corporation, Mr. Freitag was the Chief Executive Officer of HTS Biosystems, a biotechnology tools start-up company, from March 2000 until its sale in early 2005. Mr. Freitag was the Chief Operating Officer, Chief Financial Officer and General Counsel of Quantech, Ltd., a public point of care diagnostic company, from December 1995 to March 2000. Prior to that time, Mr. Freitag practiced corporate law in Minneapolis, Minnesota. Mr. Freitag is also a director of the Foundation Board of Fairview Health Services, a health care system in Minnesota, and PDS Biotechnology Corporation, a private, clinical stage biopharmaceutical company developing immunotherapies for cancer and other disease areas such as infectious disease. Mr. Freitag holds a JD from the University of Chicago and a BA Economics & Business and Law & Society from Macalester College, Minnesota. Eric A. Sandberg, Chief Commercial Officer (Age 54) Mr. Sandberg has served as Axogen’s Chief Commercial Officer since January 2019. From 2016 until joining Axogen, he served as the Chief Executive Officer of Visura Technologies, Inc., a cardiologist-founded medical device company. From 2016 until 2018, Mr. Sandberg served as the Chief Business Officer of Rhythm Therapeutics, Inc., an electrophysiologist-founded preclinical biotechnology company. From 2014 until 2016, he served as the President and Chief Executive Officer of Tangent Medical Technologies, Inc., a medical device company. Mr. Sandberg also served as Senior Vice President, Sales at CardioDx, Inc., a molecular diagnostics company, from 2008 until 2013. Prior to joining CardioDx, Inc., Mr. Sandberg worked at Russell Reynolds Associates and held leadership positions across sales, marketing, corporate accounts, and business development at Guidant Corporation and Boston Scientific. Mr. Sandberg currently serves as an observer on the Board of Directors of Visura Technologies, Inc. Mr. Sandberg earned an MBA from Harvard Business School and a Bachelor of Science degree in mechanical engineering from Bradley University in Peoria, IL. Mark Friedman, Ph.D., Vice President of Regulatory Affairs and Quality Assurance(Age 61) Dr. Friedman has served as Axogen’s Vice President of Regulatory Affairs and Quality Assurance since November 2011. He has also served as Axogen’s Director of Quality Assurance and Regulatory Affairs from September 2006 to June 2011. Prior to joining Axogen, Dr. Friedman held several regulatory and quality leadership positions at Enable Medical Corporation, a medical device company, including Director of Quality Assurance from 1997 to 1998 and Vice President of Quality and Regulatory from 1998 to 2001 and from 2004 to 2005. Dr. Friedman also worked for AtriCure, Inc., a company that develops, manufactures and sells surgical ablation systems to treat atrial fibrillation, as Vice President of Quality and Regulatory from 2001 to 2004 and as Vice President of Operations in 2004. AtriCure acquired Enable Medical in 2005. Dr. Friedman has over 25 years of experience in developing and directing regulatory strategy and quality systems for medical products, including 15 years with start-up medical product firms. Dr. Friedman has a Ph.D. in Chemistry specializing in protein biochemistry from the University of Cincinnati. Dr. Friedman sits on various agency committees for the Alliance of Regenerative Medicine, Medical Device Manufacturer’s Association and American Association of Tissue Banks, working on improving regulatory laws and standards for regenerative products and medical devices. 40 Table of Contents David Hansen, Vice President of Finance and Treasurer (Age 58) Mr. Hansen has served as Axogen’s Vice President of Finance and Treasurer since June 2017. Mr. Hansen previously served as Chief Accounting Officer of Axogen from December 2015 to May 2017, and as Corporate Controller of Axogen from June 2006 to November 2015. Mr. Hansen was Vice President of Finance—Corporate Controller and Treasurer of Perma-Fix Environmental Services, Inc., a publicly-traded environmental services company, and held other corporate and regional accounting positions at Perma-Fix Environmental Services from 1995 to 2005. Mr. Hansen was also the Vice President - Finance at Kraft Foodservice, Inc., Ocala, Florida from 1994 to 1995 and held other accounting and procurement positions at Kraft Foodservice, Inc. from 1985 to 1994. Mr. Hansen has over 20 years of experience in senior financial positions at both publicly traded and private companies. Mr. Hansen holds a BBA degree in Accounting from the University of Oklahoma. Maria Martinez, Chief Human Resources Officer (Age 50) Ms. Martinez has served as Axogen’s Chief Human Resources Officer since October 2018. From January 2018 until joining Axogen as Chief Human Resources Officer, Ms. Martinez provided consulting services related to human resources through her consulting firm MDM Consulting Services, LLC. Prior to founding MDM , she was Chief Human Resources Officer at HSNi, a $3.5B interactive multichannel retailer overseeing nearly seven thousand employees in nine locations. Ms. Martinez joined HSNi in July 2010 and served as SVP Talent Management until she assumed the role of Chief Human Resources Officer. Prior to joining HSNi, Ms. Martinez was Vice President of Human Resources with Laser Spine Institute, LLC., a minimally invasive spine surgery company, having started with them in 2008. From 2007 to 2008, she worked at Bausch + Lomb, Inc. where she served as Director, Human Resources US Pharmaceuticals and, from 2005 to 2007, Ms. Martinez was Sr. Director, Human Resources Corporate with Darden Restaurants, Inc. Prior to 2005, Ms. Martinez held positions related to the field of human resources. Ms. Martinez has a Master of Science in Industrial/Organizational Psychology from the Florida Institute of Technology, Melbourne, FL and a Bachelor of Science in Psychology; Bachelor of Arts in French, Minor in Italian from the University of South Florida, Tampa, FL. Isabelle Billet, Chief Strategy and Business Development Officer (Age 57) Ms. Billet has served as Axogen’s Chief Strategy and Business Development Officer since October 2018. From July 2013 until joining Axogen as Chief Strategy and Business Development Officer, Ms. Billet worked for IBHC Advisors LLC, a consulting firm she founded which assisted medical device companies in their organic and inorganic growth strategies and supported private equity firms on their investment strategy and due diligence. From 2010 to 2013, Ms. Billet worked at Cardinal Health, Inc where she served as Senior Vice President of Marketing and Innovation for the Medical segment focusing on their private brand portfolio development. From 2005 to 2010, she was Vice President Marketing and New Business Development for C.R. Bard Medical division. She worked for Johnson and Johnson from 1992 to 2005, splitting her tenure between Advanced Sterilization Products and Ethicon, Inc in positions of increasing responsibilities in marketing and new business development in France, Europe and US. Ms. Billet spent the first 7 years of her career as the head pharmacist and material manager for a private hospital in France. Ms. Billet is a member of the Clinical Innovations Board of Directors, a medical device company exclusively focused in Labor and Delivery and Neonates Intensive Care. She has an MBA from EM Lyon Business School, France and Cranfield School of Management, UK and a Doctorate in Pharmacy from Montpellier University in France. Erick DeVinney, Vice President of Clinical and Translational Sciences (Age 44) Mr. DeVinney has served as Axogen’s Vice President of Clinical and Translational Sciences since January 2014. From April 2007 until January 2014, Mr. DeVinney was the Director of Clinical and Translational Sciences for Axogen. Erick has over 14 years of experience in the successful planning and management of clinical development. Prior to joining Axogen Mr. DeVinney served as Manager of Clinical Operations for Angiotech Pharmaceuticals from 2005 to 2007 and Clinical Program Lead for Pharmaceutical Research Associates International from 2001 to 2005. Mr. DeVinney has been involved in the successful submission of numerous 510(k), IDE and NDA applications. He has a BS in Chemistry from Virginia Commonwealth University. 41 Table of Contents Mike Donovan, Vice President of Operations (Age 54) Mr. Donovan has served as Axogen’s Vice President of Operations since September 2015. Prior to September 2015, Mr. Donovan was Axogen’s Director of Operations from January 2011 until September 2015. From 1988 to 2010, Mr. Donovan held positions at Zimmer Holdings in manufacturing, continuous improvement, quality assurance and sterilization including Director of Manufacturing from 2002 to 2010. Mr. Donovan has a BS in Chemical Engineering and an MBA from the University of Akron. Angelo G. Scopelianos, Ph.D., Vice President of Research and Development (64) Dr. Scopelianos has served as Axogen’s Vice President of Research and Development since September 2018. From 2012 until joining Axogen, Dr. Scopelianos was an independent consultant specializing in medical devices. He began consulting after his retirement from a 24-year tenure at Johnson & Johnson (J&J). Angelo began at J&J in 1988 as section manager of R&D and held the escalating positions of manager of R&D, director of R&D, vice president of R&D and finally from October 2010 to September 2012 senior vice president of R&D. He joined J&J after research leadership positions at EI Dupont de Nemours in Wilmington, Delaware, and Pennwalt Corporation. Angelo received his doctorate degree in organic chemistry from Pennsylvania State University, following completion of a Bachelor of Science degree from the State University of New York—Oneonta. He holds over 35 U.S. patents and numerous international patents, and his awards include the Outstanding Science Alumni Award by Penn State University; the Scientific Leadership Award in Biomaterials Science awarded by a consortium of NJ research universities: Rutgers University, Princeton University and NJ Institute of Technology; the Johnson & Johnson Philip B. Hofmann Award for technical achievements in scientific research; and an Honorary Doctor of Science Degree bestowed by the State University of New York. ITEM 1A. RISK FACTORS Axogen’s business involves a number of risks, some of which are beyond its control. The risk and uncertainties described below are not the only ones the Company faces. Set forth below is a discussion of the risks and uncertainties that management believes to be material to Axogen. Risks Related To The Company Axogen has not experienced positive cash flow from its operations, and the ability to achieve positive cash flow from operations will depend on increasing revenue from distribution of its products, which may not be achievable. Axogen has historically operated with negative cash flow from its operations. As of December 31, 2018, Axogen had an accumulated deficit of approximately $151 million. If revenue does not increase as anticipated, then it will continue to experience negative cash flows and adverse operating conditions. Axogen’s continuing capital needs and other factors could cause the Company to raise additional funds through public or private equity offerings, debt financings or from other sources. The sale of additional equity may result in dilution to Axogen’s shareholders. There is no assurance that Axogen will be able to secure funding on terms acceptable to it, or at all. Axogen’s revenue growth depends on its ability to expand its sales force, increase distribution and sales to existing customers and develop new customers, and there can be no assurance that these efforts will result in significant increases in sales. Axogen is in the process of investing in its distribution and sales channels composed of a combination of its direct sales force and independent agencies/distributors to allow it to increase distribution and sales to existing customers and reach new customers. There can be no assurance that these efforts will be successful in expanding Axogen’s revenue. Axogen currently distributes tissue and sells products directly through its sales force and indirectly through agency relationships. Axogen is engaged in an initiative to build and further expand sales and marketing capabilities. The incurrence of these expenses impacts Axogen’s operating results, and there can be no assurance of their effectiveness. If Axogen is unable to develop its sales force, increase sales to existing customers and attract new customers, it may not be able to grow revenue or maintain its current level of revenue generation. 42 Table of Contents Axogen’s revenue depends primarily on four products. ® Substantially all of Axogen’s revenue is currently derived from only four products, Avance Nerve Graft, Avive Soft Tissue Membrane, Axoguard Nerve Protector and Axoguard Nerve Connector, for the treatment of peripheral nerve damage. Of these four products, the Avance Nerve Graft represents approximately half of the Company’s total revenues. Any disruption in Axogen’s ability to generate revenue from the distribution of tissue and sale of products will have a material adverse impact on Axogen’s business, results of operations, financial condition and growth prospects. ® ® ® ® ® The Axoguard products are only available through an exclusive distribution agreement with Cook Biotech. The agreement was amended February 26, 2018 to run through June 30, 2027. However, there are conditions for continuation of the agreement, including payment terms and minimum purchase requirements, that if breached could result in an earlier termination of the agreement; except that through mutual agreement the parties have not established such minimums and to date have not enforced such minimum purchase provision. Additionally, in the event that Axogen and Cook Biotech were to fail to reach an agreement as to minimum purchase quantities, Cook Biotech could terminate the agreement if it was deemed that Axogen had failed to generate commercially reasonable sales of Axoguard as measured by sales similar to a competitive product at the same stage in its commercial launch as verified by a mutually acceptable third party. Although there are products that Axogen believes it could develop or obtain that would replace the Axoguard products obtained through the agreement with Cook Biotech, the loss of the ability to sell the Axoguard products could have a material adverse effect on Axogen’s business until other replacement products are available. ® ® ® Axogen’s success will be dependent on continued acceptance of its products by the medical community. Continued market acceptance of Axogen’s products will depend on its ability to demonstrate that its products are an attractive alternative to existing nerve reconstruction treatment options and provide appropriate solutions for nerve repair. Its ability to do so will depend on surgeons’ evaluations of clinical safety, efficacy, ease of use, reliability, and cost-effectiveness of Axogen’s nerve repair products. For example, although Axogen’s Avance Nerve Graft follows stringent safety standards, including sterilization by gamma irradiation, Axogen believes that a small portion of the medical community has lingering concerns over the risk of disease transmission through the use of allografts in general. Furthermore, Axogen believes that even if its products receive general acceptance within the medical community, acceptance and clinical recommendations by influential surgeons will be important to the commercial success of Axogen’s products. ® Negative publicity concerning methods of donating human tissue and screening of donated tissue, in the industry in which Axogen operates, may reduce demand for its products and negatively impact the supply of available donor tissue. ® ® ® Axogen is highly dependent on its ability to recover human peripheral nerve tissue from tissue donors for its Avance Nerve Graft product and acquire birth tissue for its Avive Soft Tissue Membrane. The availability of acceptable donors is relatively limited, and this availability is impacted by regulatory changes, general public opinion of the donation process and Axogen’s reputation for its handling of the donation process. Media reports or other negative publicity concerning both improper methods of tissue recovery from donors and disease transmission from donated tissue, including bones and tendons, may limit widespread acceptance of Axogen’s Avance Nerve Graft and Avive Soft Tissue Membrane. Unfavorable reports of improper or illegal tissue recovery practices, both in the U.S. and internationally, as well as incidents of improperly processed tissue leading to transmission of disease, may broadly affect the rate of future tissue donation and market acceptance of allograft technologies and donated tissue use. Potential patients may not be able to distinguish Axogen products, technologies, and tissue recovery and processing procedures from others engaged in tissue recovery. In addition, unfavorable reports could make families of potential donors or donors themselves from whom Axogen is required to obtain consent before processing tissue reluctant to agree to donate tissue to for- profit tissue processors. Any disruption in the supply could have negative consequences for Axogen’s revenue, operating results and continued operations. ® 43 Table of Contents Axogen is highly dependent on the continued availability of its facilities and could be harmed if the facilities are unavailable for any prolonged period of time. Any failure in the physical infrastructure of Axogen’s facilities, including the facility it licenses from CTS, could lead to significant costs and disruptions that could reduce its revenues and harm its business reputation and financial results. Any natural or man-made event that impacts Axogen’s ability to utilize its facilities could have a significant impact on its operating results, reputation and ability to continue operations. This includes termination of the CTS Agreement which is subject to earlier termination by either party at any time for cause (subject to the non-terminating party’s right to cure, in certain circumstances), or without cause by Axogen upon 6 months prior notice wherebysuch notice cannot be provided until March 1, 2021. Axogen believes it can find and make operational a new licensed facility in less than six months, if required. In addition, Axogen acquired property which is located near the CTS facility and it is expected that renovations will be completed by the termination date of the CTS Agreement to provide a new processing facility that can be included in our BLA for the Avance Nerve Graft. However, the regulatory process for approval of facilities whether licensed or owned is time-consuming and unpredictable. Axogen’s ability to license, renovate, rebuild or find acceptable service facilities takes a considerable amount of time and expense and could cause a significant disruption in service to its customers if it were to lose the availability of its production or distribution facilities. Although Axogen has business interruption insurance which would, in instances other than service agreement termination, cover certain costs, it may not cover all costs nor help to regain Axogen’s standing in the market. ® Axogen must maintain high quality processing of its products. Axogen’s Avance Nerve Graft is processed through its Avance Process which requires careful ® ® ® calibration and precise, high-quality processing and manufacturing. Its Avive Soft Tissue Membrane is also human tissue that requires skill in its processing. Achieving precision and quality control requires skill and diligence by its personnel. If it fails to achieve and maintain these high levels of quality control and processing standards, including avoidance of processing errors, defects or product failures, Axogen could experience recalls or withdrawals of its product, delays in delivery, cost overruns or other problems that would adversely affect its business. Axogen reported two (2) biological deviations in 2018 for quality system issues related to human tissue distribution (no patient safety issues were involved) and corrective action was taken without a material adverse consequence to Axogen. Axogen cannot completely eliminate the risk of errors, defects or failures. In addition, Axogen may experience difficulties in scaling-up processing of its Avance and Avive products, including problems related to yields, quality control and assurance, tissue availability, adequacy of control policies and procedures, and lack of skilled personnel. If Axogen is unable to process and produce its human tissue products on a timely basis, at acceptable quality and costs, and in sufficient quantities, or if it experiences unanticipated technological problems or delays in production, its business would be adversely affected. ® ® Delays, interruptions or the cessation of production by Axogen’s third party suppliers of important materials or delays in qualifying new materials, may prevent or delay Axogen’s ability to manufacture or process the final products. Most of the raw materials used in the process for Avance Nerve Graft and Avive Soft Tissue Membrane ® ® ® are available from more than one supplier. However, one of the chemicals Axogen used in the processing of Avance Nerve Graft, Triton X-200, is no longer manufactured by the original single source provider. Axogen developed and outsourced an identical chemical replacement for Triton X-200 and validated Avance Nerve Graft processing using that replacement. The FDA was notified of this change in August of 2018 with an IND Amendment and Axogen has transitioned to using the new supplier. In addition, some of the test results, packaging and reagents/chemicals Axogen uses in its manufacturing process are also obtained from single suppliers. Axogen does not have written contracts with any of its single source suppliers, and at any time they could stop supplying Axogen’s orders. FDA review of a new supplier may be required if these materials become unavailable from Axogen’s current suppliers. Although there may be other suppliers that have equivalent materials that would be available to Axogen, FDA review of any alternate suppliers, if required, could take several months or years to obtain, if able to be obtained at all. Any delay, interruption or cessation of production by Axogen’s third party suppliers of important materials, or any delay in qualifying new materials, if necessary, would prevent or delay Axogen’s ability to manufacture products. In addition, an uncorrected impurity, a supplier’s variation in a raw material or testing, either unknown to Axogen or incompatible with its manufacturing process, or any other problem with Axogen’s materials, testing or components, would prevent or delay its ability to ® 44 Table of Contents process tissue. These delays may limit Axogen’s ability to meet demand for its products and delay its clinical trial, which would have a material adverse impact on its business, results of operations and financial condition. The failure of third parties to perform many necessary services for the commercialization of Avance ® Nerve Graft and Avive Soft Tissue Membrane, including services related to recovery/acquisition, distribution and transportation, would impair Axogen’s ability to meet commercial demand. ® Axogen relies upon third parties for certain recovery/acquisition, distribution and transportation services ® ® ® for its Avance Nerve Graft and Avive Soft Tissue Membrane. In accordance with product specifications, third parties ship Avance Nerve Graft in specially validated shipping containers at frozen temperatures. If any of the third parties that Axogen relies upon in its recovery/acquisition, distribution or transportation process fail to comply with applicable laws and regulations, fail to meet expected deadlines, or otherwise do not carry out their contractual duties to Axogen, or encounter physical damage or natural disaster at their facilities, Axogen’s ability to deliver product to meet commercial demand may be significantly impaired. Axogen is dependent on its relationships with independent agencies to generate revenue. Axogen derives material revenues through its relationships with independent agencies. If certain agency relationships were terminated for any reason, it could materially and adversely affect Axogen’s ability to generate revenues and profits. If Axogen required additional agencies it may not be able to find additional agencies who will agree to market and distribute Axogen’s products on commercially reasonable terms, if at all. If Axogen is unable to establish new agency relationships or renew certain current distribution agreements on commercially acceptable terms, its operating results could suffer. Loss of key members of management, who it needs to succeed, could adversely affect its business. Axogen’s future success depends on the continued efforts of the members of its senior management team. Competition for experienced management personnel in the healthcare industry is intense. If one or more of Axogen’s senior executives or other key personnel are unable or unwilling to continue in their present positions, or if Axogen is unable to attract and retain high quality senior executives or key personnel in the future, its business may be adversely affected. Axogen’s operating results will be harmed if it is unable to effectively manage and sustain its future growth or scale its operations. There can be no assurance that Axogen will be able to manage its future growth efficiently or profitably. Its business is unproven on a large scale and actual revenue and operating margins, or revenue and margin growth, may be less than expected. If Axogen is unable to scale its production capabilities efficiently or maintain pricing without significant discounting, it may fail to achieve expected operating margins, which would have a material and adverse effect on its operating results. Growth may also stress Axogen’s ability to adequately manage its operations, quality of products, safety and regulatory compliance. If growth significantly decreases it will negatively impact Axogen’s cash reserves, and it may be required to obtain additional financing, which may increase indebtedness or result in dilution to shareholders. Further, there can be no assurance that Axogen would be able to obtain additional financing on acceptable terms if all at. There may be significant fluctuations in Axogen’s operating results. Significant quarterly fluctuations in Axogen’s results of operations may be caused by, among other factors, its volume of revenues, seasonal changes in nerve repair activity, timing of sales force expansion and general economic conditions. There can be no assurance that the level of revenues and profits, if any, achieved by Axogen in any particular fiscal period, will not be significantly lower than in other comparable fiscal periods. Axogen’s expense levels are based, in part, on its expectations as to future revenues. As a result, if future revenues are below expectations, net income or loss may be disproportionately affected by a reduction in revenues, as any corresponding reduction in expenses may not be proportionate to the reduction in revenues. 45 Table of Contents Axogen’s revenues depend upon prompt and adequate reimbursement from public and private insurers and national health systems. Political, economic and regulatory influences are subjecting the healthcare industry in the U.S. to fundamental change. The ability of a hospital or an ambulatory surgery center (“ASC”) to pay fees for Axogen’s products depends in part on the availability of adequate coverage and reimbursement from third- party payors for either our products specifically, the procedures associated with the use of our products, or both. Providers that purchase our products generally rely on third-party payors to reimburse all or part of the costs and fees associated with the procedures performed with our products or the products themselves. Adequate coverage and reimbursement from third-party payors, including governmental payors, such as Medicare and Medicaid, therefore, is important for obtaining product acceptance and widespread adoption in the marketplace. ® When our products (Avance Nerve Graft, Axoguard Connector, Axoguard Protector, Avive Soft Tissue Membrane) are used in the operating room of a hospital, they are commonly treated as general supplies utilized in surgery and the cost is included in payment to the facility for the procedure. When Avance Nerve Graft and Axoguard Connector are used in an outpatient setting where the nerve repair is the primary reason for the procedure, facilities may use a Category I CPT code to facilitate payment. ® ® ® ® ® In January 2018, the American Medical Association created a Category I CPT code (64912) specific to ® nerve repair with nerve allograft (Avance Nerve Graft) and a separate code (+64913) for each additional strand of allograft used in a procedure. Category I CPT codes are used by providers to facilitate payment to the provider (either hospital or ASC) for outpatient procedures. Additionally, Category I CPT codes are used to facilitate payment to the surgeon, for both time spent in outpatient and inpatient procedures. Prior to January 2018, there was no designated Category I CPT code for nerve repair cases that included nerve allograft. To date, the Company has not been able to determine whether there has been either a positive or negative effect as a result of the availability of the new code. The process for securing coding for a product or procedure is separate from the process of securing ® ® coverage and establishing a reimbursement payment rate. In the United States, coverage and reimbursement for medical devices vary among payors. In addition, payors review coverage policies on an ongoing basis and can, without notice, change or deny coverage for these new products and procedures. We estimate that commercial payors covering a significant number of U.S. covered lives have legacy non-coverage policies relating to our Avance Nerve Graft and our Axoguard product lines, designating these products investigational or experimental. Some commercial payors do not currently cover or reimburse our products because they have determined insufficient evidence of favorable clinical outcomes is available. Although some consider the Avance Nerve Graft and our Axoguard product lines investigational or experimental at this time, these payors may in the future determine sufficient evidence has been developed to cover and reimburse our products and related procedures. We are actively working to reverse these non-coverage decisions but cannot provide assurance that we will be successful in these efforts. If we are not successful in reversing existing non- coverage policies, or if other third-party payors issue similar policies, this could have a material adverse effect on our business and operations. Further, third-party payors who currently cover and reimburse customers for procedures using our products may in the future choose to decrease current levels of reimbursement or eliminate reimbursement altogether, either of which will cause our business to suffer. ® ® The amount of reimbursement received by our customers from third-party payors is dependent generally on fee schedules established by these payors for the existing CPT codes. For governmental payors, such as Medicare and Medicaid, the fee schedule amount is determined by statutory and regulatory formulas. For commercial payors, the reimbursement amount generally is dependent upon the specific contract terms between the provider and payor. We cannot provide assurance that government or commercial payors will continue to reimburse for procedures with our products using the existing codes, nor can we provide assurance that the payment rates will be adequate. If providers and physicians are unable to obtain reimbursement for the procedure at cost-effective levels when use of our products is included, this could have a material adverse effect on our business and operations. Hospitals and ASCs may not purchase our products if they do not receive payment sufficient to cover the cost of our products and related procedures. In addition, in the event that the current coding and/or payment methodology for these procedures changes, this could have a material adverse effect on our business and business operations. 46 Table of Contents Axogen may be subject to future product liability litigation which could be expensive and its insurance coverage may not be adequate. Although Axogen is not currently subject to any product liability proceedings and it has no provision for product liability disbursements, it may incur material liabilities relating to product liability claims in the future, including product liability claims arising out of the usage of Axogen products. Although Axogen currently carries product liability insurance in an amount consistent with industry averages, its insurance coverage and any provision it may maintain in the future for product related liabilities may not be adequate and Axogen’s business could suffer material adverse consequences. Technological change could reduce demand for Axogen’s products. The medical technology industry is intensely competitive. Axogen competes with both U.S. and international companies that engage in the development and production of medical technologies and processes including: · · · biotechnology, orthopedic, pharmaceutical, biomaterial, chemical and other companies; academic and scientific institutions; and public and private research organizations. Axogen products compete with autograft, hollow-tube conduits, commercially available wraps and amnion ® products, as well as with alternative medical procedures. For the foreseeable future, Axogen believes a significant number of surgeons will continue to choose to perform autograft procedures when feasible, despite the necessity of performing a second operation and its drawbacks. In addition, many members of the medical community will continue to prefer the use of hollow-tube conduits due in part to their familiarity with these products and the procedures required for their use. Amnion products are widely available and Axogen may not be able to distinguish the Avive Soft Tissue Membrane from such other products so as to produce significant revenue from its distribution. Also, steady improvements have been made in synthetic human tissue substitutes, which could compete with Axogen’s products in the future. Unlike allografts, synthetic tissue technologies are not dependent on the availability of human or animal tissue. Although Axogen’s growth strategy contemplates the introduction of new technologies, the development of these technologies is a complex and uncertain process, requiring a high level of innovation, as well as the ability to accurately predict future technology and market trends. Axogen may not be able to respond effectively to technological changes and emerging industry standards, or to successfully identify, develop or support new technologies or enhancements to existing products in a timely and cost-effective manner, if at all. There can be no assurance that in the future Axogen’s competitors will not develop products that have superior performance or are less expensive relative to Axogen’s products rendering Axogen’s products obsolete or noncompetitive. In this regard, Integra and Baxter have each announced that they will provide a new product consisting of a hollow tube conduit filled with material which they suggest is superior to their current hollow conduit products. Due to Axogen’s limited resources, its smaller size and its relatively early stage, Axogen may face competitive challenges from these new products or existing products and barriers that are difficult to overcome and could negatively impact its growth. Finally, a Chinese company provides a human peripheral nerve allograft in China, however, such product is not sold in markets of interest of Axogen because of Axogen’s IP protection in its identified markets. Axogen may be unsuccessful in commercializing its products outside the U.S. To date, Axogen has focused its commercialization efforts in the U.S., except for minor revenues in certain countries outside the U.S. Axogen intends to expand distribution and sales in these and other countries outside the U.S. and will need to comply with applicable foreign regulatory requirements, including obtaining the requisite approvals to do so. The regulatory environment for Axogen’s portfolio of products is complex. Avance Nerve Graft is distributed in Canada, United Kingdom, and certain other countries. Distribution in Spain currently allows only for compassionate use and Axogen is proceeding with the regulatory submission process in Germany. Axogen is not seeking approval for France and Italy at this time. Avive Soft Tissue Membrane is currently available in the U.S. and select other countries for expansion. Cook Biotech is currently renewing the Axoguard product CE Mark and until such renewal Axogen can only sell those Axoguard products that are currently in inventory in the E.U., which inventory may not be sufficient to ® © ® 47 Table of Contents satisfy all product sales prior to obtaining the renewal. In addition, the United Kingdom voted to exit the E.U. (“Brexit”) and Axogen cannot be sure what changes could occur or the cost of regulatory compliance with both the United Kingdom and E.U. Until such time as Axogen can obtain, if at all, the necessary registrations and approvals for its products, material expansion beyond the United States will be limited. Finally, the cost of regulatory compliance for sales outside the U.S. can be significant and time consuming. Additionally, Axogen will need to either enter into distribution agreements with third parties or develop a direct sales force in foreign markets. If it does not obtain adequate levels of reimbursement from third party payers outside of the U.S., it may be unable to develop and grow its revenue internationally. Outside of the U.S., reimbursement systems vary significantly by country. Many ex-U.S. markets have government-managed healthcare systems that govern reimbursement for medical devices, implants and procedures. Additionally, some ex-U.S. reimbursement systems provide for limited payments in a given period and therefore result in extended payment periods. If Axogen is unable to successfully commercialize its products internationally, its long-term growth prospects may be limited. If Axogen does not manage tissue and tissue donation in an effective and efficient manner, it could adversely affect its business. Many factors affect the supply, quantity and timing of donor medical releases, such as effectiveness of donor screening, the effective recovery of tissue, the timely receipt, recording, review and approval of required medical and testing documentation, and employee loss and turnover in Axogen’s and its contractor’s recovery department. Axogen can provide no assurance that tissue recovery or donor medical releases will occur at levels that will maximize processing efficiency and minimize Axogen’s costs. If Axogen does not manage product inventory in an effective and efficient manner, it could adversely affect profitability. Many factors affect the efficient use and planning of product inventory, such as effectiveness of predicting demand, effectiveness of preparing manufacturing to meet demand, efficiently meeting product mix and product demand requirements and product expiration. Axogen may be unable to manage its inventory efficiently, keep inventory within expected budget goals, keep its work-in-process inventory on hand or manage it efficiently, control expired product or keep sufficient product on hand to meet demand. Finally, Axogen can provide no assurance that it can keep inventory costs within its target levels. Failure to do so may harm long term growth prospects. Axogen’s failure to protect its technology systems and comply with data protection laws and regulations could lead to government enforcement actions and significant penalties against Axogen, and adversely impact Axogen’s operating results. We rely on information technology systems, including technology from third party vendors, to process, transmit and store electronic information in our day-to-day operations. Similar to other companies, the size and complexity of our information technology systems makes them vulnerable to a cyber-attack, malicious intrusion, breakdown, destruction, loss of data privacy, or other significant disruption. Our information systems require an ongoing commitment of resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards and the increasing need to protect patient and customer information. Any failure by us to maintain or protect our information technology systems and data integrity, including from cyber-attacks, intrusions or other breaches, could result in the unauthorized access to patient data and personally identifiable information, theft of intellectual property or other misappropriation of assets, or otherwise compromise our confidential or proprietary information and disrupt our operations. In the U.S., federal and state privacy and security laws require certain of our operations to protect the confidentiality of personal information including patient medical records and other health information. E.U. member states and other foreign jurisdictions, including Switzerland, have adopted data protection laws and regulations which impose significant compliance obligations. Moreover, the collection and use of personal health data in the E.U., which was formerly governed by the provisions of the E.U. Data Protection Directive, was replaced with the European Union General Data Protection Regulation (“GDPR”) in May 2018. The GDPR, which is wide-ranging in scope, imposes several 48 Table of Contents requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification and the use of third party processors in connection with the processing of personal data. The GDPR also imposes strict rules on the transfer of personal data out of the E.U. to the United States, provides an enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater. The recent implementation of the GDPR has increased Axogen’s responsibility and liability in relation to personal data that Axogen processes, including in clinical trials, and Axogen may in the future be required to put in place additional mechanisms to ensure compliance with the GDPR, which could divert management's attention and increase Axogen’s cost of doing business. In addition, new regulation or legislative actions regarding data privacy and security (together with applicable industry standards) may increase Axogen’s costs of doing business. In this regard, Axogen expects that there will continue to be new proposed laws, regulations and industry standards relating to privacy and data protection in the United States, the E.U. and other jurisdictions, and Axogen cannot determine the impact such future laws, regulations and standards may have on its business. Axogen’s management has broad discretion in the use of Axogen’s cash and cash equivalents and, despite management’s efforts, cash and cash equivalents may be used in a manner that does not increase the value of shareholders’ investments. Axogen’s management has broad discretion in the use of Axogen’s cash and cash equivalents, and investors must rely on the judgment of management regarding the use of such cash and cash equivalents. Management may invest Axogen’s cash and cash equivalents in short-term or long-term, investment-grade, interest-bearing securities. These investments may not yield favorable returns to shareholders. If Axogen does not invest or apply its cash and cash equivalents in ways that enhance shareholder value, Axogen may fail to achieve expected financial results, which could cause its stock price to decline. Axogen incurs costs as a result of operating as a public company, and its management is required to devote substantial time to compliance initiatives. As a public company, Axogen incurs legal, accounting and other expenses to comply with relevant securities laws and regulations, including, without limitation, the requirement of establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Axogen’s management devotes substantial time and financial resources to these compliance initiatives. Failure to comply with public company requirements could have a material adverse effect on Axogen’s business. In addition, activity by shareholders or others that bring into question aspects of Axogen’s business or financial reporting, whether based on facts or baseless and contrived for individual economic gain, can have a negative impact on the price of Axogen’s stock and can result in substantial time and financial resources being expended to address the situation. Our business and stock price may be adversely affected if our internal controls are not effective. Section 404 of the Sarbanes-Oxley Act of 2002 requires that public companies conduct a comprehensive evaluation of their internal control over financial reporting. To comply with this statute, each year we are required to document and test our internal control over financial reporting and our management is required to assess and issue a report concerning it. In our annual report on Form 10-K for the year ended December 31, 2016, we reported material weaknesses in our internal control as of December 31, 2016 relating to the design and operation of key controls around the calculations of significant judgment and estimates and quarterly cycle count procedures related to consigned inventories. These control deficiencies did not result in any changes of prior period financial statements or previously released financial results. We believe we took appropriate actions to remediate the control deficiencies we identified in these instances. Although we have taken actions to correct the control deficiencies we identified and to strengthen our internal control over financial reporting, we cannot assure you that we will not discover other material weaknesses in the future or that no material weakness will result from any difficulties, errors, delays or disruptions while we implement and transition to new internal systems. The existence of one or more material weaknesses could result in errors in our 49 Table of Contents financial statements, and substantial costs and resources may be required to rectify these or other internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our common stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business and our business and financial condition could be harmed. Our business and financial performance could be adversely affected, directly or indirectly, by disasters, by terrorist activities or by international hostilities. Neither the occurrence nor the potential impact of disasters (such as hurricanes and other natural disasters), terrorist activities and international hostilities can be predicted. However, these occurrences could impact Axogen directly as a result of damage to our facilities or by preventing us from conducting our business in the ordinary course, or indirectly as a result of their impact on our customers, suppliers or other counterparties. We could also suffer adverse consequences to the extent that disasters, terrorist activities or international hostilities affect the financial markets or the economy in general or in any particular region. Axogen’s ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our resiliency planning, and our ability, if any, to anticipate the nature of any such event that occurs. The adverse impact of disasters or terrorist activities or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses that we deal with, particularly those that we depend upon but have no control over. Risks Related to the Regulatory Environment in which Axogen Operates Axogen’s business is subject to continuing regulatory compliance by the FDA and other authorities which is costly and could result in negative effects on its business. Axogen is subject to extensive regulation by foreign and domestic government entities, including compliance with regulations governing appropriate relationships with healthcare professionals, such as physicians, hospitals and those to whom and through whom we may market our products. We are subject to various federal, state and territorial laws in the United States and other jurisdictions in which we conduct business. These include, for example, anti-kickback laws, false claims laws, health care fraud laws, and anti- bribery laws such as the United States Foreign Corrupt Practices Act. Violations of these laws can be punishable by criminal and/or civil sanctions, including, in some instances, fines, imprisonment and, within the United States, exclusion from participation in government healthcare programs, including Medicare, Medicaid and Veterans Administration health programs. These laws are administered by, among others, the U.S. Department of Justice (“DOJ”), the Office of Inspector General of the Department of Health and Human Services, state attorneys general, and their respective counterparts in the applicable foreign jurisdictions in which we conduct business. Many of these agencies have increased their enforcement activities with respect to medical device manufacturers in recent years. There can also be changes to the regulations by foreign and domestic government entities that require Axogen to update or upgrade business processes or to perform additional validation activities for product or processes. Compliance with such changes can be costly to implement or result in non-compliance, thus restricting the ability to distribute tissue or sell products that could have a material adverse effect. ® ® Our products are also subject to regulation by the FDA in the U.S. The FDA regulates the development, clinical testing, marketing, distribution, manufacturing, labeling, and promotion of biological products, such as that of Axogen’s Avance Nerve Graft product. The FDA requires the approval of a biological product, like Avance Nerve Graft, through a BLA prior to marketing. Although Avance Nerve Graft product has not yet been approved by FDA through a BLA, FDA is permitting the product to be distributed, subject to FDA enforcement discretion, provided that Axogen: (1) transitions to compliance with section 501(a)(2)(B) of the FD&C Act, the cGMP regulations in 21 CFR Parts 210 and 211 and the applicable regulations and standards in 21 CFR Parts 600-610 prior to initiation of a phase 3 clinical trial designed to demonstrate the safety, purity, and potency of Avance Nerve Graft; (2) conducts a phase 3 clinical trial to demonstrate safety, purity and potency of Avance Nerve Graft under an SPA; (3) continues to comply with the requirements of 21 CFR Part 1271; and (4) exercises due diligence in executing the transition plan. See “Business — Government Regulations — U.S. Government Regulation Review.” ® ® ® 50 Table of Contents ® Avive Soft Tissue Membrane is processed and distributed in accordance with FDA requirements for Human Cellular and Tissue-based Products (HCT/P) under 21 CFR Part 1271 regulations and U.S. State regulations. The FDA also regulates medical devices, for example the Axoguard products, and requires them to be cleared through the 510(k) premarket notification process prior to marketing. The FDA’s premarket review process for new and modified existing devices that precedes product marketing can be time consuming and expensive. Some of the future products and enhancements to such products that Axogen expects to develop and market may require marketing clearance or approval from the FDA. ® There can be no assurance, however, that clearance or approval will be granted with respect to any of Axogen’s device products or enhancements of marketed products or that Axogen’s Avance Nerve Graft will meet FDA’s requirements for continued marketing and transition to a BLA or ultimately an approved BLA. FDA review of Axogen’s devices or biological products may encounter significant delays during FDA’s premarket review process that would adversely affect Axogen’s ability to market its products or enhancements. In addition, there can be no assurance that Axogen products, including the Avance Nerve Graft, or enhancements will not be subject to a lengthy and expensive approval process with the FDA. ® ® It is possible that if regulatory clearances or approvals to market a product are obtained from the FDA, the clearances or approvals may contain limitations on the indicated uses of such product and other uses may be prohibited. Product approvals by the FDA can also be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial approval. Furthermore, the FDA could limit or prevent the distribution of Axogen products and the FDA has the power to require the recall of such products. FDA regulations depend heavily on administrative interpretation, and there can be no assurance that future interpretations made by the FDA or other regulatory bodies will not adversely affect Axogen’s operations. Axogen, and its facilities, may be inspected by the FDA from time to time to determine whether it is in compliance with various regulations relating to specifications, development, documentation, validation, testing, quality control and product labeling. A determination that Axogen is in violation of such regulations could lead to imposition of civil penalties, including fines, product recalls or product seizures and, in certain cases, criminal sanctions. The use, misuse or off-label use of Axogen’s products may harm its reputation or the image of its products ® ® in the marketplace, or result in injuries that lead to product liability suits, which could be costly to Axogen’s business or result in FDA sanctions if the company is deemed to have engaged in off-label promotion. Axogen is seeking a biologics license through the BLA process for specific uses of Avance Nerve Graft under specific circumstances. Its promotional materials and training methods must comply with FDA requirements and other applicable laws and regulations, including the prohibition against off-label promotion. Axogen’s promotion of the Axoguard products, which are regulated as medical devices, also must comply with FDA’s requirements and must only use labeling that is consistent with the specific indication(s) for use included in the FDA substantial equivalence order that results in marketing the devices. Avive Soft Tissue Membrane is processed and distributed in accordance with FDA requirements for (HCT/P) under 21 CFR Part 1271 regulations and is to be dispensed only by or on the order of a licensed physician and is contraindicated for use in any patient in whom soft tissue implants are contraindicated. The FDA does not restrict or regulate a physician’s use of a medical product within the practice of medicine, and Axogen cannot prevent a physician from using its products for an off-label use. However, the FD&C Act and the FDA’s regulations restrict the kind of promotional communications that may be made about Axogen’s products and if the FDA determines that Axogen’s promotional or training materials constitute the unlawful promotion of an off-label use, it could request that Axogen modify its training or promotional materials and/or subject the Company to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, civil money penalties, seizure, injunction or criminal fines and penalties. Other federal, state or foreign governmental authorities might also take action if they consider Axogen promotion or training materials to constitute promotion of an uncleared or unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement, or exclusion from participation in federal health programs. In that event, Axogen’s reputation could be damaged and the use of its products in the marketplace could be impaired. ® In addition, there may be increased risk of injury if physicians or others attempt to use Axogen products off-label. Furthermore, the use of Axogen’s product for indications other than those for which its products have been approved, cleared or licensed by the FDA may not effectively treat the conditions not referenced in product indications, which 51 Table of Contents could harm Axogen’s reputation in the marketplace among physicians and patients. Physicians may also misuse Axogen’s product or use improper techniques if they are not adequately trained in the particular use, potentially leading to injury and an increased risk of product liability. Product liability claims are expensive to defend and could divert management’s attention from its primary business and result in substantial damage awards against Axogen. Any of these events could harm Axogen’s business, results of operations and financial condition. Axogen’s Avance Nerve Graft product is currently allowed to be distributed pursuant to a transition ® plan with the FDA and a change in position by the FDA regarding its use of enforcement discretion to permit the sale of Avance Nerve Graft would have a material adverse effect on Axogen. ® ® ® ® The FDA considers Axogen’s Avance Nerve Graft product to be a biological product, subject to BLA approval requirements. Although the Avance Nerve Graft product has not yet been approved by FDA through a BLA, Axogen’s Avance Nerve Graft product is currently distributed under the controls applicable to a HCT/P pursuant to Section 361 of the Public Health Service Act and 21 CFR Part 1271 of FDA’s regulations, subject to FDA’s enforcement discretion and Axogen’s compliance with a transition plan established by the FDA. See “Business — Government Regulations — U.S. Government Regulation Review.” Axogen has continued to communicate with the CBER since the acceptance of the transition plan on clinical trial design, preclinical studies, Chemistry, Manufacturing, and Controls (“CMC”) for Avance Nerve Graft, and other issues related to the effective IND. Subject to the FDA’s enforcement discretion, Axogen can commercially distribute Avance Nerve Graft until the FDA makes a final determination on an Avance Nerve Graft BLA submission, assuming Axogen remains in compliance with the transition plan and exercises due diligence in executing the transition plan. In the event that the FDA becomes dissatisfied with Axogen’s progress or actions with respect to the transition plan or the FDA changes its position for any reason regarding its use of enforcement discretion to permit Axogen to distribute Avance Nerve Graft product in accordance with the transition plan, Axogen would no longer be able to distribute Avance Nerve Graft, which would have a material adverse effect on Axogen’s operations and financial viability. In addition, if Axogen does not meet the conditions of the transition plan, or fails to comply with applicable regulatory requirements, the FDA could impose civil penalties, including fines, product seizures, injunctions or product recalls and, in certain cases, criminal sanctions. These consequences also would have a material adverse effect on Axogen’s operations and financial viability. ® ® ® ® ® Axogen’s business is subject to continuing compliance to standards by various accreditation and registration bodies which is costly and loss of accreditation or registration could result in negative effects on its business. Axogen is subject to accreditation such as that by the AATB and as a Verified-Accredited Wholesale Distributor by National Association of Boards of Pharmacy. Axogen has registration requirements such as that with ISO 13485 registration bodies. These accreditations and regulations can affect distribution and sale of Axogen products on a state-by-state basis, within the United States and also affects distribution and sale of Axogen products outside of the United States. The loss of accreditation or registration could keep Axogen from selling and distributing its products which may have negative effects on its business. Axogen’s Axoguard and Avive products are subject to FDA and other regulatory requirements. ® ® ® Axogen’s Axoguard product line is regulated as a medical device under the FD&C Act and subject to premarket notification and clearance requirements under section 510(k) of the FD&C Act, 21 CFR Part 820 (Quality System Regulation) and other FDA regulations. Axogen distributes for Cook Biotech the Axoguard product line and Cook Biotech is responsible for the regulatory compliance of the Axoguard Connector and Protector product lines. Cook Biotech has obtained a 510(k) premarket clearance for Axoguard Nerve Connector from the FDA for porcine (pig) small intestine submucosa for the repair of peripheral nerve transections where gap closure can be achieved by flexion of the extremity. Cook Biotech has also obtained a 510(k) premarket clearance for Axoguard Nerve Protector for the repair of peripheral nerve damage in which there is no gap or where a gap closure is achieved by flexion of the extremity. Axogen is responsible for the regulatory compliance of the Axoguard Nerve Cap. Axogen has obtained a 510(k) premarket clearance for Axoguard Nerve Cap to protect a peripheral nerve end and separate the nerve from the surrounding environment and to prevent or to reduce the development of symptomatic or painful neuroma. If Axogen or Cook Biotech fails to comply with applicable regulatory requirements, the FDA could deny or withdraw ® ® ® ® ® ® 52 Table of Contents 510(k) clearance for the Axoguard products, or impose civil penalties, including fines, product seizures or product recalls and, in certain cases, criminal sanctions. ® Avive Soft Tissue Membrane is processed and distributed in accordance with U.S. FDA requirements for ® Human Cellular and Tissue-based Products (361 HCT/P) and as such, complies with 21 CFR Part 1271 regulations, U.S. State regulations and the guidelines of the American Association of Tissue Banks (“AATB”). FDA could determine that Avive Soft Tissue Membrane should be regulated under Section 351 of the Public Health Service Act and cannot be marketed without a BLA. If so, FDA could take enforcement action including requiring that AxoGen remove the product from the market until a BLA is approved. If Axogen fails to comply with applicable regulatory requirements, the FDA could also impose civil penalties, including fines, product seizures or product recalls and, in certain cases, criminal sanctions. ® Axogen’s Axotouch and Acroval products are subject to FDA and other regulatory requirements. ® ® Axogen’s Axotouch and Acroval products are regulated as medical devices under the FD&C Act and ® ® subject to premarket notification and clearance requirements under section 510(k) of the FD&C Act, 21 CFR Part 820 (Quality System Regulation) and other FDA regulations. If Axogen fails to comply with applicable regulatory requirements, the FDA could deny or withdraw 510(k) clearance for these products, or impose civil penalties, including fines, product seizures or product recalls and, in certain cases, criminal sanctions. Defective Axogen product could lead to recall or other negative business conditions. ® If Axogen’s products are defective or otherwise pose safety risks, the FDA could require their recall or Axogen may initiate a voluntary recall of its products. The FDA may require recall of a marketed medical device product, such as the Axoguard products, in the event that it determines the medical device presents a reasonable probability of serious adverse health consequences or death. However, most device recalls do not rise to this level of health significance and result from voluntary action. The FDA has authority to recall biological products when a batch, lot or other quantity of the product presents an imminent or substantial hazard to the public health. However, in such circumstances, the FDA usually initially requests voluntary recalls of biological products, such as the Avance Nerve Graft. If a company does not comply with an FDA request for a recall, the FDA can order one under the above-referenced circumstances or take other enforcement actions, such as product seizure. In addition, manufacturers may, on their own initiative, recall a product to remove or correct a deficiency or to remedy a violation of the FD&C Act that may pose a risk to health. A government-mandated, government-requested or voluntary recall could occur as a result of an unacceptable risk to health, reports of safety issues, failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls and other field corrections for any of Axogen’s products would divert managerial and financial resources and have an adverse effect on its business, results of operations and financial condition. A recall could harm Axogen’s reputation with customers and negatively affect its sales. Axogen may initiate recalls involving some of its products in the future that it determines do not require notification of the FDA. If the FDA were to disagree with Axogen’s determinations, it could request that it report those actions as recalls, and take regulatory or enforcement action against Axogen or the product. ® If Axogen’s products cause or contribute to a death, a serious injury or any adverse reaction involving a communicable disease related to its products, or malfunction in certain ways, it will be subject to reporting regulations, which can result in voluntary corrective actions or agency enforcement actions. See “Business — Regulation — Education Grants, U.S. Anti-kickback, False Claims and Other Healthcare Fraud and Abuse Laws — Pervasive and False Claims.” If Axogen fails to report these events to the FDA within the required timeframes, or at all, the FDA could take regulatory or enforcement action against Axogen. Any adverse event involving Axogen’s products could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection, mandatory recall or other enforcement action. Any corrective action, whether voluntary or involuntary, as well as Axogen defending itself in a lawsuit, would require the dedication of time and capital, distract management from operating its business, and may harm Axogen’s reputation, business, results of operations and financial condition. 53 Table of Contents Axogen’s operations must comply with FDA and other governmental requirements. Axogen’s operations require it to comply with the FDA’s and other governmental authorities’ laws and regulations regarding the manufacture and production of medical products, which is costly and could subject Axogen to enforcement action. See “Business — Government Regulations — Education Grants, U.S. Anti- kickback, False Claims and Other Healthcare Fraud and Abuse Laws — Fraud, Abuse and False Claims”. Any of these actions could impair Axogen’s ability to produce its products in a cost-effective and timely manner in order to meet customer demands. Axogen may also be required to bear other costs or take other actions that may have an adverse impact on its future revenue and its ability to generate profits. Furthermore, Axogen’s key material suppliers, licensors and or other contractors may not continue to be in compliance with all applicable regulatory requirements, which could result in Axogen’s failure to produce its products on a timely basis and in the required quantities, if at all. Distribution of Axogen human tissue products outside the U.S. are subject to foreign regulatory requirements that vary from country to country. In the European Union (“E.U.”), human tissue regulations, if applicable, differ from one E.U. member state to the next. Because of the absence of a harmonized regulatory framework and the proposed regulation for advanced therapy medicinal products in the E.U., as well as for other countries, the approval process for human derived cell or tissue based medical products may be extensive, lengthy, expensive and unpredictable. Axogen products will be subject to E.U. member states’ regulations that govern the donation, procurement, testing, coding, traceability, processing, preservation, storage, and distribution of human tissues and cells and cellular or tissue-based products. In addition, some E.U. member states have their own tissue banking regulations. The inability to meet foreign regulatory requirements could materially affect Axogen’s future growth and compliance with such requirements could place a significant financial burden on Axogen. In addition, the United Kingdom voted to exit the European Union (“Brexit”) and the timing and scope remain unclear. To date there is no business disruption, but Axogen cannot be sure what changes could occur.. The cost of regulatory compliance with both the United Kingdom and E.U. could be significant and time consuming. Finally, regulations in both the United States and other countries are subject to constant change. There can be no assurance that Axogen can meet the requirements of future regulations or that compliance with current regulations assures future capability to distribute and sell its products. Clinical trials can be long, expensive and results are ultimately uncertain which could jeopardize Axogen’s ability to obtain regulatory approval and continue to market its Avance Nerve Graft product. ® Axogen is required to perform a clinical trial for its Avance Nerve Graft under FDA’s statutory ® requirements to obtain approval of a BLA for the product. This trial is expensive, is expected to take several years to execute, and is subject to factors within and outside of Axogen’s control. The outcome of this trial is uncertain. ® Axogen submitted for RECON an IND for the Avance Nerve Graft in April 2013 and received FDA approval in March 2015. The phase 3 clinical trial was initiated in the second quarter of 2015. The RECON study is designed to assess the outcome of peripheral nerve repair in approximately 170 subjects in up to 20 centers. The study completed initial subject enrollment in January 2019. No outcome data is available at this time. As required by the SPA and agreed to by FDA and Axogen, an independent statistical analysis was conducted to determine if greater study enrollment is appropriate to maintain the planned statistical power of the study. Axogen is working with FDA to review the interim analysis findings and obtain agreement on the next study phase. If additional enrollment results from these discussions an amended IND will be filed. Any such changes will increase the time and cost of RECON and extend the timeframe for final determination of Axogen’s BLA submission. Axogen is working to ensure compliance with the applicable regulations by having ongoing discussions on the transition of the quality system to 21 CFR Parts 210/211 and 600-610 regulations with the FDA. Final determination of regulatory compliance with 21 CFR Parts 210/211 and 600-610 will be made during FDA’s pre-license inspection as part of the BLA review. If the FDA is unable to agree with Axogen, or Axogen is unable to meet the standards required of it by the FDA, regarding preclinical studies, clinical studies and CMC, the approval of Axogen’s BLA would not occur or be delayed. 54 Table of Contents Axogen continues to work diligently with the FDA and, in this context, continues to distribute the Avance ® Nerve Graft products. The FDA will end the period of enforcement discretion upon a final determination of Axogen’s BLA submission or if the FDA finds that Axogen does not meet the conditions for the transition plan or is not exercising due diligence in executing the transition (e.g., not progressing toward study completion or BLA submission in a timely or adequate fashion). If final action on the BLA is negative or Axogen is found to not meet the conditions for the transition plan or its execution, Axogen will not be able to continue to distribute Avance Nerve Graft, and Axogen’s business and financial condition will be materially adversely affected. ® The results of non-clinical studies do not necessarily predict future clinical trial results and predecessor clinical trial results may not be repeated in subsequent clinical trials. Additionally, the FDA may disagree with Axogen’s interpretation of the data from its non-clinical studies and clinical trials and may require the company to pursue additional non-clinical studies or clinical trials, or not approve Axogen’s BLA. If Axogen is unable to demonstrate the safety and efficacy of its product through its clinical trials, it will be unable to obtain regulatory approval to market the Avance Nerve Graft and will not be able to continue to provide it. ® Axogen will rely on third parties to conduct its clinical trial and they may not perform as contractually required or expected. Axogen will rely on third parties, such as contract research organizations (“CROs”), medical institutions, clinical investigators and contract laboratories to conduct its clinical trial and certain nonclinical studies. Axogen and its CROs are required to comply with all applicable regulations governing clinical research, including good clinical practice, or GCP. The FDA enforces these regulations through periodic inspections of trial sponsors, principal investigators, CROs and trial sites. If Axogen or its CROs fail to comply with applicable FDA regulations, the data generated in its clinical trials may be deemed unreliable and the FDA may require Axogen to perform additional clinical trials before approving its applications. Axogen cannot be certain that, upon inspection, the FDA and similar foreign regulatory authorities will determine that Axogen’s clinical trial complies or complied with clinical trial regulations, including GCP. In addition, Axogen’s clinical trial must be conducted with product produced under applicable cGMP regulations. Failure to comply with the clinical trial regulations may require Axogen to repeat clinical trials, which would delay the regulatory approval process. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to Axogen’s clinical protocols or regulatory requirements or for other reasons, Axogen’s non-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and it would not be able to obtain regulatory approval for its products on a timely basis, if at all, and its business, results of operations, financial condition and growth prospects would be adversely affected. Furthermore, Axogen’s third party clinical trial investigators may be delayed in conducting its clinical trials for reasons outside of their control. U.S. governmental regulation could restrict the use of Axogen’s Avance Nerve Graft and Avive Soft ® ® Tissue Membrane product, restrict Axogen’s procurement of tissue or increase costs. ® ® In addition to the FDA requirements for biological products, Avance Nerve Graft will continue to be subject to, as is Avive Soft Tissue Membrane, various requirements for human tissue under 21 CFR Part 1271 controls. Human tissues intended for transplantation have been regulated by the FDA since 1993. In May 2005, three new comprehensive regulations went into effect that address manufacturing activities associated with HCT/P. The first regulation requires that companies that produce and distribute HCT/Ps register with the FDA. The second regulation provides criteria that must be met for donors to be eligible to donate tissues and is referred to as the “Donor Eligibility” rule. The third regulation governs the processing and distribution of the tissues and is often referred to as the “Current Good Tissue Practices” rule. The Current Good Tissue Practices rule covers all stages of allograft processing, from procurement of tissue to distribution of final allografts. Together, the three basic requirements of 21 CFR Part 1271 are designed to ensure that sound, high quality practices are followed to reduce the risk of tissue contamination and of communicable disease transmission to recipients. These regulations increased regulatory scrutiny within the industry in which Axogen operates and have led to increased enforcement actions, which affects the conduct of its business. In addition, new guidance was issued by the FDA in late 2017 on Regulatory Considerations for Human Cells, Tissues, and Cellular and 55 Table of Contents Tissue-Based Products: Minimal Manipulation and Homologous Use and FDA Commissioner Gottlieb has publicly announced that other guidance for cell and gene therapy products are forthcoming. FDA actions interpreting these guidance will need to be followed closely, and the potential implications on the regulatory status of Avive and future HCT/P products is being evaluated by the Company. ® Additional regulations or guidance documents may be implemented by the FDA in the future. These changes may require new documentation requirements, process changes or testing that could increase costs and regulatory burden. See “Business — Government Regulations.” These regulations can also increase the cost of tissue recovery activities. Finally, Avance Nerve Graft and Avive Soft Tissue Membrane are subject to certain state and local regulations, as well as compliance with the standards of the tissue bank industry’s accrediting organization, the AATB. ® ® The procurement and transplantation of allograft nerve tissue is also subject to federal law pursuant to the National Organ Transplant Act (“NOTA”), a criminal statute which prohibits the purchase and sale of human organs used in human transplantation, including nerve and related tissue, for “valuable consideration.” NOTA only permits reasonable payments associated with the removal, transportation, processing, preservation, quality control, implantation and storage of human nerve tissue. Axogen makes payments to certain of its clients and tissue banks for their services related to recovering allograft nerve and umbilical cord tissue on its behalf. If NOTA is interpreted or enforced in a manner which prevents Axogen from receiving payment for services it renders, or which prevents it from paying tissue banks or certain of its clients for the services they render for Axogen, its business could be materially and adversely affected. Axogen has engaged, through its marketing employees, independent sales agents and sales representatives in ongoing efforts designed to educate the medical community as to the benefits of Axogen products, and Axogen intends to continue its educational activities. Although Axogen believes that NOTA permits payments in connection with these educational efforts as reasonable payments associated with the processing, transportation and implantation of Axogen products, payments in connection with such education efforts are not exempt from NOTA’s restrictions and Axogen’s inability to make such payments in connection with its education efforts may prevent it from paying Axogen sales representatives for their education efforts and could adversely affect Axogen’s business and prospects. No federal agency or court has determined whether NOTA is, or will be, applicable to every allograft nerve tissue-based material which Axogen’s processing technologies may generate. Assuming that NOTA applies to Axogen’s processing of allograft nerve and umbilical cord tissue, Axogen believes that it complies with NOTA, but there can be no assurance that more restrictive interpretations of, or amendments to, NOTA will not be adopted in the future, which would call into question one or more aspects of Axogen’s method of operations. Other regulatory entities include state agencies with statutes covering tissue banking. Regulations issued by Florida, New York, California and Maryland, among other states, are particularly relevant to Axogen’s business. Most states do not currently have tissue banking regulations. However, incidents of allograft related issues in the industry may stimulate the development of regulation in other states. It is possible that third parties may make allegations against Axogen or against donor recovery groups or tissue banks about non- compliance with applicable FDA regulations or other relevant statutes or regulations. Allegations like these could cause regulators or other authorities to take investigative or other action, or could cause negative publicity for Axogen’s business and the industry in which it operates. Healthcare policy changes may have a material adverse effect on Axogen. In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (the “Act”), which Act substantially changes the way healthcare is financed by both governmental and private insurers, and encourages improvements in the quality of healthcare items and services. While implementation of the Act has been uneven, several provisions significantly impact the biotechnology and medical device industries and could have a material adverse impact on numerous aspects of Axogen’s business. 56 Table of Contents This Act includes, among other things, the following measures: · · · · · a 2.3% excise tax on any entity that manufactures or imports medical devices offered for sale in the U.S., with limited exceptions, beginning in 2013, referred to as the Device Tax, which has been suspended through 2019; a new Patient-Centered Outcomes Research Institute to oversee, identify priorities and conduct comparative clinical effectiveness research; reporting and disclosure requirements on healthcare manufacturers for any “transfer of value” made or distributed to physicians and teaching hospitals, as well as reporting of certain physician ownership interests (“Sunshine Act”); payment system reforms, including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models; and a new abbreviated pathway for the licensure of biologic products that are demonstrated to be biosimilar or biosimilar and interchangeable with a licensed biologic product. There are also a number of states (such as Vermont, Massachusetts, Minnesota) with their own Sunshine Acts that implement the reporting and disclosure requirements on healthcare manufacturers for any “transfer of value” made or distributed to physicians and teaching hospitals, as well as reporting of certain physician ownership interests. In the future, there may continue to be additional proposals relating to the reform of the U.S. healthcare system. Certain of these proposals could limit the prices Axogen is able to charge for its products or the amounts of reimbursement available for its products and could also limit the acceptance and availability of its products. The adoption of some or all of these proposals could have a material adverse effect on Axogen’s business, results of operations and financial condition. Additionally, initiatives sponsored by government agencies, legislative bodies and the private sector in the U.S. and elsewhere to limit the growth of healthcare costs, especially for drugs and biologics, including price regulation and competitive pricing, are ongoing in markets where Axogen does business. Axogen could experience an adverse impact on operating results due to increased pricing pressure in the U.S. and in other markets. Governments, hospitals, pharmacy benefit managers (PBMs) and other third-party payors could reduce the amount of approved reimbursement for Axogen’s products, deny coverage altogether, or impose new requirements on manufacturers to justify their prices. Reductions in reimbursement levels or coverage or other cost-containment measures could unfavorably affect Axogen’s future operating results. Risks Related to Axogen’s Intellectual Property Failure to protect Axogen’s IP rights could result in costly and time-consuming litigation and its loss of any potential competitive advantage. Axogen’s success will depend, to a large extent, on its ability to successfully obtain and maintain patents, prevent misappropriation or infringement of IP, maintain trade secret protection, and conduct operations without violating or infringing on the IP rights of third parties. See “Business — Intellectual Property.” There can be no assurance that Axogen’s patented and patent-pending technologies will provide it with a competitive advantage, that Axogen will be able to develop or acquire additional technology that is patentable, or that third parties will not develop and offer technologies which are similar to Axogen’s. Moreover, Axogen can provide no assurance that confidentiality agreements with its employees, consultants and other parties, trade secrecy agreements or similar agreements intended to protect unpatented technology or prevent unauthorized use, disclosure, or misappropriation will not be breached by those third parties. IP litigation is extremely expensive and time-consuming, and it is often difficult, if not impossible, to predict the outcome of such litigation. A failure by Axogen to protect its IP, or a breach by third parties of agreements aimed at protecting Axogen’s IP, could have a materially adverse effect on its business and operating results and its ability to successfully compete in its industry. 57 Table of Contents Future protection for Axogen’s proprietary rights is uncertain which may impact its ability to successfully compete in its industry. The degree of future protection for Axogen’s proprietary rights is uncertain. Axogen cannot ensure that: · · · · · · · · · it, or its licensors, were the first to make the inventions covered by each of Axogen’s patents; it, or its licensors, were the first to file patent applications for these inventions; others will not independently develop similar or alternative technologies or duplicate any of Axogen’s technologies; any of Axogen’s pending patent applications will result in issued patents; any of Axogen’s issued patents or those of its licensors are valid and enforceable; any patents issued to Axogen or its collaborators will provide any competitive advantages or will not be challenged by third parties; it will develop additional proprietary technologies that are patentable; the patents of others will not have a material adverse effect on our business rights; or the measures Axogen relies on to protect its IP underlying its products are adequate to prevent third parties from using, disclosing or misappropriating that IP, all of which could harm its ability to compete in the market. Axogen’s commercial success depends in part on its ability and the ability of its collaborators and licensors to avoid infringing patents and proprietary rights of third parties which could expose it to litigation or commercially unfavorable licensing arrangements. Third parties may accuse Axogen or collaborators and licensors of employing their proprietary technology in Axogen products, or in the materials or processes used to make Axogen products, without authorization. Any legal action against Axogen collaborators, licensors or it claiming damages and/or seeking to enjoin Axogen’s commercial activities relating to the affected products, materials and processes could, in addition to subjecting Axogen to potential liability for damages, require it or its collaborators and licensors to obtain a license to continue to utilize the affected materials or processes or to manufacture or market the affected products. Axogen cannot predict whether it or its collaborators and licensors would prevail in any of these actions or whether any license required under any of these patents would be made available on commercially reasonable terms, if at all. If Axogen were unable to obtain such a license, it and its collaborators and licensors may be unable to continue to utilize the affected materials or processes, or manufacture or market the affected products, or Axogen may be obligated by a court to pay substantial royalties and/or other damages to the patent holder. Even if Axogen were able to obtain such a license, the terms of such a license could substantially reduce the commercial value of the affected product or products and impair Axogen’s prospects for profitability. Accordingly, Axogen cannot predict whether, or to what extent, the commercial value of the affected product or products or Axogen’s prospects for profitability may be harmed as a result of any of the liabilities discussed above. Furthermore, infringement and other IP claims, with or without merit, can be expensive and time-consuming to litigate and can divert management’s attention from its core business. Axogen and its licensors may be unable to obtain and enforce IP rights to adequately protect its products and related IP. The patent protection for our products may expire before we are able to maximize their commercial value which may subject us to increased competition and reduce or eliminate our opportunity to generate product revenue. The patents for our commercialized products and products in development have varying expiration dates and, when these patents expire, we may be subject to increased competition and we may not be able to recover our development costs. For example, the material U.S. patents covering the formulations used in our Axoguard product line, which are held by Cook Biotech, have expired. Expiration of these patents could adversely affect our ability to successfully execute our business strategy to maximize the value of Axoguard products and could negatively impact our future financial condition and results of operations. ® ® Others may claim an ownership interest in Axogen IP which could expose it to litigation and have a significant adverse effect on its prospects. A third party may claim an ownership interest in one or more of Axogen’s patents or other IP. A third party could bring legal actions against Axogen claiming it infringes their patents or proprietary rights, and seek monetary damages 58 Table of Contents and/or enjoin clinical testing, manufacturing and marketing of the affected product or products. While Axogen believes it owns the right, title and interest in the patents for which it or its licensors have applied and Axogen’s other IP (including that which is licensed from third parties), and is presently unaware of any claims or assertions by third-parties with respect to Axogen’s patents or IP, it cannot guarantee that a third party will not assert a claim or an interest in any of such patents or IP. If Axogen becomes involved in any litigation, it could consume a substantial portion of Axogen’s resources and cause a significant diversion of effort by Axogen’s technical and management personnel regardless of the outcome of the litigation. If any of these actions were successful, in addition to any potential liability for damages, Axogen could be required to obtain a license to continue to manufacture or market the affected product, in which case Axogen may be required to pay substantial royalties or grant cross-licenses to Axogen’s patents. Axogen cannot, however, assure you that any such license will be available on acceptable terms, if at all. Ultimately, Axogen could be prevented from commercializing a product or be forced to cease some aspect of its business operations as a result of claims of patent infringement or violation of other IP rights, which could have a material and adverse effect on Axogen’s business, financial condition, and results of operations. Further, the outcome of IP litigation is subject to uncertainties that cannot be adequately quantified in advance, including the demeanor and credibility of witnesses and the identity of the adverse party. This is especially true in IP cases that may turn on the testimony of experts as to technical facts or the scope or meaning of patent claims upon which experts may reasonably disagree. Axogen depends on maintenance of exclusive licenses. Axogen depends fundamentally on keeping and satisfying the terms of exclusive licenses of its nerve repair technologies from UFRF and UTA. Nonetheless, a disagreement between Axogen and either licensor could have a negative impact on its ability to operate its business effectively. In addition, Axogen could learn that the technologies it has licensed do not perform as purported, are not efficacious, or are not the property of the licensor, any of which would have an immediate and negative impact on Axogen’s business. Axogen trademarks are valuable In the U.S. and other countries, we currently hold trademark registrations and have trademark applications pending, any of which may be the subject of a governmental or third party objection, which could prevent the maintenance or issuance of the same. As our products mature, our reliance on our trademarks to protect our brand and, in part, differentiate us from our competitors increases and as a result, if we are unable to prevent third parties from adopting, registering or using trademarks, including trade dress, that infringe, dilute or otherwise violate our trademark rights, our business could be materially adversely affected. 59 Table of Contents Risks Related to Our Common Stock An active trading market in our common stock may not be maintained. The trading market in our common stock has been extremely volatile. The quotation of our common stock on The Nasdaq Capital Market does not assure that a meaningful, consistent and liquid trading market will exist. We cannot predict whether an active market for our common stock will be maintained in the future. An absence of an active trading market could adversely affect our shareholders’ ability to sell our common stock at current market prices in short time periods, or possibly at all. Additionally, market visibility for our common stock may be limited and such lack of visibility may have a depressive effect on the market price for our common stock. As of December 31, 2018, approximately 7.41% of our outstanding shares of common stock was held by our officers, directors, beneficial owners of 5% or more of our securities and their respective affiliates, which adversely affects the liquidity of the trading market for our common stock, in as much as federal securities laws restrict sales of our shares by these shareholders. If our affiliates continue to hold their shares of common stock, there will be limited trading volume in our common stock, which may make it more difficult for investors to sell their shares or increase the volatility of our stock price. The price of Axogen’s common stock could be highly volatile due to a number of factors, which could lead to losses by investors and costly securities litigation. Our common stock is listed on the Nasdaq Capital Market under the symbol “AXGN.” The stock market in general, and the market for medical technology companies in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The trading price of our common stock has experienced substantial volatility and is likely to continue to be highly volatile in response to a number of factors including, without limitation, the following: · · limited daily trading volume resulting in the lack of a liquid market; fluctuations in price and volume due to investor speculation and other factors that may not be tied to the financial performance of Axogen; performance by Axogen in the execution of its business plan; financial viability; actual or anticipated variations in our operating results; announcements of developments by us or our competitors; · · · · · market conditions in our industry; · announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; adoption of new accounting standards affecting our industry; additions or departures of key personnel; introduction of new products by us or our competitors; sales of our common stock or other securities in the open market; regulatory developments in both the United States and foreign countries; performance of products sold and advertised by licensees in the marketplace; economic and other external factors; period-to-period fluctuations in financial results; and other events or factors, including the other factors described in this “Risk Factors” section, many of which are beyond our control. · · · · · · · · · 60 Table of Contents The stock market is subject to significant price and volume fluctuations. In the past, and several recent situations, following periods of volatility in the market price of a company’s securities, securities class action litigation has been initiated against such company. Axogen has experienced such situation and is subject to a class action. Litigation initiated against us, including that which we are currently involved, whether or not successful, could result in substantial costs and diversion of our management’s attention and resources, which could harm our business and financial condition. On January 9, 2019, Plaintiff Neil Einhorn, on behalf of himself and others similarly situated, filed a putative class action complaint alleging violations of the federal securities laws against Axogen, Inc., certain of its directors and officers (“Individual Defendants”), and Axogen’s 2017 Offering Underwriters and 2018 Offering Underwriters (collectively, with the Individual Defendants, the “Defendants”), captioned Einhorn v. Axogen, Inc., et al., No. 8:19-cv-00069 (M.D. Fl.). Plaintiff asserts that Defendants made false or misleading statements in connection with the Company’s November 2017 registration statement issued regarding its secondary public offering in November 2017 and May 2018 registration statement issued regarding its secondary public offering in May 2018, and during a class period of August 7, 2017 to December 18, 2018. In particular, Plaintiff asserts that Defendants issued false and misleading statements and failed to disclose to investors: (1) that the Company aggressively increased prices to mask lower sales; (2) that the Company’s pricing alienated customers and threatened the Company’s future growth; (3) that ambulatory surgery centers form a significant part of the market for the Company’s products; (4) that such centers were especially sensitive to price increases; (5) that the Company was dependent on a small number of surgeons whom the Company paid to generate sales; (6) that the Company’s consignment model for inventory was reasonably likely to lead to channel stuffing; (7) that the Company offered purchase incentives to sales representatives to encourage channel stuffing; (8) that the Company’s sales representatives were encouraged to backdate revenue to artificially inflate metrics; (9) that the Company lacked adequate internal controls to prevent such channel stuffing and backdating of revenue; (10) that the Company’s key operating metrics, such as number of active accounts, were overstated; and (11) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects, were materially misleading and/or lacked a reasonable basis. Axogen was served on January 15, 2019. On February 4, 2019, the court granted the parties’ stipulated motion which provided that Axogen is not required to file a response to the complaint until thirty days after Plaintiff files a consolidated amended complaint, which will not occur until thirty days after the court appoints a lead plaintiff and lead counsel. We do not anticipate paying any cash dividends in the foreseeable future. The operation and expansion of our business will continue to require funding. We do not anticipate that we will pay any cash dividends on our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, if any investor purchases shares of common stock, realization of a gain on such investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock. Anti-takeover provisions in Minnesota law may deter acquisition bids for us that you might consider favorable. We are governed by the provisions of Sections 302A.671, 302A.673 and 302A.675 of the Minnesota Business Corporation Act (the “MBCA”). These provisions may discourage a negotiated acquisition or unsolicited takeover of us and deprive our shareholders of an opportunity to sell their common stock at a premium over the market price. In general, Section 302A.671 of the MBCA provides that a corporation’s shares acquired in a control share acquisition have no voting rights unless voting rights are approved in a prescribed manner. A “control share acquisition” is a direct or indirect acquisition of beneficial ownership of shares that would, when added to all other shares beneficially owned by the acquiring person, entitle the acquiring person to have voting power of 20% or more in the election of directors. In general, Section 302A.673 of the MBCA prohibits a public Minnesota corporation from engaging in a business combination with an interested shareholder for a period of four years after the date of the transaction in which the person 61 Table of Contents became an interested shareholder, unless the business combination is approved in a prescribed manner. The term “business combination” includes mergers, asset sales and other transactions resulting in a financial benefit to the interested shareholder. An “interested shareholder” is a person who is the beneficial owner, directly or indirectly, of 10% or more of a corporation’s voting stock or who is an affiliate or associate of the corporation, and who, at any time within four years before the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the corporation’s voting stock. Section 302A.673 does not apply if a committee of our Board of Directors consisting of all of its disinterested directors (excluding current and former officers) approves the proposed transaction or the interested shareholder’s acquisition of shares before the interested shareholder becomes an interested shareholder. If a tender offer is made for our common stock, Section 302A.675 of the MBCA precludes the offeror from acquiring additional shares of stock (including in acquisitions pursuant to mergers, consolidations or statutory share exchanges) within two years following the completion of the tender offer, unless shareholders selling their shares in the later acquisition are given the opportunity to sell their shares on terms that are substantially the same as those contained in the earlier tender offer. Section 302A.675 does not apply if a committee of our Board of Directors consisting of all of its disinterested directors (excluding its current and former officers) approves the proposed acquisition before any shares are acquired pursuant to the earlier tender offer. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES The Company and SNH Medical Office Properties Trust, a Maryland real estate investment trust (“SNH”), are parties to that certain lease dated as of February 6, 2007, as amended, (the “Primary Lease”) pursuant to which the Company leases its approximately nineteen thousand square foot corporate headquarters facility in the Progress Center at 13631 Progress Boulevard, Alachua, Florida 32615 (the “Primary Premises”). The annual cost for the Primary Premises ranges from $353,000 to $363,000 through the end of the term of the lease, which expires on October 31, 2021. On January 23, 2017 the Company entered into a lease (the “First Expansion Lease”) with SNH for one thousand four hundred square feet at 13709 Progress Boulevard, Alachua, Florida 32615 (the “First Expansion Premises”) adjacent to the Primary Premises. The Company has entered into the Second Expansion Lease and Third Expansion Lease, as defined below, which relate to properties that are adjacent to the Primary Premises and First Expansion Premises resulting in the Company having approximately eighteen thousand square feet for its corporate headquarters and certain research space in the Progress Center in Alachua, Florida. On November 19, 2018, the Company entered into a Lease (the “Second Expansion Lease”) with SNH for two thousand eight hundred square feet at 13709 Progress Boulevard, Suites S-160, S-162 and S-164, Alachua, Florida 32615 (the “Second Expansion Premises”). Pursuant to the Second Expansion Lease, the Company is to use the Second Expansion Premises for general office uses. The Second Expansion Lease commenced December 1, 2018 and expires November 30, 2020. The annual cost of the Second Expansion Premises is approximately $45,000 for the first twelve months of the term and $42,000 for the final eleven months. The Company is also obligated to pay for certain taxes, insurance costs and electricity costs incurred by SNH. On November 19, 2018, AC entered into a Lease (the “Third Expansion Lease”) with SNH for two thousand square feet at 13709 Progress Boulevard, Suites S-175, S-177 and S-179, Alachua, Florida 32615 (the “Third Expansion Premises”). Pursuant to the Third Expansion Lease, the Company is to use the Third Expansion Premises for general office and biomedical research uses. The Third Expansion Lease commenced December 1, 2018 and its term expires November 30, 2020. The annual cost of the Third Expansion Premises is approximately $37,000 for the first twelve months of the term and $35,000 for the final eleven months. The Company is also obligated to pay for certain taxes, insurance costs and electricity costs incurred by SNH. On November 21, 2018, the Company, entered into Commercial Lease Amendment 3 (the “Burleson Amendment”), to the Commercial Lease dated April 21, 2015, as amended, with Ja-Cole L.P. Under the terms of the Burleson Amendment, the Company leased an additional two thousand five hundred square feet of warehouse/office space in 62 Table of Contents Burleson, Texas (collectively with the space leased under the Commercial Lease with Ja-Cole L.P. prior to the effectiveness of the Burleson Amendment, the “Burleson Facility”). The Burleson Facility will now comprise a total of twelve thousand five hundred square feet, all of which, pursuant to the Burleson Amendment, will be leased until December 31, 2021. The annual rental cost of the entire Burleson Facility is now approximately $113 through December 31, 2020 and $116 for the calendar year 2021. The Burleson Facility houses raw material storage and product distribution while allowing same day order fulfillment for both the east and west coasts of the United States. On October 26, 2018 (the “Ashley Avenue Lease Effective Date”), the Company entered into a Lease (the “Ashley Avenue Lease”) with Ashley Avenue Associates I, LLC., a Delaware limited liability company (“Ashley”), for the lease by the Company of approximately fifteen thousand square feet of office space on the second floor of the building located at 1000 N. Ashley Drive, Tampa, Florida 33602 (the “Ashley Avenue Premises”). Pursuant to the Ashley Avenue Lease, the Company will use the Ashley Avenue Premises for general office purposes. The initial term of the Ashley Avenue Lease commenced on December 1, 2018 and expires on November 30, 2020. The Company has an option to terminate the lease after eighteen months by providing Ashley with four months advance written notice. The rental cost for the Ashley Avenue Premises will be $381,000 for the first twelve month period, and $360,000 for the final eleven month period. The Company will also be obligated to pay for its pro rata share of the building’s property taxes, utilities, administrative costs, common area maintenance and management fees, excluding any capital improvements or any damage due to fire, hurricane or other casualty. On September 20, 2018, the Company entered into an agreement with Heights Union, LLC, a Florida limited liability company (“Heights Union”), for the lease of seventy-five thousand square feet of office space (the “Heights Union Premises”) in a one hundred and fifty thousand square foot office building that Heights Union intends to construct and complete on or before February 15, 2020, on an area of land in Tampa, Florida. Pursuant to the Heights Union lease, the Company will use the Heights Union Premises for general office, medical laboratory, training and meeting purposes. The annual costs of the Heights Union Premises ranges from $2.4 million to $3.3 million during the term of the lease. Axogen believes it can obtain certain economic incentives from state authorities associated with the employment at the facility; such incentives are not expected to be a material offset to the expenses of the project as a whole. ® On August 6, 2015, Axogen entered into the CTS Agreement with CTS, an FDA registered tissue establishment. Processing of the Avance Nerve Graft pursuant to the CTS Agreement began in February 2016. The CTS Agreement terminates December 31, 2021, subject to earlier termination by either party for cause (subject to the non-terminating party’s right to cure, in certain circumstances), or without cause upon 6 months’ notice whereby notice cannot be provided prior to March 1, 2021. Under the CTS Agreement, Axogen pays CTS a facility fee for clean room/manufacturing, storage and office space. CTS also provides services in support of Axogen’s manufacturing such as routine sterilization of daily supplies, providing disposable supplies, microbial services and office support. Effective June 8, 2018, AC entered into an Agreement for Purchase and Sale of Real Property with ARC CRVANOH001, LLC, a Delaware limited liability company (“ARC”), for the acquisition (the “Acquisition”) by AC of certain real property located in Vandalia, Ohio comprised of a 70,000 square foot building on approximately 8.6 acres of land. AC thereafter transferred its rights and obligations under the Agreement to Axogen Processing Corporation, incorporated for purposes of the Acquisition. On July 31, 2018, Axogen Processing Corporation completed the Acquisition pursuant to the terms of the Agreement for Purchase and Sale of Real Property. In addition, Axogen leases space and maintains records at certain other facilities, including Axogen’s prior corporate headquarters at 1407 South Kings Highway, Texarkana, Texas 75501. The aggregate cost of all of Axogen’s and its subsidiaries’ properties is approximately $1.9 million per year. Axogen believes that its facilities will be sufficient to operate its business for the next 12 months and that current lease obligations will not change materially. 63 Table of Contents ITEM 3. LEGAL PROCEEDINGS Except as provided below, Axogen and its subsidiaries do not have any active or pending material legal proceedings: 1. On January 9, 2019, Plaintiff Neil Einhorn, on behalf of himself and others similarly situated, filed a putative class action complaint in the United Stated District Court for the Middle District of Florida alleging violations of the federal securities laws against Axogen, Inc., certain of its directors and officers (“Individual Defendants”), and Axogen’s 2017 Offering Underwriters and 2018 Offering Underwriters (collectively, with the Individual Defendants, the “Defendants”), captioned Einhorn v. Axogen, Inc., et al., No. 8:19-cv-00069 (M.D. Fla.). Plaintiff asserts that Defendants made false or misleading statements in connection with the Company’s November 2017 registration statement issued regarding its secondary public offering in November 2017 and May 2018 registration statement issued regarding its secondary public offering in May 2018, and during a class period of August 7, 2017 to December 18, 2018. In particular, Plaintiff asserts that Defendants issued false and misleading statements and failed to disclose to investors: (1) that the Company aggressively increased prices to mask lower sales; (2) that the Company’s pricing alienated customers and threatened the Company’s future growth; (3) that ambulatory surgery centers form a significant part of the market for the Company’s products; (4) that such centers were especially sensitive to price increases; (5) that the Company was dependent on a small number of surgeons whom the Company paid to generate sales; (6) that the Company’s consignment model for inventory was reasonably likely to lead to channel stuffing; (7) that the Company offered purchase incentives to sales representatives to encourage channel stuffing; (8) that the Company’s sales representatives were encouraged to backdate revenue to artificially inflate metrics; (9) that the Company lacked adequate internal controls to prevent such channel stuffing and backdating of revenue; (10) that the Company’s key operating metrics, such as number of active accounts, were overstated; and (11) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects, were materially misleading and/or lacked a reasonable basis. Axogen was served on January 15, 2019. On February 4, 2019, the court granted the parties’ stipulated motion which provided that Axogen is not required to file a response to the complaint until thirty days after Plaintiff files a consolidated amended complaint, which will not occur until thirty days after the court appoints a lead plaintiff and lead counsel. Plaintiff is seeking compensatory damages, reimbursement of expenses and costs, including counsel and expert fees and such other relief as the court deems just and proper. The Company and Individual Defendants dispute the allegations and intend to vigorously defend against the Complaint. 2. On February 4, 2019, a complaint in Jerry Espinoza, Jr. v. Megan M. Hess (2019-cv-30016) was filed in the District Court, Montrose County, Colorado. Plaintiffs, who are relatives of decedents, allege that Axogen purchased specimens from a vendor who failed to obtain consent before procuring the specimen from four decedents. Against Axogen, Plaintiffs allege claims of: (1) outrageous conduct; (2) unjust enrichment; (3) negligence; (4) negligence per se; (5) aiding and abetting; (6) civil conspiracy; and (7) Colorado Organized Crime Control Act. Plaintiffs seek compensatory damages for emotional distress and anxiety and exemplary damages. Axogen was served with the complaint on February 13, 2019. The Company disputes the allegations and intends to vigorously defend against the Complaint. ITEM 4. MINE SAFETY DISCLOSURES None. 64 Table of Contents PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Axogen’s common stock is traded on the Nasdaq Capital Market under the symbol “AXGN.” On February 22, 2019, the last reported closing sale price of the Company common stock on the Nasdaq Capital Market was $17.96 per share. Shareholders As of February 22, 2019, the Company had 38,945,029 shares of common stock outstanding, and approximately 254 common shareholders of record, based upon information received from our stock transfer agent. However, this number does not include beneficial owners whose shares were held of record by nominees or broker dealers. The Company estimates that there are more than 11,890 individual owners. Stock Performance Graph The following graph compares the cumulative total shareholder return on our common stock for the period from December 31, 2013 to December 31, 2018 with (i) the Nasdaq Stock Market Composite Index; and (ii) the Nasdaq Stock Market Biotechnology Index. The graph assumes an investment of $100 in our common stock and the respective indices for the period of December 31, 2013 to December 31, 2018. The comparisons set forth in the graph are provided pursuant to SEC rules and are not intended to forecast or be indicative of the future performance of our common stock or either of the included indices. The performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this annual report into any filing under the Securities Act of 1933, as amended, or 65 Table of Contents the Exchange Act of 1934, as amended, except to the extent we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such acts. Purchases of Equity Securities by the Issuer and Affiliated Purchasers We did not repurchase any of our securities in the fourth quarter of 2018. Recent Sales of Unregistered Securities We had no sales of unregistered securities in 2018. 66 Table of Contents ITEM 6. SELECTED FINANCIAL DATA The selected financial data set forth below has been derived from our audited financial statements. This data should be read in conjunction with the financial statements, the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report. Dollar amounts are in thousands, except per share amounts. 2018 Year ended December 31, 2015 2016 2017 2014 Statement of Operations Data: Revenues Cost of goods sold Gross Profit Costs and Expenses: Sales and marketing Research and development General and administrative Total costs and expenses Loss from operations Other income (expense): Investment income Interest expense Interest expense - deferred financing costs Loss on extinguishment of debt Other (expense) Total other income (expense) Net loss Loss per common share - basic and diluted $ 83,937 $ 60,426 $ 41,108 $ 27,331 $ 16,817 12,923 3,442 71,014 51,115 34,641 22,483 13,375 6,467 4,848 9,311 6,699 56,617 37,636 28,426 20,089 13,194 3,033 4,212 11,773 23,124 14,731 10,133 6,949 91,514 59,066 42,771 31,749 23,176 (9,801) (20,500) 3,237 8,423 (8,130) (9,266) (7,951) — (2,217) (246) — (31) (2,494) 1,525 (1,127) (81) (2,186) (28) (1,897) — (6,812) (1,101) — 3 (7,910) (22,397) (10,445) (14,411) (13,356) (17,711) (0.99) — (5,386) (875) — (20) (6,281) — (3,989) (128) — 27 (4,090) (0.31) (0.60) (0.51) (0.47) Balance Sheet Data: Total current assets Total assets Total current liabilities Total long-term obligations, net of current maturities and deferred financing fees Total liabilities Total shareholders' equity (deficit) 2018 2017 2016 2015 2014 $150,953 $ 55,741 $ 44,037 $ 35,051 $ 14,411 160,173 58,875 46,360 36,700 16,401 13,044 13,719 11,081 2,445 3,709 147 19,974 20,358 24,795 25,201 13,191 33,693 31,439 28,504 27,646 146,982 25,182 14,921 8,196 (11,245) 67 Table of Contents ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with “Selected Financial Data” contained in Item 6 of this Form 10-K, our consolidated financial statements and the notes thereto contained in Item 8 of this Form 10-K, the “Cautionary Notice Regarding 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, in 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 helping to restore peripheral nerve function and quality of life to patients with physical damage or transection to peripheral nerves providing innovative, clinically proven and economically effective repair solutions for surgeons and health care providers. Peripheral nerves provide the pathways for both motor and sensory signals throughout the body. Every day, people suffer traumatic injuries or undergo surgical procedures that impact the function of their peripheral nerves. Physical damage to a peripheral nerve, or the inability to properly reconnect peripheral nerves, can result in the loss of muscle or organ function, the loss of sensory feeling, or the initiation of pain. ® ® Axogen’s platform for peripheral nerve repair features a comprehensive portfolio of products, including Avance Nerve Graft, a biologically active off-the-shelf processed human nerve allograft for bridging severed peripheral nerves without the comorbidities associated with a second surgical site, Axoguard Nerve Connector, a porcine submucosa extracellular matrix (“ECM”) coaptation aid for tensionless repair of severed peripheral nerves, Axoguard Nerve Protector, a porcine submucosa ECM product used to wrap and protect injured peripheral nerves and reinforce the nerve reconstruction while preventing soft tissue attachments and Avive Soft Tissue Membrane, a minimally processed human umbilical cord membrane that may be used as a resorbable soft tissue covering to separate tissues and modulate inflammation in the surgical bed. Along with these core surgical products, we also offer the Axotouch Two-Point Discriminator and Acroval Neurosensory and Motor Testing System. These evaluation and measurement tools assist healthcare professionals in detecting changes in sensation, assessing return of sensory, grip and pinch function, evaluating effective treatment interventions, and providing feedback to patients on peripheral nerve function. Our portfolio of products is available in the United States, Canada, the United Kingdom and several European and other international countries. ® ® ® ® ® Revenue from the distribution of Axogen’s peripheral nerve repair products, the Avance Nerve Graft, Axoguard Nerve Connector and Axoguard Nerve Protector and Avive Soft Tissue Membrane, in the United States is the main contributor to Axogen’s total reported sales and has been the key component of its growth to date. Axogen revenues increased in 2018 compared to 2017 primarily as a result of continuing revenue growth through product penetration in, and increases of the number of, active accounts, and to a lesser extent, the development and growth of new accounts. ® ® ® 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 the Axogen portfolio and have ordered Axogen products at least six times in the last twelve months. As such, revenue growth primarily occurs from increased purchasing from active accounts, followed by revenue growth from new accounts. Each new period of measurement is thus benefited from growth in active accounts which may include those that were new accounts in the prior measurement period. Axogen has continued to broaden its sales and marketing focus which is expected to have a positive contribution to its revenue growth in the long term. In 2018, the Company continued to invest in the development of our commercial team, infrastructure capabilities, clinical studies, 68 Table of Contents product development and research, as well as surgeon education. As a result, the growth in these expenses outpaced our revenue growth. Results of Operations Comparison of the Years Ended December 31, 2018 and 2017 The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of total revenue: Year Ended December 31, 2018 % of 2017 % of Amount Revenue Amount Revenue $ 83,937 12,923 71,014 56,617 11,773 23,124 91,514 (20,500) 1,525 (1,127) (81) (2,186) (28) (1,897) $ (22,397) (dollars in thousands) 100.0 % 15.4 84.6 $ 60,426 9,311 51,115 67.5 14.0 27.5 109.0 (24.4) 37,636 6,699 14,731 59,066 (7,951) 1.8 (1.4) 0.0 (2.7) 0.0 (2.3) (26.7)% — (2,217) (246) — (31) (2,494) $ (10,445) 100.0 % 15.4 84.6 62.3 11.1 24.4 97.8 (13.2) 0.0 (3.7) (0.4) 0.0 0.0 (4.1) (17.3)% Revenues Cost of goods sold Gross profit Costs and expenses: Sales and marketing Research and development General and administrative Total costs and expenses Loss from operations Other income (expense): Investment income Interest expense Interest expense — deferred financing costs Loss on extinguishment of debt Other expense Total other expense Net Loss Revenues Revenues for the year ended December 31, 2018 increased 38.9% to $83,937 as compared to $60,426 for the year ended December 31, 2017. This increase was primarily a result of continuing growth in active accounts from improved penetration within these active accounts, as well as an increase in the number of active accounts. In the fourth quarter of 2018, we had 712 active accounts, an increase of 20% from 591 at the end of 2017. In addition, the Company received grant revenue of $195 in the year ended December 31, 2018, as compared to grant revenue of $56 in the year ended December 31, 2017. Gross Profit Gross profit for the year ended December 31, 2018 increased 38.9% to $71,014 as compared to $51,115 for the year ended December 31, 2017. This increase was consistent with and primarily attributable to the increased revenues in 2018. Gross profit margin in 2018 was unchanged at 84.6% as compared to 84.6% in 2017. 69 Table of Contents Costs and Expenses Total cost and expenses increased 54.9% to $91,514 for the year ended December 31, 2018 as compared to $59,066 for the year ended December 31, 2017. The increase was primarily due to variable costs associated with increased sales activity, expansion of our commercial team, expanding product development and clinical study activities, expanded surgeon education programs, and increases in compensation and general expenses associated with ongoing expansions of infrastructure to support the Company’s growth. As a percentage of revenues, total cost and expenses increased to 109.0% in 2018 compared to 97.8% in 2017. Sales and marketing expenses increased 50.4% to $56,617 for the year ended December 31, 2018 as compared to $37,636 for the year ended December 31, 2017. The increase was primarily due to: (a) increased compensation expenses related to Axogen’s direct sales force as a result of increased sales and hiring of additional personnel; (b) increased travel expenses to support the commercial team’s activities; (c) expansion of the Company’s surgeon education program; and (d) increased marketing activity. As a percentage of revenues, sales and marketing expenses were 67.5% for the year ended December 31, 2018 compared to 62.3% for the year ended December 31, 2017. General and administrative expenses increased 57.0% to $23,124 for the year ended December 31, 2018 as compared to $14,731 for the year ended December 31, 2017. The increase was primarily the result of increased expenses related to infrastructure expansion to support the Company’s growth, including professional fees, salaries, and $4,007 of non-cash stock compensation. As a percentage of revenues, general and administrative expenses increased to 27.5% for the year ended December 31, 2018 compared to 24.4% for the year ended December 31, 2017. Research and development expenses increased 75.7% to $11,773 in the year ended December 31, 2018 as ® ® compared to $6,699 for the year ended December 31, 2017. Research and development costs include Axogen’s product development and clinical efforts substantially focused on its Biologics License Application, or BLA, for the Avance Nerve Graft and the RECON and RANGER studies. These activities vary from quarter to quarter due to the timing of certain projects. The increase in expenses for 2018 relate to expenditures for these clinical activities, including the pivotal clinical trial to support the BLA, and hiring additional personal to support clinical and product development activity as well as expenses associated with the new processing facility. It is expected that costs associated with the BLA will continue to increase as we continue to invest in completing the license application. Axogen continues to conduct product development efforts focused on both new peripheral nerve products and new peripheral nerve applications for our existing products. Axogen pursues research grants to support research and early product development. Axogen’s increased product and clinical pipeline development initiatives contributed to the increase in research and development expenses in 2018, with grant revenue offsetting a portion of this activity. As a result, research and development expenses increased to 14.0% in 2018 from 11.1% in 2017, as a percentage of revenues. Other Income and Expenses For the year ended December 31, 2018, we recognized $1,525 of investment income from our asset management and cash investment sweep accounts that were opened during the second quarter of 2018. As a result of the prepayment in full of the Term Loan and Revolving Loan with MidCap, as defined in “Term and Revolving Loan Agreements” below, during the second quarter of 2018, interest expense decreased 49.2% to $1,127 in 2018 as compared to $2,217 for the year ended December 31, 2017, and interest expense – deferred financing costs decreased 67.1% to $81 for the years ended December 31, 2018 as compared to $246 for the year ended December 31, 2017. For the year ended December 31, 2018, we incurred a loss on the extinguishment of the debt of $2,186 for exit, prepayment fees and the amortization of the remaining balance of the deferred financing costs. Other expenses decreased 9.7% to $28 for the year ended December 31, 2018, as compared to $31 for the year ended December 31, 2017. Income Taxes Axogen had no income tax expenses or income tax benefit for 2018 or 2017 due to incurrence of net operating loss for the year, the benefits of which have been fully value allowed. Axogen does not believe there are any additional tax expenses or benefits currently available. 70 Table of Contents Comparison of the Years Ended December 31, 2017 and 2016 The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of total revenue: Year Ended December 31, 2017 % of 2016 % of Amount Revenue Amount Revenue $ 60,426 9,311 51,115 (dollars in thousands) 100.0 % 15.4 84.6 $ 41,108 6,467 34,641 37,636 6,699 14,731 59,066 (7,951) 62.3 11.1 24.4 97.8 (13.2) 28,426 4,212 10,133 42,771 (8,130) — (2,217) (246) — (31) (2,494) $ (10,445) 0.0 (3.7) (0.4) 0.0 0.0 (4.1) (17.3)% — (5,386) (875) — (20) (6,281) $ (14,411) 100.0 % 15.7 84.3 69.1 10.2 24.6 103.9 (19.6) 0.0 (13.1) (2.1) 0.0 0.0 (15.2) (34.8)% Revenues Cost of goods sold Gross profit Costs and expenses: Sales and marketing Research and development General and administrative Total costs and expenses Loss from operations Other income (expense): Investment income Interest expense Interest expense — deferred financing costs Loss on extinguishment of debt Other expense Total other expense Net Loss Revenues Revenues for the year ended December 31, 2017 increased 47.0% to $60,426 as compared to $41,108 for the year ended December 31, 2016. This increase was primarily a result of continuing growth in active accounts as a result of improved sales efficiency and penetration within these active accounts. In the fourth quarter of 2017 we had 591 active accounts, an increase of 31% from 452 at the end of 2016. In addition, the Company received grant revenue of $56 in the year ended December 31, 2017, as compared to grant revenue of $290 in the year ended December 31, 2016. Gross Profit Gross profit for the year ended December 31, 2017 increased 47.7% to $51,115 as compared to $34,641 for the year ended December 31, 2016. This increase was primarily attributable to the increased revenues in 2017, coupled with a product price increase instituted in March 2017. As a result, gross profit margin also improved to 84.6% in 2017 as compared to 84.3% for 2016. Costs and Expenses Total cost and expenses increased 38.1% to $59,066 for the year ended December 31, 2017 as compared to $42,771 for the year ended December 31, 2016. These increases were primarily due to variable costs associated with increased sales activity, continuing product development and clinical study activities, expanded surgeon education programs, increases in compensation and general expenses associated with expanded infrastructure to support the Company’s 71 Table of Contents growth. As a percentage of revenues, total cost and expenses decreased to 97.8% in 2017 compared to 103.9% in 2016 as a result of improving leverage of our business model. Sales and marketing expenses increased 32.4% to $37,636 million for the year ended December 31, 2017 as compared to $28,426 for the year ended December 31, 2016. This increase was primarily due to: (a) increased compensation expenses related to Axogen’s direct sales force as a result of increased sales and hiring of additional personnel; (b) increased commissions to independent distributors as a result of increased sales; (c) expansion of the Company’s surgeon education program; and (d) increased marketing activity. As a percentage of revenues, sales and marketing expenses were 62.3% for the year ended December 31, 2017 compared to 69.1% for the year ended December 31, 2016. The decrease in sales and marketing expenses as a percentage of revenue was a result of productivity improvements of our commercial team, including the increased penetration in active accounts as revenue growth outpaced the related growth of expenses. General and administrative expenses increased 45.5% to $14,731 for the year ended December 31, 2017 as compared to $10,133 for the year ended December 31, 2016. The increase was primarily the result of increased general expenses related to infrastructure expansion to support the Company’s growth, including professional fees, salaries and $2,520 of non-cash stock compensation. As a percentage of revenues, general and administrative expenses decreased slightly to 24.4% for the year ended December 31, 2017 compared to 24.6% for the year ended December 31, 2016. ® Research and development expenses increased 59.5% to $6,699 in the year ended December 31, 2017 as compared to approximately $4,212 for the year ended December 31, 2016. Research and development costs include Axogen’s product development and clinical efforts substantially focused on its BLA for the Avance ® Nerve Graft and the RECON and RANGER studies. These activities vary from quarter to quarter due to the timing of certain projects. The increase in expenses for 2017 relate to expenditures for these clinical activities, including the pivotal clinical trial to support the BLA, and hiring additional personal to support both clinical and product development activity. It is expected that costs associated with the BLA will continue to increase as more patients are enrolled in the trial over the next year. Although Axogen’s products are developed for sale in their current use, it continues to conduct product development efforts focused on new products and new applications for existing products. Axogen is active in pursuing research grants to support research and early product development. Axogen’s product pipeline development continued to contribute to a portion of the research and development expenses in 2017, with grant revenue offsetting a portion of this activity. As a result, research and development expenses increased to 11.1% in 2017 from 10.2% in 2016, as a percentage of revenues. Other Income and Expenses Interest expense decreased 59.3% to $2,217 in 2017 as compared to $5,386 for the year ended December 31, 2016. This decrease was primarily due to the lower interest rate as a result of the refinancing of our debt facility in October 2016, as well as the charges associated with the refinancing. As part of that refinancing, we incurred costs for prepayment fees and the write-off of previously recorded deferred interest charges associated with the extinguishment of the Three Peaks Term Loan Agreement and Revenue Interest Agreement. Under the terms of the Three Peaks Term Loan Agreement, the Company paid Three Peaks a final payment of $2,447 inclusive of prepayment fees and accrued interest through October 25, 2016. As a result of the accounting treatment for the Three Peaks transaction, the Company had recorded a total of $750 of deferred interest charges which were offset against those prepayment fees. The net impact of those transactions resulted in a net interest charge of $1,700 for the fiscal year ended December 31, 2016. Interest expense — deferred financing costs decreased to $247 for the year ended December 31, 2017 as compared to $875 for the year ended December 31, 2016. This decrease is primarily due to the write off of the remaining Three Peaks financing costs of approximately $750 in 2016 as the result of the extinguishment of the Three Peaks Term Loan Agreement and Revenue Interest Agreement; however, the decrease was partially offset by the deferred financing costs associated with the new credit facility amortizing over a shorter time period. 72 Table of Contents Income Taxes Axogen had no income tax expenses or income tax benefit for 2017 or 2016 due to incurrence of net operating loss for the year, the benefits of which have been fully value allowed. Axogen does not believe there are any additional tax expenses or benefits currently available. Liquidity and Capital Resources Cash Flow Information As of December 31, 2018, the Company had cash and cash equivalents of $24,294, a decrease of $12,213 from $36,507 at December 31, 2017, primarily as a result of the proceeds, net of expenses, of $132,707 from the public offering of common stock completed in May 2018, $120,000 of which was invested in a custodial asset management account. As of December 31, 2018, the asset management account had a balance of $105,259. Cash disbursements in 2018 included $25,599 for the prepayment in full of the Term Loan and Revolving Loan with MidCap, as defined in “Term and Revolving Loan Agreements” below, and $5,030 for the acquisition of the Axogen Processing Center in Vandalia, Ohio. Axogen had working capital of approximately $137,909 and a current ratio of 11.6 at December 31, 2018, compared to working capital of $42,022 and a current ratio of 4.1 at December 31, 2017. The increase in working capital at December 31, 2018 as compared to December 31, 2017 was primarily due to the increase in cash from the net proceeds of the May 2018 stock offering, along with increases in accounts receivable and inventory as a result the Company’s growth. The increase in the current ratio was primarily attributable to the net proceeds from the May 2018 stock offering, which was partially offset by the increase in accounts payable and accrued expenses. The Company believes it has sufficient cash resources to meet its liquidity requirements for at least the next twelve months. Axogen’s future capital requirements depend on a number of factors including, without limitation, revenue increases consistent with its business plan, cost of products and acquisition and/or development of new products. Axogen could face increasing capital needs. Such capital needs could be substantial depending on the extent to which Axogen is unable to increase revenue. If Axogen needs additional capital in the future, it may raise additional funds through public or private equity offerings, debt financings or from other sources. The sale of additional equity would result in dilution to Axogen’s shareholders. There is no assurance that Axogen will be able to secure funding on terms acceptable to it, or at all. The increasing need for capital could also make it more difficult to obtain funding through either equity or debt. Should additional capital not become available to Axogen as needed, Axogen may be required to take certain action, such as slowing sales and marketing expansion, delaying regulatory approvals or reducing headcount. Net Cash Used in Operating Activities Axogen used $17,862 of cash for operating activities in 2018, as compared to using $9,238 of cash for operating activities in 2017. This increase in cash used in operating activities was primarily attributed to the increase in the net loss, accounts receivable and inventory for the year ended December 31, 2018 as compared to 2017, partially offset by the decrease in accounts payable and accrued expenses and non-cash stock compensation during 2018. Net Cash Used in Investing Activities Investing activities for 2018 used $98,193 of cash as compared to $1,292 during 2017. This increase in use was principally attributable to our investing the proceeds from the May 2018 stock offering, and the increase in purchases of property and equipment, primarily our facility in Vandalia, Ohio. 73 Table of Contents Net Cash Provided by Financing Activities Financing activities in 2018 provided $109,842 of cash as compared to providing $17,022 of cash in 2017. The increase was the result of the net proceeds of the May 2018 public stock offering, offset by $25,599 of payments to extinguish the Company’s debt, including the prepayment of the Term Loan and Revolving Loan with MidCap, as defined in “Term and Revolving Loan Agreements” below, and related fees. Proceeds from the exercise of stock options provided $3,884, $1,434 and $1,078 of cash for the years ended December 31, 2018, 2017 and 2016, respectively. Term and Revolving Loan Agreements On October 25, 2016 (the “Closing Date”), Axogen and AC, each as borrowers, entered into a Credit and Security Agreement (Term Loan) (the ''MC Term Loan Agreement") with the lenders party thereto and MidCap Financial Trust (“MidCap”), as administrative agent and a lender. Under the MC Term Loan Agreement, MidCap provided the Company a term loan in the aggregate principal amount of $21,000 (the "Term Loan") which had a maturity date of May 1, 2021 and required interest only payments through December 1, 2018, and thereafter, 30 monthly payments of principal and interest resulting in the Term Loan being fully paid by the maturity date. Interest was payable monthly at 8.0% per annum plus the greater of LIBOR or 0.5%. In addition to the interest charged on the Term Loan, the Company was also obligated to pay certain fees, including an annual agency fee of 0.25% of the aggregate principal amount of the Term Loan. The Company had the option at any time to prepay the Term Loan in whole or in part, subject to certain conditions, a prepayment fee, and a 5.0% exit fee as specified in the MC Term Loan Agreement. The prepayment fee was determined by multiplying the amount being prepaid by the following applicable percentage amount: (a) 3.0% during the first year following the Closing Date; (b) 2.0% during the second year following the Closing Date, and (c) 1.0% thereafter. However, no prepayment fee would be due in the event the prepayment was a result of refinancing the Term Loan and Revolving Loan with MidCap or an affiliate of MidCap. On May 22, 2018, the Company paid $22,599 to prepay the Term Loan in full, which included exit and pre-payment fees of 5% and 2%, respectively, of the outstanding balance for a total of $1,470. In addition to the prepayment fees, the Company charged to interest expense the unamortized deferred financing costs associated with the Term Loan of $473. In addition, on October 25, 2016, Axogen and AC, each as borrowers, also entered into a Credit and Security Agreement (Revolving Loan) (the ''Revolving Loan Agreement") with the lenders party thereto and MidCap, as administrative agent and a lender. Under the Revolving Loan Agreement, MidCap agreed to lend to the Company up to $10,000 under a revolving credit facility (the "Revolving Loan") which amount could be drawn down by the Company based upon an available borrowing base which included certain accounts receivable and inventory. The Revolving Loan could be increased to up to $15,000 at the Company’s request and with the approval of MidCap. The maturity date of the Revolving Loan was May 1, 2021. Interest was payable monthly at 4.5% per annum plus the greater of LIBOR or 0.5% on outstanding advances. In addition to the interest charged on the Revolving Loan, the Company was also obligated to pay certain fees, including a collateral management fee of 0.5% per annum of the principal amount outstanding on the Revolving Loan from time to time and an unused line fee of 0.5% per annum on the difference between the average amount outstanding on the Revolving Loan minus the total amount of the Revolving Loan commitment. The Revolving Loan was subject to a minimum balance, such that the Company paid the greater of: (i) interest accrued on the actual amount drawn under the Revolving Loan Facility; and (ii) interest accrued on 30% of the average borrowing base. If the Revolving Loan was terminated or permanently reduced prior to the maturity date, MidCap was owed a deferred revolving loan origination fee as specified in the Revolving Loan Agreement. No deferred revolving loan origination fee would be due in the event the Revolving Loan was paid in full or the termination of the revolving credit facility was a result of refinancing the Term Loan and Revolving Loan with MidCap or an affiliate of MidCap. The MC Term Loan Agreement and the Revolving Loan Agreement each contained covenants that placed restrictions on Axogen’s operations, including, without limitation, covenants related to debt restrictions, investment restrictions, dividend restrictions, restrictions on transactions with affiliates and certain revenue covenants. MidCap, on behalf of the lenders under the agreements, had a first perfected security interest in the assets of the Company to 74 Table of Contents guarantee the payment in full of the agreements. On May 22, 2018, the Company paid $2,958 to prepay the Revolving Loan in full, which included pre-payment fees of $236. Contractual Obligations and Commitments The following table summarizes our obligations with regard to our contractual obligations as of December 31, 2018, and the expected timing of maturities of these contractual obligations. This table should be read in conjunction with the notes to consolidated financial statements included elsewhere in this annual report on Form 10-K. Contractual Obligations Operating leases Capital lease minimum lease payments Total Less than 1 year $ 43,579 1,866 63 43,642 $ 28 1,894 1-3 years 6,510 28 6,538 3-5 years 5,092 More than 5 years 30,111 7 5,099 - 30,111 The Company had no material commitments for capital expenditures at December 31, 2018 or 2017. Public Offering of Common Stock On October 7, 2016, Axogen entered into an underwriting agreement with JMP Securities LLC, as representative of the several underwriters (collectively, the “2016 Offering Underwriters”), to issue and sell 2,333,334 shares of the Company’s common stock in an underwritten registered public offering (the “2016 Offering”) at an offering price of $7.50 per share. Pursuant to the underwriting agreement, the Company also granted the 2016 Offering Underwriters a 30-day option to purchase up to an additional 350,000 shares of common stock, which the 2016 Offering Underwriters exercised in full on October 7, 2016. Five of the Company’s directors and officers purchased an aggregate of approximately 33,000 Shares in the 2016 Offering and such purchases were made on the same terms and conditions as purchases by the public in the 2016 Offering. The 2016 Offering closed on October 13, 2016, and the Company received net proceeds of approximately $18,674 from the sale of 2,683,334 shares of common stock, which included the additional 350,000 shares of common stock, after deducting the underwriting discounts and commissions and estimated offering expenses. The 2016 Offering was pursuant to a prospectus supplement dated October 7, 2016, which was filed with the SEC in connection with the Company’s shelf registration statement on Form S-3 (File No. 333-207829) that was filed with the SEC on November 5, 2015 and declared effective on December 11, 2015 and the related prospectus dated December 11, 2015. On November 16, 2017, Axogen entered into a certain underwriting agreement (the “Leerink Underwriting Agreement”) with Leerink Partners LLC, as representative of the several underwriters named therein (collectively, the “2017 Offering Underwriters”) and Essex, pursuant to which (i) the Company agreed to issue and sell 700,000 shares of the Company’s common stock pursuant to a registration statement on Form S-3 (File No. 333-207829), filed with the SEC on November 5, 2015, and declared effective by the SEC on December 11, 2015, and the prospectus contained therein, as supplemented by the prospectus supplement dated November 16, 2017, and (ii) Essex agreed to sell 1,000,000 shares of the Company’s common stock pursuant to a registration statement on Form S-3 (File No. 333-220770), filed with the SEC on October 2, 2017, and declared effective by the SEC on October 11, 2017, and the prospectus contained therein, as supplemented by the Prospectus Supplement, in an underwritten registered public offering at an offering price of $21.00 per share. The Company and Essex granted the 2017 Offering Underwriters a 30-day option to purchase up to an aggregate of 255,000 additional shares of common stock, at the public offering price, less the underwriting discounts and commissions, which was exercised in full on November 16, 2017. The Company received net proceeds of approximately $15,655 after deducting the underwriting discounts and commissions and estimated offering expenses. On May 8, 2018, the Company entered into an underwriting agreement with Jefferies LLC and Leerink Partners LLC, as representatives of the several underwriters named therein (collectively, the “2018 Offering Underwriters”), pursuant to which the Company agreed to issue and sell 3,000,000 shares of the Company’s common stock in an underwritten registered public offering at an offering price of $41.00 per share (the “2018 Offering”). The Company granted the 2018 Offering Underwriters a 30-day option to purchase up to an aggregate of 450,000 additional shares of common stock, at the public offering price, less the underwriting discounts and commissions, which was exercised in full on May 9, 2018. The 2018 Offering closed on May 11, 2018, and the Company received proceeds of approximately 75 Table of Contents $132,707 from the sale of the shares (including the sale of 450,000 additional shares issued upon exercise of the 2018 Offering Underwriters’ overallotment option), after deducting the underwriting discounts and commissions and estimated offering expenses. Off-Balance Sheet Arrangements Axogen does not have any off-balance sheet arrangements. Effect of Inflation Inflation has not had a significant impact on our historical operations and we do not expect it to have a significant impact on our results of operations or financial condition in the foreseeable future. Critical Accounting Policies and Estimates The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States (“USGAAP”). 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 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 our significant accounting policies in Note 3 – Summary of Significant Accounting Policies to our consolidated financial statements included in this Form 10-K. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition The Company enters into contracts to sell and distribute products and services to hospitals and surgical facilities for use in caring for patients with peripheral nerve damage or transection. Revenue is recognized when the Company has met its performance obligations pursuant to its contracts with its customers in an amount that we expect to be entitled to in exchange for the transfer of control of the products and services to our customers. In the case of products or services sold to a customer under a distribution or purchase agreement, the Company has no further performance obligations and revenue is recognized at the point control transfers which occurs either when: i) the product is shipped via common carrier; or ii) the product is delivered to the customer or distributor, in accordance with the terms of the agreement. A portion of the Company's product revenue is generated from consigned inventory maintained at hospitals and independent sales agencies, and also from inventory physically held by field sales representatives. For these types of products sales, the Company retains control until the product has been used or implanted, at which time revenue is recognized. The Company accounts for shipping and handling activities as a fulfillment cost rather than a separate performance obligation. Amounts billed to customers for shipping and handling are included as part of the transaction price and recognized as revenue when control of the underlying products is transferred to the customer. The related shipping and freight charges incurred by the Company are included in cost of sales. Allowance for Doubtful Accounts Receivable We evaluate the collectability of accounts receivable to determine the appropriate allowance for doubtful accounts. In determining the amount of the allowance, we consider the aging of account balances, historical credit losses, customer-specific information and other relevant factors. We review accounts receivable and adjust the allowance based 76 Table of Contents on current circumstances and charge off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. Our history of write-offs against the allowance has not been significant. The allowance for doubtful accounts balance was $1,117 and $461 at December 31, 2018 and 2017, respectively. Investments The Company invests primarily in U.S. Government securities, corporate bonds, commercial paper and asset-backed securities and classifies all investments as available-for-sale. Investments are recorded at fair value. The Company has elected the fair value option (“FVO”) for all of its available-for-sale investments. The FVO election results in all changes in unrealized gains and losses being included in investment income in the Consolidated Statements of Operations. Inventories Inventories are comprised of unprocessed tissue, work-in-process, Avance Nerve Graft, Axoguard Nerve ® ® Connector, Axoguard Nerve Protector, Avive Soft Tissue Membrane, Acroval Neurosensory and Motor Testing System, Axotouch Two-Point Discriminator and supplies and are valued at the lower of cost (first-in, first-out) or net realizable value. ® ® ® ® We regularly review the inventory status to determine the expected write down required for expiration and obsolescence. The Company policy is to monitor the shelf life of its products and write down amounts based on the expiration date of the finished goods inventory. We also write down a portion of raw materials based on our historical experience of tissue that fails during the inspection and debridement stage due to medical history, serology compliance or poor quality. Our inventory allowance for write down balance was $1,068 and $812 at December 31, 2018 and 2017, respectively. Share-Based Compensation We account for share-based compensation for all share-based payment awards, including stock options, restricted stock units, performance stock units and stock purchases related to an employee stock purchase plan, based on their estimated fair values. We estimate the fair value of time-based options on the date of grant using the multi-point Black-Scholes option pricing model (Black-Scholes model). Our determination of fair value of share-based payment awards is affected by our stock price, as well as assumptions regarding a number of subjective variables. These variables include but are not limited to our expected stock price volatility over the term of the awards. The value of the portion of the awards that are ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Operations. We estimate the fair value of restricted stock unit and performance stock unit awards based upon the grant date closing market price of our common stock. We also have an employee stock purchase plan (ESPP) which is available to all eligible employees as defined by the plan document. Under the ESPP, shares of our common stock may be purchased at a discount, currently fifteen percent (15%). We estimate the number of shares to be purchased under the ESPP at the beginning of the purchase period and calculate estimated compensation expense using the Black-Scholes model based upon the fair value of the stock at the beginning of the purchase period. Compensation expense is recognized over each purchase period, and expense is adjusted at the time of stock purchase. We believe our critical accounting policies regarding revenue recognition, allowance for uncollectible accounts receivable, investments, inventories and share-based employee compensation affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. We base our judgments and estimates on historical experience, current conditions and other reasonable factors. 77 Table of Contents Recent Accounting Pronouncements See Note 3 – Summary of Significant Accounting Policies to our Consolidated Financial Statements for further information. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Company is exposed to market risk from interest rates. For our cash and cash equivalents, a change in interest rates affects the amount of interest income that can be earned. The Company invests its cash primarily in money market accounts, U.S. government agencies and securities, corporate bonds and commercial paper. Although the Company believes its cash to be invested in a conservative manner, with cash preservation being the primary investment objective, the value of the securities held will fluctuate with changes in the financial markets including, among other things, changes in interest rates, credit quality and general volatility. This risk is managed by investing in high quality investment grade securities with short-term maturities. Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalent balances and investments in corporate bonds. Certain of Axogen’s cash and cash equivalents balances exceed FDIC insured limits or are invested in money market accounts with investment banks that are not FDIC-insured. The Company places its cash and cash equivalents in what it believes to be credit-worthy financial institutions. As of December 31, 2018, $23,794 of the cash and cash equivalents balance was in excess of FDIC limits. 78 Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONTENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 2018 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 2017 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2018 AND 2017 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Page 80 82 84 85 86 87 88 118 79 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Axogen, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheet of Axogen, Inc. and subsidiaries (the “Company”) as of December 31, 2018, the related consolidated statements of operations, shareholders’ equity, and cash flows, for the year ended December 31, 2018, and the related notes and the schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely 80 Table of Contents detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Miami, Florida February 26, 2019 We have served as the Company's auditor since 2018. 81 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 2017 To the Shareholders and Board of Directors of Axogen, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Axogen, Inc. and Subsidiaries (the "Company") as of December 31, 2017 and 2016, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes and financial statement schedules listed in the index appearing under item 15(a)(2) (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9a. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 82 Table of Contents Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Lurie, LLP Minneapolis, Minnesota February 28, 2018 We served as the Company’s auditor from 2004 to 2018 83 Table of Contents AXOGEN, INC. CONSOLIDATED BALANCE SHEETS December 31, 2018 and 2017 (In Thousands, Except Share Amounts) Assets Current assets: Cash and cash equivalents Restricted cash Investments Accounts receivable, net of allowance for doubtful accounts of $1,117 and $461, respectively Inventory Prepaid expenses and other Total current assets Property and equipment, net Intangible assets Total assets Liabilities and Shareholders’ Equity Current liabilities: Borrowings under revolving loan agreement Accounts payable and accrued expenses Current maturities of long term obligations Contract liabilities, current Total current liabilities Long Term Obligations, net of current maturities and deferred financing fees Other long-term liabilities Contract liabilities Total liabilities Commitments and contingencies - see Note 14 December 31, December 31, 2018 2017 $ 24,294 $ 6,000 92,311 15,321 11,982 1,045 150,953 8,039 1,181 $ 160,173 $ $ — $ 12,998 28 18 13,044 35 70 42 13,191 36,507 — — 11,065 7,316 853 55,741 2,197 937 58,875 4,000 8,952 735 32 13,719 19,810 95 69 33,693 Shareholders’ equity: Common stock, $0.01 par value per share; 100,000,000 shares authorized; 38,900,875 and 34,350,329 shares issued and outstanding Additional paid-in capital Accumulated deficit Total shareholders’ equity Total liabilities and shareholders’ equity 389 297,319 (150,726) 146,982 $ 160,173 $ 343 153,168 (128,329) 25,182 58,875 The accompanying notes are an integral part of these consolidated financial statements. 84 Table of Contents AXOGEN, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2018, 2017 and 2016 (In Thousands, Except Per Share Amounts) 2018 2017 2016 Revenues Cost of goods sold Gross profit Costs and expenses: Sales and marketing Research and development General and administrative Total costs and expenses Loss from operations Other income (expense): Investment income Interest expense Interest expense — deferred financing costs Loss on extinguishment of debt Other expense Total other expense, net $ 83,937 $ 12,923 71,014 60,426 $ 9,311 51,115 41,108 6,467 34,641 28,426 4,212 10,133 42,771 (8,130) — (5,386) (875) — (20) (6,281) (14,411) 56,617 11,773 23,124 91,514 (20,500) 1,525 (1,127) (81) (2,186) (28) (1,897) (22,397) 37,636 6,699 14,731 59,066 (7,951) — (2,217) (246) — (31) (2,494) (10,445) Net Loss Weighted average common shares outstanding — basic and diluted Loss per common share — basic and diluted $ 37,127 (0.60) $ 33,323 (0.31) $ 30,702 (0.47) The accompanying notes are an integral part of these consolidated financial statements. 85 Table of Contents AXOGEN, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Years ended December 31, 2018, 2017 and 2016 (In Thousands) Additional Common Stock Shares Amount Paid-in Capital Accumulated Deficit Total Shareholders’ Equity/(Deficit) Balance, December 31, 2015 29,985 $ 300 $ 111,369 $ (103,473) $ 8,196 Stock-based compensation Exercise of stock options Issuance of common shares Net loss — 341 2,683 — 3 27 1,390 1,075 18,641 — — — (14,411) 1,390 1,078 18,668 (14,411) Balance, December 31, 2016 33,009 $ 330 $ 132,475 $ (117,884) $ 14,921 Stock-based compensation Exercise of stock options Issuance of common shares Net loss — 536 805 — — 5 8 — 3,609 1,429 15,655 — — — — (10,445) 3,609 1,434 15,663 (10,445) Balance, December 31, 2017 34,350 $ 343 $ 153,168 $ (128,329) $ 25,182 Stock-based compensation Exercise of stock options and employee stock purchase plan Issuance of common shares Net loss — 1,101 3,450 — — 11 35 — 7,606 — 7,606 3,873 132,672 — — — (22,397) 3,884 132,707 (22,397) Balance, December 31, 2018 38,901 389 297,319 (150,726) 146,982 The accompanying notes are an integral part of these consolidated financial statements. 86 Table of Contents AXOGEN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2018, 2017 and 2016 (In Thousands) Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash used in operating activities: 2018 2017 2016 $ (22,397) $ (10,445) $ (14,411) Depreciation Amortization of intangible assets Amortization of deferred financing costs Loss on disposal of equipment Loss on extinguishment of debt Provision for bad debt Provision for inventory write down Changes in investment gains and losses Share-based compensation Interest added to note payable Change in assets and liabilities: Accounts receivable Inventory Prepaid expenses and other Accounts payable and accrued expenses Contract and other liabilities Net cash used in operating activities Cash flows from investing activities: Purchase of property and equipment Purchase of investments Sale of investments Acquisition of intangible assets Net cash used for investing activities Cash flows from financing activities: 774 77 81 1 2,186 852 1,343 (721) 7,606 — (5,108) (6,009) (192) 3,711 (66) (17,862) (6,282) (114,736) 23,146 (321) (98,193) 488 79 246 — — 223 1,438 — 3,609 — 362 75 125 — 750 80 788 — 1,390 1,924 (3,236) (3,295) (342) 1,927 70 (3,349) (2,313) (87) 3,411 18 (9,238) (11,237) (1,105) — — (187) (1,292) (931) — — (226) (1,157) Proceeds from issuance of common stock Cash paid for equity offering Borrowing on revolving loan Payments on revolving loan and prepayment penalties Repayments of long-term debt and prepayment penalties Debt issuance costs Proceeds from exercise of stock options Net cash provided by financing activities Net (decrease) increase in cash, cash equivalents, and restricted cash Cash, cash equivalents, and restricted cash, beginning of year Cash, cash equivalents and restricted cash, end of year 132,964 (257) 26,253 (30,489) (22,513) — 3,884 109,842 (6,213) 36,507 30,294 $ $ 18,767 15,891 (99) (228) 6,685 57,599 (6,685) (57,624) (2,446) (21) (801) (29) 1,078 1,434 16,499 17,022 4,105 6,492 30,015 25,910 36,507 $ 30,015 Supplemental disclosures of cash flow activity: Cash paid for interest Supplemental disclosure of non-cash investing and financing activities: $ 1,325 $ 2,198 $ 5,769 Payments of fixed assets in accounts payable and accrued expenses $ Payments of long term debt with proceeds from term loan of $21,000 and revolver loan of $4,000 Capital lease additions $ $ 335 $ 55 $ 32 — $ — $ — $ 25,000 — 62 $ The accompanying notes are an integral part of these consolidated financial statements. 87 Table of Contents AXOGEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2018, 2017 and 2016 (In Thousands, Except Per Share Amounts) 1. Basis of Presentation The accompanying consolidated financial statements include the accounts of Axogen, Inc. (the “Company” or “Axogen”) and its wholly owned subsidiaries, Axogen Corporation (“AC”), Axogen Processing Corporation (“APC”) and Axogen Europe GmbH, as of December 31, 2018 and December 31, 2017 and for the three years ended December 31, 2018. The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany accounts and transactions have been eliminated in consolidation. 2. Organization and Business Axogen is a global provider of innovative surgical solutions for physical damage or transection to peripheral nerves. Axogen is focused specifically on the science, development and commercialization of technologies for peripheral nerve regeneration and repair. Axogen’s products are designed to restore nerve function and are used to treat patients with physical damage or transection to peripheral nerves by providing innovative, clinically proven and economically effective repair solutions for surgeons and health care providers. Peripheral nerves provide the pathways for both motor and sensory signals throughout the body. 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. ® ® Axogen’s portfolio of products includes Avance Nerve Graft, an off-the-shelf processed human nerve allograft for bridging severed peripheral nerves without the comorbidities associated with a second surgical site, Axoguard Nerve Connector, a porcine submucosa extracellular matrix (“ECM”) coaptation aid for tensionless repair of severed peripheral nerves, Axoguard Nerve Protector, a porcine submucosa ECM product used to wrap and protect injured peripheral nerves and reinforce the nerve reconstruction while preventing soft tissue attachments and Avive Soft Tissue Membrane, a minimally processed human umbilical cord membrane that may be used as a resorbable soft tissue covering to separate tissues and modulate inflammation in the surgical bed. Along with these core surgical products, Axogen also offers the Axotouch Two-Point Discriminator and Acroval Neurosensory and Motor Testing System. These evaluation and measurement tools assist healthcare professionals in detecting changes in sensation, assessing return of sensory, grip and pinch function, evaluating effective treatment interventions, and providing feedback to patients on peripheral nerve function. The Company’s portfolio of products is available in the United States, Canada, and other European and international countries. ® ® ® ® Avance Nerve Graft and Avive Soft Tissue Membrane are processed in the United States by Axogen at ® ® ® its processing facility in Dayton, Ohio. Axoguard Nerve Connector and Axoguard Nerve Protector are manufactured in the United States by Cook Biotech Incorporated and are distributed worldwide exclusively by Axogen. The Acroval Neurosensory and Motor Testing System and Axotouch Two Point Discriminator are contract manufactured by Viron Technologies, LLC (formerly Cybernetics Research Laboratories) (“Viron”) Tucson, Arizona. Viron supplies the Acroval and Axotouch unpackaged and they are packaged at Axogen’s distribution facility in Burleson, Texas. Axogen maintains its corporate offices in Alachua, Florida and is the parent company of its wholly owned operating subsidiaries, AC, APC and Axogen Europe GmbH. ® ® ® ® ® 88 Table of Contents 3. Summary of Significant Accounting Policies Cash and Cash Equivalents and Concentration The Company considers highly liquid investments with maturities of three months or less at the date of acquisition as cash equivalents in the accompanying Consolidated Financial Statements. The Company has not experienced any losses related to these balances; however, as of December 31, 2018, $23,794 of the cash and cash equivalents balance was in excess of FDIC limits. As of December 31, 2018, the Company had restricted cash balances of $6,000 as collateral for an irrevocable standby letter of credit. There were no restricted cash balances as of December 31, 2017. The following table provides a reconcilaiton of cash, cash equivalents and restricted cash reported within the consolidated balance sheet that sum to the total of the same amounts shown in the statement of cash flows: Cash and cash equivalents Restricted cash Total cash, cash equivalents, and restricted cash shown in the statement of cash flows December 31, December 31, $ 2018 24,294 $ 6,000 2017 36,507 — $ 30,294 $ 36,507 Investments The Company invests primarily in U.S. Government securities, corporate bonds, commercial paper and asset-backed securities and classifies all investments as available-for-sale. Investments are recorded at fair value. The Company has elected the fair value option (FVO) for all of its available-for-sale investments. The FVO election results in all changes in unrealized gains and losses being included in investment income in the Consolidated Statements of Operations. Revenue Recognition On January 1, 2018, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) No. 606, “Revenue from Contracts with Customers”, utilizing the modified retrospective method applied to contracts that were not completed. The adoption of the standard did not have a material impact on the timing and amounts of the Company’s revenue, processes or internal controls. Upon adoption, the Company did not have any material remaining performance obligations, significant judgements, or material costs to obtain or fulfill contracts with its customers. The Company enters into contracts to sell and distribute products and services to hospitals and surgical facilities for use in caring for patients with peripheral nerve damage or transection. Revenue is recognized when the Company has met its performance obligations pursuant to its contracts with its customers in an amount that the Company expects to be entitled to in exchange for the transfer of control of the products and services to the Company’s customers. In the case of products or services sold to a customer under a distribution or purchase agreement, the Company has no further performance obligations and revenue is recognized at the point control transfers which occurs either when: i) the product is shipped via common carrier; or ii) the product is delivered to the customer or distributor, in accordance with the terms of the agreement. A portion of the Company's product revenue is generated from consigned inventory maintained at hospitals and independent sales agencies, and also from inventory physically held by field sales representatives. For these types of products sales, the Company retains control until the product has been used or implanted, at which time revenue is recognized. The Company elected to account for shipping and handling activities as a fulfillment cost rather than a separate performance obligation. Amounts billed to customers for shipping and handling are included as part of the transaction price and recognized as revenue when control of the underlying products is transferred to the customer. The related shipping and freight charges incurred by the Company are included in cost of sales. 89 Table of Contents The Company operates in a single reportable segment of peripheral nerve repair, offers similar products to its customers, and enters into consistently structured arrangements with similar types of customers. As such, the Company does not disaggregate revenue from contracts with customers as the nature, amount, timing and uncertainty of revenue and cash flows does not materially differ within and among the contracts with customers. The contract with the customer states the final terms of the sale, including the description, quantity, and price of each implant distributed. The payment terms and conditions in the Company’s contracts vary; however, as a common business practice, payment terms are typically due in full within 30 to 60 days of delivery. Since the customer agrees to a stated price in the contract that does not vary over the contract term, the contracts do not contain any material types of variable consideration, and contractual rights of return are not material. The Company has several contracts with distributors in international markets which include consideration paid to the customer in exchange for distinct marketing and other services. The Company records such consideration paid to the customer as a reduction to revenue from the contracts with those distributor customers. ® In connection with the Acroval Neurosensory and Motor Testing System, the Company sells extended warranty and service packages to some of its customers who purchase this evaluation and measurement tool, and the prepayment of these extended warranties represent contract liabilities until the performance obligations are satisfied ratably over the term of the contract. The sale of the aforementioned extended warranty represents the only performance obligation the Company satisfies over time and creates the contract liability disclosed below. The opening and closing balances of the Company’s contract receivables and liabilities are as follows: Contract Balances Net Receivables 11,065 $ 15,321 4,256 $ Contract Liabilities, Current 32 18 (14) Contract Liabilities, Long-Term 69 42 (27) $ Opening, January 1, 2018 Closing, December 31, 2018 Increase (decrease) Allowance for Doubtful Accounts Receivable and Concentration of Credit Risk The Company evaluates the collectability of accounts receivable to determine the appropriate allowance for doubtful accounts. In determining the amount of the allowance, the Company considers aging of account balances, historical credit losses, customer-specific information and other relevant factors. An increase to the allowance for doubtful accounts results in a corresponding increase in general and administrative expense. The Company reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. The Company’s history of write-offs has not been significant. The allowance for doubtful accounts balance was approximately $1,117 and $461 at December 31, 2018 and 2017, respectively. Concentrations of credit risk with respect to accounts receivable are limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk. The Company also controls credit risk through credit approvals and monitoring procedures. Inventories Inventories are comprised of unprocessed tissue, work-in-process, Avance Nerve Graft, Axoguard Nerve ® ® Connector, Axoguard Nerve Protector, Avive Soft Tissue Membrane, Acroval Neurosensory and Motor Testing ® ® ® 90 Table of Contents System, Axotouch Two-Point Discriminator and supplies and are valued at the lower of cost (first-in, first-out) or net realizable value. ® The Company monitors the shelf life of its products and historical expiration and spoilage trends, and writes-down inventory based on the estimated amount of inventory that will not be distributed before expiration or spoilage. Deferred Financing Costs The Company records as a discount to debt all third-party costs associated with the issuance of long-term debt. The costs are amortized to interest expense over the term of the debt using the effective interest method. Net Loss Per Share Basic and diluted net loss per share is computed in accordance with FASB ASC 260, “Earnings Per Share” (ASC 260), by dividing the net loss by the weighted average number of common shares outstanding during the period. Since the Company has experienced net losses for all periods presented, options and awards of 2,621,440, 2,253,399 and 1,177,456 which were outstanding as of December 31, 2018, 2017 and 2016, respectively, were not included in the computation of diluted Eps because dilutive shares are not factored into the calculation of EPS when a loss applicable to common shares as they would be anti-dilutive. Advertising Advertising costs are expensed as incurred. Advertising costs were $29, $204 and $40 for the years ended December 31, 2018, 2017 and 2016, respectively, and are included in sales and marketing expense on the accompanying Consolidated Statements of Operations. Research and Development Costs Research and development costs are expensed as incurred and were $11,773, $6,699 and $4,212 for the years ended December 31, 2018, 2017 and 2016, respectively. Stock-Based Compensation The Company measures all employee stock-based compensation awards using the fair value, including stock options, restricted stock, performance stock and stock purchases related to an employee stock purchase plan. The share-based compensation recognized under ASC 718 for years ended December 31, 2018, 2017 and 2016 was $7,606, $3,609, and $1,390, respectively. ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an 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 in the Company’s Consolidated Statements of Operations. The expense has been reduced for forfeitures as they occur. The Company estimates the fair value of time-based options on the date of grant using the Multi-Point Black-Scholes option-pricing model (Black-Scholes model). The Company’s determination of fair value is affected by the Company’s stock price, as well as assumptions regarding several subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards. The Company estimates the fair value of restricted stock based upon the grant date closing market price of the Company’s common stock. The Company also has an employee stock purchase plan (ESPP) which is available to all eligible employees as defined by the plan document. Under the ESPP, shares of the Company’s common stock may be purchased at a discount. The Company estimates the number of shares to be purchased under the ESPP at the beginning of each purchase period 91 Table of Contents based upon the fair value of the stock at the beginning of the purchase period using the Black-Scholes model and records estimated compensation expense during the period. Expense is adjusted at the time of stock purchase. With respect to performance stock units (“PSUs”), the number of shares that vest and are issued to the recipient is based upon the Company’s performance as measured against specified targets over the measurement period. The fair value of the PSUs is based on the Company’s closing stock price on the grant date and its estimate of achieving such performance targets. For further discussion and disclosures, see Note 11 – Equity Compensation Plans. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes the critical accounting policies regarding revenue recognition, allowance for uncollectible accounts receivable, investments, inventories and share-based employee compensation affect our more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. Actual results could differ materially from those estimates. Recent Accounting Pronouncements In May 2014, the FASB issued a new standard on revenue recognition which outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard was designed to create greater comparability for financial statement users across industries and jurisdictions and also requires enhanced disclosures. The standard could be applied retrospectively to each prior period presented or by use of the modified retrospective method with the cumulative effect recognized as of the adoption date. The Company adopted the standard on January 1, 2018 utilizing the modified retrospective method. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements, other than the enhanced disclosure included in the notes herein. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update will increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This update is effective for annual and interim reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. In July 2018, the FASB issued ASU No. 2018-11, Targeted Improvements to ASC 842, Leases. ASU 2018-11 provided entities with an alternative modified transition method to elect not to recast the comparative periods presented when adopting ASC 842. The new standard provides a number of optional practical expedients in transition. The Company expects to elect: (1) the ‘package of practical expedients’, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs and (2) the use-of-hindsight. In addition, the new standard provides practical expedients for an entity’s ongoing accounting that the Company anticipates making, such as the (1) the election for certain classes of underlying asset to not separate non-lease components from lease components and (2) the election for short-term lease recognition exemption for all leases that qualify. The Company will adopt ASU 842 as of January 1, 2019, using the alternative modified transition method. In preparation of adopting ASC 842, the Company is implementing additional internal controls to enable future preparation of financial information in accordance with ASC 842. The Company has also substantially completed its evaluation of the impact on the Company’s lease portfolio. The Company believes the largest impact will be on the consolidated balance sheets for the accounting of facilities-related leases, which represents a majority of its operating leases it has entered into as a lessee. These leases will be recognized under the new standard as right of use assets (“ROU”) and 92 Table of Contents operating lease liabilities. The Company will also be required to provide expanded disclosures for its leasing arrangements. As of December 31, 2018, the Company had $43,579 of undiscounted future minimum operating lease commitments that are not recognized on its consolidated balance sheets as determined under the current standard. For a lessee, the results of operations are not expected to significantly change after adoption of the new standard. While substantially complete, the Company is still in the process of finalizing its evaluation of the effect of ASU 842 on the Company’s financial statements and disclosures, including the determination of the Company’s incremental borrowing rate for each of the operating leases to estimate the interest rate we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments. The Company will finalize its accounting assessment and quantitative impact of the adoption during the first quarter of fiscal year 2019. In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230). The ASU was issued intending to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the Consolidated Statement of Cash Flows by providing guidance on eight specific cash flow issues. We retrospectively adopted the standard on January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), guidance that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. We retrospectively adopted the standard on January 1, 2018. The adoption of this standard did not have a material impact on the Company’s Consolidated Statement of Cash Flows. In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarity on which changes to the terms or conditions of share-based payment awards require entities to apply the modification accounting provisions required in Topic 718. We retrospectively adopted the standard on January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. In June 2018, the FASB issued ASU No. 2018-07, which supersedes ASC 505-50 and expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. As result, most of the guidance in ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to nonemployee share-based payment arrangements. This update is effective for annual and interim reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We do not expect this standard will have a material impact on the Company’s consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-15, Guidance on Cloud Computing Arrangements. ASU 2018-15 provides guidance on implementation costs incurred in a cloud computing arrangement (CCA) that is a service contract and aligns the accounting for such costs with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, the ASU amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized. This update is effective for annual and interim reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this standard will have on the Company’s consolidated financial statements. The Company’s management has reviewed and considered all other recent accounting pronouncements and believe there are none that could potentially have a material impact on the Company’s consolidated financial condition, results of operations, or disclosures. 4. Inventories Inventories are comprised of unprocessed tissue, work-in-process, Avance Nerve Graft, Axoguard Nerve ® ® Connector, Axoguard Nerve Protector, Avive Soft Tissue Membrane, Acroval Neurosensory and Motor Testing ® ® ® 93 Table of Contents System, Axotouch Two-Point Discriminator and supplies and are valued at the lower of cost (first-in, first-out) or net realizable value and consist of the following: ® Finished goods Work in process Raw materials Inventories December 31, December 31, 2018 2017 $ $ 9,194 $ 454 2,334 11,982 $ 5,489 470 1,357 7,316 For the years ended December 31, 2018, 2017 and 2016, the Company had inventory write-downs of $1,343, $1,438 and $788, respectively, primarily relating to product expiration. 5. Fair Value of Investments The Company has elected the FVO for all investments in debt securities. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three- level valuation hierarchy for classification and disclosure of fair value measurements as follows: Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company classifies cash and investments in U.S. government securities as Level 1 within the fair value hierarchy. Accounts receivable, short-term other assets, accounts payable and accrued liabilities are also classified as Level 1. The carrying amounts of these assets and liabilities approximate their fair values due to their relatively short-term nature. Investments in corporate bonds and commercial paper are classified as Level 2 within the fair value hierarchy. The fair value of long-term debt is estimated by calculating the net present value of future debt payments at current market interest rates and is classified as Level 2.   94 Table of Contents The following table represents the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of December 31, 2018: Quoted Prices in Active Markets for Indentical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Other Unobservable Inputs (Level 3) Assets: Money market funds U.S. government securities Corporate bonds Commerical paper Asset-backed securities Total assets $ $ 12,947 $ 15,923 — — — 28,870 $ — $ — 31,495 27,869 17,025 76,389 $ — $ — — — — — $ Total 12,947 15,923 31,495 27,869 17,025 105,259 There were no changes in the levels or methodology of the measurement of financial assets or liabilities during the year ended December 31, 2018. There were no investments as of December 31, 2017. The maturity date of all of the Company’s investments is less than one year. 6. Property and Equipment Property and equipment consist of the following: Furniture and equipment Leasehold improvements Processing equipment Land Projects in process Less: accumulated depreciation and amortization Property and equipment, net December 31, 2018 December 31, 2017 $ $ 1,763 $ 1,151 2,349 731 4,906 (2,861) 8,039 $ 1,382 711 1,840 — 553 (2,289) 2,197 Depreciation expense for the years ended December 31, 2018, 2017 and 2016 was $774, $488 and $362, respectively. 95 Table of Contents 7. Intangible Assets The Company’s intangible assets consist of the following: License agreements Less: accumulated amortization License agreements, net Patents Less: accumulated amortization Patents, net Intangible assets, net December 31, 2018 December 31, 2017 $ $ $ $ 1,034 $ (553) 481 $ 755 (55) 700 $ 1,181 $ 1,008 (486) 522 460 (45) 415 937 License agreements are being amortized over periods ranging from seventeen to twenty years. Certain patent costs of $22 were being amortized over three years. As of December 31, 2018, these patents were fully amortized, and the remaining patents of $755 are a combination of pending and issued patent costs, $132 of which is being amortized over periods up to twenty years. Amortization expense for 2018, 2017 and 2016 was approximately $77, $79 and $75, respectively. As of December 31, 2018, future amortization of license agreements is expected to be $75 for 2019 through 2024 and $113, thereafter . License Agreements The Company has entered into multiple license agreements (together, the “License Agreements”) with the University of Florida Research Foundation and the University of Texas at Austin. Under the terms of the License Agreements, the Company acquired exclusive worldwide licenses for underlying technology used in repairing and regenerating nerves. The licensed technologies include the rights to issued patents and patents pending in the United States and international markets. The effective term of the License Agreements extends through the term of the related patents and the agreements may be terminated by the Company with 60 days prior written notice. Additionally, in the event of default, licensors may terminate an agreement if the Company fails to cure a breach after written notice. The License Agreements contain the key terms listed below: · Axogen pays royalty fees ranging from 1% to 3% under the License Agreements based on net sales of licensed products. One of the agreements also contains a minimum royalty of $13 per quarter, which may include a credit in future quarters in the same calendar year for the amount the minimum royalty exceeds the royalty fees. Also, when Axogen pays royalties to more than one licensor for sales of the same product, a royalty stack cap applies, capping total royalties at 3.75%; · If Axogen sublicenses technologies covered by the License Agreements to third parties, Axogen would pay a percentage of sublicense fees received from the third party to the licensor. Currently, Axogen does not sublicense any technologies covered by License Agreements. The Company is not considered a sub-licensee under the License Agreements and does not owe any sub-licensee fees for its own use of the technologies; · Axogen reimburses the licensors for certain legal expenses incurred for patent prosecution and defense of the technologies covered by the License Agreements; and · Currently, under the University of Texas at Austin’s agreement, Axogen would owe a $15 milestone fee upon receiving a Phase II Small Business Innovation Research or Phase II Small Business Technology Transfer grant involving the licensed technology. The Company has not received either grant and does not owe such a milestone fee. A milestone fee to the University of Florida Research 96 Table of Contents Foundation of $2 is due if Axogen receives FDA approval of its Avance Nerve Graft, a milestone fee of $25 is due upon the first commercial use of certain licensed technology to provide services to manufacture products for third parties and a milestone fee of $10 is due upon the first use to manufacture products that utilize certain technology that is not currently incorporated into Axogen products. ® Royalty fees were $1,661, $1,195 and $812 for the years ended December 31, 2018, 2017 and 2016, respectively, and are included in sales and marketing expense on the accompanying consolidated statements of operations. 8. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consists of the following: Accounts payable Accrued expenses Accrued compensation Accounts Payable and Accrued Expenses 97 December 31, December 31, 2018 2017 $ $ 4,517 $ 2,004 6,477 12,998 $ 3,238 1,771 3,943 8,952 Table of Contents 9. Term Loan Agreements and Long-Term Debt Term Loan Agreement and Long-Term Debt consist of the following: Term Loan Agreement with MidCap Financial Trust (“MidCap”) for a total of $21,000, net of $554 unamortized deferred financing fees at December 31, 2017. Interest was payable monthly at 8.0% per annum plus the greater of LIBOR or 0.5%. As of December 31, 2018, the Term Loan was paid in full. Revolving Loan Agreement with MidCap for up to $10,000 with borrowings based upon eligible accounts receivable and inventory. Interest was payable monthly at 4.5% per annum plus the greater of LIBOR or 0.5%. As of December 31, 2018, the Revolving Loan was paid in full. Equipment Lease Agreement with Cisco Capital for a total lease amount of $59 which has a 36 month term and requires no lease payments for the first three months of the lease and 33 equal payments of principal and interest until the end of the term. Interest on the lease is payable monthly at 3.5% per annum. Equipment Lease Agreement with Raymond Leasing Corporation for a total lease amount of $30 which has a 48 month term with equal payments for principal and interest until the end of the term. Interest on the lease is payable monthly at 6.7% per annum. Equipment Lease Agreement with B&B Office Systems for a total lease amount of $32 which has a 60 month term with equal payments for principal and interest until the end of the term. Interest on the lease is payable monthly at 8.5% per annum. Total Less current revolving loan Less current maturities of long-term debt Long-term portion Credit Facilities MidCap Term Loan Agreement December 31, December 31, 2018 2017 $ — $ 20,446 — 4,000 15 37 22 30 26 63 — (28) 35 $ 32 24,545 (4,000) (735) 19,810 $ On October 25, 2016 (the “Closing Date”), Axogen and AC, each as borrowers, entered into a Credit and Security Agreement (Term Loan) (the ''MC Term Loan Agreement") with the lenders party thereto and MidCap Financial Trust (“MidCap”), as administrative agent and a lender. Under the MC Term Loan Agreement, MidCap provided the Company a term loan in the aggregate principal amount of $21,000 (the "Term Loan") which had a maturity date of May 1, 2021 and required interest only payments through December 1, 2018, and thereafter, 30 monthly payments of principal and interest resulting in the Term Loan being fully paid by the maturity date. Interest was payable monthly at 8.0% per annum plus the greater of LIBOR or 0.5%. In addition to the interest charged on the Term Loan, the Company was also obligated to pay certain fees, including an annual agency fee of 0.25% of the aggregate principal amount of the Term Loan. The Company had the option at any time to prepay the Term Loan in whole or in part, subject to certain conditions, a prepayment fee and a 5.0% exit fee as specified in the MC Term Loan Agreement. The prepayment fee was determined by multiplying the amount being prepaid by the following applicable percentage amount: (a) 3.0% during the first year following the Closing Date; (b) 2.0% during the second year following the Closing Date, and (c) 1.0% thereafter. 98 Table of Contents However, no prepayment fee would be due in the event the prepayment was a result of refinancing the Term Loan and Revolving Loan with MidCap or an affiliate of MidCap. On May 22, 2018, the Company paid $22,599 to prepay the Term Loan in full, which included exit and pre-payment fees of 5% and 2%, respectively, of the outstanding balance for a total of $1,470. Included in the loss on extinguishment is the unamortized deferred financing costs associated with the Term Loan of $473. MidCap Revolving Loan Agreement In addition, on October 25, 2016, Axogen and AC, each as borrowers, also entered into a Credit and Security Agreement (Revolving Loan) (the ''Revolving Loan Agreement") with the lenders party thereto and MidCap, as administrative agent and a lender. Under the Revolving Loan Agreement, MidCap agreed to lend to the Company up to $10,000 under a revolving credit facility (the "Revolving Loan") which amount could be drawn down by the Company based upon an available borrowing base which included certain accounts receivable and inventory. The Revolving Loan could be increased to up to $15,000 at the Company’s request and with the approval of MidCap. The maturity date of the Revolving Loan was May 1, 2021. Interest was payable monthly at 4.5% per annum plus the greater of LIBOR or 0.5% on outstanding advances. In addition to the interest charged on the Revolving Loan, the Company was also obligated to pay certain fees, including a collateral management fee of 0.5% per annum of the principal amount outstanding on the Revolving Loan from time to time and an unused line fee of 0.5% per annum on the difference between the average amount outstanding on the Revolving Loan minus the total amount of the Revolving Loan commitment. The Revolving Loan was subject to a minimum balance, such that the Company paid the greater of: (i) interest accrued on the actual amount drawn under the Revolving Loan Facility; and (ii) interest accrued on 30% of the average borrowing base. If the Revolving Loan was terminated or permanently reduced prior to the maturity date, MidCap was owed a deferred revolving loan origination fee as specified in the Revolving Loan Agreement. No deferred revolving loan origination fee would be due in the event the Revolving Loan was paid in full or the termination of the revolving credit facility was a result of refinancing the Term Loan and Revolving Loan with MidCap or an affiliate of MidCap. The MC Term Loan Agreement and the Revolving Loan Agreement each contained covenants that placed restrictions on Axogen’s operations, including, without limitation, covenants related to debt restrictions, investment restrictions, dividend restrictions, restrictions on transactions with affiliates and certain revenue covenants. MidCap, on behalf of the lenders under the agreements, had a first perfected security interest in the assets of the Company to guarantee the payment in full of the agreements. On May 22, 2018, the Company paid $2,958 to prepay the Revolving Loan in full, which included pre-payment fees of $236. Interest expense for the year ended December 31, 2018 was $1,127 compared to $2,217 for the year ended December 31, 2017 and $5,386 for the year ended December 31, 2016. Annual maturities of the Company’s long-term obligations are as follows: Year Ending December 31 2019 2020 2021 2022 TOTAL Amount $ $ 28 13 15 7 63 99 Table of Contents 10. Public Offering of Common Stock Axogen, Inc. Classes of Stock Axogen, Inc.’s authorized capital stock consists of 100,000,000 shares of common stock, par value $0.01 per share. The authorized capital stock is divisible into the classes and series, has the designation, voting rights, and other rights and preferences and is subject to the restrictions that the Axogen Board of Directors may establish from time to time. Unless otherwise designated by the Axogen Board of Directors, all shares are common stock. Axogen has not designated any shares other than common stock. Public Offerings On October 7, 2016, Axogen entered into an underwriting agreement with JMP Securities LLC, as representative of the several underwriters (collectively, the “2016 Offering Underwriters”), to issue and sell 2,333,334 shares of the Company’s common stock in an underwritten registered public offering (the “2016 Offering”) at an offering price of $7.50 per share. Pursuant to the underwriting agreement, the Company also granted the 2016 Offering Underwriters a 30-day option to purchase up to an additional 350,000 shares of common stock, which the 2016 Offering Underwriters exercised in full on October 7, 2016. Five of the Company’s directors and officers purchased an aggregate of approximately 33,000 Shares in the 2016 Offering and such purchases were made on the same terms and conditions as purchases by the public in the 2016 Offering. The 2016 Offering closed on October 13, 2016, and the Company received net proceeds of approximately $18,674 from the sale of 2,683,334 shares of common stock, which included the additional 350,000 shares of common stock, after deducting the underwriting discounts and commissions and estimated offering expenses. The 2016 Offering was pursuant to a prospectus supplement dated October 7, 2016, which was filed with the SEC in connection with the Company’s shelf registration statement on Form S-3 (File No. 333-207829) that was filed with the SEC on November 5, 2015 and declared effective on December 11, 2015 and the related prospectus dated December 11, 2015. On November 16, 2017, Axogen entered into a certain underwriting agreement (the “Leerink Underwriting Agreement”) with Leerink Partners LLC, as representative of the several underwriters named therein (collectively, the “2017 Offering Underwriters”) and Essex, pursuant to which (i) the Company agreed to issue and sell 700,000 shares of the Company’s common stock pursuant to a registration statement on Form S-3 (File No. 333-207829), filed with the SEC on November 5, 2015, and declared effective by the SEC on December 11, 2015, and the prospectus contained therein, as supplemented by the prospectus supplement dated November 16, 2017, and (ii) Essex agreed to sell 1,000,000 shares of the Company’s common stock pursuant to a registration statement on Form S-3 (File No. 333-220770), filed with the SEC on October 2, 2017, and declared effective by the SEC on October 11, 2017, and the prospectus contained therein, as supplemented by the Prospectus Supplement, in an underwritten registered public offering at an offering price of $21.00 per share. The Company and Essex granted the 2017 Offering Underwriters a 30-day option to purchase up to an aggregate of 255,000 additional shares of common stock, at the public offering price, less the underwriting discounts and commissions, which was exercised in full on November 16, 2017. The Company received net proceeds of approximately $15,655 after deducting the underwriting discounts and commissions and estimated offering expenses. On May 8, 2018, the Company entered into an underwriting agreement with Jefferies LLC and Leerink Partners LLC, as representatives of the several underwriters named therein (collectively, the “2018 Offering Underwriters”), pursuant to which the Company agreed to issue and sell 3,000,000 shares of the Company’s common stock in an underwritten registered public offering at an offering price of $41.00 per share (the “2018 Offering”). The Company granted the 2018 Offering Underwriters a 30-day option to purchase up to an aggregate of 450,000 additional shares of common stock, at the public offering price, less the underwriting discounts and commissions, which was exercised in full on May 9, 2018. The 2018 Offering closed on May 11, 2018, and the Company received proceeds of approximately $132,707 from the sale of the shares (including the sale of 450,000 additional shares issued upon exercise of the 2018 Offering Underwriters’ overallotment option), after deducting the underwriting discounts and commissions and estimated offering expenses. 100 Table of Contents 11. Equity Compensation Plans The Company maintains two share-based incentive plans: the Axogen 2010 Stock Incentive Plan, as amended (2010 Plan), and the Axogen 2017 Employee Stock Purchase Plan (2017 ESPP). Stock Incentive Plan The 2010 Plan allows for issuance of incentive stock options, non-qualified stock options, performance stock units (PSU) and restricted stock units (RSU) to employees, directors and consultants at exercise prices not less than the fair market value at the date of grant. The Compensation Committee of the Board of Directors administers the 2010 Plan and has the authority to determine the terms of any awards, including the number of shares subject to each award, the exercisability of the awards and the type of awards. As of December 31, 2018 , there were 7,700,000 shares of common stock authorized for issuance under the 2010 Plan and 407,368 were available for future grants. The options to employees typically vest 25% one year after the grant date and 12.5% every six months thereafter for the remaining three-year period until fully vested after four years and those to directors and certain executive officers have vested 25% per quarter over one year or had no vesting period. Beginning in June 2017, options to employees typically vest 50% two years after the grant and 12.5% every six months thereafter for the remaining four-year period until fully vested after five years. Options issued to consultants have vesting provisions based on the engagement ranging from no vesting to vesting over the service period ranging from three to ten years. Options have terms ranging from seven to ten years. Activity under the 2010 Plan during 2017 and 2018 was as follows: Weighted Number of Shares Outstanding Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Price Term(Years) Value 4,080,264 $ 4.65 16.91 871,375 5.47 (86,453) (560,985) 3.36 4,304,201 $ 7.28 29.48 656,250 9.56 (40,473) (1,026,807) 3.72 3,893,171 $ 11.94 3,893,171 $ 11.94 2,027,440 $ 5.98 4.83 $ 17,762 5.39 $ 90,473 5.95 $41,020 5.95 $41,020 4.08 $29,739 Number of Weighted Average Shares Grant Date Outstanding Fair Value 8.95 26.24 8.95 9.49 21.14 23.34 8.95 25.89 22.18 202,100 $ 430,980 (7,150) (15,200) 610,730 $ 516,433 (7,150) (13,650) 1,106,363 Time-Based Stock Options Outstanding at December 31, 2016: Granted Forfeited Exercised Outstanding at December 31, 2017: Granted Forfeited Exercised Outstanding at December 31, 2018 Vested and expected to vest Exercisable at December 31, 2018 Restricted and Performance Stock Units Outstanding at December 31, 2016: Granted Released Forfeited Outstanding at December 31, 2017: Granted Released Forfeited Outstanding at December 31, 2018 101 Table of Contents The intrinsic value of equity awards exercised during the years ended December 31, 2018, 2017 and 2016 was $34,229, $7,783 and $1,496, respectively. As a result of the Company’s full valuation allowance on its net deferred tax assets, no tax benefit was recognized related to the exercises of stock options. The exercise price per share of each option is equal to the fair market value of the underlying share on the date of grant. For 2018, 2017 and 2016, $3,884, $1,434 and $1,078, respectively, in cash proceeds were included in the Company’s Consolidated Statements of Cash Flows as a result of the exercise of stock options. The total fair value of restricted stock vested during 2018 and 2017 was $196 and $108. There were no restricted stock vested during 2016. The Company issues registered shares of common stock to satisfy stock option exercises and restricted stock grants. The Company recognized stock-based compensation expense of $7,606, $3,609 and $1,390 for the years ended December 31, 2018, 2017 and 2016, respectively, which consisted of compensation expense related to employee stock options, PSUs and RSUs. As of December 31, 2018, there was $27,948 of unrecognized compensation costs related to non-vested stock options and restricted stock awards. This cost is expected to be recognized over a weighted-average period of 2.53 years for stock options and 3.26 years for restricted stock awards. On December 18, 2017 the Compensation Committee of the Board of Directors also approved PSU awards to certain executives related to their work on the Company’s BLA. The PSU awards consist of a targeted total award of 200,000 shares. The number of shares are allocated to certain milestones related to the BLA submission to and approval by the FDA. The performance measure is based upon achieving each of the specific milestones and will vest 50% upon achieving each of the milestones and 50% one year later. The Company estimated the fair value of the PSUs based on its closing stock price at the time of grant and its estimate of achieving such performance target and will record compensation expense as the milestones are achieved. Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the related compensation expense will be adjusted based upon the Company’s estimate of achieving such performance target. The number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on the actual performance metrics as set forth in the applicable PSU award agreement. The amount actually awarded will be based upon achievement of the performance measures and can range from 0 to 200,000 shares. The grant date fair value of the common stock on December 18, 2017 was $27.00. The total unrecognized future compensation expense related to this PSU, assuming achievement of 100% of the target award is $5,400. Assuming the minimum of 0% and the maximum of 100% payout opportunity for the PSU, the range of total future compensation expense related to this PSU award is between $0 and $5,400 as of December 31, 2018. Employee Stock Purchase Plan The 2017 ESPP, which was effective as of January 1, 2018, allows for eligible employees to acquire shares of our common stock through payroll deductions at a discount from market value (currently 15%) of the lesser of the closing price of the Company’s common stock on the first day or last day of the offering period. The offering period is currently six months, and the offering prices are subject to change. Participants may not purchase more than $25 of the Company’s common stock in a calendar year. As of December 31, 2018 , there were 600,000 shares of common stock authorized for issuance under the 2017 ESPP and 533,684 were available for future issuance. Valuation and Expense Information Under FASB ASC 718 The Company estimates the fair value of each option grant using a Multiple Point Black-Scholes option- pricing model which uses a weighted average of historical volatility and peer company volatility. The Company determines the expected life giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. The Company uses the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life of the award. 102 Table of Contents The Company used the following weighted-average assumptions for stock options granted during the year ended December 31: Year ended December 31, Expected term (in years) Expected volatility Risk free rate Expected dividends 2018 2017 2016 6.22 4.60 6.16 50.99 % 50.43 % 59.58 % 1.72 % — % 2.12 % — % 2.70 % — % The fair value of restricted stock awards is based on the market value of the Company’s common stock on the date of the awards. Based on the assumptions noted above, the weighted average estimated grant date fair value per share of the stock options and restricted stock granted for the years ended December 31, 2018, 2017 and 2016, respectively, was as follows: Stock options Restricted and performance stock units 2018 2017 2016 $ 15.05 $ 23.34 8.41 $ 26.24 3.84 8.95 12. Income Taxes The Company has temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their respective income tax basis, as measured by enacted state and federal rates as follows: December 31 2018 2017 2016 Deferred tax assets: Net operating loss carryforwards Charitable contributions Inventory write down Depreciation Amortization Interest limitation Allowance for doubtful accounts Stock-based compensation Total deferred tax assets Deferred tax liabilities: Depreciation Amortization Contract liabilities Net deferred tax assets Valuation allowance $ $ 30,588 $ — 273 117 — 336 285 2,335 33,934 — (43) (15) 33,876 (33,876) $ 27,578 $ — 206 — 23 — 117 520 28,444 (81) — (6) 28,357 (28,357) $ 38,299 1 361 — 90 — 102 341 39,194 (83) — — 39,111 (39,111) As of December 31, 2018, the Company had tax-affected net operating loss carry forwards of approximately $30,588 to offset future taxable income which expire in various years through 2038. A portion of the net operating loss carry forwards may expire due to limitations imposed by section 382 of the Internal Revenue Code. A valuation allowance is recorded to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more-likely-than-not that a portion or none of the deferred tax assets will be realized. After consideration of all the evidence, 103 Table of Contents including reversal of deferred tax liabilities, future taxable income and other factors, management has determined that a full valuation allowance is necessary as of December 31, 2018, 2017 and 2016. The valuation allowance increased by $5,519 during 2018, primarily as a result of current year increase in the net operating loss carry forward. During 2017, the valuation allowance decreased by $10,754, primarily due to the remeasurement of the Company’s deferred tax assets and liabilities as a result of the Tax Reform enacted on December 22, 2017. During 2016, the valuation allowance increased $5,097, to offset the deferred tax benefit in that year. The difference between the financial statement income tax and the income tax benefit using statutory rates is primarily due to the decrease in the valuation allowance. The Company had no income tax expense or income tax benefit for 2016, 2017 and 2018 due to incurrence of net operating losses. The Company does not believe there are any additional tax refund opportunities currently available. 13. Employee Benefit Plan The Company sponsors the Axogen 401(k) plan (the 401(k) Plan), a defined contribution plan covering substantially all employees of the Company. All full-time employees who have attained the age of 18 are eligible to participate in the 401(k) Plan. Eligibility is immediate upon employment and enrollment is available any time during employment. Participating employees may make annual pretax contributions to their accounts up to a maximum amount as limited by law. The 401(k) Plan requires the Company to make matching contributions of 3% on the first 3% of the employee’s annual salary and 1% of the next 2% of the employee’s annual salary as long as the employee participates in the 401(k) Plan. Both employee contributions and Company contributions vest immediately. The Company contributed $650, $439 and $334 in matching funds during the years ended December 31, 2018, 2017 and 2016, respectively. 14. Commitments and Contingencies Operating Leases The Company and SNH Medical Office Properties Trust, a Maryland real estate investment trust (“SNH”), are parties to that certain lease dated as of February 6, 2007, as amended, (the “Primary Lease”) pursuant to which the Company leases its approximately nineteen thousand square foot corporate headquarters facility in the Progress Center at 13631 Progress Boulevard, Alachua, Florida 32615 (the “Primary Premises”). The annual cost for the Primary Premises ranges from $353 to $363 through the end of the term of the lease, which expires on October 31, 2021. On January 23, 2017 the Company entered into a lease (the “First Expansion Lease”) with SNH for one thousand four hundred square feet at 13709 Progress Boulevard, Alachua, Florida 32615 (the “First Expansion Premises”) adjacent to the Primary Premises. The Company has entered into the Second Expansion Lease and Third Expansion Lease, as defined below, which relate to properties that are adjacent to the Primary Premises and First Expansion Premises resulting in the Company having approximately eighteen thousand square feet for its corporate headquarters and certain research space in the Progress Center in Alachua, Florida. On November 19, 2018, the Company entered into a Lease (the “Second Expansion Lease”) with SNH for two thousand eight hundred square feet at 13709 Progress Boulevard, Suites S-160, S-162 and S-164, Alachua, Florida 32615 (the “Second Expansion Premises”). Pursuant to the Second Expansion Lease, AC is to use the Second Expansion Premises for general office uses. The Second Expansion Lease commenced December 1, 2018 and expires November 30, 2020. The annual cost of the Second Expansion Premises is approximately $45 for the first twelve months of the term and $42 for the final eleven months. The Company is also obligated to pay for certain taxes, insurance costs and electricity costs incurred by SNH. On November 19, 2018, AC entered into a Lease (the “Third Expansion Lease”) with SNH for two thousand square feet at 13709 Progress Boulevard, Suites S-175, S-177 and S-179, Alachua, Florida 32615 (the “Third Expansion Premises”). Pursuant to the Third Expansion Lease, the Company is to use the Third Expansion Premises for general office and biomedical research uses. The Third Expansion Lease commenced December 1, 2018 and its term expires November 30, 2020. The annual cost of the Third Expansion Premises is approximately $37 for the first twelve months of the term and $35 for the final eleven months. The Company is also obligated to pay for certain taxes, insurance costs and electricity costs incurred by SNH. 104 Table of Contents On November 21, 2018, the Company, entered into Commercial Lease Amendment 3 (the “Burleson Amendment”), to the Commercial Lease dated April 21, 2015, as amended, with Ja-Cole L.P. Under the terms of the Burleson Amendment, the Company leased an additional two thousand five hundred square feet of warehouse/office space in Burleson, Texas (collectively with the space leased under the Commercial Lease with Ja-Cole L.P. prior to the effectiveness of the Burleson Amendment, the “Burleson Facility”). The Burleson Facility will now comprise a total of twelve thousand five hundred square feet, all of which, pursuant to the Burleson Amendment, will be leased until December 31, 2021. The annual rental cost of the entire Burleson Facility is now approximately $113 through December 31, 2020 and $116 for the calendar year 2021. The Burleson Facility houses raw material storage and product distribution while allowing same day order fulfillment for both the east and west coasts of the United States. On October 26, 2018, the Company entered into a Lease (the “Ashley Avenue Lease”) with Ashley Avenue Associates I, LLC., a Delaware limited liability company (“Ashley”), for the lease by the Company of approximately fifteen thousand square feet of office space on the second floor of the building located at 1000 N. Ashley Drive, Tampa, Florida 33602 (the “Ashley Avenue Premises”). Pursuant to the Ashley Avenue Lease, the Company will use the Ashley Avenue Premises for general office purposes. The initial term of the Ashley Avenue Lease commenced on December 1, 2018 and expires on November 30, 2020. The Company has an option to terminate the lease after eighteen months by providing Ashley with four months advance written notice. The rental cost for the Ashley Avenue Premises will be $381 for the first twelve month period, and $360 for the final eleven month period. The Company will also be obligated to pay for its pro rata share of the building’s property taxes, utilities, administrative costs, common area maintenance and management fees, excluding any capital improvements or any damage due to fire, hurricane or other casualty. On September 20, 2018, the Company entered into an agreement with Heights Union, LLC, a Florida limited liability company (“Heights Union”), for the lease of seventy-five thousand square feet of office space (the “Heights Union Premises”) in a one hundred and fifty thousand square foot office building that Heights Union intends to construct and complete on or before February 15, 2020, on an area of land in Tampa, Florida. Pursuant to the Heights Union lease, the Company will use the Heights Union Premises for general office, medical laboratory, training and meeting purposes. The annual costs of the Heights Union Premises ranges from $2,400 to $3,308 during the term of the lease. Axogen believes it can obtain certain economic incentives from state authorities associated with the employment at the facility; such incentives are not expected to be a material offset to the expenses of the project as a whole. In addition, Axogen leases space and maintains records at certain other facilities, including the Company’s prior corporate headquarters at 1407 South Kings Highway, Texarkana, Texas 75501. Estimated future minimum rental payments on the leases are as follows: Year Ending December 31, 2019 2020 2021 2022 2023 Thereafter TOTAL Amount 1,866 2,540 3,970 2,518 2,574 30,111 43,579 $ Total rent expense for the Company’s leased office and lab space for the years ended December 31, 2018, 2017 and 2016 was $484, $494 and $433, respectively. Service Agreements On August 6, 2015, Axogen entered into a License and Services Agreement with Community Blood Center (d/b/a Community Tissue Services) (“CTS”), Dayton, Ohio, an FDA registered tissue establishment. Processing of the Avance Nerve Graft pursuant to the CTS agreement began in February ® 2016. Subsequent to the year ended December 31, 2018, on February 22, 2019, Axogen Corporation and CTS entered into a fourth amendment to the License and 105 Table of Contents Services Agreement wherein the term of the agreement was extended such that the Occupancy Date in section 12.01 of the agreement shall end on December 31, 2021, subject to earlier termination by either party at any time for cause (subject to the non-terminating party’s right to cure, in certain circumstances), or by Axogen without cause upon six months’ prior notice, whereby notice cannot be provided prior to March 1, 2021. Under the CTS agreement Axogen pays CTS a facility fee for clean room/manufacturing, storage and office space, which has been determined to be an embedded operating lease. CTS also provides services in support of Axogen’s manufacturing such as routine sterilization of daily supplies, providing disposable supplies, microbial services and office support. Pursuant to the CTS Agreement, Axogen pays license fees and the operating lease amounts, on a monthly basis to CTS which total an annual amount of approximately $1,931 for the year ended December 31, 2018, $1,409 for the year ended December 31, 2017 and $754 for the year ended December 31, 2016. In August 2008, the Company entered into an agreement to distribute the Axoguard product worldwide in the field of peripheral nerve repair, and the parties subsequently amended the agreement on February 26, 2018. Pursuant to the February 2018 amendment, the agreement expires on June 30, 2027. The Cook Biotech agreement also requires certain minimum purchases, although through mutual agreement the parties have not established such minimums and to date have not enforced such provision, and establishes a formula for the transfer cost of the Axoguard products. Under the agreement, Axogen provides purchase orders to Cook Biotech, and Cook Biotech fulfills the purchase orders. ® ® In December 2011, the Company also entered into a Master Services Agreement for Clinical Research and Related Services. The Company was required to pay $151 upon execution of this agreement and the remainder monthly based on activities associated with the execution of Axogen’s phase 3 pivotal clinical trial to support a BLA for Avance Nerve Graft. ® Certain executive officers of the Company are parties to employment contracts. Such contracts have severance payments for certain conditions including change of control. Concentrations Vendor ® Substantially all of Axogen’s revenue is currently derived from four products, Avance Nerve Graft, Axoguard Nerve Protector, Axoguard Nerve Connector and Avive Soft Tissue Membrane. Axogen has an exclusive distribution agreement with Cook Biotech for the purchase of Axoguard which expires June 30, 2027. The Cook Biotech agreement also requires certain minimum purchases, although through mutual agreement the parties have not established such minimums and to date have not enforced such provision, and establishes a formula for the transfer cost of the Axoguard products. ® ® ® ® ® The agreement allows for termination provisions for both parties. Although there are products that Axogen believes it could develop or obtain that would replace the Axoguard products, the loss of the ability to sell the Axoguard products could have a material adverse effect on Axogen’s business until other replacement products would be available. ® ® Processor Axogen is highly dependent on the continued availability of its processing facilities at CTS and could be harmed if the physical infrastructure of this facility is unavailable for any prolonged period of time. In addition, disruptions could lead to significant costs and reductions in revenues, as well as a potential harm to the Axogen’s business reputation and financial results. The CTS agreement terminates December 31, 2021, subject to earlier termination by either party at any time for cause (subject to the non-terminating party’s right to cure, in certain circumstances), or by Axogen without cause, upon 6 months’ prior notice, whereby notice cannot be provided prior to March 1, 2021. Although Axogen believes it can find and make operational a new facility in less than six months if required. In addition, Axogen acquired property which is located near the CTS facility and it is expected that renovations will be completed by the termination date of the CTS Agreement to provide a new processing facility that can be included in our BLA for the Avance Nerve Graft. However, the regulatory process for approval of facilities whether licensed or owned is time-consuming and unpredictable. Axogen’s ability to license, renovate, rebuild or find acceptable service facilities takes a considerable ® 106 Table of Contents amount of time and expense and could cause a significant disruption in service to its customers if it were to lose the availability of it production or distribution facilities. Although Axogen has business interruption insurance which would, in instances other than lease termination, cover certain costs, it may not cover all costs nor help to regain Axogen’s standing in the market. Litigation On January 9, 2019, Plaintiff Neil Einhorn, on behalf of himself and others similarly situated, filed a putative class action complaint in the United Stated District Court for the Middle District of Florida alleging violations of the federal securities laws against Axogen, Inc., certain of its directors and officers (“Individual Defendants”), and Axogen’s 2017 Offering Underwriters and 2018 Offering Underwriters (collectively, with the Individual Defendants, the “Defendants”), captioned Einhorn v. Axogen, Inc., et al., No. 8:19-cv-00069 (M.D. Fl.). Plaintiff asserts that Defendants made false or misleading statements in connection with the Company’s November 2017 registration statement issued regarding its secondary public offering in November 2017 and May 2018 registration statement issued regarding its secondary public offering in May 2018, and during a class period of August 7, 2017 to December 18, 2018. In particular, Plaintiff asserts that Defendants issued false and misleading statements and failed to disclose to investors: (1) that the Company aggressively increased prices to mask lower sales; (2) that the Company’s pricing alienated customers and threatened the Company’s future growth; (3) that ambulatory surgery centers form a significant part of the market for the Company’s products; (4) that such centers were especially sensitive to price increases; (5) that the Company was dependent on a small number of surgeons whom the Company paid to generate sales; (6) that the Company’s consignment model for inventory was reasonably likely to lead to channel stuffing; (7) that the Company offered purchase incentives to sales representatives to encourage channel stuffing; (8) that the Company’s sales representatives were encouraged to backdate revenue to artificially inflate metrics; (9) that the Company lacked adequate internal controls to prevent such channel stuffing and backdating of revenue; (10) that the Company’s key operating metrics, such as number of active accounts, were overstated; and (11) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects, were materially misleading and/or lacked a reasonable basis. Axogen was served on January 15, 2019. On February 4, 2019, the court granted the parties’ stipulated motion which provided that Axogen is not required to file a response to the complaint until thirty days after Plaintiff files a consolidated amended complaint, which will not occur until thirty days after the court appoints a lead plaintiff and lead counsel. Plaintiff is seeking compensatory damages, reimbursement of expenses and costs, including counsel and expert fees and such other relief as the court deems just and proper. On February 4, 2019, a complaint in Jerry Espinoza, Jr. v. Megan M. Hess (2019-cv-30016) was filed in the District Court, Montrose County, Colorado. Plaintiffs, who are relatives of decedents, allege that Axogen purchased specimens from a vendor who failed to obtain consent before procuring the specimen from four decedents. Against Axogen, Plaintiffs allege claims of: (1) outrageous conduct; (2) unjust enrichment; (3) negligence; (4) negligence per se; (5) aiding and abetting; (6) civil conspiracy; and (7) Colorado Organized Crime Control Act. Plaintiffs seek compensatory damages for emotional distress and anxiety and exemplary damages. Axogen was served with the complaint on February 13, 2019. These matters are subject to various uncertainties and it is possible that they may be resolved unfavorably to the Company. However, while it in not possible to predict with certainty the outcome of these matters, the Company and the Individual Defendants dispute the allegations and intend to vigorously defend themselves in these matters. 107 Table of Contents 15. Quarterly Results of Operations (Unaudited) The following is a summary of the quarterly results of operations for the years ended December 31, 2018 and 2017: 2018 Revenues Gross profit Net loss Loss per common share - basic and diluted 2017 Revenues Gross profit Net loss Loss per common share - basic and diluted $ $ Quarter Second Third First Fourth Total 17,260 $ 14,547 (5,644) (0.16) 20,584 $ 17,478 (7,427) (0.20) 22,660 $ 19,196 (4,102) (0.11) 23,433 $ 19,793 (5,224) (0.13) 83,937 71,014 (22,397) (0.60) 12,241 $ 10,325 (3,762) (0.11) 15,168 $ 12,891 (2,060) (0.06) 16,046 $ 13,542 (2,124) (0.06) 16,971 $ 14,357 (2,499) (0.07) 60,426 51,115 (10,445) (0.31) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Company maintains “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, and Board of Directors, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. Changes in Internal Control Over Financial Reporting In the ordinary course of business, we routinely enhance our information systems by either upgrading current systems or implementing new ones. There were no changes in our internal control over financial reporting that occurred during the three months ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial 108 Table of Contents statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that: · · · Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements. Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2018. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. The Company’s independent registered public accounting firm, Deloitte & Touche LLP, who audited the consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of managements internal control over financial reporting as of December 31, 2018. This report states that the internal control over financial reporting was effective and appears on page 81 of this Annual Report on Form 10-K. ITEM 9B. OTHER INFORMATION None. 109 Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. Information required by this item concerning our directors will be set forth under the caption “Election of Directors” in our definitive proxy statement for our 2019 annual meeting, and is incorporated herein by reference. Information required by this item concerning compliance with Section 16(a) of the Exchange Act, as amended, will be set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for our 2019 annual meeting, and is incorporated herein by reference. Information required by this item concerning the audit committee of the Company, the audit committee financial expert of the Company and any material changes to the way in which security holders may recommend nominees to the Company’s Board of Directors will be set forth under the caption “Corporate Governance” in our definitive proxy statement for our 2019 annual meeting, and is incorporated herein by reference. The Board of Directors adopted a Code of Ethics, which is posted on our website http://ir.Axogeninc.com/governance.cfm that is applicable to all employees and directors. We will provide copies of our Code of Business Conduct and Ethics without charge upon request. To obtain a copy, please visit our website or send your written request to Investors Relations, 13631 Progress Blvd., Suite 400, Alachua, FL 32615. With respect to any amendments or waivers of this Code of Business Conduct and Ethics (to the extent applicable to the Company’s chief executive officer, principal accounting officer or controller, or persons performing similar functions) the Company intends to either post such amendments or waivers on its website or disclose such amendments or waivers pursuant to a Current Report on Form 8-K. ITEM 11. EXECUTIVE COMPENSATION. Information required by this item will be set forth under the caption “Executive Compensation” in our definitive proxy statement for our 2019 annual meeting, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS Information required by this item concerning ownership will be set forth under the caption “Security Ownership of Certain Beneficial Owners”, “Security Ownership of Directors and Executive Officers” and “Equity Compensation Plan Information” in our definitive proxy statement for our 2019 annual meeting, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information required by this item concerning ownership will be set forth under the caption “Corporate Governance — Director Independence” and “Certain Relationships and Related Transactions” in our definitive proxy statement for our 2019 annual meeting, and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information required by this item concerning ownership will be set forth under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm” in our definitive proxy statement for our 2019 annual meeting, and is incorporated herein by reference. 110 Table of Contents ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES PART IV (1) The financial statements required by Item 15(a) are filed in Item 8 of this annual report on Form 10-K. (2) The financial statement schedules required by Item 15(a) are filed in Item 8 of this annual report on Form 10-K. Schedule II, Valuation and Qualifying Accounts for the years ended December 31, 2018, 2017 and 2016 is included in the Consolidated Financial Statements of Axogen, Inc. on page 85. All other financial statement schedules are omitted because they are inapplicable, not required or the information is indicated elsewhere in the consolidated financial statements or the notes thereto. (3) The following exhibits are included in this annual report on Form 10-K or incorporated by reference in the Form 10-K: Exhibit Number Description +3.1 Amended and Restated Articles of Incorporation of Axogen, Inc. +3.2 Axogen, Inc. Amended and Restated Bylaws. 4.1 Registration Rights Agreement, dated as of August 26, 2015, between Axogen, Inc. and Essex Woodlands Fund IX, L.P. (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed on February 28, 2018). *10.1 Patent License Agreement, dated as of August 3, 2005, by and between Axogen Corporation and the Board of Regents of the University of Texas System (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 6, 2011). *10.2.1 Amended and Restated Standard Exclusive License Agreement with Sublicensing Terms, dated as of February 21, 2006, by and between Axogen Corporation and the University of Florida Research Foundation, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 6, 2011). 10.2.2 *10.3 *10.4.1 *10.4.2 Second Amendment to the Amended and Restated Standard Exclusive License Agreement No. A5140, effective as of July 5, 2016, by and between Axogen Corporation and the University of Florida Research Foundation, Inc. (incorporated by reference to Exhibit 10.2.1 to the Company’s Current Report on Form 8-K filed on July 11, 2016). Sid Martin Biotechnology Development Institute Incubator License Agreement, dated as of September 26, 2006, by and between Axogen, Inc. and the University of Florida Research Foundation, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 6, 2011). Amended and Restated Nerve Tissue Processing Agreement, dated as of February 27, 2008, by and between Axogen Corporation and LifeNet Health (incorporated by reference to Exhibit 10.4.1 to the Company’s Current Report on Form 8-K filed on October 6, 2011). Second Amendment to Amended and Restated Nerve Tissue Processing Agreement, dated as of August 9, 2011, by and between Axogen Corporation and LifeNet Health (incorporated by reference to Exhibit 10.4.2 to the Company’s Current Report on Form 8-K filed on October 6, 2011). 111 Table of Contents Exhibit Number *10.4.3 Description Third Amendment to Amended and Restated Nerve Tissue Processing Agreement, dated as of March 12, 2012, by and between Axogen Corporation and LifeNet Health (incorporated by reference to Exhibit 10.4.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 15, 2012). *10.4.4 Fourth Amendment to Amended and Restated Nerve Tissue Processing Agreement, dated as of September 8, 2014, by and between Axogen Corporation and LifeNet Health (incorporated by reference to Exhibit 10.4.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed on November 13, 2014). *10.5.1 Distribution Agreement, dated as of August 27, 2008, by and between Axogen, Inc. and Cook Biotech Incorporated (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on October 6, 2011). 10.5.2 10.5.3 Amendment No. 1 to Distribution Agreement, dated as of February 24, 2012, by and between Axogen, Inc. and Cook Biotech Incorporated (incorporated by reference to Exhibit 10.5.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 15, 2012). Amendment No. 2 to Distribution Agreement, dated as of February 26, 2018, by and between Axogen, Inc. and Cook Biotech Incorporated (incorporated by reference to Exhibit 10.5.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed on February 28, 2018). **10.6 Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of March 23, 2016 (incorporated by reference to Appendix A to the Company’s Proxy Statement filed on April 8, 2016). **10.7.1 Executive Employment Agreement, effective as of October 15, 2007, by and between Axogen Corporation and Karen Zaderej (incorporated by reference to Exhibit 10.8.1 to the Company’s Current Report on Form 8-K filed on October 6, 2011). **10.8 Executive Employment Agreement dated as of July 17, 2017, by and between Axogen Corporation and Jon S. Gingrich (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K/A, filed on July 20, 2017). **10.8.1 Form of Non-Qualified Stock Option Inducement Award Agreement to be granted by Axogen, Inc. to Jon S. Gingrich on July 17, 2017 (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K/A, filed on July 20, 2017). 10.9.1 10.9.2 10.9.3 Lease dated as of February 6, 2007, by and between Axogen Corporation and WIGSHAW, LLC (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed on November 14, 2011). Second Amendment to Lease, dated as of February 27, 2013 to lease dated as of February 6, 2007, by and between Axogen Corporation and SNH Medical Office Properties Trust (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed on March 12, 2013). Third Amendment to Lease, dated November 12, 2013 to lease dated as of February 6, 2007, by and between Axogen Corporation and SNH Medical Office Properties Trust (incorporated by reference to Exhibit 10.10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on March 6, 2014). 112 Table of Contents Exhibit Number 10.9.4 Description Fourth Amendment to Lease, dated as of March 16, 2016, by and between Axogen Corporation and SNH Medical Office Properties Trust (incorporated by reference to Exhibit 10.10.4 to the Company’s Current Report on Form 8-K filed on March 18, 2016). **10.10.1 Form of Employee Incentive Stock Option Agreement (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on September 26, 2007). **10.10.2 Amended Form of Employee Incentive Stock Option Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of March 23, 2016 (incorporated by reference to Exhibit 10.10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). **10.11.1 Executive Employment Agreement, effective as of October 1, 2011, by and between Axogen, Inc. and Gregory Freitag (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 15, 2012). **10.11.2 Amendment No. 1 to Executive Employment Agreement, dated as of May 11, 2014, by and between Axogen, Inc. and Greg Freitag (incorporated by reference to Exhibit 10.16.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed on August 4, 2014). **10.11.3 Amendment No. 2 to Employment Agreement, dated as of August 6, 2015, by and between Gregory G. Freitag and Axogen, Inc. (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed on November 5, 2015). **10.11.4 Amendment No. 3 to Employment Agreement, dated as of June 1, 2016, by and between Greg Freitag and Axogen, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 31, 2016). **10.11.5 Amendment No. 4 to Employment Agreement, dated as of October 29, 2018, by and between Greg Freitag and Axogen, Inc. (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on October 29, 2018). 10.12.1 Commercial Lease, dated April 21, 2015, by and between Axogen Corporation and Ja-Cole, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 22, 2015). 10.12.2 Addendum to Commercial Lease, dated April 21, 2015 by and between Axogen Corporation and Ja-Cole, L.P. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 22, 2015). 10.12.3 Commercial Lease Amendment 2, dated as of October 25, 2016, by and between Axogen Corporation and Ja-Cole L.P. (incorporated by reference to Exhibit 10.2.1 to the Company’s Current Report on Form 8-K filed on October 31, 2016). 10.12.4 Commercial Lease Amendment 3, dated November 21, 2018 by and between Ja-Cole L.P. and Axogen Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 26, 2018). 10.13 License and Services Agreement, dated as of August 6, 2015, by and between Axogen Corporation and Community Blood Center (d/b/a Community Tissue Services) (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed on November 5, 2015). 113 Table of Contents Exhibit Number +10.13.1 Description Fourth Amendment to License and Services Agreement, dated as of February 22, 2019, by and between Axogen Corporation and Community Blood Center (d/b/a Community Tissue Services). **10.14 Executive Employment Agreement, effective as of February 25, 2013, by and between Axogen, Inc. and Shawn McCarrey (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed on April 30, 2013). 10.15 10.16 10.17 Securities Purchase Agreement dated as of November 12, 2014, between Axogen, Inc., and PDL BioPharma, Inc. (incorporated by reference to Exhibit 10.4 to Amendment No. 1 on Form 8-K/A to the Company’s Current Report on Form 8-K filed on November 13, 2014, filed on February 4, 2015). Securities Purchase Agreement, dated as of August 26, 2015, between Axogen, Inc and Essex Woodlands Fund IX, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed on November 5, 2015). Development, License & Option Agreement, dated as of November 3, 2014, by and between Axogen Corporation and Sensory Management Services LLC (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed on November 5, 2015). **10.18 Executive Employment Agreement, dated as of February 25, 2016, by and between Axogen Corporation and Peter Mariani (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed on May 4, 2016). **10.19 Executive Employment Agreement, dated as of March 11, 2016, by and between Axogen Corporation and Kevin Leach (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 14, 2016). * 10.20 Credit and Security Agreement (Term Loan), dated as of October 25, 2016, by and among Axogen, Inc., Axogen Corporation, MidCap Financial Trust, MidCap Funding XIII Trust and MidCap Funding V Trust (incorporated by reference to Exhibit 10.20 to the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). * 10.21 Credit and Security Agreement (Revolving Loan), dated as of October 25, 2016, by and among Axogen, Inc., Axogen Corporation and MidCap Financial Trust (incorporated by reference to Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2015, filed on November 5, 2015). 10.22 Form of Non-Incentive Stock Option Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of March 23, 2016 (incorporated by reference to Exhibit 10.22 to the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). *10.23 **10.24 Form of Performance Stock Unit Award Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of May 26, 2016 (incorporated by reference to Exhibit 10.23 to the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). Retention Stock Unit Award Agreement, dated December 29, 2016, by and between Axogen, Inc. and Karen Zaderej, pursuant to Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of March 23, 2016 (incorporated by reference to Exhibit 10.24 to the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). 114 Table of Contents Exhibit Number 10.25 Lease, dated as of January 23, 2017, by and between Axogen Corporation and SNH Medical Office Properties Trust (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 26, 2017). Description **10.26 Form of 2018 Performance Stock Unit Award Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of March 23, 2016 (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). 10.27 Underwriting Agreement by and between the Company, EW Healthcare Partners L.P. and Leerink Partners LLC, as representative of the underwriters named therein, dated November 16, 2017 (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on November 16, 2017). **10.28 Form of Restricted Stock Unit Award Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of March 23, 2016 (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). 10.29 10.30 Current Premises Election Notice, dated as of April 10, 2018, by and between Axogen Corporation and SNH Medical Office Properties Trust (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 13, 2018). Underwriting Agreement by and among the Company, Jefferies LLC and Leerink Partners LLC, as representatives of the underwriters named therein, dated May 8, 2018 (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on May 14, 2018). 10.31 Agreement For Purchase and Sale of Real Property, dated as of June 8, 2018, by and between ARC CRVANOH001, LLC and Axogen Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 12, 2018). **10.32 Executive Employment Agreement, dated September 4, 2018, by and between Axogen Corporation and Angelo Scopelianos (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 7, 2018). 10.33 10.34 Letter Agreement effective September 20, 2018 by between Axogen Corporation and SNH Medical Office Properties Trust (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 21, 2018). Office Lease dated September 20, 2018 by and between Axogen, Inc., Axogen Corporation and Heights Union, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 21, 2018). 10.35 Agreement of Lease dated October 26, 2018, by and between Ashley Avenue Associates I, LLC and Axogen Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 29, 2018). **10.36 Executive Employment Agreement, dated as of October 29, 2018, by and between Axogen Corporation and Isabelle Billet (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 29, 2018). 115 Table of Contents Exhibit Number **10.37 Description Form of Incentive Stock Option Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of October 29, 2018 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 29, 2018). **10.38 Form of Restricted Stock Unit Award Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of October 29, 2018 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on October 29, 2018). **10.39 Executive Employment Agreement, dated as of October 29, 2018, by and between Axogen Corporation and Maria Martinez (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on October 29, 2018). 10.40 10.41 10.42 Lease, dated November 19, 2018 by and between SNH Medical Office Properties Trust and Axogen Corporation (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 26, 2018). Lease, dated November 19, 2018 by and between SNH Medical Office Properties Trust and Axogen Corporation (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on November 26, 2018). First Amendment to Lease dated as of November 19, 2018 by and between SNH Medical Office Properties Trust and Axogen Corporation (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on November 26, 2018). **10.43 Separation Agreement and General Release, dated January 15, 2019, between Axogen Corporation and Jon Gingrich (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 16, 2019). **10.44 Separation Agreement and General Release, dated January 18, 2019, between Axogen Corporation and Shawn McCarrey (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 18, 2019). **10.45 Executive Employment Agreement dated as of January 21, 2019, by and between Axogen Corporation and Eric Sandberg (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 22, 2019). **10.46 Form of Non-Qualified Stock Option Inducement Award Agreement to be granted by Axogen, Inc. to Eric Sandberg on January 22, 2019 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 22, 2019). ***+**10.47 Form of Performance Stock Unit Award Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of April 5, 2017. +21.1 Subsidiaries of the Registrant. +23.1 Consent of Lurie, LLP. +23.2 Consent of Deloitte & Touche, LLP. ++24.1 Power of Attorney. +31.1 Certification of Principal Executive Officer. 116 Table of Contents Exhibit Number Description +31.2 Certification of Principal Financial Officer. +++32.1 Chief Executive Officer and Chief Financial Officer Certifications pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. +101.INS XBRL Instance Document. +101.SCH XBRL Taxonomy Extension Schema Document. +101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF XBRL Taxonomy Extension Definition Linkbase Document. +101.LAB XBRL Extension Labels Linkbase. +101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. * Confidential treatment has been granted for portions of this Exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 as amended. The confidential portions have been deleted and filed separately with the United States Securities and Exchange Commission. ** Management contract or compensatory plan or arrangement. *** Confidential treatment has been requested as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission. + Filed herewith. ++ Included on signature page. +++ Furnished herewith. ITEM 16. Form 10-K Summary None. 117 Table of Contents (e) Financial Statement Schedules: Schedule II – Valuation and Qualifying Accounts AXOGEN, INC. SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 Allowance for doubtful accounts 2016 2017 2018 Valuation allowance for deferred tax assets 2016 2017 2018 Balance at Beginning of Year Deductions (Chargeoffs) Balance at End of Year Additions 192 272 461 34,014 39,111 28,357 104 223 852 (24) (34) (196) 272 461 1,117 5,097 — 5,519 — (10,754) — 39,111 28,357 33,876 Schedules not included have been omitted because they are not applicable or because the required information is included in the Consolidated Financial Statements and notes thereto. 118 Table of Contents Exhibit Number EXHIBIT INDEX Description +3.1 Amended and Restated Articles of Incorporation of Axogen, Inc. +3.2 Axogen, Inc. Amended and Restated Bylaws. 4.1 Registration Rights Agreement, dated as of August 26, 2015, between Axogen, Inc. and Essex Woodlands Fund IX, L.P. (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017) *10.1 Patent License Agreement, dated as of August 3, 2005, by and between Axogen Corporation and the Board of Regents of the University of Texas System (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 6, 2011). *10.2.1 Amended and Restated Standard Exclusive License Agreement with Sublicensing Terms, dated as of February 21, 2006, by and between Axogen Corporation and the University of Florida Research Foundation, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 6, 2011). 10.2.2 Second Amendment to the Amended and Restated Standard Exclusive License Agreement No. A5140, effective as of July 5, 2016, by and between Axogen Corporation and the University of Florida Research Foundation, Inc. (incorporated by reference to Exhibit 10.2.1 to the Company’s Current Report on Form 8-K filed on July 11, 2016). *10.3 Sid Martin Biotechnology Development Institute Incubator License Agreement, dated as of September 26, 2006, by and between Axogen, Inc. and the University of Florida Research Foundation, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 6, 2011). *10.4.1 Amended and Restated Nerve Tissue Processing Agreement, dated as of February 27, 2008, by and between Axogen Corporation and LifeNet Health (incorporated by reference to Exhibit 10.4.1 to the Company’s Current Report on Form 8-K filed on October 6, 2011). *10.4.2 *10.4.3 Second Amendment to Amended and Restated Nerve Tissue Processing Agreement, dated as of August 9, 2011, by and between Axogen Corporation and LifeNet Health (incorporated by reference to Exhibit 10.4.2 to the Company’s Current Report on Form 8-K filed on October 6, 2011). Third Amendment to Amended and Restated Nerve Tissue Processing Agreement, dated as of March 12, 2012, by and between Axogen Corporation and LifeNet Health (incorporated by reference to Exhibit 10.4.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 15, 2012). *10.4.4 Fourth Amendment to Amended and Restated Nerve Tissue Processing Agreement, dated as of September 8, 2014, by and between Axogen Corporation and LifeNet Health (incorporated by reference to Exhibit 10.4.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed on November 13, 2014). *10.5.1 Distribution Agreement, dated as of August 27, 2008, by and between Axogen, Inc. and Cook Biotech Incorporated (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on October 6, 2011). 119 Table of Contents Exhibit Number 10.5.2 Description Amendment No. 1 to Distribution Agreement, dated as of February 24, 2012, by and between Axogen, Inc. and Cook Biotech Incorporated (incorporated by reference to Exhibit 10.5.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 15, 2012). 10.5.3 Amendment No. 2 to Distribution Agreement, dated as of February 26, 2018, by and between Axogen, Inc. and Cook Biotech Incorporated (incorporated by reference to Exhibit 10.5.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). **10.6 Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of March 23, 2016 (incorporated by reference to Appendix A to the Company’s Proxy Statement filed on April 8, 2016). **10.7.1 Executive Employment Agreement, effective as of October 15, 2007, by and between Axogen Corporation and Karen Zaderej (incorporated by reference to Exhibit 10.8.1 to the Company’s Current Report on Form 8-K filed on October 6, 2011). **10.8 Executive Employment Agreement dated as of July 17, 2017, by and between Axogen Corporation and Jon S. Gingrich (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K/A, filed on July 20, 2017). **10.8.1 Form of Non-Qualified Stock Option Inducement Award Agreement to be granted by Axogen, Inc. to Jon S. Gingrich on July 17, 2017 (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K/A, filed on July 20, 2017). 10.9.1 Lease dated as of February 6, 2007, by and between Axogen Corporation and WIGSHAW, LLC (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed on November 14, 2011). 10.9.2 10.9.3 Second Amendment to Lease, dated as of February 27, 2013 to lease dated as of February 6, 2007, by and between Axogen Corporation and SNH Medical Office Properties Trust (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed on March 12, 2013). Third Amendment to Lease, dated November 12, 2013 to lease dated as of February 6, 2007, by and between Axogen Corporation and SNH Medical Office Properties Trust (incorporated by reference to Exhibit 10.10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on March 6, 2014). 10.9.4 Fourth Amendment to Lease, dated as of March 16, 2016, by and between Axogen Corporation and SNH Medical Office Properties Trust (incorporated by reference to Exhibit 10.10.4 to the Company’s Current Report on Form 8-K filed on March 18, 2016). **10.10.1 Form of Employee Incentive Stock Option Agreement (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on September 26, 2007). **10.10.2 Amended Form of Employee Incentive Stock Option Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of March 23, 2016 (incorporated by reference to Exhibit 10.10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). **10.11.1 Executive Employment Agreement, effective as of October 1, 2011, by and between Axogen, Inc. and Gregory Freitag (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 15, 2012). 120 Table of Contents Exhibit Number **10.11.2 Description Amendment No. 1 to Executive Employment Agreement, dated as of May 11, 2014, by and between Axogen, Inc. and Greg Freitag (incorporated by reference to Exhibit 10.16.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed on August 4, 2014). **10.11.3 Amendment No. 2 to Employment Agreement, dated as of August 6, 2015, by and between Gregory G. Freitag and Axogen, Inc. (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed on November 5, 2015). **10.11.4 Amendment No. 3 to Employment Agreement, dated as of June 1, 2016, by and between Greg Freitag and Axogen, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 31, 2016). **10.11.5 Amendment No. 4 to Employment Agreement, dated as of October 29, 2018, by and between Greg Freitag and Axogen, Inc. (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on October 29, 2018). 10.12.1 Commercial Lease, dated April 21, 2015, by and between Axogen Corporation and Ja-Cole, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 22, 2015). 10.12.2 Addendum to Commercial Lease, dated April 21, 2015 by and between Axogen Corporation and Ja-Cole, L.P. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 22, 2015). 10.12.3 Commercial Lease Amendment 2, dated as of October 25, 2016, by and between Axogen Corporation and Ja-Cole L.P. (incorporated by reference to Exhibit 10.2.1 to the Company’s Current Report on Form 8-K filed on October 31, 2016). 10.12.4 Commercial Lease Amendment 3, dated November 21, 2018 by and between Ja-Cole L.P. and Axogen Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 26, 2018). 10.13 License and Services Agreement, dated as of August 6, 2015, by and between Axogen Corporation and Community Blood Center (d/b/a Community Tissue Services) (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed on November 5, 2015). +10.13.1 Fourth Amendment to License and Services Agreement, dated as of February 22, 2019, by and between Axogen Corporation and Community Blood Center (d/b/a Community Tissue Services). **10.14 Executive Employment Agreement, effective as of February 25, 2013, by and between Axogen, Inc. and Shawn McCarrey (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed on April 30, 2013). 10.15 10.16 Securities Purchase Agreement dated as of November 12, 2014, between Axogen, Inc., and PDL BioPharma, Inc. (incorporated by reference to Exhibit 10.4 to Amendment No. 1 on Form 8-K/A to the Company’s Current Report on Form 8-K filed on November 13, 2014, filed on February 4, 2015). Securities Purchase Agreement, dated as of August 26, 2015, between Axogen, Inc and Essex Woodlands Fund IX, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed on November 5, 2015). 121 Table of Contents Exhibit Number 10.17 Description Development, License & Option Agreement, dated as of November 3, 2014, by and between Axogen Corporation and Sensory Management Services LLC (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, filed on November 5, 2015). **10.18 Executive Employment Agreement, dated as of February 25, 2016, by and between Axogen Corporation and Peter Mariani (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed on May 4, 2016). **10.19 Executive Employment Agreement, dated as of March 11, 2016, by and between Axogen Corporation and Kevin Leach (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 14, 2016). * 10.20 Credit and Security Agreement (Term Loan), dated as of October 25, 2016, by and among Axogen, Inc., Axogen Corporation, MidCap Financial Trust, MidCap Funding XIII Trust and MidCap Funding V Trust (incorporated by reference to Exhibit 10.20 to the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). * 10.21 Credit and Security Agreement (Revolving Loan), dated as of October 25, 2016, by and among Axogen, Inc., Axogen Corporation and MidCap Financial Trust (incorporated by reference to Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2015, filed on November 5, 2015). 10.22 Form of Non-Incentive Stock Option Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of March 23, 2016 (incorporated by reference to Exhibit 10.22 to the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). *10.23 Form of Performance Stock Unit Award Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of May 26, 2016 (incorporated by reference to Exhibit 10.23 to the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). **10.24 Retention Stock Unit Award Agreement, dated December 29, 2016, by and between Axogen, Inc. and Karen Zaderej, pursuant to Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of March 23, 2016 (incorporated by reference to Exhibit 10.24 to the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). 10.25 Lease, dated as of January 23, 2017, by and between Axogen Corporation and SNH Medical Office Properties Trust (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 26, 2017). **10.26 Form of 2018 Performance Stock Unit Award Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of March 23, 2016 (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 1, 2018). 10.27 Underwriting Agreement by and between the Company, EW Healthcare Partners L.P. and Leerink Partners LLC, as representative of the underwriters named therein, dated November 16, 2017 (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on November 16, 2017). 122 Table of Contents Exhibit Number **10.28 Description Form of Restricted Stock Unit Award Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of March 23, 2016 (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). 10.29 Current Premises Election Notice, dated as of April 10, 2018, by and between Axogen Corporation and SNH Medical Office Properties Trust (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 13, 2018). 10.30 Underwriting Agreement by and among the Company, Jefferies LLC and Leerink Partners LLC, as representatives of the underwriters named therein, dated May 8, 2018 (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on May 14, 2018). 10.31 Agreement For Purchase and Sale of Real Property, dated as of June 8, 2018 by and between ARC CRVANOH001, LLC and Axogen Corporation, (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 12, 2018). **10.32 Executive Employment Agreement dated September 4, 2018, by and between Axogen Corporation and Angelo Scopelianos (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 7, 2018). 10.33 Letter Agreement effective September 20, 2018 by between Axogen Corporation and SNH Medical Office Properties Trust (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 21, 2018). 10.34 Office Lease dated September 20, 2018 by and between Axogen, Inc., Axogen Corporation and Heights Union, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 21, 2018). 10.35 Agreement of Lease dated October 26, 2018, by and between Ashley Avenue Associates I, LLC and Axogen Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 29, 2018). **10.36 Executive Employment Agreement, dated as of October 29, 2018, by and between Axogen Corporation and Isabelle Billet (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 29, 2018). **10.37 Form of Incentive Stock Option Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of October 29, 2018 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 29, 2018). **10.38 Form of Restricted Stock Unit Award Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of October 29, 2018 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on October 29, 2018). **10.39 Executive Employment Agreement, dated as of October 29, 2018, by and between Axogen Corporation and Maria Martinez (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on October 29, 2018). 10.40 Lease, dated November 19, 2018 by and between SNH Medical Office Properties Trust and Axogen Corporation (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 26, 2018). 123 Table of Contents Exhibit Number Description 10.41 Lease, dated November 19, 2018 by and between SNH Medical Office Properties Trust and Axogen Corporation (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on November 26, 2018). 10.42 First Amendment to Lease dated as of November 19, 2018 by and between SNH Medical Office Properties Trust and Axogen Corporation (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on November 26, 2018). **10.43 Separation Agreement and General Release, dated January 15, 2019, between Axogen Corporation and Jon Gingrich (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 16, 2019). **10.44 Separation Agreement and General Release, dated January 18, 2019, between Axogen Corporation and Shawn McCarrey (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 18, 2019). **10.45 Executive Employment Agreement dated as of January 21, 2019, by and between Axogen Corporation and Eric Sandberg (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 22, 2019). **10.46 Form of Non-Qualified Stock Option Inducement Award Agreement to be granted by Axogen, Inc. to Eric Sandberg on January 22, 2019 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 22, 2019). ***+**10.47 Form of Performance Stock Unit Award Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of April 5, 2017. +21.1 Subsidiaries of the Registrant. +23.1 Consent of Lurie, LLP. +23.2 Consent of Deloitte & Touche, LLP. ++24.1 Power of Attorney. +31.1 Certification of Principal Executive Officer. +31.2 Certification of Principal Financial Officer. +++32.1 Chief Executive Officer and Chief Financial Officer Certifications pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. +101.INS XBRL Instance Document. +101.SCH XBRL Taxonomy Extension Schema Document. +101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. +101.DEF XBRL Taxonomy Extension Definition Linkbase Document. +101.LAB XBRL Extension Labels Linkbase. +101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. 124 Table of Contents * Confidential treatment has been granted for portions of this Exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 as amended. The confidential portions have been deleted and filed separately with the United States Securities and Exchange Commission. ** Management contract or compensatory plan or arrangement. *** Confidential treatment has been requested as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission. + Filed herewith. ++ Included on signature page. +++ Furnished herewith. 125 Table of Contents Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES AXOGEN, INC /s/ Karen Zaderej Karen Zaderej Chief Executive Officer February 26, 2019 KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Karen Zaderej (with full power to act alone), as his or her true and lawful attorney-in- fact and agent, with full powers of substitution and re-substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to the Annual Report on Form 10-K of Axogen, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their substitute or substitutes, lawfully do or cause to be done by virtue hereof. In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Karen Zaderej Karen Zaderej, President, Chief Executive Officer and Director (Principal Executive Officer) February 26, 2019 /s/ Peter Mariani Peter Mariani, CFO (Principal Financial Officer) (Principal Accounting Officer) February 26, 2019 /s/ Gregory G. Freitag Gregory G. Freitag, General Counsel and Director February 26, 2019 /s/ Jamie M. Grooms Jamie M. Grooms Director /s/ Robert J. Rudelius Robert J. Rudelius Director /s/ Dr. Mark Gold Mark Gold, M.D. Director /s/ Guido J. Neels Guido J. Neels Director /s/ Amy Wendell Amy Wendell Director February 26, 2019 February 26, 2019 February 26, 2019 February 26, 2019 February 26, 2019 126 Exhibit 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF AXOGEN, INC. The name of the corporation is “Axogen, Inc.” ARTICLE 1. NAME ARTICLE 2. REGISTERED OFFICE The address of the registered office of the corporation in Minnesota is Corporation Service Company, 2345 Rice Street, Roseville, MN 55113. ARTICLE 3. AUTHORIZED SHARES The aggregate number of authorized shares of the corporation is 100,000,000, $0.01 par value per share, which shall be divisible into the classes and series, have the designations, voting rights, and other rights and preferences and be subject to the restrictions that the Board of Directors of the corporation may from time to time establish, fix, and determine consistent with Articles 4 and 5 hereof and as permitted by law. Unless otherwise designated by the Board of Directors, all issued shares shall be deemed Common Stock with equal rights and preferences. ARTICLE 4. NO CUMULATIVE VOTING There shall be no cumulative voting by the shareholders of the corporation. ARTICLE 5. NO PREEMPTIVE RIGHTS The shareholders of the corporation shall not have preemptive rights to subscribe for or acquire securities or rights to purchase securities of any kind, class, or series of the corporation. ARTICLE 6. WRITTEN ACTION BY DIRECTORS An action required or permitted to be taken at a meeting of the Board of Directors of the corporation may be taken by a written action signed, or consented to by authenticated electronic communication, by all of the directors unless the action need not be approved by the shareholders of the corporation, in which case the action may be taken by a written action signed, or consented to by authenticated electronic communication, by the number of directors that would be required to take the same action at a meeting of the Board of Directors of the corporation at which all of the directors were present. ARTICLE 7. DIRECTOR LIABILITY To the fullest extent permitted by the Minnesota Business Corporation Act as the same exists or may hereafter be amended, a director of this corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. Neither the amendment, modification or repeal of this Article nor the adoption of any provision in these articles of incorporation inconsistent with this Article shall adversely affect any right or protection of a director or officer of the corporation with respect to any act or omission that occurred prior to the time of such amendment, modification, repeal or adoption. Exhibit 3.2 AXOGEN, INC. AMENDED AND RESTATED BYLAWS February 25, 2019 Table of Contents Article 1. Offices, Corporate Seal. 1.1 Registered Office 1.2 Other Offices 1.3 Corporate Seal Article 2. Meetings of Shareholders. 2.1 Place and Time of Meetings 2.2 Regular Meetings 2.3 Advance Notice of Other Business 2.4 Advance Notice of Director Nominations 2.5 Special Meetings 2.6 Quorum; Adjourned Meetings 2.7 Voting 2.8 Closing of Books 2.9 Notice of Meeting 2.10 Waiver of Notice 2.11 Written Action Article 3. Directors. 3.1 General Powers 3.2 Number, Qualification and Terms of Office 3.3 Board of Director Meetings 3.4 Calling Meetings; Notice 3.5 Waiver of Notice 3.6 Quorum 3.7 Absent Directors 3.8 Conference Communications 3.9 Vacancies; Newly Created Directorships 3.10 Removal 3.11 Committees 3.12 Written Action 3.13 Compensation Article 4. Officers 4.1 Number 4.2 Election, Term of Office and Qualifications 4.3 Removal and Vacancies 4.4 Chairman of the Board of Directors 4.5 Lead Director 4.6 President 4.7 Vice Presidents 4.8 Secretary Page 1 1 1 1 1 1 1 1 3 4 4 5 5 5 5 6 6 6 6 6 6 6 6 6 7 7 7 7 8 8 8 8 8 8 8 8 9 9 9 4.9 Treasurer 4.10 Compensation Article 5. Shares and Their Transfer 5.1 Certificated and Uncertificated Share 5.2 Issuance of Shares 5.3 Transfer of Shares 5.4 Loss of Certificates Article 6. Dividends; Record Date 6.1 Dividends 6.2 Record Date Article 7. Books and Records; Fiscal Year 7.1 Share Register 7.2 Other Books and Records 7.3 Fiscal Year Article 8. Loans, Guarantees, Suretyship 8.1 Loans, Guarantees, Suretyship Article 9. Indemnification of Certain Persons 9.1 Indemnification of Certain Persons Article 10. Amendments 10.1 Amendments Article 11. Securities of Other Corporations 11.1 Voting Securities Held by the Corporation 11.2 Purchase and Sale of Securities 9 9 9 9 10 10 10 10 10 10 11 11 11 11 11 11 12 12 12 12 12 12 13 AMENDED AND RESTATED BYLAWS OF AXOGEN, INC. Adopted by the Board of Directors on February 25, 2019. Article 1. Offices, Corporate Seal 1.1 Registered Office. The registered office of the corporation in the State of Minnesota shall be that set forth in the corporation’s Articles of Incorporation or in the most recent amendment of the corporation’s Articles of Incorporation or resolution of the directors filed with the Secretary of State of Minnesota changing the registered office. 1.2 Other Offices. The corporation may have such other offices, within or without the State of Minnesota, as the Board of Directors shall, from time to time, determine. 1.3 Corporate Seal. The corporation shall have no seal. Article 2. Meetings of Shareholders 2.1 Place and Time of Meetings . Except as provided otherwise by Minnesota Statutes Chapter 302A, meetings of the shareholders may be held at any place, within or without the State of Minnesota, as may from time to time be designated by the Board of Directors and, in the absence of such designation, shall be held at the registered office of the corporation in the State of Minnesota. The Board of Directors shall designate the time of day for each meeting and, in the absence of such designation, every meeting of shareholders shall be held at ten o’clock a.m. 2.2 Regular Meetings. (a) A regular meeting of the shareholders shall be held on such date as the Board of Directors shall by resolution establish. (b) At a regular meeting the shareholders, voting as provided in the corporation’s Articles of Incorporation and these Bylaws, shall designate the number of directors to constitute the Board of Directors (subject to the authority of the Board of Directors thereafter to increase or decrease the number of directors as permitted by law), shall elect qualified successors for directors who serve for an indefinite term or whose terms have expired or are due to expire within six (6) months after the date of the meeting and shall transact such other business as may properly come before them. 2.3 Advance Notice of Other Business . Only business that has been properly brought before a regular meeting of the shareholders may be conducted. To be properly brought before a regular meeting, business must be: (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors; (b) otherwise properly brought before the regular meeting by or at the direction of the 1 Board of Directors; or (c) a proper matter for shareholder action under the Minnesota Business Corporation Act that has been properly brought before the meeting by a shareholder: (i) who is a shareholder of record on the date of the giving of the notice provided for in this Section 2.3 and on the record date for the determination of shareholders entitled to vote at such annual meeting; and (ii) who complies with the notice procedures set forth in this Section 2.3. For such business to be considered properly brought before the meeting by a shareholder such shareholder must, in addition to any other applicable requirements, have given timely notice in proper form of such shareholder’s intent to bring such business before such meeting. To be timely, such shareholder’s notice must: (a) in the case of a proposal submitted for inclusion in the corporation’s proxy statement and form of proxy pursuant to Rule 14a–8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), meet the deadline for proposals submitted under such rule; or (b) in the case of all other matters, be delivered to or mailed and received by the secretary of the corporation at the corporation’s principal executive offices not later than the close of business on the 90th day, nor earlier than the close of business on the 120th day, prior to the anniversary date of the immediately preceding regular meeting; provided, however, that in the event that no regular meeting was held in the previous year or the regular meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever occurs first. To be in proper form, a shareholder’s notice shall be in writing and shall set forth: (a) the name and record address of the shareholder who intends to propose the business, the class or series and number of shares of capital stock of the corporation which are owned beneficially or of record by such shareholder or any Associated Person (as defined below) of such shareholder and any other direct or indirect positions, agreements or understandings to which such shareholder or any Associated Person of such shareholder is a party (including hedged positions, short positions, options, derivatives, convertible securities and any other stock appreciation or voting interests) which provide the opportunity to profit or share in any profit derived from any increase or decrease in the value of the shares of the corporation; (b) a representation that the shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to introduce the business specified in the notice; (c) a complete description of the business desired to be brought before the regular meeting and the reasons for conducting such business at the regular meeting; (d) any material interest of the shareholder or any Associated Person of such 2 shareholder in such business including any agreements the shareholder or any Associated Person of such shareholder may have with others in connection with such business; and (e) any other information that is required to be provided by the shareholder pursuant to Regulation 14A under the Exchange Act. If any of the foregoing information changes in any material respect from the date the notice is received through the date of the meeting, the shareholder shall promptly supplement such information to reflect such change by notice in writing and delivered to or mailed and received by the secretary of the corporation at the corporation’s principal executive offices. For purposes of this Section 2.3 and Section 2.4, “ Associated Person” of any shareholder or proposed nominee shall mean: (i) any member of the immediate family of such shareholder or proposed nominee sharing the same household with such shareholder or proposed nominee; (ii) any person controlling, controlled by or under common control with, such shareholder or proposed nominee; (iii) any person acting in concert or as part of a group (within the meaning of the Exchange Act and the regulations promulgated thereunder) with such shareholder or proposed nominee; or (iv) any beneficial owner of shares of stock of the corporation owned of record or beneficially by such shareholder or proposed nominee. In order to include information with respect to a shareholder proposal in the corporation’s proxy statement and form of proxy for a shareholder’s meeting, shareholders must provide notice as required by, and otherwise comply with the requirements of, the Exchange Act and their regulations promulgated thereunder in addition to the requirements of this Section 2.3. No business shall be conducted at the regular meeting of the shareholder except business brought before the regular meeting in accordance with the procedures set forth in this Section 2.3. The chairperson of the regular meeting may refuse to acknowledge the proposal of any business not made in compliance with the foregoing procedures. 2.4 Advance Notice of Director Nominations . Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. To be properly brought before a regular meeting of the shareholders, or any special meeting of the shareholders called for the purpose of electing directors, nominations for the election of a director must be: (i) specified in the notice of meeting (or any supplement thereto); (ii) made by or at the direction of the Board of Directors (or any duly authorized committee thereof); or (iii) made by any shareholder of the corporation (a) who is a shareholder of record on the date of the giving of the notice provided for in this Section 2.4 and on the record date for the determination of shareholders entitled to vote at such meeting and (b) who complies with the notice procedures set forth in this Section 2.4. In addition to any other applicable requirements, for a nomination to be made by a shareholder, such shareholder must have given timely notice thereof in proper written form to the secretary of the corporation. To be timely, a shareholder’s notice to the secretary must be delivered to or mailed and received at the corporation’s principal executive offices, in the case of a regular meeting, in accordance with the provisions set forth in Section 2.3, and, in the case of a special meeting of the shareholders called for the purpose of electing directors, not later than the close of business on the 10th day following the day on which notice of the date of the special meeting was mailed or public 3 disclosure of the date of the special meeting was made, whichever occurs first. To be in proper form, a shareholder’s notice shall be in writing and shall set forth: (a) as to each person whom the shareholder proposes to nominate for election as a director: (i) the name, age, business address and residence address of the person; (ii) the principal occupation or employment of the person; (iii) the class or series and number of shares of capital stock of the corporation which are owned beneficially or of record by the person or any Associated Person of the person; (iv) any other direct or indirect positions, agreements or understandings to which such person or any Associated Person of such person is a party (including hedged positions, short positions, options, derivatives, convertible securities and any other stock appreciation or voting interests) which provide the opportunity to profit or share in any profit derived from any increase or decrease in the value of the shares of the corporation; (v) a description of all arrangements, understandings or material relationships between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the shareholder; (vi) any other information relating to such person that is required to be disclosed in solicitations of proxies for elections of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including, without limitation, such person’s written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected and a completed questionnaire concerning such person’s business experience, beneficial ownership, relationships and transactions with the corporation, independence and other matters typically contained in the corporation’s questionnaire for directors and officers); and (b) as to such shareholder giving notice, the information required to be provided pursuant to Section 2.3. If any of the foregoing information changes in any material respect from the date the notice is received through the date of the meeting, the shareholder shall promptly supplement such information to reflect such change by notice in writing and delivered to or mailed and received by the secretary of the corporation at the corporation’s principal executive offices. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 2.4. If the chairperson of the meeting properly determines that a nomination was not made in accordance with the foregoing procedures, the chairperson shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. 2.5 Special Meetings. Special meetings of the shareholders may be held at any time and for any purpose and may be called by the President, Treasurer, any two (2) or more directors or by one (1) or more shareholders holding ten percent (10%) or more of the shares entitled to vote on the matters to be presented at the meeting. 2.6 Quorum; Adjourned Meetings. The holders of a majority of the shares entitled to vote shall constitute a quorum for the transaction of business at any regular or special meeting. In case a quorum shall not be present at a meeting, those present may adjourn the meeting to such day 4 as they shall, by majority vote, agree upon, and a notice of such adjournment and the date and time at which such meeting shall be reconvened shall be mailed to each shareholder entitled to vote at least five (5) days before such reconvened meeting. If a quorum is present, a meeting may be adjourned from time to time without notice other than announcement at the meeting. At adjourned meetings at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. If a quorum is present, the shareholders may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. 2.7 Voting. At each meeting of the shareholders every shareholder having the right to vote shall be entitled to vote either in person or by proxy. Each shareholder, unless the corporation’s Articles of Incorporation or statute provide otherwise, shall have one (1) vote for each share having voting power registered in such shareholder’s name on the books of the corporation. Jointly owned shares may be voted by any joint owner unless the corporation receives written notice from any one of them denying the authority of that person to vote those shares. Upon the demand of any shareholder, the vote upon any question before the meeting shall be by ballot. All questions shall be decided by a majority vote of the number of shares entitled to vote and represented at the meeting at the time of the vote except if otherwise required by statute, the corporation’s Articles of Incorporation or these Bylaws. 2.8 Closing of Books . The Board of Directors may fix a time, not exceeding sixty (60) days preceding the date of any meeting of shareholders, as a record date for the determination of the shareholders entitled to notice of, and to vote at, such meeting, notwithstanding any transfer of shares on the books of the corporation after any record date so fixed. The Board of Directors may close the books of the corporation against the transfer of shares during the whole or any part of such period. If the Board of Directors fails to fix a record date for determination of the shareholders entitled to notice of, and to vote at, any meeting of shareholders, the record date shall be the twentieth (20th) day preceding the date of such meeting. 2.9 Notice of Meeting . There shall be mailed to each shareholder, shown by the books of the corporation to be a holder of record of voting shares, at his address as shown by the books of the corporation, a notice setting out the time and place of each regular meeting and each special meeting, except where the meeting is an adjourned meeting and the date, time and place of the meeting were announced at the time of adjournment, which notice shall be mailed to all shareholders of record, whether entitled to vote or not, at least fourteen (14) days prior thereto. Every notice of any special meeting called pursuant to Section 2.5 hereof shall state the purpose or purposes for which the meeting has been called, and the business transacted at all special meetings shall be confined to the purpose stated in the notice. 2.10 Waiver of Notice. Notice of any regular or special meeting may be waived by any shareholder either before, at or after such meeting orally or in writing signed by such shareholder or a representative entitled to vote the shares of such shareholder. A shareholder, by his attendance at any meeting of shareholders, shall be deemed to have waived notice of such meeting, except where the shareholder objects at the beginning of the meeting to the transaction of business because the time may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting. 5 2.11 Written Action. Any action which might be taken at a meeting of the shareholders may be taken without a meeting if done in writing and signed by all of the shareholders entitled to vote on that action. Article 3. Directors 3.1 General Powers. The business and affairs of the corporation shall be managed by or under the authority of the Board of Directors, except as otherwise permitted by statute. 3.2 Number, Qualification and Terms of Office . The number of directors shall be eight, which number of directors may be increased or decreased from time to time by resolution of the shareholders (subject to the authority of the Board of Directors to increase or decrease the number of directors as permitted by law). Directors need not be shareholders or residents of the State of Minnesota. Each of the directors shall hold office until the regular meeting of shareholders next held after such director’s election and until such director’s successor shall have been elected and shall qualify, or until the earlier death, resignation, removal or disqualification of such director; provided, however, that no director shall be elected to a term in excess of five (5) years. 3.3 Board of Director Meetings. Meetings of the Board of Directors may be held from time to time at such time and place within or without the State of Minnesota as may be designated in the notice of such meeting. 3.4 Calling Meetings; Notice . Meetings of the Board of Directors may be called by the Chairman of the Board of Directors by giving at least twenty–four (24) hours’ notice, or by any other director by giving at least five (5) days’ notice, of the date, time and place thereof to each director by mail, telephone, telegram or in person. 3.5 Waiver of Notice. Notice of any meeting of the Board of Directors may be waived by any director either before, at or after such meeting orally or in a writing signed by such director. A director, by his attendance at any meeting of the Board of Directors, shall be deemed to have waived notice of such meeting, except where the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and does not participate thereafter in the meeting. 3.6 Quorum. A majority of the directors holding office immediately prior to a meeting of the Board of Directors shall constitute a quorum for the transaction of business at such meeting. 3.7 Absent Directors. A director may give advance written consent or opposition to a proposal to be acted on at a meeting of the Board of Directors. If such director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected. 6 3.8 Conference Communications. Any or all directors may participate in any meeting of the Board of Directors, or of any duly constituted committee thereof, by any means of communication through which the directors may simultaneously hear each other during such meeting. For the purposes of establishing a quorum and taking any action at the meeting, such directors participating pursuant to this Section 3.8 shall be deemed present in person at the meeting and the place of the meeting shall be the place of origination of the conference telephone conversation or other comparable communication technique. 3.9 Vacancies; Newly Created Directorships. Vacancies in the Board of Directors of this corporation occurring by reason of death, resignation, removal or disqualification shall be filled for the unexpired term by a majority of the remaining directors although less than a quorum. Newly created directorships resulting from an increase in the authorized number of directors by action of the Board of Directors as permitted by Section 3.2 may be filled by a majority vote of the directors serving at the time of such increase. Each director elected pursuant to this Section 3.9 shall be a director until such director’s successor is elected by the shareholders at their next regular or special meeting. 3.10 Removal. Any or all of the directors may be removed from office at any time, with or without cause, by the affirmative vote of the shareholders holding a majority of the shares entitled to vote at an election of directors except, as otherwise provided by Minnesota Statutes Section 302A.223, as amended, when the shareholders have the right to cumulate their votes. A director named by the Board of Directors to fill a vacancy may be removed from office at any time, with or without cause, by the affirmative vote of the remaining directors if the shareholders have not elected directors in the interim between the time of the appointment to fill such vacancy and the time of the removal. In the event that the entire Board of Directors or any one or more directors be so removed, new directors shall be elected at the same meeting. In addition to the foregoing, any director may be removed at any time by the affirmative vote of a majority of the remaining directors if (a) such director is convicted of a felony or (b) if the remaining directors determine that the director to be removed is engaged in an activity that is competitive with any business of the Company. A director may be determined to be engaged in an activity if he or she is an employee, director, partner, consultant, owner, representative, agent or shareholder (other than a shareholder beneficially owning less than one percent (1%) of the outstanding stock) of a company, partnership, sole proprietorship or other organization. An activity may be deemed to be competitive with the Company if the product or service created by the activity is the same as or an alternative to any of the products or services of the Company. The Board of Directors shall determine whether a director is engaged in a competitive activity utilizing the guidelines described in the previous two sentences as well as any other guidelines it determines to be relevant. The Board of Director’s decision shall not be overturned by any court unless the decision is shown to be clearly erroneous. 3.11 Committees. A resolution approved by the affirmative vote of a majority of the Board of Directors may establish committees having the authority of the Board of Directors in the management of the business of the corporation to the extent provided in the resolution. A committee shall consist of one (1) or more persons, who need not be directors, appointed by the affirmative vote of a majority of the directors present. Committees are subject to the direction and control of, and vacancies in the membership thereof shall be filled by, the Board of Directors, except as provided by Minnesota Statutes Section 302A.243. A majority of the members of the committee present at a meeting is a quorum for the transaction of business, unless a larger or small 7 proportion or number is provided in a resolution approved by the affirmative vote of a majority of the directors present. 3.12 Written Action. Any action which might be taken at a meeting of the Board of Directors, or any duly constituted committee thereof, may be taken without a meeting if done in writing and signed by all of the directors or committee members, unless the corporation’s Articles of Incorporation provide otherwise and the action need not be approved by the shareholders. 3.13 Compensation. Directors who are not salaried officers of this corporation shall receive such fixed sum per meeting attended or such fixed annual sum as shall be determined, from time to time, by resolution of the Board of Directors. The Board of Directors may, by resolution, provide that all directors shall receive their expenses, if any, of attendance at meetings of the Board of Directors or any committee thereof. Nothing herein contained shall be construed to preclude any director from serving this corporation in any other capacity and receiving proper compensation therefor. Article 4. Officers 4.1 Number. The officers of the corporation shall consist of a Chairman of the Board of Directors (if one is elected by the Board of Directors), the President, one or more Vice Presidents (if desired by the Board of Directors), a Treasurer, a Secretary (if one is elected by the Board of Directors) and such other officers and agents as may, from time to time, be elected by the Board of Directors. Any number of offices may be held by the same person. 4.2 Election, Term of Office and Qualifications . The Board of Directors shall elect or appoint, by resolution approved by the affirmative vote of a majority of the directors present, from within or without their number, the President, Treasurer and such other officers as may be deemed advisable, each of whom shall have the powers, rights, duties, responsibilities and terms in office provided for in these Bylaws or a resolution of the Board of Directors not inconsistent therewith. The President and all other officers who may be directors shall continue to hold office until the election and qualification of their successors, notwithstanding an earlier termination of their directorship. 4.3 Removal and Vacancies . Any officer may be removed from his office by the Board of Directors at any time, with or without cause. Such removal, however, shall be without prejudice to the contract rights of the person so removed. If there be a vacancy among the officers of the corporation by reason of death, resignation or otherwise, such vacancy shall be filled for the unexpired term by the Board of Directors. 4.4 Chairman of the Board of Directors . The Chairman of the Board of Directors, if one is elected, shall preside at all meetings of the shareholders and directors and shall have such other duties as may be prescribed, from time to time, by the Board of Directors. 4.5 Lead Director. The Lead Directors, if one is elected, shall facilitate the functioning of the Board of Directors independently of management of the Company and provide independent leadership to the Board of Directors and shall have such other duties as may be prescribed, from time to time, by the Board of Directors. 8 4.6 President. The President shall be the chief executive officer and shall have general active management of the business of the corporation. In the absence of the Chairman of the Board of Directors, he shall preside at all meetings of the shareholders and directors. He shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall execute and deliver, in the name of the corporation, any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the corporation unless the authority to execute and deliver is required by law to be exercised by another person or is expressly delegated by the corporation’s Articles of Incorporation, these Bylaws or by the Board of Directors to some other officer or agent of the corporation. He shall maintain records of and, whenever necessary, certify all proceedings of the Board of Directors and the shareholders, and in general, shall perform all duties usually incident to the office of the President. He shall have such other duties as may, from time to time, be prescribed by the Board of Directors. 4.7 Vice Presidents. Each Vice President, if one or more are elected, shall have such powers and shall perform such duties as prescribed by the Board of Directors or by the President. In the event of the absence or disability of the President, the Vice President(s) shall succeed to his power and duties in the order designed by the Board of Directors. 4.8 Secretary. The Secretary, if one is elected, shall be secretary of and shall attend all meetings of the shareholders and Board of Directors and shall record all proceedings of such meetings in the minute book of the corporation. He shall give proper notice of meetings of shareholders and directors. He shall perform such other duties as may, from time to time, be prescribed by the Board of Directors or by the President. 4.9 Treasurer. The Treasurer shall be the chief financial officer and shall keep accurate financial records for the corporation. He shall deposit all moneys, drafts and checks in the name of, and to the credit of, the corporation in such banks and depositaries as the Board of Directors shall, from time to time, designate. He shall have the power to endorse, for deposit, all notes, checks and drafts received by the corporation. He shall disburse the funds of the corporation, as ordered by the Board of Directors, making proper vouchers therefor. He shall render to the President and the directors, whenever requested, an account of all of his transactions as Treasurer and of the financial condition of the corporation, and shall perform such other duties as may, from time to time, be prescribed by the Board of Directors or by the President. 4.10 Compensation. The officers of this corporation shall receive such compensation for their services as may be determined, from time to time, by resolution of the Board of Directors. Article 5. Shares and Their Transfer 5.1 Certificated and Uncertificated Shares. Shares of the corporation’s stock may be certificated or uncertificated, as provided under Minnesota law. Shares of stock represented by certificates shall be in such form as shall be prescribed by the Board of Directors. Share certificates shall include the number of shares of the corporation owned by the shareholder, shall be numbered in the order in which they shall be issued and shall be signed, in the name of the corporation, by the President and by the Secretary or an Assistant Secretary or by such officers as the Board of Directors may designate. If the certificate is signed by a transfer agent or registrar, such signatures of the corporate officers may be by facsimile if authorized by the Board of Directors. Every certificate surrendered to the corporation for exchange or transfer shall be canceled, and no new certificate or 9 certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled, except in cases provided for in Section 5.4. 5.2 Issuance of Shares. The Board of Directors is authorized to cause to be issued shares of the corporation up to the full amount authorized by the corporation’s Articles of Incorporation in such amounts as may be determined by the Board of Directors and as may be permitted by law. No shares shall be allotted except in consideration of cash or other property, tangible or intangible, received or to be received by the corporation under a written agreement, of services rendered or to be rendered to the corporation under a written agreement, or of an amount transferred from surplus to state capital upon a share dividend. At the time of such allotment of shares, the Board of Directors making such allotments shall state, by resolution, their determination of the fair value to the corporation in monetary terms of any consideration other than cash for which shares are allotted. 5.3 Transfer of Shares. Transfer of shares on the books of the corporation may be authorized only by the registered holder of such shares, or the shareholder’s legal representative, or the shareholder’s duly authorized attorney–in–fact, and, in the case of certificated shares, upon surrender of the certificate or the certificates for such shares. The corporation may treat as the absolute owner of shares of the corporation, the person or persons in whose name shares are registered on the books of the corporation. 5.4 Loss of Certificates. Except as otherwise provided by Minnesota Statutes Section 302A.419, any shareholder claiming a certificate for shares to be lost, stolen or destroyed shall make an affidavit of that fact in such form as the Board of Directors shall require and shall, if the Board of Directors so requires, give the corporation a bond of indemnity in form, in an amount, and with one or more sureties satisfactory to the Board of Directors, to indemnify the corporation against any claim which may be made against it on account of the reissue of such certificate, whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to have been lost, stolen or destroyed. Article 6. Dividends; Record Date 6.1 Dividends. Subject to the provisions of the corporation’s Articles of Incorporation, of these Bylaws and of law, the Board of Directors may declare dividends whenever, and in such amounts as, in its opinion, are deemed advisable. 6.2 Record Date. Subject to any provisions of the corporation’s Articles of Incorporation, the Board of Directors may fix a date not exceeding one hundred twenty (120) days preceding the date fixed for the payment of any dividend as the record date for the determination of the shareholders entitled to receive payment of the dividend and, in such case, only shareholders of record on the date so fixed shall be entitled to receive payment of such dividend notwithstanding any transfer of shares on the books of the corporation after the record date. The Board of Directors may close the books of the corporation against the transfer of shares during the whole or any part of such period. 10 Article 7. Books and Records; Fiscal Year 7.1 Share Register. The Board of Directors of the corporation shall cause to be kept at its principal executive office, or at another place or places within the United States determined by the Board of Directors: (a) a share register not more than one year old, containing the names and addresses of the shareholders and the number and classes of shares held by each shareholder; and (b) a record of the dates on which certificates or transaction statements representing shares were issued. 7.2 Other Books and Records . The Board of Directors shall cause to be kept at its principal executive office, or, if its principal executive office is not in the State of Minnesota, shall make available at its registered office within ten (10) days after receipt by an officer of the corporation of a written demand for them made by a shareholder or other person authorized by Minnesota Statutes section 302A.461, originals or copies of: (a) records of all proceedings of shareholders for the last three (3) years; (b) records of all proceedings of the Board of Directors for the last three (3) years; (c) its Articles of Incorporation and all amendments currently in effect; (d) its Bylaws and all amendments currently in effect; (e) financial statements required by Minnesota Statutes Section 302A.463 and the financial statements for the most recent interim period prepared in the course of the operation of the corporation for distribution to the shareholders or to a governmental agency as a matter of public records; (f) reports made to shareholders generally within the last three (3) years; (g) a statement of the names and usual business addresses of its directors and principal officers; (h) any shareholder voting or control agreements of which the corporation is aware; and (i) such other records and books of account as shall be necessary and appropriate to the conduct of the corporate business. 7.3 Fiscal Year. The fiscal year of the corporation shall be determined by the Board of Directors. Article 8. Loans, Guarantees, Suretyship 8.1 Loans, Guarantees, Suretyship . The corporation may lend money to, guarantee an obligation of, become a surety for or otherwise financially assist a person if the transaction, or a class of transactions to which the transaction belongs, is approved by the affirmative vote of a majority of the directors present, and: (a) is in the usual and regular course of business of the corporation; (b) is with, or for the benefit of, a related corporation, an organization in which the corporation has a financial interest, an organization with which the corporation has a business relationship or an organization to which the corporation has the power 11 to make donations; (c) is with, or for the benefit of, an officer or other employee of the corporation or a subsidiary, including an officer or employee who is a director of the corporation or a subsidiary, and may reasonably be expected, in the judgment of the Board of Directors, to benefit the corporation; or (d) has been approved by (i) the holders of two-thirds of the voting power of the shares entitled to vote which are owned by persons other than the interested person or persons, or (ii) the unanimous affirmative vote of the holders of all outstanding shares, whether or not entitled to vote. The loan, guarantee, surety contract or other financial assistance may be with or without interest, and may be unsecured, or may be secured in the manner as a majority of the directors approve, including, without limitation, a pledge of or other security interest in shares of the corporation. Nothing in this section shall be deemed to deny, limit or restrict the power of guaranty or warranty of the corporation at common law or under a statute of the State of Minnesota. Article 9. Indemnification of Certain Persons 9.1 Indemnification of Certain Persons . The corporation shall indemnify such persons, for such expenses and liabilities, in such manner, under such circumstances and to such extent as permitted by Minnesota Statutes Section 302A.521 as now enacted or hereafter amended. Article 10. Amendments 10.1 Amendments. These Bylaws may be amended or altered by a vote of the majority of the whole Board of Directors at any meeting, provided that notice of such proposed amendment shall have been given in the notice given to the directors of such meeting. Such authority in the Board of Directors is subject to the power of the shareholders to change or repeal such Bylaws by a majority vote of the shareholders present or represented at any regular or special meeting of shareholders called for such purpose, and the Board of Directors shall not make or alter any Bylaws fixing a quorum for meetings of shareholders, prescribing procedures for removing directors or filling vacancies in the Board of Directors or fixing the number of directors or their classifications, qualifications or terms of office, except that the Board of Directors may adopt or amend any Bylaw to increase their number. Article 11. Securities of Other Corporations 11.1 Voting Securities Held by the Corporation . Unless otherwise ordered by the Board of Directors, the President shall have full power and authority on behalf of the corporation: (a) to attend any meeting of security holders of other corporations in which the corporation may hold securities and to vote such securities on behalf of this corporation; (b) to execute any proxy for such meeting on behalf of the corporation; or (c) to execute a written action in lieu of a meeting of such other corporation on behalf of this corporation. At such meeting, the president shall possess and may exercise any and all rights and power incident to the ownership of such securities that the corporation possesses. The Board of Directors may, from time to time, grant such power and 12 authority to one or more other persons and may remove such power and authority from the President or from any such other person or persons. 11.2 Purchase and Sale of Securities . Unless otherwise ordered by the Board of Directors, the President shall have full power and authority on behalf of the corporation to purchase, sell, transfer or encumber any and all securities of any other corporation owned by the corporation, and may execute and deliver such documents as may be necessary to effectuate such purchase, sale, transfer or encumbrance. The Board of Directors may, from time to time, confer like powers upon any other person or persons. 13 FOURTH AMENDMENT TO LICENSE AND SERVICES AGREEMENT Exhibit 10.13.1 This Fourth Amendment to License and Services Agreement (this “Fourth Amendment”) is effective as of February 22, 2019 (the “Fourth Amendment Effective Date”) by and between Axogen Corporation, a Delaware corporation (“Licensee”) and Community Blood Center (d/b/a Community Tissue Services), an Ohio corporation (“Licensor”). Capitalized terms not otherwise defined in this Fourth Amendment shall have the meaning as set forth in the Agreement (defined below). WHEREAS, on or about August 6, 2015 the parties entered into that certain License and Services Agreement, as amended effective September 11, 2015 (“First Amendment”), May 12, 2017 (“Second Amendment”), and May 19, 2017 (“Third Amendment”) (collectively, the “Agreement”); and WHEREAS, the parties desire to modify certain terms and conditions of the Agreement as more fully set forth below. NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Licensor and Licensee intending to be legally bound agree as follows: 1. Term Extension. Section 12.01 of the Agreement is hereby deleted in its entirety and replaced with the following: “12.01 Term. Unless otherwise terminated pursuant to the terms of this Agreement, the License granted hereunder shall commence on the Occupancy Date and shall end on December 31, 2021.” 2. Termination. Section 12.02(d) of the Agreement is hereby deleted in its entirety and replaced with the following: “(d) Other than as provided in Section 12.02 (a) and (b), and through February 28, 2021, neither party shall terminate this Agreement. Effective and beginning March 1, 2021, Licensee may terminate this Agreement upon providing six (6) months written notice of termination to Licensor.” 3. Fee Adjustment. Section 3 of Schedule II “Fees” of the Agreement is hereby deleted in its entirety and replaced with the following as of the Effective Date of this Fourth Amendment: “In addition to adjustments under the circumstances described in Section 4.01, the Support Service Fees shall increase by three percent (3%) on each January 1 during the Term. Effective September 1, 2020, the License Fee shall increase on a one-time basis by an additional twenty percent (20%). st 4. Option for Additional Clean Room. The parties acknowledge that Clean Room No. M423 is currently part of Licensee’s Option Space (the “Available Clean Room”). As of June 1, 2020, and upon nine (9) months advanced written notice to Licensor, Licensee shall have the exclusive option to add the Available Clean Room to the Licensed Space and shall owe Licensor such additional fees as provided pursuant to Schedule II to the Agreement, as amended, for the additional Licensed Space. The parties rights in the Agreement with respect to other Option Space, CTS Option Space or Reserved Space remain unaffected except to the extent amended herein with regard to the Available Clean Room. 5. Portland Recovery. Licensee shall prioritize its procurement of nerves from CTS Portland above all other sources in an effort to ensure that CTS Portland maintains at least the same volume as recorded in 2018, and no less than 76 annually. 1 6. Full Force and Effect. With the modifications set forth in this Fourth Amendment, the Agreement remains in full force and effect. 7. Miscellaneous: This Fourth Amendment may be executed in one or more counterparts, each of which shall be deemed an original of this Fourth Amendment and all of which, when taken together, shall be deemed to constitute one and the same valid and binding Fourth Amendment. This Fourth Amendment may be transmitted by facsimile or in .pdf electronic format, and it is the intent of the parties that any signature printed by a receiving facsimile machine or computer system to be deemed an original signature. IN WITNESS WHEREOF, the parties hereto have duly executed this Fourth Amendment as of the Fourth Amendment Effective Date. COMMUNITY BLOOD CENTER D/B/A COMMUNITY TISSUE SERVICES AXOGEN CORPORATION By: /s/Diane Wilson Name: Diane Wilson Title: COO 2/20/19 By: /s/ Karen Zaderej Name: Karen Zaderej Title: President and CEO 2/22/19 2 Pursuant to 17 CFR 240.24b-2, confidential information has been omitted in places marked “***” and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission. Exhibit 10.47 AXOGEN, INC. PERFORMANCE STOCK UNIT AWARD AGREEMENT Participant: [.] Maximum Performance-Based Restricted Stock Units: [.] Target Performance-Based Restricted Stock Units: [.] Award Type: Performance-Based Restricted Stock Unit Award Agreement Plan Name: AxoGen, Inc. 2010 Incentive Stock Plan Award Date: [.] This Agreement, dated as of the [.] day of [.] (the “Grant Date”), is between AxoGen, Inc., a Minnesota corporation (the “Company”), and the Participant. All capitalized terms not otherwise defined herein shall have the meaning ascribed thereto in the Company’s 2010 Incentive Stock Plan, as Amended and Restated as of April 5, 2017 (the “Plan”). 1. Grant and Acceptance of Award. The Company hereby indicates its award to the Participant that number of performance-based Restricted Stock Units (the “Units”) set forth herein (the “Award”). Each Unit is equivalent in value to one share of Company Common Stock, par value $.01 per share (“Share”) and represents the Company’s commitment to issue one Share at a future date, subject to certain eligibility, performance, vesting and other conditions set forth herein. The Award is intended to be granted pursuant to, and is subject to the terms and conditions of, this Agreement and the provisions of the Plan. 2. Eligibility Conditions upon Award of Units. The Participant hereby acknowledges the intent of the Company to award Units subject to certain eligibility, performance, vesting and other conditions set forth herein. 3. Vesting. All of the Units are nonvested and forfeitable as of the Grant Date. So long as the Participant’s employment is continuous from the Grant Date through the applicable date upon which vesting is scheduled to occur, the Units will become vested and nonforfeitable in accordance with the vesting schedule set forth in this Section 3 subject to the accelerated vesting provisions in Section 7 of this Agreement. (a) Satisfaction of Performance-Based Conditions. Subject to the timing conditions described in Section 6 of this Agreement, except as otherwise provided in Section 9 of this Agreement and Appendix B, and the satisfaction of the performance conditions set forth on Appendix A to this Agreement during the time period from January 1, 2019 through December 31, 2020 (the “Performance Period”), the Company will issue Shares hereunder to the Participant subject to the further vesting provisions provided in subsection (b) of this Section 3. 1 (b) Satisfaction of Time-Based Vesting Conditions. The Company’s Compensation Committee of the Board of Directors (the “Committee”) will determine by February 15, 2021 the number of shares of Shares, if any, (the “Eligible Shares”) that may be issued based on the satisfaction of the performance conditions in Appendix A. Subject to the timing conditions described in Section 6 of this Agreement, except as otherwise provided in Section 9 of this Agreement and Appendix B, Units will be the settled by the Company via the issuance of Shares, on the following dates provided that the Participant’s employment is continuous through each applicable vesting date (each a “Vesting Date”): i. ii. iii. 33.33% of the Eligible Shares shall vest on February 15, 2021; 33.33% of the Eligible Shares shall vest on February 15, 2022; and 33.34% of the Eligible Shares shall vest on February 15, 2023 4. Timing of Settlement. The Units will be settled by the Company, via the issuance of Shares as described herein, on the date that the Units become vested and nonforfeitable. However, if a scheduled issuance date falls on a Saturday, Sunday or federal holiday, such issuance date shall instead fall on the next following day that the principal executive offices of the Company are open for business. Notwithstanding the foregoing, in the event that: (i) the Participant is subject to the Company’s policy permitting officers and directors to sell shares only during certain “window” periods, in effect from time to time or the Participant is otherwise prohibited from selling the Shares in the public market and any Shares covered by the Units are scheduled to be issued on a day (the “Original Distribution Date”) that does not occur during an open “window period” applicable to the Participant, as determined by the Company in accordance with such policy, or does not occur on a date when the Participant is otherwise permitted to sell Shares in the open market; and (ii) the Company elects not to satisfy its tax withholding obligations by withholding Shares from the Participant’s distribution, then such Shares shall not be issued and delivered on such Original Distribution Date and shall instead be issued and delivered on the first business day of the next occurring open “window period” applicable to the Participant pursuant to such policy (regardless of whether the Participant is still providing continuous services at such time) or the next business day when the Participant is not prohibited from selling Shares in the open market, but in no event later than the fifteenth day of the third calendar month of the calendar year following the calendar year in which the Original Distribution Date occurs. In all cases, the issuance and delivery of the Shares under this Agreement is intended to comply with Treasury Regulation 1.409A-1(b)(4) and shall be construed and administered in such a manner. 5. Participant’s Rights in the Shares. The Shares, if and when issued hereunder, shall be registered in the name of the Participant and evidenced in the manner as the Company may determine. During the period prior to the issuance of Shares, the Participant will have no rights of a shareholder of the Company with respect to the Shares, including no right to receive dividends or vote the number of Shares underlying each Award. 6. Termination of Employment -- Eligibility Conditions. If the employment of the Participant with the Company is terminated or the Participant separates from the Company for any reason (including death or disability), none of the Units will become vested and the right to any Eligible Shares remaining subject to the vesting provisions of Section 3(b) shall be void. Except as set forth in Section 7, eligibility to be issued Shares is conditioned on the Participant’s continuous employment with the Company through and on the last day of the Performance Period and the Vesting Dates as set forth in 2 Section 3 above. 7. Change in Control of the Company. (a) In the event of a Change in Control of the Company prior to the end of the Performance Period, Shares shall be issued based on the greater of: (i) the Target Performance Units (100% of the Revenue target achieved as provided in Appendix A); or (ii) the expected performance as determined by the Committee in its sole discretion prior to the consummation of the Change in Control. All such Units will become fully-vested. (b) In the event of a Change in Control of the Company prior to the date that all Eligible Shares meet the vesting requirements of Section 3 of this Agreement, all unvested Eligible Shares will vest immediately prior to the consummation of the Change in Control and be issued to the Participant (c) For purposes of this Agreement, a “Change in Control” of the Company shall be deemed to have occurred if: (i) any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) shall, together with his, her or its “Affiliates” and “Associates” (as such terms are defined in Rule 12b-2 promulgated under the Exchange Act), become the “Beneficial Owner” (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities (any such person being hereinafter referred to as an “Acquiring Person”); (ii) the “Continuing Directors” (as hereinafter defined) shall cease to constitute a majority of the Company’s Board of Directors during a 12 month period; or (iii) there should occur: (A) any consolidation or merger involving the Company and the Company shall not be the continuing or surviving corporation or the shares of the Company’s capital stock shall be converted into cash, securities or other property; provided, however, that this subclause (A) shall not apply to a merger or consolidation in which: i. the Company is the surviving corporation and ii. the shareholders of the Company immediately prior to the transaction have the same proportionate ownership of the capital stock of the surviving corporation immediately after the transaction; or (B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company. (d) For purposes of this Agreement, a “Continuing Director” shall mean any person who is a member of the Board of Directors of the Company, while such person is a member of the Board of Directors, who is not an Acquiring Person, an Affiliate or Associate of an Acquiring Person or a representative of an Acquiring Person or of any such Affiliate or Associate and who: (i) was a member of the Company’s 3 Board of Directors on the Grant Date, or (ii) subsequently became a member of the Board of Directors, upon the nomination or recommendation, or with the approval of, a majority of the Continuing Directors. 8. Issuance of Shares. The Company shall not be obligated to issue any Shares until: (i) all federal and state laws and regulations as the Company may deem applicable have been complied with; (ii) the Shares have been listed or authorized for listing upon official notice to NASDAQ or have otherwise been accorded trading privileges; and (iii) all other legal matters in connection with the issuance and delivery of the shares have been approved by the Company’s legal department. 9. Tax Withholding. The Participant shall be responsible for the payment of any taxes of any kind required by any national, state or local law to be paid with respect to the Units or the Shares to be awarded hereunder, including, without limitation, the payment of any applicable withholding, income, social and similar taxes or obligations. Except as otherwise provided in this Section 11, upon the issuance of Shares or the satisfaction of any eligibility condition with respect to the Shares to be issued hereunder, or upon any other event giving rise to any tax liability, the Company shall hold back from the total number of Shares to be delivered to the Participant, and shall cause to be transferred to the Company, whole Shares having a Fair Market Value on the date the Shares are subject to issuance or taxation an amount as nearly as possible equal to (rounded to the next whole share) the Company’s withholding, income, social and similar tax obligations with respect to the Shares at such time. To the extent of the Fair Market Value of the withheld shares, the Participant shall be deemed to have satisfied the Participant’s responsibility under this Section 11 to pay these obligations. The Participant shall satisfy the Participant’s responsibility to pay any other withholding, income, social or similar tax obligations with respect to the Shares, and (subject to such rules as the Committee may prescribe) may satisfy the Participant’s responsibility to pay the tax obligations described in the immediately preceding sentence, by so indicating to the Company or its designee in writing at least one (1) business day prior to the date the Shares are subject to issuance and by paying the amount of these tax obligations in cash to the Company or its designee within fifteen (15) business days following the date the Units vest or by making other arrangements satisfactory to the Committee for payment of these obligations. In no event shall whole Shares be withheld by, or delivered to, the Company in satisfaction of tax withholding requirements in excess of the maximum statutory tax withholding required by law. The Participant agrees to indemnify the Company against any and all liabilities, damages, costs and expenses that the Company may hereafter incur, suffer or be required to pay with respect to the payment or withholding of any taxes. The obligations of the Company under this Agreement and the Plan shall be conditional upon such payment or arrangements, and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Participant. 10. Investment Intent. The Participant acknowledges that the acquisition of the Shares to be issued hereunder is for investment purposes without a view to distribution thereof. 11. Limits on Transferability; Restrictions on Shares; Legend on Certificate. Until the eligibility conditions of this Award have been satisfied and Shares have been issued in accordance with the terms of this Agreement or by action of the Committee, the Units awarded hereunder are not transferable and shall not be sold, transferred, assigned, pledged, gifted, hypothecated or otherwise disposed of or encumbered by the Participant. Transfers of the Shares by the Participant are subject to 4 the Company’s Insider Trading Policy and applicable securities laws. Shares issued to the Participant in certificate form or to the Participant’s book entry account upon satisfaction of the vesting and other conditions of this Award may be restricted from transfer or sale by the Company and evidenced by stop- transfer instructions upon the Participant’s book entry account or restricted legend(s) affixed to certificates in the form as the Company or its counsel may require with respect to any applicable restrictions on sale or transfer. 12. Award Subject to the Plan. The Award to be made pursuant to this Agreement is made subject to the Plan. The terms and provisions of the Plan, as may be amended from time to time are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained in this Agreement and a term or provision of the Plan, the applicable terms and conditions of the Plan will govern and prevail. 13. Amendment. This Agreement may be amended from time to time by the Committee in its discretion; provided, however, that this Agreement may not be modified in a manner that would have a materially adverse effect on the Units or Shares as determined in the discretion of the Committee, except as provided in the Plan or in a written document signed by the Participant and the Company. 14. No Rights to Continued Employment. The Company’s intent to issue the Shares hereunder shall not confer upon the Participant any right to continued employment or other association with the Company or any of its affiliates or subsidiaries; and this Agreement shall not be construed in any way to limit the right of the Company or any of its subsidiaries or affiliates to terminate the employment or other association of the Participant with the Company or to change the terms of such employment or association at any time. 15. Legal Notices. Any legal notice necessary under this Agreement shall be addressed to the Company in care of its General Counsel at the principle executive offices of the Company and to the Participant at the address appearing in the personnel records of the Company for such Participant or to either party at such other address as either party may designate in writing to the other. Any such notice shall be deemed effective upon receipt thereof by the addressee. 16. Governing Law. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of Florida (without regard to the conflict of laws principles thereof) and applicable federal laws. For purposes of litigating any dispute that arises directly or indirectly from the relationship of the parties evidenced by this Agreement, the parties hereby submit and consent to the exclusive jurisdiction of the state of Florida and agree that such litigation shall be conducted only in the state of Florida, or the federal courts for the United States for the District of Florida, and no other courts, where this Award is made and/or to be performed. 17. Headings. The headings contained in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 18. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to the one and the same instrument. 5 (signatures on following page) AXOGEN, INC. By: Name: Karen Zaderej Title: CEO and President Participant Name: [.] Date: [.] By: 6 PLAN: AXOGEN, INC 2010 STOCK INCENTIVE PLAN APPENDIX A Target Performance-Based Restricted Stock Units as provided on the first page of this Agreement will become subject to vesting as provided in Section 3(b) of this Agreement in a range of 0% to 150% of the number of Units based upon the final determination of the Committee after the end of the Performance Period as to which of the performance standards A through D below have been achieved (the “Achieved Standard”) and taking into consideration, for performance standards B and C, a scaling upward to a maximum payout percentage of the next higher performance standard, based upon the extent to which actual Gross Revenue and percentage increase between 2019 and 2020 Gross Revenues exceeded the Achieved Standard. Performance Standards A. 0% of the Units will vest if 2020 Gross Revenue is below “***” or less than a “***”% increase over 2019 Gross Revenue; B. 50% of the Units will vest if 2020 Gross Revenue equals or exceeds “***” minimum revenue and equals or exceeds a “***”% increase over 2019 Gross Revenue; C. 100% of the Units will vest if 2020 Gross Revenue equals or exceeds “***” minimum revenue and equals or exceeds a “***”% increase over 2019 Gross Revenue; and D. 150% of the Units will vest if 2020 Gross Revenue equals or exceeds “***” minimum revenue and equals or exceeds a “***”% increase over 2019 Gross Revenue: 7 Nature of Grant . In accepting the grant, Participant acknowledges that: APPENDIX B (1) the Plan is established voluntarily by the Company, is discretionary in nature and may be modified, amended, suspended or terminated by the Company at any time; (2) this Award does not create any contractual or other right to receive future awards, or other benefits in lieu of an award, even if awards have been given repeatedly in the past, and all decisions with respect to future awards, if any, will be at the sole discretion of the Company; (3) this Award is not part of normal or expected compensation or salary for any purposes, including, but not limited to, calculating any severance, termination, bonuses, retirement benefits or similar payments; (4) the future value of the Shares is unknown and cannot be predicted with certainty; and (5) in consideration of the Award, no claim or entitlement to compensation or damages shall arise from termination of the Award resulting from termination of his or her employment by the Company (for any reason whatsoever and whether or not in breach of local labor laws) and the Participant irrevocably releases the Company from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by accepting this Award, the Participant shall be deemed to have irrevocably waived his or her entitlement to pursue such claim. Data Privacy. Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data as described herein by and among, as applicable, the Company and its subsidiary for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. The Participant understands that the Company holds certain personal information about him or her, including, but not limited to, the Participant’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any Shares or directorships held in the Company, details of all options or any other entitlement to Shares awarded, canceled, exercised, vested, unvested or outstanding in the Participant’s favor, for the purpose of implementing, administering and managing the Plan (“Data”). The Participant understands that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan. The Participant authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Participant may elect to deposit any Shares acquired upon settlement of the Units. The 8 Participant understands that Data will be held only as long as is necessary to implement, administer and manage his or her participation in the Plan. The Participant understands that the Participant may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein. The Participant understands, however, that refusing or withdrawing his or her consent may affect his or her ability to participate in the Plan. 9 SUBSIDIARY OF AXOGEN, INC. As of December 31, 2018, Axogen Inc. had three sole subsidiaries: 1. Axogen Corporation, a Delaware corporation; 2. Axogen Europe GmbH, an Austrian corporation; and 3. Axogen Processing Corporation, a Delaware corporation. EXHIBIT 21.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements of Axogen, Inc. on Form S-3 (File Nos. 333-224713, 333-220770 and 333-207829) and Form S-8 (File Nos. 333-227105, 333-222019, 333- 218290, 333-211660, 333-201238 and 333-177980) of our report dated February 28, 2018, relating to the consolidated financial statements, financial statement schedules, and the effectiveness of internal control over financial reporting, which appears in this Annual Report on Form 10-K of Axogen, Inc. for the year ended December 31, 2018. EXHIBIT 23.1 /s/ LURIE, LLP Minneapolis, Minnesota February 26, 2019 Exhibit 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statements Nos. 333-224713, 333-207829 and 333-220770 on Form S-3 and Registration Statements Nos. 333-227105, 333-222019, 333-218290, 333-211660, 333-201238 and 333-177980 on Form S-8 of our report dated February 26, 2019, relating to the financial statements and financial statement schedule of Axogen, Inc., and the effectiveness of Axogen, Inc.’s internal control over financial reporting appearing in this Annual Report on Form 10-K of Axogen, Inc. for the year ended December 31, 2018. /s/ DELOITTE & TOUCHE LLP Miami, Florida February 26, 2019 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 31.1 I, Karen Zaderej, certify that: 1. I have reviewed this annual report on Form 10-K of Axogen, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have; a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 26, 2019 /s/ Karen Zaderej Karen Zaderej Chief Executive Officer CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 31.2 I, Peter Mariani, certify that: 1. I have reviewed this annual report on Form 10-K of Axogen, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have; a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 26, 2019 Ge /s/ Peter Mariani Peter Mariani Chief Financial Officer EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES —OXLEY ACT OF 2002 In connection with the Annual Report of Axogen, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2018 as filed with the Securities and Exchange Commission (the “Report”), I, Karen Zaderej, Chief Executive Officer and Peter Mariani, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Karen Zaderej Karen Zaderej Chief Executive Officer February 26, 2019 /s/ Peter Mariani Peter Mariani Chief Financial Officer February 26, 2019 

Continue reading text version or see original annual report in PDF format above