RISK FACTORS

Before LecTec shareholders approve the Merger, such shareholders should carefully consider the risks described below in addition to the other information contained in this proxy statement/prospectus, including the section entitled “Note Regarding Forward-Looking Statements” on page  14 of this proxy statement/prospectus. If any of the following risks actually occur, the combined company’s business, financial condition or results of operations could be materially adversely affected, the value of LecTec’s common stock could decline, and shareholders may lose all or part of their investment in LecTec common stock.

Risks Relating to the Merger

LecTec and AxoGen may not realize all of the anticipated benefits of the transactions.

To be successful after the Merger, LecTec and AxoGen will need to integrate their separate companies and perform on the AxoGen business plan. AxoGen is a private company and as a result of the Merger will be subject to regulation as a public company pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including the Sarbanes-Oxley Act. The integration process and new reporting requirements may divert the attention of the combined company’s executive officers and management from day-to-day operations. Such disruption in the business could preclude realization of the full benefits of the transaction expected by LecTec and AxoGen. LecTec has not completed a merger or acquisition comparable in size or scope to the Merger. The failure of the combined company, after the Merger, to successfully integrate the operations of LecTec and AxoGen or otherwise to realize any of the anticipated benefits of the Merger could cause an interruption of, or a loss of momentum in, the activities of the combined company and could adversely affect its results of operations. In addition, the overall integration of the two companies may result in unanticipated problems, expenses or liabilities, and may cause LecTec’s stock price to decline.

Because the businesses of LecTec and AxoGen differ, the results of operations of the combined company and the market price of LecTec common stock after the Merger may be affected by factors different from those existing prior to the Merger and may suffer as a result of the Merger. As a result, LecTec cannot assure you that the combination of the businesses and operations of LecTec with AxoGen will result in the realization of the full benefits anticipated from the Merger.

Provisions of the Merger Agreement may deter alternative business combinations.

Restrictions in the Merger Agreement prohibit, in certain contexts, LecTec from soliciting any acquisition proposal or offer for a merger or business combination with any other party. This includes a proposal that could be advantageous to the shareholders of LecTec when compared to the terms and conditions of the Merger described in this proxy statement/prospectus.

AxoGen is a private company making it difficult to determine its fair market value.

AxoGen is a private company and as such there is no public market price for which to value it. This makes it extremely difficult to determine the fair market value of AxoGen. The number of shares of LecTec common stock to be issued to AxoGen stockholders was determined based on negotiations between the parties, within a value range determined by LecTec, and it may not be indicative of its true value.

The value of the LecTec common stock issued in the Merger will depend on its market price at the time of the Merger, as the number of LecTec shares to be provided to security holders of AxoGen is fixed.

Pursuant to the Merger Agreement, the number of shares of LecTec’s common stock that security holders of AxoGen will receive is unaffected by the share price of LecTec’s common stock, as reflected on the OTCBB. Increases in the value of LecTec common stock will result in a higher price being paid by LecTec for AxoGen

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common stock and more value received by AxoGen stockholders in the Merger. Pursuant to the Merger Agreement, LecTec will not have the right to terminate or renegotiate the Merger Agreement or to re-solicit proxies as a result of any increase in the value of LecTec’s outstanding common stock.

The market price of LecTec common stock could decline as a result of the large number of shares that will become eligible for sale after consummation of the Merger.

If the Merger is consummated, assuming $11,350,000 in Net Cash, the new shares of LecTec common stock issued as Merger Consideration will become saleable after the closing of the Merger as follows: 728,819 shares immediately, 3,444,410 six months after closing and all shares twelve months after closing. Consequently, after such periods, additional shares of LecTec common stock will be eligible for resale in the public market. Current shareholders of LecTec and former stockholders of AxoGen may not wish to continue to invest in the operations of the combined company after the Merger, or for other reasons, may wish to dispose of some or all of their interests in LecTec after the Merger. Sales of substantial numbers of shares of both the newly issued and the existing LecTec common stock in the public market following the Merger could adversely affect the market price of such shares.

AxoGen’s credit agreement with Oxford Finance Corporation and Atel Ventures, Inc. is due to expire September 30, 2011, and AxoGen may not be able to find suitable alternative financing.

AxoGen currently has a loan for an aggregate amount of approximately $4.7 million with Oxford Finance Corporation and Atel Ventures, Inc. (the “Lenders”) which comes due September 30, 2011. AxoGen has received a commitment from different lenders for a new $5.0 million facility contingent on closing the Merger and satisfaction of certain other conditions. AxoGen intends to use the proceeds from the new loan facility to repay the entire outstanding balance under the existing loan. The proposed new loan facility will be for 42 months, with interest only payments for the first 12 months and straight line amortization of principal and interest for the remaining 30 months. The interest rate is the greater of 9.9% per annum or the three-year Treasury Rate plus 8.92%. Such loan will be secured by all of the assets of AxoGen. The lenders for the proposed new loan facility will also receive a 10 year warrant to purchase approximately 83,000 shares of LecTec common stock at $2.401 per share, subject to adjustment based upon the price of LecTec common stock at the closing of the Merger. If the proposed new loan facility does not close after the Merger, and alternative arrangements are not established, cash reserves will be required to pay the $4.7 million loan to the Lenders. Such use of cash could result in slowing the AxoGen business plan to adjust for less available capital or require the combined entity to raise additional capital within twelve months of the Merger. Any additional capital raise could be dilutive to shareholders of the combined company.

AxoGen has not experienced positive cash flow from their operations, and the ability of the combined company to achieve positive cash flow from operations, will depend on increasing sales of its products, which may not be achievable.

AxoGen has historically operated with negative cash flow from its operations. Management of LecTec and AxoGen, in considering the advantages of the Merger, believes that additional capital to invest in sales and marketing will provide AxoGen with a higher profile in its market and with its customers and result in higher sales. However, if such beliefs turn out to be incorrect and AxoGen product sales do not increase as anticipated, then LecTec shareholders will experience negative cash flows and adverse operating conditions.

The issuance of shares of LecTec common stock to AxoGen stockholders in connection with the Merger will substantially reduce the percentage ownership of current LecTec shareholders.

If the Merger is completed and assuming that LecTec Net Cash at the closing of the Merger is $11,350,000, 6,160,000 shares of LecTec’s common stock will be issued in exchange for the stock of AxoGen, 562,856 shares of LecTec common stock will be reserved for issuance upon exercise of AxoGen stock options that will be converted into LecTec stock options pursuant to the Merger and certain AxoGen stockholders will purchase

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420,179 shares of LecTec common stock at $2.38 per share. The exact number of shares of LecTec common stock to be issued, reserved for issuance or purchased will adjust slightly based on the final LecTec Net Cash amount. LecTec shareholders will continue to own their existing shares of LecTec common stock, which will not be affected by the Merger, other than by the dilution resulting from the issuance of the above mentioned shares. As a result, current LecTec shareholders will own approximately 40% of the shares of LecTec common stock outstanding and on a fully diluted basis after the Merger. As such, current LecTec shareholders will have a significant reduction in the relative percentage interests of earnings, voting, liquidation, book and market value.

AxoGen’s security holders will collectively hold a large percentage of the outstanding LecTec common stock after consummation of the Merger, and, should they choose to act together, will have significant influence over the outcome of corporate actions requiring shareholder approval; such shareholders’ priorities for LecTec’s business may be different from LecTec’s or its other shareholders.

After completion of the Merger, the former AxoGen security holders (including investors other than LecTec in AxoGen’s Interim Notes and those purchasing LecTec common stock at closing) will collectively hold approximately 60% of the outstanding LecTec common stock and the current LecTec shareholders will hold approximately 40% of the outstanding LecTec common stock. Accordingly, AxoGen security holders, should they choose to act together, will be able to significantly influence the outcome of any corporate transaction or other matter submitted to the LecTec shareholders for approval, including the election of directors, any merger, consolidation or sale of all or substantially all of LecTec’s assets or any other significant corporate transaction, such that such AxoGen security holders, should they choose to act together, could delay or prevent a change of control of LecTec, even if such a change of control would benefit LecTec’s other shareholders. The interests of such AxoGen investors may differ from the interests of LecTec’s other shareholders.

The conditions to closing of Merger may be waived by LecTec or AxoGen without re-soliciting LecTec shareholder or AxoGen shareholder approval of the Merger Agreement.

The Merger is subject to the satisfaction of the closing conditions set forth in the Merger Agreement. These conditions may be waived by LecTec or AxoGen, subject to the agreement of the other party in specific cases. See “The Merger Agreement—Conditions to Completion of the Merger” on page 86. In the event of a waiver of any condition, LecTec and AxoGen will not be required to re-solicit the LecTec shareholders or AxoGen stockholders, and may complete the transaction without seeking further shareholder approval.

If the conditions to the Merger are not met or waived, the Merger will not occur.

Even if the Merger is approved by the shareholders of LecTec, specified conditions must be satisfied or waived to complete the Merger. These conditions are described in the section entitled “The Merger Agreement—Conditions to Completion of the Merger” on page 86 and in the Merger Agreement set forth in Appendices A1, A2 and A3. LecTec cannot assure you that all of the conditions will be satisfied. If the conditions are not satisfied or waived, the Merger will not occur or will be delayed, which would result in the loss of some or all of the expected benefits of the Merger.

The date on which the Merger will close is uncertain.

The date on which the Merger will close depends on the satisfaction of the closing conditions set forth in the Merger Agreement, or the waiver of those conditions by the parties thereto. Although LecTec and AxoGen expect to complete the Merger within five days of the Annual Meeting, such closing may not take place as anticipated. Either LecTec or AxoGen may terminate the Merger Agreement if the Merger has not taken place on or before September 30, 2011, unless the Merger Agreement is amended to extend such date.

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After the Merger, LecTec will continue to incur costs as a result of operating as a public company, and its management may be required to devote substantial time to compliance initiatives.

As a public company, LecTec currently incurs legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the NASDAQ Stock Market, have imposed various requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. LecTec’s management devotes both time and financial resources to these compliance initiatives.

After the Merger, LecTec will remain subject to all of its current public obligations, including the Sarbanes-Oxley Act. If, after the Merger, LecTec fails to staff its accounting and finance function adequately, or maintain internal controls adequate to meet the demands that are placed upon it as a public company, including the requirements of the Sarbanes-Oxley Act, it may be unable to report its financial results accurately or in a timely manner and its business and stock price may suffer. The costs of being a public company, as well as diversion of management’s time and attention, may have a material adverse effect on LecTec’s future business, financial condition and results of operations.

LecTec may not have uncovered all the risks associated with the acquisition of AxoGen and a significant liability may be discovered after closing of the Merger.

There may be risks that LecTec failed to discover in the course of performing its due diligence investigations related to the acquisition of AxoGen, which could result in significant liabilities arising after the consummation of the Merger. In connection with the acquisition of AxoGen, LecTec will assume all of AxoGen’s liabilities, both pre-existing and contingent, as a matter of law upon the exchange of all AxoGen securities. The Merger Agreement does not provide for LecTec’s indemnification by the former AxoGen stockholders against any of AxoGen’s liabilities, should they arise or become known after the closing of the Merger. Furthermore, there is no escrow account or indemnity agreement protecting LecTec in the event of any breach of AxoGen’s representations and warranties in the Merger Agreement. While LecTec tried to minimize risks by conducting due diligence that LecTec deemed appropriate under the circumstances, LecTec may not have identified all existing or potential risks. Any significant liability that may arise may harm LecTec’s business, financial condition, results of operations and prospects by requiring LecTec to expend significant funds to satisfy such liability.

If the Merger does not qualify as a tax-free reorganization for U.S. federal income tax purposes, there could be adverse tax consequences for the AxoGen stockholders.

The Merger is intended to qualify as a reorganization within the meaning of Section 368(a) of the Code and it is a condition to closing of the Merger that AxoGen receive an opinion from its counsel to that effect. In the event that the Merger does not qualify as a reorganization, the Merger would result in taxable gain or loss for each AxoGen stockholder, with the amount of such gain or loss determined by the amount that each AxoGen stockholder’s adjusted tax basis in the AxoGen common stock surrendered is less or more than the fair market value of the LecTec common stock received in exchange therefor.

Risks Relating to LecTec’s Business

LecTec has limited staffing.

LecTec’s success is dependent upon the efforts of the LecTec Board of Directors and the full time employees of LecTec. As of the date of this proxy statement/prospectus, LecTec had two full-time employees whose efforts are focused on its external reporting requirements, maintaining its day-to-day operations and pursuing merger and acquisition opportunities. LecTec is considered a small business issuer as defined under the rules of the SEC. Current legislation related to the Sarbanes-Oxley Act and LecTec’s efforts to become compliant thereunder, have been, and are expected to be, costly to it despite the internal controls LecTec has in place. If its

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full-time employees or members of the LecTec Board of Directors decide to depart from LecTec, it could be adversely affected if suitable replacement personnel or directors are not quickly retained. The current financial condition and associated risks of LecTec may make it difficult to retain and attract, if necessary, qualified personnel. LecTec currently has a key man life insurance policy on its CEO and CFO, Gregory G. Freitag, in the amount of $2,000,000.

The price of LecTec’s common stock could be highly volatile due to a number of factors.

The trading price of LecTec common stock may fluctuate widely as a result of a number of factors, including:

LecTec does not meet the criteria to list its common stock on an exchange such as the NASDAQ Stock Market and its common stock is illiquid and may be difficult to sell.

Trading of LecTec’s common stock is conducted on the OTCBB. Generally, securities that are quoted on the OTCBB lack liquidity and analyst coverage. This may result in lower prices for its common stock than might otherwise be obtained if it met the criteria to list its securities on a larger or more established exchange, such as the NASDAQ Capital Market, and could also result in a larger spread between the bid and asked prices for its common stock.

In addition, there has been only limited trading activity in LecTec’s common stock. The relatively small trading volume will likely make it difficult for LecTec shareholders to sell their common stock as, and when, they choose. As a result, investors may not always be able to resell shares of LecTec common stock publicly at the time and prices that they feel are fair or appropriate.

LecTec’s ongoing royalty stream is derived from its only licensing agreement; the amount of royalties resulting from this licensing agreement is uncertain.

LecTec currently receives royalty income pursuant to a licensing agreement it has with Novartis related to the sales of an adult vapor patch. Such royalty payments were $111,376 and $91,273 in the years ended 2009 and 2010, respectively. Royalties resulting from such license provide limited funds to continuing operations and are uncertain because of the acceptance of the product in the marketplace, severity of the cough, cold and flu seasons, marketing efforts by Novartis and other factors that LecTec is unable to control. Year over year the Novartis royalties have declined and there can be no assurance that this trend will not continue. Currently, LecTec has no other licensing arrangements in place and there is no assurance that LecTec will be able to enter into additional licensing agreements.

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If licensees of LecTec’s patents do not comply with regulatory requirements when marketing products which rely on LecTec’s patents, LecTec’s royalties could be negatively affected.

The research, development, manufacture, labeling, distribution, marketing and advertising of products that are sold by licensees in reliance on LecTec’s patents are subject to extensive regulation by governmental regulatory authorities in the United States and other countries. Failure by such licensees to comply with regulatory requirements for marketing their products could subject them to regulatory or judicial enforcement actions, including, but not limited to, product recalls or seizures, injunctions, civil penalties, criminal prosecution, refusals to approve new products and suspensions and withdrawals of existing approvals. This in turn could decrease the revenues generated by such patent licensees and thereby decrease LecTec’s royalty income.

If products relying on LecTec’s patents are no longer regulated as over-the-counter products, LecTec royalties could be negatively affected.

Currently, many of the therapeutic consumer products that are or could be sold in reliance on LecTec’s patents are regulated as over-the-counter products. LecTec cannot assure you that the U.S. Food and Drug Administration (“FDA”) will continue to regulate these products as over-the-counter products. If the FDA changes its approach to regulating such therapeutic consumer products, the licensees would be faced with significant additional costs and may be unable to sell some or all of the products. Any such change could have a negative effect on the licensee’s revenues, which in turn could decrease LecTec’s royalty income.

LecTec’s patents and other proprietary rights provide uncertain protection of LecTec proprietary information and LecTec’s inability to protect a patent or other proprietary rights may adversely affect its business.

The patent and other proprietary rights position of companies such as LecTec’s is uncertain and involves complex legal and factual questions. Issued patents can later be held invalid by the patent office issuing the patent or by a court. LecTec cannot assure you that LecTec’s patents will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide LecTec value. Many other organizations, with substantially greater resources than LecTec’s, are engaged in research and development of technologies and products. Such organizations may currently have, or may obtain in the future, legally blocking proprietary rights, including patent rights, in one or more technologies, products or methods which LecTec currently considers proprietary to LecTec. LecTec has taken steps and incurred expenses to protect and evaluate LecTec’s patent portfolio in an effort to verify and determine the validity of LecTec’s patent rights. The outcome of this evaluation is uncertain and could be challenged. Moreover, LecTec can provide no assurance that confidentiality agreements, trade secrecy agreements or similar agreements intended to protect unpatented technology will provide the intended protection. Intellectual property litigation is extremely expensive and time-consuming, and it is often difficult, if not impossible, to predict the outcome of such litigation. Currently LecTec has ended all of its previous patent litigation and does not expect to proceed with any further litigation unless circumstances regarding LecTec’s intellectual property changes.

LecTec’s patents have a limited life and finite expiration periods.

Although LecTec has new patents pending approval, including a patent for the hand sanitizer patch, patent life of LecTec’s patents range from one to 11 years.

The issuance of new accounting pronouncements may have an impact on financial results.

The issuance of accounting pronouncements may affect LecTec’s results from time to time depending on specific issues relevant to LecTec, as well as adoption dates and alternatives that LecTec may choose with respect to the particular pronouncement.

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Risks Relating to AxoGen’s Business

AxoGen’s auditor’s report for the fiscal year 2010 included a “going concern” explanatory paragraph.

AxoGen has suffered recurring losses and negative cash flows from operations since inception, and its working capital is severely limited. As of June 30, 2011, AxoGen had an accumulated deficit of approximately $42.9 million and a working capital deficit of $1.3 million. AxoGen’s access to working capital continues to be limited and its debt service obligations and projected operating costs for 2011 exceed its cash balance at June 30, 2011. As a result, AxoGen’s auditor’s report for fiscal year 2010 included an explanatory paragraph that expresses substantial doubt about AxoGen’s ability to continue as a “going concern.”

Future revenue will depend on AxoGen’s ability to expand its sales force and develop new customers, and there can be no assurance that these efforts will result in significant sales.

AxoGen is in the process of investing in its sales channel composed of a combination of its direct sales force and independent distributors to allow it to reach new customers. There can be no assurance that these efforts will be successful in expanding AxoGen’s product sales. AxoGen currently sells products directly through its employees and indirectly through distributor relationships. AxoGen is engaged in a major initiative to build and further expand sales and marketing capabilities. The incurrence of these expenses may impact AxoGen’s operating results, and there can be no assurance of their effectiveness. If AxoGen is unable to develop its sales force and new customers, it may not be able to grow revenue or maintain its current level of revenue generation. See “Certain Information Concerning AxoGen—Sales and Marketing,” on page 105.

AxoGen’s revenue depends solely on three products.

All of AxoGen’s revenue is currently derived from only three products, the Avance ^® Nerve Graft, AxoGuard ^® Nerve Protector and AxoGuard ^® Nerve Connector, for the treatment of peripheral nerve injury. Its ability to generate revenue is dependent on the success of these products. Accordingly, any disruption in AxoGen’s ability to generate revenue from the sale of these products will have a material adverse impact on its business, results of operations, financial condition and growth prospects. In addition, AxoGen’s expenditures for research and development are minimal and funding to develop, or increase efforts to find collaboration or licensing opportunities to obtain, additional products will be necessary.

In addition, the AxoGuard ^® products are only available through an exclusive distribution agreement with Cook Biotech Incorporated (“Cook Biotech”). Such contract is for a seven year term expiring August 2015, unless extended by agreement of the parties. 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. Although AxoGen believes it could develop or obtain alternative 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 are available. See “Certain Information Concerning AxoGen—Intellectual Property—License Agreements” and “Certain Information Concerning AxoGen—Tissue Recovery and Processing for Avance ^® Nerve Graft—Manufacturing for the AxoGuard ^® Product Line.”

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 options. 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 reconstruction 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.

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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 Avance ^® Nerve Graft product and negatively impact the supply of available donor tissue.

AxoGen is highly dependent on its ability to recover cadaveric nerves from tissue donors for its Avance ^® Nerve Graft product. 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 for other allografts (i.e., bones, tendon, etc.) may limit widespread acceptance of AxoGen’s Avance ^® Nerve Graft allograft. 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. 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, families of potential donors from whom AxoGen is required to obtain consent before processing tissue may become 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. See “AxoGen Business—Tissue Recovery and Processing for Avance ^® Nerve Graft” on page 104.

Loss of key members of AxoGen management, who it needs to succeed, could adversely affect its business.

AxoGen is highly dependent on the services of Karen Zaderej, its Chief Executive Officer, and other key members of AxoGen’s management team and staff. The loss of Ms. Zaderej or any of the management team’s services could have an adverse effect on AxoGen’s future operations. AxoGen will establish a key-woman life insurance policy for $3,000,000 insuring the life of Ms. Zaderej at the time of, or before, the closing of the Merger.

AxoGen is highly dependent on the continued availability of its facilities and its relationship with its processor LifeNet Health and would be harmed if it was unavailable for any prolonged period of time.

Any failure in the physical infrastructure of AxoGen’s facilities, including the facility of its processor LifeNet Health, could lead to significant costs and disruptions that could reduce its revenues and harm its business reputation and financial results. AxoGen is highly reliant on its relationship with LifeNet Health. AxoGen currently uses LifeNet Health to process the peripheral nerve tissue and package the Avance ^® Nerve Graft product. Any natural or man-made event that impacts AxoGen’s ability to utilize these facilities could have a significant adverse impact on its operating results, reputation and ability to continue operations. The process for approval of facilities is time-consuming and AxoGen’s ability to rebuild facilities would take a considerable amount of time and expense and cause a significant disruption in service to its customers. AxoGen is in the process of putting business interruption insurance into place, and if it does, this insurance will help in these instances, but it may not cover all costs nor help to regain AxoGen’s standing in the market. See “Certain Information Concerning AxoGen—Facilities” on page 120.

AxoGen and LifeNet Health are party to a tissue processing agreement that renews for one-year terms annually unless either party terminates with six months written notice prior to the expiration of the then current term. The current expiration date of the agreement is February 27, 2012, and the parties are in discussions to renew, modify and extend the agreement beyond this date. However, there can be no assurance that the parties will be able to reach agreement on a modified agreement or that one of the parties will not give notice, which would be due no later than August 27, 2011, that would cause the agreement to expire at the end of its current term. If AxoGen’s relationship with LifeNet ceases, AxoGen would need to make alternative arrangements for the processing currently done by LifeNet, either through an alternate processor or by undertaking the processing operations itself. While AxoGen currently has excess capacity in manufacturing and could potentially start processing at a new facility by moving equipment and qualifying tissue processing at a new processor location or

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by establishing its own clean room operation, this process transfer would take six months or more. The process transfer would require considerable resources and expense and it could cause service disruptions to AxoGen’s customers. If AxoGen’s relationship with LifeNet ceases and the agreement is not replaced by an alternate processor or with AxoGen establishing its own clean room operations, or if there are difficulties in making alternative arrangements, there could be a significant adverse impact on AxoGen’s operating results, reputation and ability to continue operations. See “Certain Information Concerning AxoGen—Tissue Recovery and Processing for Avance ^® Nerve Graft” on page 104.

AxoGen must maintain high quality manufacturing and processing.

AxoGen’s Avance ^® Nerve Graft product requires careful calibration and precise, high-quality processing and manufacturing. Achieving precision and quality control requires skill and diligence by its personnel. If it fails to achieve and maintain these high quality controls, processing and manufacturing standards, including avoidance of manufacturing 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 cannot completely eliminate the risk of errors, defects or failures. In addition, AxoGen may experience difficulties in scaling-up manufacturing of its Avance ^® product, 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 allografts 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.

AxoGen relies on third-party suppliers, some of which are currently the only source for the respective components or materials they supply to it.

Although most of the raw materials used in the production of Avance ^® Nerve Graft are available from more than one supplier, AxoGen currently obtains one of the chemicals it uses in the manufacture of Avance ^® Nerve Graft from only one supplier. Some of the reagents AxoGen uses in testing its manufacturing process are also obtained from single suppliers. FDA approval 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 approval of any alternate suppliers, if required, could take several months or years to obtain, if they are 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 manufacture products. 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.

AxoGen relies on third parties to perform many necessary services for the commercialization of Avance ^® Nerve Graft, including services related to the recovery, distribution, storage and transportation.

AxoGen relies upon third parties for certain recovery, distribution, and transportation services. In accordance with product specifications, these 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, distribution, storage 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. See “Certain Information Concerning AxoGen—Tissue Recovery and Processing for Avance ^® Nerve Graft” on page 104.

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AxoGen is dependent on its relationships with distributors to generate revenue.

AxoGen derives substantial revenues through its relationships with distributors. If such distributor relationships were terminated for any reason, it could materially and adversely affect AxoGen’s ability to generate revenues and profits. AxoGen intends to obtain the assistance of additional distributors to continue its sales growth. It may not be able to find additional distributors who will agree to market and distribute its products on commercially reasonable terms, if at all. If it is unable to establish new distribution relationships or renew current distribution agreements on commercially acceptable terms, operating results could suffer.

AxoGen’s operating results will be harmed if it is unable to effectively manage and sustain its future growth.

AxoGen might not 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, 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 AxoGen’s cash reserves, it may be required to obtain additional financing, which may increase indebtedness or result in dilution to LecTec shareholders. Further, there can be no assurance that LecTec would be able to obtain any additional financing.

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 reconstruction 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.

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 hospitals to pay fees for AxoGen’s products depends in part on the extent to which reimbursement for the costs of such materials and related treatments will continue to be available from governmental health administration authorities, private health coverage insurers and other organizations. Major third-party payors of hospital services and hospital outpatient services, including Medicare, Medicaid and private healthcare insurers, annually revise their payment methodologies, which can result in stricter standards for reimbursement of hospital charges for certain medical procedures or the elimination of reimbursement. Further, Medicare, Medicaid and private healthcare insurer cutbacks could create downward price pressure on AxoGen’s products.

AxoGen may be subject to future product liability litigation that could be expensive and its insurance coverage may not be adequate in a catastrophic situation.

Although AxoGen is not currently subject to any product liability proceedings, and it has no reserves 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. AxoGen currently carries product liability insurance of up to $5 million, however, its insurance coverage and any reserves it may maintain in the future for product related liabilities may not be adequate and AxoGen’s business could suffer material adverse consequences.

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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:

AxoGen products compete with autograft and hollow-tube conduits, 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. Also, steady improvements have been made in synthetic human tissue substitutes, which could compete with AxoGen’s products. 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. Finally, 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 its products rendering them obsolete or noncompetitive.

AxoGen may be unsuccessful in commercializing its products outside the U.S.

To date, AxoGen has focused its commercialization efforts in the U.S. It intends to expand sales outside the U.S. and will need to comply with applicable foreign regulatory requirements, including obtaining the requisite approvals, to do so. Additionally, AxoGen will need to either enter into distribution agreements with third parties or develop a direct sales force in these foreign markets. If it does not obtain adequate levels of reimbursement from third-party payors outside of the U.S., it may be unable to develop and grow its product sales internationally. Outside of the U.S., reimbursement systems vary significantly by country. Many foreign markets have government-managed healthcare systems that govern reimbursement for medical devices and procedures. Additionally, some foreign 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, level and timing of donor medical releases, such as effectiveness of donor screening (currently performed by donor recovery groups), the effective recovery of tissue, the timely receipt, recording and review of required medical documentation, and employee loss and turnover in AxoGen’s and its contractor’s recovery departments. 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 cost per allograft processed.

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 the effectiveness of predicting demand, effectiveness of preparing manufacturing to meet demand, and efficiently meeting product

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mix and product demand requirements. AxoGen may be unable to manage its inventory efficiently, keep inventory within expected budget goals, or keep sufficient product on hand to meet demand, and AxoGen can provide no assurance that it can keep inventory costs within its target levels. Failing to do so may require AxoGen to raise additional cash resources or may harm long term growth prospects.

Risks Related to the Regulatory Environment in which AxoGen Operates

AxoGen’s Avance ^® Nerve Graft product is currently allowed to be sold 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 has determined that the Avance ^® Nerve Graft is a biologic product that will be reviewed and regulated by the Center for Biologics Evaluation and Research (“CBER”) under the biologics licensing provision of the Public Health Service Act (the “PHS Act”). AxoGen has been working with CBER on developing the design for a phase 3 clinical trial that would support a premarket submission for Avance ^® . The FDA has issued a letter stating the agency’s intent to exercise enforcement discretion with respect to the introduction or delivery for introduction into interstate commerce of Avance ^® pursuant to section 361 of the PHS Act and 21 CFR Part 1271 Human Cell & Tissue Products (“HCT/P”) controls provided that AxoGen meets certain conditions outlined in a transition plan. AxoGen has continued to communicate with the FDA regarding clinical trial design, preclinical studies, Chemistry, Manufacturing and Control (“CMC”) and compliance with the cGMP requirements and will have to make significant efforts to continue to meet the requirements asked of AxoGen by the FDA. If AxoGen is unable to agree, or unable to meet the standards required of it by the FDA, AxoGen’s Biologics License Application (“BLA”) may not be approved or approval may be delayed and/or may add significant costs to the ongoing production of Avance ^® .

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 HCT/P controls. Such action was based on AxoGen’s good faith belief that the Avance ^® Nerve Graft was a 361 HCT/P tissue product. AxoGen was in communication with the FDA starting in 2008 concerning the regulatory status of the Avance ^® Nerve Graft. These communications included an April 2009 letter from FDA’s “Tissue Reference Group” stating its belief that Avance ^® was a biologic product subject to regulation under Section 351 of the PHS Act by CBER. AxoGen disagreed with this recommendation and submitted a Request For Designation (“RFD”) to the FDA’s Office of Combination Products (“OCP”) to resolve the regulatory identity of the Avance ^® Nerve Graft. In April 2010, in response to the RFD submitted by AxoGen, the FDA determined that the Avance ^® Nerve Graft was a biologic product that would be reviewed and regulated by CBER under the biologics licensing provision of the PHS Act.

AxoGen disagreed with the FDA determination that the Avance ^® Nerve Graft is a biologic product and took the position that, if FDA could not agree to regulating it as a 361 HCT/P, the product’s regulatory status was that of a medical device. In April 2010, AxoGen filed a “Request for Supervisory Review” of the Office of Combination Products’s (“OCP”) designation for the Avance ^® Nerve Graft. In its request, AxoGen stated that the information that was previously submitted in the RFD to support the recommendation that the Avance ^® Nerve Graft be regulated as a device should be reconsidered and the OCP determination should be reversed. AxoGen met with the FDA in August 2010 to present and discuss the Request for Supervisory Review. The FDA responded to the Request for Supervisory Review in July 2011 and affirmed the OCP’s determination that the Avance ^® Nerve Graft was a biologic product that would be reviewed and regulated by CBER under the biologics licensing provision of the PHS Act. AxoGen has not yet responded to the agency’s decision on AxoGen’s Request for Supervisory Review.

AxoGen has been working with CBER on developing the design for a phase 3 clinical trial that would support a premarket submission for the Avance ^® Nerve Graft. AxoGen met with CBER in July 2010 and, in the time period between July 2010 and November 2010, provided information to CBER that resulted in the FDA’s

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issuing a letter stating the agency’s intent to exercise enforcement discretion with respect to the introduction or delivery for introduction into interstate commerce of the Avance ^® Nerve Graft provided that:

The FDA will end the period of enforcement discretion upon final FDA action on the premarket submission or if the FDA finds that AxoGen does not meet the conditions for the transition plan.

AxoGen is continuing to communicate with CBER on clinical trial design and CMC for the Avance ^® Nerve Graft. In accordance with the transition plan, until FDA takes final action on the Avance ^® Nerve Graft premarket submission, AxoGen is able to continue to provide the Avance ^® Nerve Graft to hospitals. In the event that the FDA or CBER changed its position regarding its use of enforcement discretion to permit AxoGen to continue to sell the Avance ^® Nerve Graft product in accordance with the transition plan, AxoGen would no longer be able to sell the Avance ^® Nerve Graft product which would have a material adverse effect on AxoGen’s operations and financial viability. In addition, if AxoGen fails to comply with applicable regulatory requirements or fails to comply with the ongoing requirements of the premarket submission to become a biologic product, the FDA could deny approval of the premarket application, or impose civil penalties, including fines, product seizures or product recalls and, in extreme cases, criminal sanctions.

AxoGen’s AxoGuard ^® 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 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 ^® product line. Cook Biotech has obtained a 510(k) marketing clearance from the FDA for porcine small intestine submucosa for the repair of peripheral nerve discontinuities where gap closure can be achieved by flexion of the extremity. If AxoGen or Cook Biotech fails to comply with applicable regulatory requirements the FDA could deny marketing clearance or approval, withdraw approvals, or impose civil penalties, including fines, product seizures or product recalls and, in extreme cases, criminal sanctions.

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. Its products are subject to regulation by the FDA in the U.S., the Center for Medicare Services of the U.S. Department of Health and Human Services and other federal governmental agencies and, in some jurisdictions, by state and foreign governmental authorities. The FDA regulates the development, distribution, manufacturing, labeling, and record-keeping procedures for human tissue for transplantation such as that of AxoGen’s Avance ^® Nerve Graft product. The FDA also regulates medical devices, such as the AxoGuard ^® products. The process of obtaining marketing clearance from the FDA for new products and new applications for existing products 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 products or enhancements or that FDA review will not involve delays that would adversely affect AxoGen’s ability to market such products or enhancements. In addition, there can be no assurance that AxoGen products or enhancements will not be subject to a lengthy and expensive approval process with the FDA.

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It is possible that if regulatory approvals to market a product are obtained from the FDA, the approvals may contain limitations on the indicated uses of such product. 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. Also, the FDA could limit or prevent the distribution of AxoGen products and 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 specification, 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 extreme 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 they are deemed to have engaged in off-label promotion. AxoGen is seeking FDA approval for 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 on the promotion of a medical device for an indication that has not been approved or cleared by the FDA, or an off-label use. The FDA does not restrict or regulate a physician’s use of a medical device 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 communications that may be made about AxoGen’s products and if the FDA determines that its promotional or training materials constitute the unlawful promotion of an off-label use, it could request that AxoGen modify its training or promotional materials or subject it to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, civil money penalties, criminal fines and penalties, and exclusion from participation in federal health programs. 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. 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 or cleared by the FDA may not effectively treat such conditions, which 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.

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 product in the event that it determines that due to material deficiencies or defects that use of the product poses an unacceptable risk to health. In addition, manufacturers may, on their own initiative, recall a product to remove or correct a deficiency or to remedy a violation of the Federal Food, Drug, and Cosmetic Act that may pose a risk to health. A government-mandated or a voluntary recall could occur as a result of an unacceptable risk to health, failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls, corrections or removals of 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 removals involving some of its products in the future that it

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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 relating to 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. Under the FDA’s medical device reporting regulations, AxoGen is required to report to the FDA any incident in which a device it markets may have caused or contributed to a death or serious injury, or in which its device (or a similar device marketed by AxoGen) malfunctioned and, if the malfunction were to recur, it would be likely to cause or contribute to death or serious injury. Under the biologics regulations, a deviation from current good manufacturing practices or an unexpected or unforeseeable event that may affect the safety, purity, or potency of the product must be reported. Under the tissue regulations, AxoGen must report certain adverse reactions involving a communicable disease related to an HCT/P that AxoGen made available for distribution. 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. On August 1, 2011, AxoGen received a report of one incident in which a patient who received an Avance ^® Nerve Graft experienced an infection. This incident is still under investigation and, depending on the outcome of the investigation, AxoGen may be required to submit a Medical Device Report or a tissue adverse reaction report to the FDA. 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.

AxoGen’s manufacturing operations must comply with FDA and other governmental requirements.

AxoGen’s manufacturing 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. AxoGen is required to comply with the FDA’s Quality System Regulation and Good Tissue Practices, which cover the methods used in, and the facilities and controls used for, the design, manufacture, quality assurance, labeling, packaging, sterilization, storage, shipping, installation and servicing of its products. The FDA enforces the Quality System Regulation and Good Tissue Practices through periodic announced and unannounced inspections of manufacturing facilities. The failure by AxoGen or one of its suppliers to comply with applicable statutes and regulations administered by the FDA and other regulatory authorities, or the failure to timely and adequately respond to any adverse inspectional observations, warning letter or product safety issues, could result in, among other things, any of the following enforcement actions:

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 sales and its ability to generate profits. Furthermore,

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AxoGen key material suppliers, licensors and processor 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.

Sales of AxoGen products outside the U.S. are subject to foreign regulatory requirements that vary from country to country. In the European Union (the “EU”), regulations, if applicable, differ from one EU 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 EU, 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 EU 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 EU 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.

Clinical trials can be long, expensive and 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 pursuant to requirements of the FDA to obtain a biologics license for the product. This trial 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, and if it does not generate positive results, could result in AxoGen not being able to continue to provide its Avance ^® Nerve Graft product to hospitals.

The commencement or completion of the AxoGen clinical trial may be delayed or halted for numerous reasons, including, but not limited to, a regulatory body placing clinical trials on hold, patients not enrolling in clinical trials at the rate AxoGen expects, patients experiencing adverse side effects, third party contractors failing to perform in accordance with AxoGen’s anticipated schedule or consistent with good clinical practices, or inconclusive or negative interim trial results. AxoGen’s costs will increase if it has material delays in its clinical trial or if it needs to perform an additional or a larger clinical trial than planned. If this occurs, AxoGen’s financial results and the commercial prospects for its products will be harmed.

If AxoGen is unable to successfully complete the non-clinical studies or clinical trials necessary to support its BLA, its ability to continue to sell its Avance ^® Nerve Graft product will be limited. Product development, including non-clinical studies and clinical trials, is a long, expensive and uncertain process and is subject to delays and failure at any stage. Furthermore, the data obtained from any trial may be inadequate to support approval of a BLA or supplement. The commencement or completion of any of AxoGen’s clinical trials may be delayed or halted, or the data it obtains may be inadequate to support approval of a BLA or supplement, for numerous reasons, including, but not limited to, the following:

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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 it to pursue additional non-clinical studies or clinical trials, or not approve AxoGen’s BLA or supplement, which could further delay the BLA of AxoGen’s products. If AxoGen is unable to demonstrate the safety and efficacy of its products through its clinical trials, it will be unable to obtain regulatory approval to market its products.

AxoGen has continued to communicate with FDA regarding clinical trial design, preclinical studies and CMC for the Avance ^® Nerve Graft, and will have to make significant efforts to continue to meet the requirements asked of AxoGen by the FDA for each of these components to begin its clinical study and receive its BLA. If AxoGen is unable to agree, or unable to meet the standards required of it by the FDA, regarding preclinical studies, clinical studies and CMC, AxoGen’s BLA may not be approved, or approval may be delayed and/or may add significant costs to the ongoing production of Avance ^® Nerve Graft.

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 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 (“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 current good manufacturing practice 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, 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.

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U.S. governmental regulation could restrict the use of AxoGen’s Avance ^® Nerve Graft product, restrict AxoGen’s procurement of tissue or increase costs.

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/Ps. The first requires that companies that produce and distribute HCT/Ps register with the FDA. The second 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 rule governs the processing and distribution of the tissues and is often referred to as the Current Good Tissue Practices (“cGTP”) rule. The cGTP rule covers all stages of allograft processing, from procurement of tissue to distribution of final allografts. Together, they 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 action, which affects the conduct of its business. See “Certain Information Concerning AxoGen—U.S. Government Regulation Overview” on page 110. In addition, these regulations can increase the cost of tissue recovery activities. Additionally, the Avance ^® Nerve Graft is subjected to certain state and local regulations, as well as compliance to the standards of the tissue bank industry’s accrediting organization, the American Association of Tissue Banks (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 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 is 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 it 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 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 others, will be particularly relevant to AxoGen’s business. Most states do not currently have tissue banking regulations. However, incidents of allograft related infections in the industry may stimulate the development of regulation in other states. It is possible that others 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.

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Healthcare policy changes, including the recently enacted legislation to reform the U.S. healthcare system, 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, which substantially changes the way healthcare is financed by both governmental and private insurers, encourages improvements in the quality of healthcare items and services, and significantly impacts the biotechnology and medical device industries. This Act includes, among other things, the following measures:

These provisions could meaningfully change the way healthcare is delivered and financed, and could have a material adverse impact on numerous aspects of AxoGen’s business. 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 to limit the growth of healthcare costs, 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 and other third-party payors could reduce the amount of approved reimbursement for AxoGen’s products or deny coverage altogether. 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 Intellectual Property 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 intellectual property (“IP”), maintain trade secret protection, and conduct operations without violating or infringing on the IP rights of third parties. See “Certain Information Concerning AxoGen—Intellectual Property” on page 108. 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, trade secrecy agreements or similar agreements intended to protect unpatented technology will

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provide the intended protection. 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 could have a materially adverse effect on its business and operating results and its ability to successfully compete in its industry.

Even if AxoGen is granted patents by government authorities or obtains the right to utilize them through licensing, AxoGen’s patents may not provide significant protection, competitive advantage or commercial benefit. The validity and enforceability of patents issued to medical technology companies has proven highly uncertain. For example, legal considerations surrounding the validity of patents in the fields of medical technology are in transition, and AxoGen cannot assure you that the historical legal standards surrounding questions of validity will continue to be applied or that current defenses relating to issued patents in these fields will be sufficient in the future. In addition, AxoGen cannot assure you as to the degree and range of protections any of its patents, if issued, may afford AxoGen or whether patents will even be issued. For example, patents that may issue to AxoGen may be subjected to further governmental review that may ultimately result in the reduction of their scope of protection, and pending patent applications may have their requested breadth of protection significantly limited before being issued, if issued at all. Further, since publication of discoveries in scientific or patent literature often lags behind actual discoveries, AxoGen cannot assure you that it was the first to invent of inventions covered by AxoGen’s pending patent applications, or that it was the first to file patent applications for these inventions.

Many medical technology companies and university and research institutions have filed patent applications or have received patents in AxoGen’s area of product development. Many of these entities’ patent applications, patents and other IP rights could prevent AxoGen from obtaining patents or could call into question the validity of any of its patents, if issued, or could otherwise adversely affect the ability to develop, manufacture or commercialize products. If use of technology incorporated into or used to produce AxoGen’s products is challenged, or if a conflicting patent issued to others is upheld in the courts, or if a conflicting patent application filed by others is issued as a patent and is upheld, AxoGen may be unable to market one or more of its products, or AxoGen may be required to obtain a license to market those products. To contend with these possibilities, AxoGen may have to enter into license agreements in the future with third parties for technologies that may be useful or necessary for the manufacture or commercialization of some of its products. In addition, AxoGen is routinely in discussions with academic and commercial entities that hold patents on technology or processes that AxoGen may find necessary in order to engage in some of its activities. AxoGen cannot, however, assure you that these licenses, or any others that may be required to market its products, will be available on commercially reasonable terms, if at all, or that AxoGen will be able to develop alternative technologies if it cannot obtain required licenses.

To protect AxoGen’s rights to any of its patents, if issued, and proprietary information, AxoGen may need to litigate against infringing third parties, or otherwise avail itself of the courts or participate in administrative proceedings to determine the scope and validity of those patents or other proprietary rights. These types of proceedings are often costly and could be very time-consuming to AxoGen, and AxoGen cannot assure you that the deciding authorities will rule in its favor. An unfavorable decision could allow third parties to use AxoGen’s technology without being required to pay AxoGen licensing fees or may compel AxoGen to license needed technologies to avoid infringing third-party patent and proprietary rights. Although AxoGen believes that it would have valid defenses to allegations that AxoGen’s current products, production methods and other activities infringe the valid and enforceable IP rights of any third parties, AxoGen cannot be certain that a third party will not challenge AxoGen’s position in the future. Even if some of these activities were found to infringe a third party’s patent rights, AxoGen may be found to be exempt from infringement under 35 U.S.C. § 271(e) to the extent that these are found to be pre-commercialization activities related to AxoGen seeking regulatory approval for a product candidate. The scope of protection under 35 U.S.C. § 271(e), however, is uncertain and AxoGen cannot assure you that any defense under 35 U.S.C. § 271(e) would be successful. Further, the defense under 35 U.S.C. § 271(e) is only available for pre-commercialization activities, and could not be used as a defense for sale and marketing of any of AxoGen’s products.

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Third parties could bring legal actions against AxoGen claiming it infringes their patents or proprietary rights, and seek monetary damages and/or enjoin clinical testing, manufacturing and marketing of the affected product or products. 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 upon which experts may reasonably disagree.

AxoGen may not be able to obtain or protect its proprietary rights relating to its products without resorting to costly and time consuming litigation.

AxoGen may not be able to obtain, maintain and protect certain proprietary rights necessary for its products or future products. Commercial success is dependent in part on obtaining and maintaining patent protection on AxoGen’s products and successfully defending these patents against third-party challenges. AxoGen’s ability to continue sales of its products will also depend in part on the patent positions of third parties, including those of any potential competitors. The patent positions of regenerative medicine companies can be highly uncertain and involve complex legal and factual questions. Accordingly, AxoGen cannot predict with certainty the scope and breadth of patent claims that may be afforded to other companies’ patents. AxoGen could incur substantial costs in litigation if it is required to defend against patent suits brought by third parties, or if they initiate suits to protect their patent rights.

In addition to the risks involved with patent protection, AxoGen also faces the risk that potential competitors could infringe AxoGen’s trademarks.

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:

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AxoGen’s success depends on its ability to avoid infringing on the intellectual property rights of third parties which could expose it to litigation or commercially unfavorable licensing arrangements.

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. 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 research or develop AxoGen products, without authorization. Any legal action against AxoGen collaborators, licensors or it claiming damages and/or seeking to stop 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 AxoGen 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.

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 IP. While AxoGen believes that it owns 100% of 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, AxoGen cannot guarantee that a third-party will not, at some time, assert a claim or an interest in any of such patents or IP. AxoGen is presently unaware of any claims or assertions by third-parties with respect to AxoGen’s patents or IP. A successful challenge or claim by a third party to AxoGen patents or IP could have a significant adverse effect on its prospects.

Although AxoGen has confidentiality agreements in place, these agreements may not adequately prevent disclosure of proprietary information.

AxoGen’s policy is to execute confidentiality agreements with its employees and consultants upon the commencement of their employment or consulting arrangement with AxoGen. These agreements generally require that all confidential information developed by an individual or to which the individual is exposed during the course of his or her relationship with AxoGen must be kept confidential even after the individual has left its employment. These agreements also generally provide that inventions conceived by the individual in the course of rendering services to AxoGen is its exclusive property. AxoGen cannot be sure that these agreements will provide meaningful protection of its proprietary and other confidential information. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom AxoGen employees or consultants have prior employment or consulting relationships. AxoGen may be forced to engage in costly and time-consuming litigation to determine the scope of and to enforce its proprietary rights. Even if successful, any litigation could divert AxoGen’s management’s attention from its business.

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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 the University of Florida Research Foundation (the “UFRF”) and the University of Texas at Austin (“UTA”) where the original technologies are purported to be invented. Though AxoGen makes an effort to follow these agreements strictly, a disagreement between AxoGen and either party could have negative impacts on its ability to operate its business effectively. In addition, AxoGen could learn that the technologies it has licensed from UFRF and UTA do not perform as purported, are not efficacious, or are not the property of UFRF or UTA, or some similar problem with the license, any of which would have an immediate and negative impact on AxoGen’s business.

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