Our ability to realize the anticipated business opportunities, growth prospects, cost savings, synergies, and other benefits of ~~the JOTEC acquisition~~these and other transactions depends on a number of factors ~~including:~~

~~The continued growth of the global market for stent grafts used in endovascular and open repair of aortic disease;~~

~~Our~~including our ability ~~to leverage~~to:

•Leverage our global infrastructure ~~including~~to sell and cross-market the acquired products;

•Drive adoption of the NEXUS Products and AMDS in the ~~markets in which JOTEC is already direct; minimize difficulties~~European and ~~costs associated with transitioning away from distributors in key markets; and accelerate our ability to go direct in Europe in developed~~other markets, ~~with the CryoLife and JOTEC product portfolios;~~

~~Our ability to foster cross-selling opportunities between the CryoLife and JOTEC product portfolios;~~

~~Our ability to bring JOTEC products to the U.S. market;~~

~~Our ability to harness the JOTEC new product pipeline and R&D capabilities to drive long-term growth,~~ including our ability to manage the substantial product training, implant support, and proctoring requirements for NEXUS procedures;

•Bring acquired products to the US market, including our acquired aortic stent grafts;

•Harness the aortic stent graft product pipeline and our research and development capabilities;

•Obtain regulatory approvals in relevant markets, including our ability to timely obtain or maintain CE Mark product certifications for pipeline and current products;

~~Our~~•Execute on development and clinical trial timelines for acquired products;

•Manage global inventories, including our ability to ~~drive gross margin expansion;~~

~~Our ability~~manage inventories for product lines with large numbers of product configurations and manage manufacturing and demand cycles to ~~successfully integrate the JOTEC business with ours, including integrating the combined European sales force;~~

~~Our ability~~avoid excess inventory obsolescence due to ~~compete effectively;~~shelf life expiration, particularly for processed tissues and aortic stent grafts;

~~Our ability to carry,~~•Carry, service, and manage ~~significantly more~~significant debt and repayment obligations; and

~~Our ability to manage~~•Manage the unforeseen risks and uncertainties related to ~~JOTEC’s business.~~these transactions, including any related to intellectual property rights.

Additionally, our ability to realize the anticipated business opportunities, growth prospects, synergies, and other benefits of the Endospan Transaction depends on a number of additional factors including Endospan’s ability to: (a) comply with the Endospan Loan and other debt obligations, and avoid an event of default; (b) successfully commercialize the NEXUS Products, raise capital and drive adoption in markets in and outside of Europe; (c) meet demand for the NEXUS Products; (d) meet quality and regulatory requirements for the NEXUS Products; (e) manage any intellectual property risks and uncertainties associated with the NEXUS Products; (f) obtain FDA approval of the NEXUS Products; (g) remain a going concern; and (h) develop the NEXUS Products, and other product improvements to meet competitive threats and physician demand. As an example of this risk, the forecasted operating results related to NEXUS decreased, resulting in an impairment to the carrying value of the Endospan Option, and a full write-down of the value of the Endospan Loan, reflecting decreased expectations with respect to the anticipated benefits of the Endospan Transaction.

Many of these factors are outside of our control and any one of them could result in increased costs, decreased revenues, and diversion of management’s time and ~~energy, which could materially, adversely impact our business, financial condition, profitability, and cash flows. These~~energy. The benefits of these transactions may not be achieved within the anticipated time frame or at all. Any of these factors could negatively impact our earnings per share, decrease or delay the expected accretive effect of the ~~acquisition,~~transaction, and negatively impact the price of our common stock. In addition, if we fail to realize the anticipated benefits of ~~the acquisition,~~a transaction, we could experience an interruption or loss of momentum in our existing business ~~activities, which~~activities.

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We may not realize all the anticipated benefits of our corporate rebranding and it may result in unanticipated disruptions to our on-going business.

In order to reflect our evolution to focus on providing innovative technologies to surgeons who treat patients with aortic disease, we changed our name to Artivion, Inc., effective January 18, 2022 (the “Corporate Rebrand”). The Corporate Rebrand also involved the adoption of a new ticker symbol on the New York Stock Exchange, “AORT”. We may face unanticipated disruptions to our business arising from the Corporate Rebrand, and it may expose us to additional risks, including:

•Disruptions or unanticipated delays accessing certain markets or segments due to delays or other issues with regulatory approvals, clinical trials, or other updates arising from or related to the Corporate Rebrand;

•Confusion within the marketplace, particularly with multiple points of contact in our downstream product flow involving purchasing and accounts payable departments and end users;

•Intellectual property risks associated with the adoption of a new corporate identity and trade dress; and

•Loss of brand equity associated with our legacy brands, including our CryoLife and JOTEC brands that will become less prominent over time.

The Corporate Rebrand involved significant financial and resource investment and will continue to do so as we complete our global brand transitions over the coming years. The anticipated benefits of the Corporate Rebrand may not be achieved within the anticipated timeframe, without additional near or long-term investment, or at all. Any of these factors could negatively impact our revenues, earnings per share, decrease or delay the expected accretive effect of the Corporate Rebrand, and negatively impact the price of our common stock.

Significant disruptions of information technology systems or breaches of information security systems could adversely affect our ~~revenues,~~business.

We rely upon a combination of sophisticated information technology systems as well as traditional recordkeeping to operate our business. In the ordinary course of business, we collect, store, and transmit confidential information (including, but not limited to, information about our business, financial ~~condition, profitability,~~information, personnel data, intellectual property, and, ~~cash flows.~~

in some instances, patient data). Our ~~indebtedness~~information technology and information security systems and records are potentially vulnerable to security breaches, service interruptions, data loss, or malicious attacks resulting from inadvertent or intentional actions by our employees, vendors, or other third parties. In addition, as a result of changes implemented during the COVID-19 pandemic, we now have remote work arrangements for some employees, and those employees may use outside technology and systems that are vulnerable to security breaches, service interruptions, data loss or malicious attacks, including by third parties.

While we have invested, and continue to invest, in our information technology and information security systems and employee information security training, there can be no assurance that our efforts will prevent all security breaches, service interruptions, or data losses, particularly in light of rapid improvements in information processing technology accompanying developments in, among other areas, artificial intelligence platforms. We have limited cyber-insurance coverage that may not cover all possible events, and this insurance is subject to deductibles and coverage limitations. Any security breaches, service interruptions, or data losses could adversely affect our business operations or result in the loss of critical or sensitive confidential information or intellectual property, or in financial, legal, business, and reputational harm to us or allow third parties to gain material, inside information that they may use to trade in our securities.

Industry Risks

Our products and tissues are highly regulated and subject to significant quality and regulatory risks.

The commercialization of medical devices and processing and distribution of human tissues are highly complex and subject to significant global quality and regulatory risks and as such, we face the following risks:

•Our products and tissues allegedly have caused, and may in the future cause, patient injury, which has exposed, and could in the future expose, us to liability claims that could lead to additional regulatory scrutiny;

•Our manufacturing and tissue processing operations are subject to regulatory scrutiny, inspections and enforcement actions, and regulatory agencies could require us to change or modify our operations or take other action, such as issuing product recalls or holds;

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•Regulatory agencies could reclassify, re-evaluate, or suspend our clearances or approvals, or fail to, or decline to, issue or reissue our clearances or approvals that are necessary to sell our products and distribute tissues;
•Regulatory and quality requirements are subject to change, which could adversely affect our ability to ~~raise additional capital~~sell our products or distribute tissues; and
•Adverse publicity associated with our products, processed tissues, or our industry could lead to ~~fund~~a decreased use of our ~~operations~~products or tissues, increased regulatory scrutiny, or product or tissue processing liability claims.

As an example of these risks, on May 25, 2017, the European Union adopted new regulations governing medical devices (the MDR), which were to be fully implemented on May 26, 2021. The MDR places stricter requirements on manufacturers and ~~limit~~European Notified Bodies regarding, among other things, product classifications and pre- and post-market clinical studies for product clearances and approvals which could result in product reclassifications or the imposition of other regulatory requirements that could delay, impede, or prevent our ability to ~~react to changes~~commercialize existing, improved, or new products in the ~~economy~~European Economic Area and other markets that require CE Marking. Additionally, to the extent the MDR places stricter requirements on manufacturers of custom-made devices, those new requirements could delay, impede, or otherwise impact the availability of our ~~industry.~~

E-xtra Design Engineering services and custom-made products. COVID-19 significantly impacted the predictability and timelines associated with the MDR transition. Most recently, the European Parliament extended the MDR transition period under Regulation (EU) 2023/607 but it is still unclear whether this extension will be able to mitigate the challenges posed by the transition to the MDR. In order for devices to qualify for the extended MDR transition period, manufacturers must submit a formal application to the relevant notified body by May 26, 2024, and the applicant and notified body must enter into a signed written agreement no later than September 26, 2024. If we are unable to obtain agreements covering our products by that time, the presently applicable extensions will expire and impact our ability to market those devices.

Since the implementation of the MDR, Notified Bodies must review any proposed changes to determine if they require evaluation under the MDR or if they can still be evaluated under the currently held Medical Device Directive (“MDD”) certifications. Our inability to obtain certifications for changes under the transitional provisions of the MDR’s Article 120 or successfully submit proposed changes requiring MDR evaluation will delay implementation of those changes which could adversely impact our ability to obtain or renew certifications, clearances, or approvals for our products.

Additionally, as MDD-based CE Marks expire, recertification must be obtained under the MDR. Industry-wide, companies are experiencing delays in obtaining new and updated certifications under the MDR as Notified Bodies struggle to recover from COVID-19, deal with smaller workforces, and handle the volume of work required to transition tens of thousands of currently-marketed devices from the MDD to the MDR. As one such example, our MDD-based CE Mark for Chord-X expired in September 2022, which will impact our ability to supply certain territories once our saleable inventory is depleted. If Notified Bodies continue to struggle to meet demand and timely process submissions and recertifications, we may face additional disruptions associated with the MDR transition.

As another example of this risk, our CE Mark for BioGlue expired in December 2021. Due to delays renewing this CE Mark and transitioning BioGlue to a new Notified Body, our ability to supply certain markets with BioGlue was impacted. Although we were able to mitigate most of the impact by obtaining derogations in the majority of relevant territories, we may face similar risks and market disruptions related to the MDR transition which continues to be in a state of change.

Finally, we anticipate additional regulatory impact as a result of Brexit. The UK Medicines and Healthcare Products Regulatory Agency has announced that CE Marking will continue to be recognized in the UK and certificates issued by EU-recognized Notified Bodies will continue to be valid in the UK market until the certificates expire or the applicable transition period expires (currently June 30, 2028 at the earliest). Upon expiration, all devices marketed in the UK will require UK Conformity Assessed Marks certified by a UK Approved Body (the re-designation of the UK Notified Body).

In 2019 our Notified Body in the UK, LRQA, informed us that it would no longer provide Notified Body services for medical devices effective September 2019. The governing German competent authority, the Regierungspraesidium-Tubingen, granted us an extended grace period until December 31, 2021 to transfer LRQA-issued certifications for BioGlue and PhotoFix to a new Notified Body. Although our BioGlue CE Mark has been successfully transferred to our new Notified Body, DEKRA, we are still in the process of transferring PhotoFix to DEKRA. While progress has been made, failure to timely complete the transfer or any other delays in the MDR transition, may have a material, adverse effect on our ability to supply PhotoFix in affected jurisdictions, have a material, adverse impact on our business, and may also impact our Medical Device Single Audit Program (“MDSAP”) certifications. Failure to timely obtain new MDSAP certifications following their expiration may impact our ability to distribute covered products in Australia, Brazil, Canada, and Japan.

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Reclassification by the FDA of CryoValve SG pulmonary heart valve (“CryoValve SGPV”) may make it commercially infeasible to continue processing the CryoValve SGPV.

Beginning in December 2019 and most recently in the fall 2023, the FDA indicted that it was planning to issue a proposed rule for reclassification of more than minimally manipulated (“MMM”) allograft heart valves to Class III medical devices, which could include our CryoValve SGPV. Following any comment period and subsequent publication of a final rule, should the CryoValve SGPV be determined to be MMM or classified as a Class III device, we currently expect to have approximately thirty months to submit a PMA application, after which the FDA will determine if, and for how long, we may continue to provide these tissues to customers during its review of the PMA application. Although this proposed rule change has, to our knowledge, remained on the HHS's unified regulatory agenda since 2019, no final rule has published at this time.

If the FDA ultimately classifies our CryoValve SGPV as a Class III medical device, and if there are delays in obtaining the PMA, if we are unsuccessful in obtaining the PMA, or if the costs associated with these activities are significant, we could decide that the requirements for continued processing of the CryoValve SGPV are too onerous, leading us to discontinue distribution of these tissues.

We may not be successful in obtaining clinical results or regulatory clearances/approvals for new and existing products and services, and our approved products and services may not achieve market acceptance.

Our growth and profitability depends in part upon our ability to develop, and successfully introduce, new products and services, or expand upon existing indications, clearances, and approvals, requiring that we invest significant time and resources to obtain new regulatory clearances/approvals, including investment into pre- and post-market clinical studies. Although we believe certain products and services in our portfolio or under development may be effective in a particular application, we cannot be certain until we successfully execute on relevant clinical trials, and the results we obtain from pre- and post-market clinical studies may be insufficient for us to obtain or maintain any required regulatory approvals or clearances.

We are currently seeking regulatory approval for BioGlue in China, where the Chinese regulatory body has made additional requests, and expressed several concerns, related to the application. We have obtained an extension of time until February 2024 in which to file an updated submission for BioGlue in China. If the costs to file an updated submission are prohibitive, or we cannot obtain approval following the review of the updated submission or the costs to do so are prohibitive, we ultimately may be unable to sell BioGlue in China. Similarly, in November 2023 we announced that we were no longer pursuing a labeling change for our On-X mitral valve in connection with our PROACT Mitral trial due to additional investments that would be required to do so.

As an example of this risk, in September 2022 we halted the PROACT Xa clinical trial based on the recommendation of the trial’s Data and Safety Monitoring Board (“DSMB”) due to insufficient evidence to support non-inferiority of apixaban to warfarin for valve thrombosis and thromboembolism. The DSMB found that continuing the trial was unlikely to achieve the primary endpoint while possibly exposing patients to increased risk.

Each of our trials, studies, and approvals is subject to the risks outlined herein.

We cannot give assurance that regulatory agencies will clear or approve these products and services or indications, or any new products and services or new indications, on a timely basis, if ever, or that the products and services or new indications will adequately meet the requirements of the market or achieve market acceptance. Pre- and post-market clinical studies may also be delayed or halted due to many factors beyond our control.

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If we are unable to successfully complete the development of a product, service, or application, or if we determine for any reason not to complete development or obtain regulatory approval or clearance of any product, service, or application, particularly in instances when we have expended significant capital, this could materially, adversely affect our financial performance. Research and development efforts are time consuming and expensive, and we cannot be certain that these efforts will lead to commercially successful products or services. Halting R&D efforts and clinical trials prematurely may lead to accelerated or unanticipated wind down costs. Even the successful commercialization of a new product or service in the medical industry can be characterized by slow growth and high costs associated with marketing, under-utilized production capacity, and continuing research and development and education costs, among other things. The introduction of new products or services may require significant physician training or years of clinical evidence in order to gain acceptance in the medical community.

Increased regulatory enforcement activities and private litigation activity relating to processes and materials used in our industry could have a material, adverse impact on us.

Some of our products, including certain On-X products, are sterilized using EtO. Although we have a small-scale EtO facility in Austin, Texas, we rely primarily on third-party large-scale EtO facilities to sterilize our products. In addition, some of our suppliers use, or rely upon third parties to use, EtO to sterilize some of our product components. Concerns about the release of EtO into the environment at unsafe levels have led to increased activism and lobbying as well as various regulatory enforcement activities against EtO facilities, including closures and temporary closures, lawsuits against EtO service providers, and proposals increasing regulations related to EtO, including any required reduction in EtO concentration levels. The number of EtO facilities in the US is limited, and any permanent or temporary closures or disruption to their operations for any reason could delay, impede, or prevent our ability to commercialize our products.

The per-and polyfluoroalkyl substances (“PFAS”) are used in a wide variety of consumer and industrial products, including medical devices and product packaging. In October 2023, the Environmental Protection Agency (the “EPA”) released final rules requiring companies to report the manufacture or import of PFAS-containing products. In addition, numerous states have instituted bans on PFAS-containing products and reporting obligations. These requirements impose a high compliance burden, and further regulation of PFAS-containing products is expected. Although we have yet to experience any material impact from this activity or identify any of our products materially impacted by PFAS-related regulation, the ultimate impact and associated cost of current and future ~~levels~~rulemaking cannot be predicted at this time.

In addition, any litigation, regulatory enforcement, or government regulation regarding the use of ~~indebtedness could:~~

EtO could result in financial, legal, business, and reputational harm to us.

~~Limit~~

We may be subject to fines, penalties, and other sanctions if we are deemed to be promoting the use of our products for unapproved, or off-label, uses.

Our business and future growth depend on the continued use of our products for approved uses. Generally, regulators contend that, unless our products are approved or cleared by a regulatory body for alternative uses, we may not make claims about the safety or effectiveness of our products or promote them for such uses. Such limitations present a risk that law enforcement could allege that the nature and scope of our sales, marketing, or support activities, though designed to comply with all regulatory requirements, constitute unlawful promotion of our products for an unapproved use. We also face the risk that such authorities might pursue enforcement based on past activities that we discontinued or changed. Investigations concerning the promotion of unapproved uses and related issues are typically expensive, disruptive, and burdensome and generate negative publicity. If our promotional activities are found to be in violation of the law, we may face significant fines and penalties and may be required to substantially change our sales, promotion, grant, and educational activities. In addition, we or our officers could be excluded from participation in government healthcare programs such as Medicare and Medicaid.

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Healthcare policy changes may have a material, adverse effect on us.

In response to perceived increases in healthcare costs in recent years, there have been, and continue to be, proposals by the governmental authorities, third-party payors, and elected office holders and candidates to impact public health, control healthcare costs and, more generally, to reform the healthcare systems. Additional uncertainty is anticipated as debates about healthcare and public health continue in light of the COVID-19 pandemic which may have an impact on US law relating to the healthcare industry. Many US healthcare laws, such as the Affordable Care Act, are complex, subject to change, and dependent on interpretation and enforcement decisions from government agencies with broad discretion. The application of these laws to us, our customers, or the specific services and relationships we have with our customers is not always clear. Our failure to anticipate accurately any changes to, or the repeal or invalidation of all or part of the Affordable Care Act and similar or future laws and regulations, or our failure to comply with them, could create liability for us, result in adverse publicity and negatively affect our business, results of operations, and financial condition.

Further, the growth of our business, results of operations and financial condition rely, in part, on customers in the healthcare industry that receive substantial revenues from governmental and other third-party payer programs. A reduction or less than expected increase in government funding for these programs or a change in reimbursement or allocation methodologies, or a change in reimbursement related to products designated as “breakthrough devices” by the FDA, could negatively affect our customers’ businesses and, in turn, negatively impact our business, results of operations and financial condition. Any changes that lower reimbursement for our products or reduce medical procedure volumes, could adversely affect our business and profitability.

Legal, Quality, and Regulatory Risks

As a medical device manufacturer and tissue services provider we are exposed to risk of product liability claims and our existing insurance coverage may be insufficient, or we may be unable to obtain insurance in the future, to cover any resulting liability.

Our products and processed tissues allegedly have caused, and may in the future cause, injury or result in other serious complications that may result in product or other liability claims from our customers or their patients. If our products are defectively designed, manufactured, or labeled, or contain inadequate warnings, defective components, or are misused, or are used contrary to our warnings, instructions, and approved indications, we may become subject to costly litigation that can have unpredictable and sometimes extreme outcomes.

We maintain claims-made insurance policies to mitigate our financial exposure to product and tissue processing liability and securities, claims, among others, that are reported to the insurance carrier while the policy is in effect. These policies do not include coverage for punitive damages. Although we have insurance for product and tissue processing liabilities, securities, property, and general liabilities, if we are unsuccessful in arranging cost-effective acceptable resolutions of claims, it is possible that our insurance program may not be adequate to cover any or all possible claims or losses, including losses arising out of natural disasters or catastrophic circumstances. Any significant claim could result in an increase in our insurance rates or jeopardize our ability to ~~borrow money for our working capital, capital expenditures, development projects, strategic initiatives,~~secure coverage on reasonable terms, if at all.

Any securities or ~~other purposes;~~

~~Require us~~product liability/tissue processing claim, even a meritless or unsuccessful one, could be costly to ~~dedicate a substantial portion~~defend, and result in diversion of our ~~cash flow~~management’s attention from ~~operations to the repayment of our indebtedness, thereby reducing funds available to us for other purposes;~~

~~Limit our flexibility in planning for, or reacting to, changes in our operations or business;~~

~~Make us more vulnerable to downturns in~~ our business, adverse publicity, withdrawal of clinical trial participants, injury to our reputation, or loss of revenue.

We are subject to various US and international bribery, anti-kickback, false claims, privacy, transparency, and similar laws, any breach of which could cause a material, adverse effect on our business, financial condition, and profitability.

Our relationships with physicians, hospitals, and other healthcare providers are subject to scrutiny under various US and international bribery, anti-kickback, false claims, privacy, transparency, and similar laws, often referred to collectively as “healthcare compliance laws.” Healthcare compliance laws are broad, sometimes ambiguous, complex, and subject to change and changing interpretations. The ongoing wars in Ukraine and Gaza, and the ~~economy, or the industry in which~~current and future sanctions imposed on Russia and others as a result may exacerbate these risks. See also Part I, Item 1A, “Risk Factors – Business and Economic Risks - We are subject to a variety of risks due to our international operations and continued global expansion.” Possible sanctions for violation of these healthcare compliance laws include fines, civil and criminal penalties, exclusion from government healthcare programs, and despite our compliance efforts, we ~~operate;~~

~~Restrict us from making strategic acquisitions, introducing new technologies, or exploiting business opportunities; and~~

~~Expose us to~~face the risk of ~~increased interest rates~~an enforcement activity or a finding of a violation of these laws.

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We have entered into consulting and product development agreements with healthcare professionals and healthcare organizations, including some who may order our products or make decisions to use them. We have also adopted the AdvaMed Code of Conduct, the MedTech Europe Code of Ethical Business Practice, and the APACMed Code of Ethical Conduct which govern our relationships with healthcare professionals to bolster our compliance with healthcare compliance laws. While our relationships with healthcare professionals and organizations are structured to comply with such laws and we conduct training sessions on these laws and codes, it is possible that enforcement authorities may view our relationships as ~~most~~prohibited arrangements that must be restructured or for which we would be subject to other significant civil or criminal penalties or debarment. In any event, any enforcement review of or action against us as a result of such review, regardless of outcome, could be costly and time consuming. Additionally, we cannot predict the impact of any changes in or interpretations of these laws, whether these changes will be retroactive or will have effect on a going-forward basis only.

The proliferation of new and expanded data privacy laws, including the General Data Protection Regulation in the European Union, could adversely affect our business.

An increasing number of federal, state, and foreign data privacy laws and regulations, which can be enforced by private parties or governmental entities, have been or are being promulgated and are constantly evolving. These laws and regulations may include new requirements for companies that receive or process an individual’s personal data (including employees), which increases our operating costs and requires significant management time and energy. Many of these laws and regulations, including the European Union’s General Data Protection Regulation (“GDPR”) also include significant penalties for noncompliance. Although our personal data practices, policies, and procedures are intended to comply with GDPR and other data privacy laws and regulations, there can be no assurance that regulatory or enforcement authorities will view our arrangements as being in compliance with applicable laws, or that one or more of our ~~borrowings~~employees or agents will not disregard the rules we have established. Any privacy related government enforcement activities may be costly, result in negative publicity, or subject us to significant penalties.

Some of our products and technologies are atsubject to significant intellectual property risks and uncertainty.

We own trade secrets, patents, patent applications, and licenses relating to our technologies and trademarks and goodwill related to our products and services, which we believe provide us with important competitive advantages. We cannot be certain that we will be able to maintain our trade secrets, that our pending patent applications will issue as patents, or that no one will challenge the validity or enforceability of any intellectual property that we adopt, own, or license. Competitors may independently develop our proprietary technologies or design non-infringing alternatives to patented inventions. We do not control the maintenance, prosecution, enforcement, or strategy for in-licensed intellectual property and as such are dependent in part on the owners of these rights to maintain their viability. Their failure to do so could significantly impair our ability to exploit those technologies. Additionally, our technologies, products, or services could infringe intellectual property rights owned by others, or others could infringe our intellectual property rights.

If we become involved in intellectual property disputes, the costs could be expensive, and if we were to lose or decide to settle, the amounts or effects of the settlement or award by a ~~variable rate of interest.~~tribunal could be costly.

Risks Relating to Our Indebtedness

The agreements governing our indebtedness contain restrictions that limit our flexibility in operating our business.

The agreements currently governing our indebtedness contain, and any instruments governing future indebtedness of ours may contain, covenants that impose significant operating and financial restrictions on us and certain of our subsidiaries, including (subject in each case to certain exceptions) restrictions or prohibitions on our and certain of our subsidiaries’ ability to, among other things:

•Incur or guarantee additional ~~debt;~~debt or create liens on certain assets;

•Pay dividends on or make distributions ~~in respect~~ of our share capital, including repurchasing or redeeming capital stock, or make other restricted payments, including restricted junior payments;

•Enter into agreements that restrict our subsidiaries’ ability to pay dividends to us, repay debt owed to us or our subsidiaries, or make loans or advances to us or our other subsidiaries;

~~Comply~~•Enter into certain transactions with ~~certain financial ratios set forth in the agreement;~~

~~Enter into~~our affiliates including any transaction or merger or consolidation, liquidation,winding-up, or dissolution; convey, sell, lease, exchange, transfer or otherwise dispose of all or any part of our business, assets or property; or sell, assign, or otherwise dispose of any capital stock of any subsidiary;

~~Create liens on certain assets;~~

~~Enter into certain transactions with our affiliates;~~

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•Enter into certain rate swap transactions, basis swaps, credit derivative transactions, and other similar transactions, whether relating to interest rates, commodities, investments, securities, currencies, or any other relevant measure, or transactions of any kind subject to any form of master purchase agreement governed by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement;

•Amend, supplement, waive, or otherwise modify our or our subsidiaries' organizational documents ~~or the organizational documents of a subsidiary~~ in a manner that would be materially adverse to the interests of the ~~lenders,~~lender, or change or amend the terms of documentation regarding junior financing in a manner that would be materially adverse to the interests of the ~~lenders;~~lender;

~~Change the Company’s, or permit a subsidiary~~•Make changes to ~~change its,~~our and our subsidiaries’ fiscal year without notice to the administrative ~~agent under the agreement;~~agent;

•Enter into agreements which restrict our ability to incur liens;

•Engage in any line of business substantially different ~~than~~from that in which we are currently engaged; and

•Make certain investments, including strategic acquisitions or joint ~~ventures~~ventures.

Our indebtedness could adversely affect our ability to raise additional capital to fund operations and limit our ability to react to changes in the economy or our industry.

Our current and future levels of indebtedness could adversely affect our ability to raise additional capital, limit our operational flexibility, and hinder our ability to react to changes in the economy or our industry. It may also limit our ability to borrow money, require us to dedicate substantial portions of our cash flow to repayment, and restrict our ability to invest in business opportunities. Because most of our borrowings are at a ~~result~~variable rate of ~~these covenants,~~interest, we are ~~limited in the manner in which we conduct our business, and we may be unable~~exposed to ~~engage in favorable business activities or finance future operations or capital needs.~~

interest rate fluctuations.

We have pledged substantially all of our ~~U.S.~~US assets as collateral under our existing ~~credit agreement.~~Credit Agreement. If we default on the terms of such credit agreements and the holders of our indebtedness accelerate the repayment of such indebtedness, there can be no assurance that we will have sufficient assets to repay our indebtedness.

A failure to comply with the covenants ~~contained~~ in our existing ~~credit agreement~~Credit Agreement could result in an event of default, ~~under such agreements,~~ which, if not cured or waived, could have a material, adverse effect on our business, financial condition, and profitability. In the event of any such default, ~~under our existing debt agreement,~~ the holders of our indebtedness:

•Will not be required to lend any additional amounts to us; and

•Could elect to declare all indebtedness outstanding, together with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit, if ~~applicable; or~~applicable.

~~Could require us to apply all of our available cash to repay such indebtedness.~~

If we are unable to repay those amounts, the holders of our secured indebtedness could proceed against their secured collateral to seek repayment out of proceeds from the ~~collateral granted to them to secure that indebtedness.~~sale or liquidation of our assets. If ~~the~~our indebtedness ~~under our existing debt agreements~~ were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full.

~~Our charges~~

Risks Relating to ~~earnings resulting from acquisition, restructuring, and integration costs may materially adversely affect the market value~~Ownership of our ~~common stock.~~

We account for the completion of our acquisitions using the purchase method of accounting. We allocate the total estimated purchase prices to net tangible assets, amortizable intangible assets and indefinite-lived intangible assets, and based on their fair values as of the date of completion of the acquisitions, record the excess of the purchase price over those fair values as goodwill. Our financial results, including earnings per share, could be adversely affected by a number of financial adjustments required in purchase accounting including the following:

~~We will incur additional amortization expense over the estimated useful lives of some of the intangible assets acquired in connection with acquisitions during such estimated useful lives;~~

~~We will incur additional depreciation expense as a result of recording purchased tangible assets;~~

~~To the extent the value of goodwill or intangible assets becomes impaired, we may be required to incur material charges relating to the impairment of those assets;~~

~~Cost of sales may increase temporarily following an acquisition as a result of acquired inventory being recorded at its fair market value;~~

~~Earnings may be affected by changes in estimates of future contingent consideration to be paid when anearn-out~~ ~~is part of the consideration; or~~

~~Earnings may be affected by transaction and implementation costs, which are expensed immediately.~~

~~We are significantly dependent on our revenues from BioGlue and are subject to a variety of risks affecting them.~~

~~BioGlue~~^® Surgical Adhesive (“BioGlue”) is currently a significant source of our revenues, representing approximately 35%, 35%, and 40% of revenues for the twelve months ended December 31, 2017, 2016, and 2015, respectively. The following could materially, adversely affect our revenues, financial condition, profitability, and cash flows:

~~BioGlue is a mature product, our U.S. Patent for BioGlue expired inmid-2012,~~ ~~and our patents in most of the rest of the world for BioGlue expired inmid-2013.~~ ~~Other companies may use the inventions disclosed in the expired patents to develop and make competing products;~~

Another company launched competitive products in 2016 and another is in the process of doing so. These companies have greater financial, technical, manufacturing, and marketing resources than we do and are well established in their markets. Companies other than these may also pursue regulatory approval for competitive products;

We may be unable to obtain regulatory approvals to commercialize BioGlue in certain countries other than the U.S. at the same rate as our competitors or at all. We also may not be able to capitalize on new regulatory approvals we obtain for BioGlue in countries other than the U.S., including approvals for new indications;

BioGlue contains a bovine blood protein. Animal-based products are increasingly subject to scrutiny from the public and regulators, who may have concerns about the use of animal-based products or concerns about the transmission of disease from animals to humans. These concerns could lead to additional regulations or product bans in certain countries;

~~Changes to components in the BioGlue product, including in the delivery system require regulatory approval, which if delayed, could cause prolonged disruptions to our ability to supply BioGlue; and~~

~~BioGlue is subject to potential adverse developments with regard to its safety, efficacy, or reimbursement practices.~~

~~We are significantly dependent on our revenues from tissue preservation services and are subject to a variety of risks affecting them.~~

Tissue preservation services are currently a significant source of our revenues, representing 37%, 37%, and 43% of revenues in the twelve months ended December 31, 2017, 2016, and 2015, respectively. The following could materially, adversely affect our revenues, financial condition, profitability, and cash flows, if we are unable to:

Source sufficient quantities of some tissue types from human donors or address potential excess supply of other tissue types. We rely primarily upon the efforts of third-party procurement organizations, tissue banks (most of which are~~not-for-profit),~~ and others to educate the public and foster a willingness to donate tissue. Factors beyond our control such as supply, regulatory changes, negative publicity concerning methods of tissue recovery or disease transmission from donated tissue, or public opinion of the donor process as well as our own reputation in the industry can negatively impact the supply of tissue;

~~Process donated tissue cost effectively or at all due to factors such as employee turnover, ineffective or inefficient operations, or an insufficiently skilled workforce;~~

Compete effectively in tissue preservation services, as we may be unable to capitalize on our clinical advantage or our competitors may have advantages over us in terms of cost structure, pricing, back office automation, marketing, and sourcing tissue; or

Mitigate sufficiently the risk that processed tissue cannot be sterilized and hence carries an inherent risk of infection or disease transmission; there is no assurance that our quality controls will be adequate to mitigate such risk.

In addition, U.S. and foreign governments and regulatory agencies have adopted restrictive laws, regulations, and rules that apply to our tissue preservation services. These include but are not limited to:

NOTA which prohibits the acquisition or transfer of human organs for valuable consideration for use in human transplantation, but allows for the payment of reasonable expenses associated with the removal, transportation, implantation, processing, preservation, quality control, and storage of human organs;

U.S. Department of Labor, Occupational Safety and Health Administration, and U.S. Environmental Protection Agency requirements for prevention of occupational exposure to infectious agents and hazardous chemicals and protection of the environment; and

~~The EUTCD which require that countries in the eEEA take responsibility for regulating tissues and cells through a Competent Authority.~~

Any of these laws, regulations, and rules or others could change, our interpretation of them could be challenged by U.S., state, or foreign governments and regulatory agencies, or these governments and regulatory agencies could adopt more restrictive laws or regulations in the future regarding tissue preservation services that could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.

~~We are significantly dependent on our revenues fromOn-X~~ ~~and are subject to a variety of risks affecting them.~~

~~On-X~~ is a significant source of our revenues, representing 20% and 19% of revenues in the twelve months ended December 31, 2017 and 2016, respectively. The following could materially, adversely affect our revenues, financial condition, profitability, and cash flows:

~~Our ability to achieve anticipatedOn-X~~ ~~revenue in international markets outside the U.S., particularly in markets with large legacy inventories;~~

~~Our ability to capitalize on the FDA’s approved reduced INR indication;~~

~~Our ability to compete effectively with our major competitors, as they may have advantages over us in terms of cost structure, pricing, sales force footprint, and brand recognition;~~

~~Our ability to manage the risks associated with less favorable contract terms forOn-X~~ ~~products on consignment at hospitals with more bargaining power;~~

~~Changes in technology that may impact the market for mechanical heart valves, such as transcatheter aortic valve replacement, or “TAVR” devices; and~~

~~Enhanced regulatory enforcement activities or failure to receive renewed certifications that could cause interruption in our ability to sellOn-X~~ ~~products in certain markets.~~

~~Our revenues for theOn-X~~ ~~AAP in Europe may continue to be adversely affected by regulatory enforcement activities regarding theOn-X~~ ~~AAP’s CE Mark.~~

~~On November 22, 2016, we received a letter fromG-Med,~~ ~~which acts as our Notified Body for theOn-X~~ ~~product line, indicating that it was temporarily suspending the CE Mark for theOn-X~~ ~~AAP in the EEA, due to an allegedly untimely and allegedly deficient plan by us to address certain technical documentation issues found byG-Med~~ ~~during a review and renewal of the design examination certificate for theOn-X~~ ~~AAP. On July 26, 2017, we received a letter fromG-Med~~ ~~indicating that it was continuing the suspension of the CE Mark for the AAP product for a period of up to 18 months pending further assessment. We have since withdrawn our application fromG-Med~~ for certification of the AAP product and are currently pursuing another pathway to CE Mark for the AAP product with a goal of returning the product to the European market in the third quarter of 2018. Failure to obtain CE Mark for the~~On-X~~ ~~AAP in the EEA could have a material adverse effect on EEA revenues in 2018 and beyond.~~

Our investment in PerClot is subject to significant risks, and our ability to fully realize our investment is dependent on our ability to obtain FDA approval and to successfully commercialize PerClot in the U.S. either directly or indirectly.

~~In 2010 and 2011, we entered into various agreements with SMI pursuant to which, among other things, we (a) may distribute PerClot~~in certain international markets and are licensed to manufacture PerClot in the U.S.; (b) acquired some technology to assist in the production of a potentially key component in PerClot; and (c) obtained the exclusive right to pursue, obtain, and maintain FDA PMA for PerClot. We are currently conducting our pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in the U.S., and assuming enrollment proceeds as anticipated, we could receive PMA from the FDA in the second half of 2019. There is no guarantee, however, that we will obtain FDA approval when anticipated or at all. The estimated timing of regulatory approval for PerClot is based on factors beyond our control, including but not limited to, the pace of enrollment in the pivotal clinical trial and the approval process may be delayed because of unforeseen scheduling difficulties and unfavorable results at various stages in the pivotal clinical trial or the process. We may also decide to delay or terminate our pursuit of U.S. regulatory approval for PerClot at any time due to changing conditions at CryoLife, in the marketplace, or in the economy in general.

Further, even if we receive FDA PMA for PerClot, we may be unsuccessful in selling PerClot in the U.S. By the time we secure approvals, competitors may have substantial market share or significant market protections due to contracts, among other things. We may also be unsuccessful in selling in countries other than the U.S. due, in part, to a proliferation in other countries of multiple generic competitors, SMI’s breach of its contractual obligations, or the lack of adequate intellectual property protection or enforcement. Any of these occurrences could materially, adversely affect our future revenues, financial condition, profitability, and cash flows.

PerClot sold in the EEA has a CE Mark owned by a third party, who informed us in the fourth quarter of 2017 that its CE Mark will expire in the second quarter of 2018. If that CE Mark is not timely renewed, we may be unable to distribute PerClot in the EEA and other countries that recognize the CE Mark, which could materially, adversely affect our future revenues.

~~Reclassification by the FDA of CryoValve~~^® ~~SGPV may make it commercially infeasible to continue processing the CryoValve SGPV.~~

~~In October 2014 the FDA convened an advisory committee meeting to consider the FDA’s recommendation tore-classify~~ more MMM allograft heart valves from an unclassified medical device to a Class III medical device. The class of MMM allograft heart valves includes our CryoValve SGPV. At the meeting, a majority of the advisory committee panel recommended to the FDA that MMM allograft heart valves be~~re-classified~~ as a Class III product. We expect that the FDA will issue a proposal for reclassification of MMM allograft heart valves, which will be subject to a public comment period before finalization. After publication of the reclassification rule, we expect to have thirty months to submit for an FDA PMA, after which the FDA will determine if, and for how long, we may continue to provide these tissues to customers. To date, the FDA has not issued a proposed reclassification for MMM allograft heart valves.

We have continued to process and ship our CryoValve SGPV tissues. If the FDA ultimately classifies our CryoValve SGPV as a Class III medical device, we anticipate requesting a meeting with the FDA to determine the specific requirements to file for and obtain a PMA, and we will determine an appropriate course of action in light of those requirements. If there are delays in obtaining the PMA, if we are unsuccessful in obtaining the PMA, or if the costs associated with these activities are significant, this could materially, adversely affect our revenues, financial condition, profitability, and/or cash flows in future periods. In addition, we could decide that the requirements for obtaining a PMA make continued processing of the CryoValve SGPV infeasible, necessitating that we discontinue distribution of these tissues.

~~Our key growth areas may not generate anticipated benefits.~~

Our strategic plan is focused on four growth areas, primarily in the cardiac and vascular surgery segment, which are expected to drive our business in the near term. These growth areas and their key elements are described below:

•

~~New Products~~ ~~– Drive growth through new products, including JOTEC andOn-X~~ ~~products;~~

•

~~New Indications –~~ ~~Drive growth by broadening the reach of some of our products and services, including the JOTEC,On-X,~~ ~~and BioGlue products, and preserved cardiac and vascular tissues, with new or expanded approvals and indications in the U.S. or in international markets;~~

•

~~Global Expansion~~ ~~– Drive growth by expanding our current products and services into new markets, including emerging markets, and developing new direct sales territories overseas; and~~

•

~~Business Development~~ – Drive growth through business development by selectively pursuing potential acquisitions, licensing, or distribution rights of companies or technologies that complement our existing products, services, and infrastructure and expand our footprint in the cardiac and vascular surgery space, as we did with the recent acquisitions of JOTEC and~~On-X;~~ ~~and licensing of products developed internally withnon-cardiac~~ ~~indications. To the extent we identify newnon-core~~ products or additional applications for our core products, we may attempt to license these products to corporate partners for further development or seek funding from outside sources to continue commercial development.

~~Although we continue to implement these strategies, we cannot be certain that they will ultimately drive business expansion and enhance shareholder value.~~

~~We may not be successful in obtaining necessary clinical results and regulatory approvals for products and services in development, and our new products and services may not achieve market acceptance.~~

Our growth and profitability will depend, in part, upon our ability to complete development of, and successfully introduce, new products and services, or expand upon existing indications, which requires that we invest significant time and resources to obtain required regulatory approvals, including significant investment of time and resources into clinical trials. Although we have conducted clinical studies on certain products and services under development, which indicate that such products and services may be effective in a particular application, we cannot be certain that we will be able to successfully execute on these clinical trials or that the results we obtain from clinical studies will be sufficient for us to obtain any required regulatory approvals or clearances.

~~As noted above, we are currently engaged in an IDE clinical trial for PerClot, as well as a clinical trial in China for BioGlue and in the U.S. for theOn-X~~ ~~valve. We also anticipate commencing in 2018 and 2019 U.S. trials for certain JOTEC products. Each of these trials is subject to the risks outlined herein.~~

We cannot give assurance that the relevant regulatory agencies will clear or approve these or any new products and services, or new indications, in a timely basis, if ever, or that the new products and services, or new indications, will adequately meet the requirements of the applicable market or achieve market acceptance. We may encounter delays or rejections during any stage of the regulatory approval process if clinical or other data fails to demonstrate satisfactorily compliance with, or if the service or product fails to meet, the regulatory agency’s requirements for safety, efficacy, and quality, or the regulatory agency otherwise has concerns about our quality or regulatory compliance. Regulatory requirements for safety, efficacy, and quality may become more stringent due to changes in applicable laws, regulatory agency policies, or the adoption of new regulations. Clinical trials may also be delayed or halted due to the following, among other factors:

~~Unanticipated side effects;~~Common Stock

~~Lack of funding;~~

~~Inability to locate or recruit clinical investigators;~~

~~Inability to locate, recruit, and qualify sufficient numbers of patients;~~

~~Redesign of clinical trial programs;~~

~~Inability to manufacture or acquire sufficient quantities of the products, tissues, or any other components required for clinical trials;~~

~~Changes in development focus; or~~

~~Disclosure of trial results by competitors.~~

Our ability to complete the development of any of our products and services is subject to all of the risks associated with the commercialization of new products and services based on innovative technologies. Such risks include unanticipated technical or other problems, manufacturing, or processing difficulties, and the possibility that we have allocated insufficient funds to complete such development. Consequently, we may not be able to successfully introduce and market our products or services, or we may not be able to do so on a timely basis. These products and services may not meet price or performance objectives and may not prove to be as effective as competing products and services.

If we are unable to successfully complete the development of a product, service, or application, or if we determine for financial, technical, competitive, or other reasons not to complete development or obtain regulatory approval or clearance of any product, service, or application, particularly in instances when we have expended significant capital, this could materially, adversely affect our revenues, financial condition, profitability, and cash flows. Research and development efforts are time consuming and expensive, and we cannot be certain that these efforts will lead to commercially successful products or services. Even the successful commercialization of a new product or service in the medical industry can be

characterized by slow growth and high costs associated with marketing, under-utilized production capacity, and continuing research and development and education costs. The introduction of new products or services may require significant physician training and years of clinical evidence derived from~~follow-up~~ ~~studies on human patients in order to gain acceptance in the medical community.~~

~~All of these could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.~~

~~We are subject to a variety of risks as we seek to expand our business globally.~~

~~The expansion of our international operations is subject to a number of risks, which may vary significantly from the risks we face in our U.S. operations, including:~~

Difficulties and costs associated with staffing, establishing and maintaining internal controls, managing foreign operations, including foreign distributor relationships, and developing direct sales operations in key foreign countries;

Expanded compliance obligations, including obligations associated with the Foreign Corrupt Practices Act, the U.K. Bribery Law, local anti-corruption laws, and Office of Foreign Asset Control administered sanction programs;

~~Broader exposure to corruption;~~

Overlapping and potentially conflicting international legal and regulatory requirements, as well as unexpected changes in international legal and regulatory requirements or reimbursement policies and programs;

~~Longer accounts receivable collection cycles in certain foreign countries and additional cost of collection of those receivables;~~

~~Diminished protection for intellectual property and the presence of a growing number of generic or smaller competitors in some countries;~~

Changes in currency exchange rates, particularly fluctuations in the British Pound and Euro as compared to the U.S. Dollar, including any fluctuations in exchange rates due to the exit of the U.K. from the European Union;

~~Differing local product preferences and product requirements;~~

~~Adverse economic or political changes or political instability;~~

~~Potential trade restrictions, exchange controls, and import and export licensing requirements including tariffs; and~~

~~Potential adverse tax consequences of overlapping tax structures.~~

~~Our failure to adequately address these risks could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.~~

~~We continue to evaluate expansion through acquisitions of, or licenses with, investments in, and distribution arrangements with, other companies or technologies, which may carry significant risks.~~

One of our growth strategies is to selectively pursue potential acquisition, licensing, or distribution rights of companies or technologies that complement our existing products, services, and infrastructure. In connection with one or more of the acquisition transactions, we may:

~~Issue additional equity securities that would dilute our stockholders’ ownership interest in us;~~

~~Use cash that we may need in the future to operate our business;~~

~~Incur debt, including on terms that could be unfavorable to us or debt that we might be unable to repay;~~

~~Structure the transaction in a manner that has unfavorable tax consequences, such as a stock purchase that does not permit astep-up~~ ~~in the tax basis for the assets acquired;~~

~~Be unable to realize the anticipated benefits, such as increased revenues, cost savings, or synergies from additional sales;~~

~~Be unable to integrate, upgrade, or replace the purchasing, accounting, financial, sales, billing, employee benefits, payroll, and regulatory compliance functions of an acquisition target;~~

~~Be unable to secure or retain the services of key employees related to the acquisition;~~

~~Be unable to succeed in the marketplace with the acquisition; or~~

~~Assume material unknown liabilities associated with the acquired business.~~

As an example of these risks, we recently acquired JOTEC, which we financed by incurring further debt, using cash on hand, and issuing additional equity securities. This acquisition poses many of the same risks as set forth above.

Any of the above risks, should they occur, could materially, adversely affect our revenues, financial condition, profitability, and cash flows, including the inability to recover our investment or cause a write-down or~~write-off~~ ~~of such investment, associated goodwill, or assets.~~

~~We are heavily dependent on our suppliers to provide quality materials and supplies~~.

The materials and supplies used in our product manufacturing and our tissue processing are subject to stringent quality standards and requirements, and many of these materials and supplies are subject to significant regulatory oversight and action. If materials or supplies used in our processes fail to meet these standards and requirements or are subject to recall or other quality action, an outcome could be the rejection or recall of our products or tissues and/or the immediate expense of the costs of the manufacturing or preservation. In addition, if these materials and supplies or changes to them do not receive regulatory approval or are recalled or the related suppliers and/or their facilities are shut down temporarily or permanently, whether by government order, natural disaster, or otherwise, there may not be sufficient materials or supplies available for purchase to allow us to manufacture our products or process tissues. Any of these occurrences or actions could materially, adversely affect our revenues, financial condition, profitability, and cash flows.

~~We are dependent on single source suppliers and single facilities~~.

Some of the materials, supplies, and services that are key components of our product manufacturing or our tissue processing are sourced from single vendors. As a result, our ability to negotiate favorable terms with those vendors may be limited, and if those vendors experience operational, financial, quality, or regulatory difficulties, or those vendors and/or their facilities refuse to supply us or cease operations temporarily or permanently, we could be forced to cease product manufacturing or tissue processing until the vendors resume operations or alternative vendors could be identified and qualified. We could also be forced to purchase alternative materials, supplies, or services with unfavorable terms due to diminished bargaining power. We also conduct substantially all of our operations at three facilities: Austin, Texas for our~~On-X~~ product line, Hechingen, Germany for our JOTEC product line, and Kennesaw, Georgia for all our other products. If one of these facilities ceases operations temporarily or permanently, due to natural disaster or other reason, our business could be substantially disrupted.

~~Our products and tissues are highly regulated and subject to significant quality and regulatory risks.~~

The manufacture and sale of medical devices and processing, preservation, and distribution of human tissues are highly complex and subject to significant quality and regulatory risks. Any of the following could materially, adversely affect our revenues, financial condition, profitability, and cash flows:

~~Our products and tissues may be recalled or placed on hold by us, the FDA, or other regulatory bodies;~~

Our products and tissues allegedly have caused, and may in the future cause, injury to patients, which has exposed, and could in the future expose, us to product and tissue processing liability claims, and such claims could lead to additional regulatory scrutiny and inspections;

Our manufacturing and tissue processing operations are subject to regulatory scrutiny and inspections, including by the FDA and foreign regulatory agencies, and these agencies could require us to change or modify our manufacturing operations, processes, and procedures;

~~Regulatory agencies could reclassify, reevaluate, or suspend our clearances and approvals to sell our products and distribute tissues;~~

European Notified Bodies have recently engaged in more rigorous regulatory enforcement activities and may continue to do so, and the European Union has adopted a new Medical Device Regulation (MDR 2017/745), which could result in product reclassifications or more stringent commercialization requirement that adversely impact our clearances and approvals; and

Adverse publicity associated with our products or processed tissues or our industry could lead to a decreased use of our products or tissues, additional regulatory scrutiny, and/or product or tissue processing liability lawsuits.

As an example of these risks, in January 2013 we received a warning letter from the FDA related to the manufacture of our products and our processing, preservation, and distribution of human tissue, as well as a subsequent 2014 Form 483, after a~~re-inspection~~ ~~by the FDA related to the warning letter that included observations concerning design and process validations,~~

~~environmental monitoring, product controls and handling, corrective and preventive actions, and employee training. Despite an FDAre-inspection~~ in the first quarter of 2015, after which the FDA closed out the warning letter issued in 2013, we remain subject to further inspections and oversight by the FDA and, if the FDA is not satisfied with our quality and regulatory compliance, it could institute a wide variety of enforcement actions, ranging from issuing additional Form 483s or warning letters, to more severe sanctions such as fines; injunctions; civil penalties; recalls of our products and/or tissues; operating restrictions; suspension of production;~~non-approval~~ or withdrawal of approvals or clearances for new products or existing products; and criminal prosecution. Any further Form 483s, warning letters, recalls, holds, or other adverse action from the FDA may decrease demand for our products or tissues or cause us to write down our inventories or deferred preservation costs and could materially, adversely affect our revenues, financial condition, profitability, and cash flows.

~~We operate in highly competitive market segments, face competition from large, well-established medical device companies with significant resources, and may not be able to compete effectively.~~

The market for our products and services is intensely competitive and significantly affected by new product introductions and activities of other industry participants. We face intense competition from other companies engaged in the following lines of business:

~~The sale of mechanical, synthetic, and animal-based tissue valves for implantation;~~

~~The sale of endovascular and surgical stents;~~

~~The sale of synthetic and animal-based patches for implantation;~~

~~The sale of surgical adhesives, surgical sealants, and hemostatic agents; and~~

~~The processing and preservation of human tissue.~~

A significant percentage of market revenues from these products was generated by Baxter, Ethicon (a Johnson & Johnson Company), Medtronic, Inc., Abbott Laboratories, LivaNova PLC, Edwards Life Sciences Corp., BD, Integra Life Sciences Holdings, LifeNet, Admedus, Inc., Aziyo Biologics, Cook Medical, Gore, Terumo Corp., Endologix, Antegraft, Inc., LeMaitre, Maquet, Inc., Vascutek, Novadaq Technologies, Inc., Pfizer, Inc., and BioCer Entwicklungs-GmbH. Several of our competitors enjoy competitive advantages over us, including:

~~Greater financial and other resources for product research and development, sales and marketing, acquisitions, and patent litigation;~~

~~Enhanced experience in, and resources for, launching, marketing, distributing, and selling products;~~

~~Greater name recognition as well as more recognizable trademarks for products similar to the products that we sell;~~

~~More established record of obtaining and maintaining FDA and other regulatory clearances or approvals for products and product enhancements;~~

~~More established relationships with healthcare providers and payors;~~

~~Lower cost of goods sold or preservation costs;~~

~~Advanced systems for back office automation, product development, and manufacturing, which may provide certain cost advantages; and~~

~~Larger direct sales forces and more established distribution networks.~~

Our competitors may develop services, products, or processes with significant advantages over the products, services and processes that we offer or are seeking to develop, and our products and tissues may not be able to compete successfully. If we are unable to successfully market and sell innovative and~~in-demand~~ products and services, our competitors may gain competitive advantages that may be difficult to overcome. In addition, consolidation among our competitors may make it more difficult for us to compete effectively. If we fail to compete effectively, this could materially, adversely affect our revenues, financial condition, profitability, and cash flows.

~~We are dependent on our key personnel.~~

Our business and future operating results depend in significant part upon the continued contributions of our key personnel, including qualified personnel with medical device and tissue processing experience, and senior management with experience in the medical device or tissue processing space, many of whom would be difficult to replace. Our business and future operating results, including production at our manufacturing and tissue processing facilities, also depend in significant part on our ability to attract and retain qualified management, operations, processing, marketing, sales, and support personnel for our operations. Our main facilities are in Kennesaw, Georgia, Austin, Texas, and Hechingen, Germany, where the local supply of qualified personnel in the medical device and tissue processing industries is limited. Competition for such

personnel is intense, and we cannot ensure that we will be successful in attracting and retaining such personnel. If we lose any key employees, if any of our key employees fail to perform adequately, or if we are unable to attract and retain skilled employees as needed, this could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.

~~Significant disruptions of information technology systems or breaches of information security could adversely affect our business.~~

We rely upon a combination of sophisticated information technology systems and traditional recordkeeping to operate our business. In the ordinary course of business, we collect, store, and transmit large amounts of confidential information (including, but not limited to, personal information, intellectual property and, in some instances, patient data). We have also outsourced elements of our operations to third parties, including elements of our information technology infrastructure and, as a result, we manage a number of independent vendor relationships with third parties who may or could have access to our confidential information. Our information technology and information security systems and records are potentially vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees or vendors. Our information technology and information security systems are also potentially vulnerable to malicious attacks by third parties. Such attacks are of ever-increasing levels of sophistication and are made by groups and individuals with a wide range of motives (including, but not limited to, industrial espionage and market manipulation) and expertise. While we have invested significantly in the protection of data and information technology, there can be no assurance that our efforts will prevent service interruptions or security breaches. For example, although we have taken security precautions and are assessing additional precautions to provide greater data security, certain data may be vulnerable to loss in a catastrophic event. We have only limited cyber-insurance coverage that will not cover a number of the events described above and this insurance is subject to deductibles and coverage limitations, and we may not be able to maintain this insurance. We thus have no insurance for most of the claims that could be raised and, for those where we have coverage, those claims could exceed the limits of our coverage. Any interruption or breach in our systems could adversely affect our business operations and/or result in the loss of critical or sensitive confidential information or intellectual property, and could result in financial, legal, business, and reputational harm to us or allow third parties to gain material, inside information that they may use to trade in our securities.

~~The implementation of the General Data Protection Regulation in the EEA in May 2018 could adversely affect our business.~~

The European Commission has approved a data protection regulation, known as the General Data Protection Regulation (“GDPR”), which takes effect in May 2018. GDPR includes significant new requirements for companies that receive or process the personal data of residents of the European Union (including company employees) and significant penalties for noncompliance. GDPR, as well as any related government enforcement activities, may be costly to comply with, result in negative publicity, increase our operating costs, require significant management time and energy, and subject us to significant penalties, any of which could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.

~~Consolidation in the healthcare industry could have an adverse effect on our revenues and results of operations.~~

Many healthcare industry companies, including health care systems, are consolidating to create new companies with greater market power. As the healthcare industry consolidates, competition to provide goods and services to industry participants will become more intense. These industry participants may try to use their market power to negotiate price concessions or reductions for medical devices that incorporate components produced by us. If we are forced to reduce our prices because of consolidation in the healthcare industry, our revenues would decrease and our financial condition, profitability, and/or cash flows would suffer.

Our sales are affected by challenging domestic and international economic and geopolitical conditions and their constraining effect on hospital budgets, and demand for our products and tissue preservation services could decrease in the future, which could materially, adversely affect our business.

The demand for our products and tissue preservation services can fluctuate from time to time. In challenging economic environments, hospitals attempt to control costs by reducing spending on consumable and capital items, which can result in reduced demand for some of our products and services. If demand for our products or tissue preservation services decreases significantly in the future, our revenues, profitability, and cash flows would likely decrease, possibly materially. In addition, the manufacturing throughput of our products and the processing throughput of our preservation services would necessarily decrease, which would likely adversely impact our margins and, therefore, our profitability, possibly materially. Further, if

demand for our products and/or tissue preservation services materially decreases in the future, we may not be able to ship our products and/or tissues before they expire, which would cause us to write down our inventories and/or deferred preservation costs.

~~Our sales may also be affected by challenging economic and geopolitical conditions in countries around the world, in addition to the U.S., particularly in countries where we have significant BioGlue,On-X~~ ~~product, or JOTEC product sales or where BioGlue,On-X~~ ~~products, or JOTEC products are still in a growth phase. These factors could materially, adversely affect our revenues, financial condition, and profitability.~~

~~The success of some of our products and preservation services depends upon relationships with healthcare professionals.~~

If we fail to maintain our working relationships with healthcare professionals, many of our products and preservation services may not be developed and marketed to appropriately meet the needs and expectations of the professionals who use and support our products and preservation services or the patients who receive them.

The research, development, marketing, and sales of many of our new and improved products and preservation services are dependent upon us maintaining working relationships with healthcare professionals. We rely on these professionals to provide us with considerable knowledge and experience regarding our products and preservation services. Healthcare professionals assist us as researchers, marketing and training consultants, product consultants, and speakers. If we are unable to maintain our relationships with these professionals and do not continue to receive their advice and input, the development and commercialization of our products and preservation services could suffer, which could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.

If healthcare providers are not adequately reimbursed for procedures conducted with our products, or if reimbursement policies change adversely, we may not be successful in marketing and selling our products or preservation services.

Most of our customers, and the healthcare providers to whom our customers supply medical devices, rely on third-party payors, including government programs and private health insurance plans, to reimburse some or all of the cost of the procedures in which medical devices that incorporate components we manufacture or assemble are used. Healthcare providers, facilities, and government agencies are unlikely to purchase our products or implant our tissues if they are not adequately reimbursed for these procedures. Unless a sufficient amount of peer-reviewed clinical data about our products and preservation services has been published, third-party payors, including insurance companies and government agencies, may refuse to provide reimbursement. The continuing efforts of governmental authorities, insurance companies, and other payors of healthcare costs to contain or reduce these costs could lead to patients being unable to obtain approval for payment from these third-party payors. Furthermore, even if reimbursement is provided, it may not be adequate to fully compensate the clinicians or hospitals. Some third-party payors may impose restrictions on the procedures for which they will provide reimbursement. If healthcare providers cannot obtain sufficient reimbursement from third-party payors for our products or preservation services or the screenings conducted with our products, we may not achieve significant market acceptance. Acceptance of our products in international markets will depend upon the availability of adequate reimbursement or funding within prevailing healthcare payment systems. Reimbursement, funding, and healthcare payment systems vary significantly by country. We may not obtain approvals for reimbursement in a timely manner or at all.

~~We may be subject to fines, penalties, injunctions, and other sanctions if we are deemed to be promoting the use of our products for unapproved, oroff-label,~~ ~~uses.~~

Our business and future growth depend on the continued use of our products for specific approved uses. Generally, unless the products are approved or cleared by the FDA for the alternative uses, the FDA contends that we may not make claims about the safety or effectiveness of our products, or promote them, for such uses. Such limitations present a risk that the FDA or other federal or state law enforcement authorities could determine that the nature and scope of our sales, marketing, and/or support activities, though designed to comply with all FDA requirements, constitute the promotion of our products for an unapproved use in violation of the FDCA. We also face the risk that the FDA or other governmental authorities might pursue enforcement based on past activities that we have discontinued or changed, including sales activities, arrangements with institutions and doctors, educational and training programs, and other activities. Investigations concerning the promotion of unapproved uses and related issues are typically expensive, disruptive, and burdensome and generate negative publicity. If our promotional activities are found to be in violation of the law, we may face significant fines and penalties and may be required to substantially change our sales, promotion, grant, and educational activities. There is also a possibility that we could be enjoined from selling some or all of our products for any unapproved use. In addition, as a result of an enforcement action against us or our executive officers, we could be excluded from participation in government healthcare programs such as Medicare and Medicaid.

~~Tax reform could have a material adverse effect on us.~~

The December 2017 legislation commonly referred to as the “Tax Cuts and Jobs Act” (the “Tax Act”) made significant changes to federal income tax law including, among other things, reducing the statutory corporate income tax rate to 21 percent from 35 percent and changing the U.S. taxation of our~~non-U.S.~~ business activities. We may be adversely affected by these changes in U.S. tax laws and regulations, and it is possible that governmental authorities in the U.S. and/or other countries could further amend tax laws that would adversely affect us. In addition, we are required to evaluate the impact of the Tax Act on our operations and financial statements, and to the extent we initially do so inaccurately, we may not provide investors or the public with advance notice of any adverse effect. Currently, we have accounted for the effects of the Tax Act using reasonable estimates based on currently available information and our interpretations thereof. This accounting may change due to, among other things, changes in interpretations we have made and the issuance of new tax or accounting guidance.

Certain changes in tax law implemented by the Tax Act will be partially effective in the current 2018 fiscal year and fully effective in the 2019 fiscal year. The primary impacts to us include repeal of the alternative minimum tax regime, decrease of the corporate income tax rate structure, net operating loss limitations, and changes to the limits on executive compensation deductions. These changes will have a material impact to the value of deferred tax assets and liabilities, and our future taxable income and effective tax rate. Although we currently anticipate the enacted changes in the corporate tax rate and calculation of taxable income will have a favorable effect on our financial condition, profitability, and/or cash flows, we are still analyzing the Tax Act with our professional advisers. Until such analysis is complete and verified, the full impact of the Tax Act on us in future periods is uncertain, and no assurances can be made by us that it will not have any negative impacts on us.

Our acquired federal tax net operating loss and general business credit carryforwards will be limited or may expire, which could result in greater future income tax expense and adversely impact future cash flows.

Our federal tax net operating loss and general business credit carryforwards include acquired net operating loss carryforwards. Such acquired net operating loss carryforwards will be limited in future periods due to a change in control of our former subsidiaries Hemosphere, Inc. (“Hemosphere”) and Cardiogenesis Corporation, as mandated by Section 382 of the Internal Revenue Code of 1986, as amended. We believe that our acquisitions of these companies each constituted a change in control, and that prior to our acquisition, Hemosphere had experienced other equity ownership changes that should be considered a change in control. We also acquired net operating loss carryforwards in the acquisition of~~On-X~~ ~~Life Technologies that are limited under Section 382. We believe, however, that such net operating loss carryforwards fromOn-X~~ will be fully realizable prior to expiration. The deferred tax assets recorded on our Consolidated Balance Sheets exclude amounts that we expect will not be realizable due to these changes in control. A portion of the acquired net operating loss carryforwards is related to state income taxes for which we believe it is more likely than not that these deferred tax assets will not be realized. Therefore, we recorded a valuation allowance against these state net operating loss carryforwards. Limitations on our federal tax net operating loss and general business credit carryforwards could result in greater future income tax expense and adversely impact future cash flows.

We are subject to various federal and state anti-kickback, self-referral, false claims privacy, and transparency laws, and similar laws, any breach of which could cause a material, adverse effect on our business, financial condition, and profitability.

Our relationships with physicians, hospitals, and other healthcare providers are subject to scrutiny under various federal anti-kickback, self-referral, false claims, privacy, and transparency laws, and similar laws, often referred to collectively as healthcare compliance laws. Healthcare compliance laws are broad, can be ambiguous, and are complex, and even minor inadvertent violations can give rise to claims that the relevant law has been violated. Possible sanctions for violation of these healthcare compliance laws include monetary fines, civil and criminal penalties, exclusion from federal and state healthcare programs, including Medicare, Medicaid, Veterans Administration health programs, workers’ compensation programs, and TRICARE (the healthcare system administered by or on behalf of the U.S. Department of Defense for uniformed services beneficiaries, including active duty and their dependents and retirees and their dependents), and forfeiture of amounts collected in violation of such prohibitions. Any government investigation or a finding of a violation of these laws could result in a material, adverse effect on our business, financial condition, and profitability.

Anti-kickback laws and regulations prohibit any knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for the referral of an individual or the ordering or recommending of the use of a product or service for which payment may be made by Medicare, Medicaid, or other government-sponsored healthcare programs. We have

entered into consulting agreements, speaker agreements, research agreements, and product development agreements with healthcare professionals, including some who may order our products or make decisions to use them. While these transactions were structured with the intention of complying with all applicable laws, including state anti-referral laws and other applicable anti-kickback laws, it is possible that regulatory or enforcement agencies or courts may in the future view these transactions as prohibited arrangements that must be restructured or for which we would be subject to other significant civil or criminal penalties. We have also adopted the AdvaMed Code of Conduct into our Code of Business Conduct, which governs our relationships with healthcare professionals, including our payment of travel and lodging expenses, research and educational grant procedures, and sponsorship of third-party conferences. In addition, we have conducted training sessions on these principles. There can be no assurance, however, that regulatory or enforcement authorities will view these arrangements as being in compliance with applicable laws or that one or more of our employees or agents will not disregard the rules we have established. Because our strategy relies on the involvement of healthcare professionals who consult with us on the design of our products, perform clinical research on our behalf, or educate the market about the efficacy and uses of our products, we could be materially impacted if regulatory or enforcement agencies or courts interpret our financial relationships with healthcare professionals, who refer or order our products, to be in violation of applicable laws and determine that we would be unable to achieve compliance with such applicable laws. This could harm our reputation and the reputations of the healthcare professionals we engage to provide services on our behalf. In addition, the cost of noncompliance with these laws could be substantial since we could be subject to monetary fines and civil or criminal penalties, and we could also be excluded from federally funded healthcare programs, including Medicare and Medicaid, for noncompliance.

The Federal False Claims Act (“FCA”) imposes civil liability on any person or entity that submits, or causes the submission of, a false or fraudulent claim to the U.S. Government. Damages under the FCA can be significant and consist of the imposition of fines and penalties. The FCA also allows a private individual or entity with knowledge of past or present fraud against the federal government to sue on behalf of the government to recover the civil penalties and treble damages. The U.S. Department of Justice (“DOJ”) on behalf of the government has previously alleged that the marketing and promotional practices of pharmaceutical and medical device manufacturers, including the~~off-label~~ promotion of products or the payment of prohibited kickbacks to doctors, violated the FCA, resulting in the submission of improper claims to federal and state healthcare entitlement programs such as Medicaid. In certain cases, manufacturers have entered into criminal and civil settlements with the federal government under which they entered into plea agreements, paid substantial monetary amounts, and entered into corporate integrity agreements that require, among other things, substantial reporting and remedial actions going forward.

The Physician Payments Sunshine Act and similar state laws require us to annually report in detail certain payments and “transfer of value” from us to healthcare professionals, such as reimbursement for travel and meal expenses or compensation for services provided such as training, consulting, and research and development. This information is then posted on the website of the Center of Medicare and Medicaid Services (“CMS”). Certain states also prohibit some forms of these payments, require adoption of marketing codes of conduct, and regulate our relationships with physicians and other referral sources.

The scope and enforcement of all of these laws is uncertain and subject to rapid change, especially in light of the scarcity of applicable precedent and regulations. There can be no assurance that federal or state regulatory or enforcement authorities will not investigate or challenge our current or future activities under these laws. Any investigation or challenge could have a material, adverse effect on our business, financial condition, and profitability. Any state or federal regulatory or enforcement review of us, regardless of the outcome, would be costly and time consuming. Additionally, we cannot predict the impact of any changes in or interpretations of these laws, whether these changes will be retroactive or will have effect on a going-forward basis only.

~~Healthcare policy changes, including U.S. healthcare reform legislation signed in 2010, may have a material, adverse effect on us.~~

In response to perceived increases in healthcare costs in recent years, there have been and continue to be proposals by the federal government, state governments, regulators, and third-party payors to control these costs and, more generally, to reform the U.S. healthcare system. Some of these proposals could limit the prices we are able to charge for our products or the amounts of reimbursement available for our products and could limit the acceptance and availability of our products. The adoption of some or all of these proposals could have a material, adverse effect on our financial condition and profitability.

The Patient Protection and Affordable Care Act (“ACA”) and the Health Care and Education Affordability Reconciliation Act of 2010 imposed significant new taxes on medical device makers in the form of a 2.3 percent excise tax on all U.S. medical device sales that commenced in January 2013. While this tax was suspended for 2016 and 2017, and just

recently suspended again for 2018 and 2019, and while efforts are being continued to repeal or delay this tax further, there is no guarantee that the excise tax will not be reinstated or that the underlying legislation might not be repealed or replaced.

Efforts to repeal and replace the ACA have been ongoing since the 2016 election, but it is unclear if these efforts will be successful. On January 20, 2017, President Trump issued an executive order titled “Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal.” In addition, as part of the Tax Act, the “individual mandate,” which required individuals to purchase insurance, was repealed. The impact of the executive order and the repeal of the individual mandate, as well as the future of the ACA itself, remain unclear. There are many programs and requirements for which the details have not yet been fully established or the consequences are not fully understood. These proposals may affect aspects of our business. We cannot predict what further reform proposals, if any, will be adopted, when they will be adopted, or what impact they may have on us. Any changes that lower reimbursement for our products or reduce medical procedure volumes, however, could adversely affect our business and profitability.

~~Our operating results may fluctuate significantly on a quarterly or annual basis as a result of a variety of factors, many of which are outside our control.~~

~~Fluctuations in our quarterly and annual financial results have resulted and will continue to result from numerous factors, including:~~

~~Changes in demand for the products we sell;~~

~~Increased product and price competition, due to the announcement or introduction of new products by our competitors, market conditions, the regulatory landscape, or other factors;~~

~~Changes in the mix of products we sell;~~

~~Availability of materials and supplies, including donated tissue used in preservation services;~~

~~Our pricing strategy with respect to different product lines;~~

~~Strategic actions by us, such as acquisitions of businesses, products, or technologies;~~

~~Effects of domestic and foreign economic conditions and exchange rates on our industry and/or customers;~~

~~The divestiture or discontinuation of a product line or other revenue generating activity;~~

~~The relocation and integration of manufacturing operations and other strategic restructuring;~~

~~Regulatory actions that may necessitate recalls of our products or warning letters that negatively affect the markets for our products;~~

~~Failure of government and private health plans to adequately and timely reimburse the users of our products;~~

~~Costs incurred by us in connection with the termination of contractual and other relationships, including distributorships;~~

~~Our ability to collect outstanding accounts receivable in selected countries outside of the U.S.;~~

~~The expiration or utilization of deferred tax assets such as net operating loss carryforwards;~~

~~Market reception of our new or improved product offerings; and~~

~~The loss of any significant customer, especially in regard to any product that has a limited customer base.~~

We have based our current and future expense levels largely on our investment plans and estimates of future events, although some of our expense levels are, to a large extent, fixed. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenue relative to our planned expenditures would have an immediate adverse effect on our business, results of operations, and financial condition. Further, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service, or marketing decisions that could have a material, adverse effect on our business, results of operations, and financial condition. Due to the foregoing factors, some of which are not within our control, the price of our common stock may fluctuate substantially. If our quarterly operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly. We believe the quarterly comparisons of our financial results are not always meaningful and should not be relied upon as an indication of our future performance.

~~Continued fluctuation of foreign currencies relative to the U.S. Dollar could materially, adversely affect our business.~~

The majority of our foreign product and tissue processing revenues are denominated in Euros and British Pounds and, as such, are sensitive to changes in exchange rates. In addition, a portion of our dollar-denominated product sales are made to

customers in other countries who must convert local currencies into U.S. Dollars in order to purchase these products. We also have balances, such as cash, accounts receivable, accounts payable, and accruals that are denominated in foreign currencies. These foreign currency transactions and balances are sensitive to changes in exchange rates. Fluctuations in exchange rates of Euros and British Pounds or other local currencies in relation to the U.S. Dollar could materially reduce our future revenues as compared to the comparable prior periods. Should this occur, it could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.

~~Our existing insurance coverage may be insufficient, and we may be unable to obtain insurance in the future.~~

Our products and tissues allegedly have caused, and may in the future cause, injury to patients using our products or tissues, and we have been, and may be, exposed to product and tissue processing liability claims. We maintain claims-made insurance policies to mitigate our financial exposure to product and tissue processing liability claims. Claims-made insurance policies generally cover only those asserted claims and incidents that are reported to the insurance carrier while the policy is in effect. In addition, our product and tissue processing liability insurance policies do not include coverage for any punitive damages. Although we have insurance for product and tissue processing liabilities, securities, property, and general liabilities, it is possible that:

~~We could be exposed to product and tissue processing liability claims and security claims greater than the amount that we have insured;~~

~~We may be unable to obtain future insurance policies in an amount sufficient to cover our anticipated claims at a reasonable cost or at all; or~~

~~Because we are not insured against all potential losses, uninsured losses due to natural disasters or other catastrophes could adversely impact our business.~~

Any product liability claim, with or without merit, could result in an increase in our product insurance rates or our inability to secure coverage on reasonable terms, if at all. Even in the absence of a claim, our insurance rates may rise in the future due to market, industry, or other factors. Any product liability claim, even a meritless or unsuccessful one, would be time-consuming and expensive to defend and could result in the diversion of our management’s attention from our business and result in adverse publicity, withdrawal of clinical trial participants, injury to our reputation, and loss of revenue.

If we are unsuccessful in arranging acceptable settlements of future product or tissue processing liability claims or future securities class action or derivative claims, we may not have sufficient insurance coverage and liquid assets to meet these obligations. If we are unable to obtain satisfactory insurance coverage in the future, we may be subject to additional future exposure from product or tissue processing liability or securities claims. Additionally, if one or more claims with respect to which we may become, in the future, a defendant should result in a substantial verdict rendered in favor of the plaintiff(s), such verdict(s) could exceed our available insurance coverage and liquid assets. If we are unable to meet required future cash payments to resolve any outstanding or any future claims, this will materially, adversely affect our financial condition, profitability, and cash flows. Further, although we have an estimated reserve for our unreported product and tissue processing liability claims for which we do expect that we will obtain recovery under our insurance policies, these costs could exceed our current estimates. Finally, our facilities could be materially damaged by tornadoes, flooding, other natural disasters, or catastrophic circumstances, for which we are not fully covered by business interruption and disaster insurance, and, even with such coverage, we could suffer substantial losses in our inventory and operational capacity, along with a potential adverse impact on our customers and opportunity costs for which our insurance would not compensate us.

~~Any of these events could have a material, adverse impact on our revenues, financial condition, profitability, and cash flows.~~

~~If we experience decreasing prices for our goods and services and we are unable to reduce our expenses, our results of operations will suffer.~~

We may experience decreasing prices for our goods and services due to pricing pressure experienced by our customers from managed care organizations and other third-party payors, increased market power of our customers as the medical device industry consolidates, and increased competition among medical engineering and manufacturing services providers. If the prices for our goods and services decrease and we are unable to reduce our expenses, our results of operations will be adversely affected.

~~Some of our products and technologies are subject to significant intellectual property risks and uncertainty.~~

We own patents, patent applications, and licenses relating to our technologies, which we believe provide us with important competitive advantages. In addition, we have certain proprietary technologies and methods that we believe provide us with important competitive advantages. We cannot be certain that our pending patent applications will issue as patents or that no one will challenge the validity or enforceability of any patent that we own or license.

We have obtained licenses from third parties for certain patents and patent application rights, including rights related to our PerClot technologies. These licenses allow us to use intellectual property rights owned by or licensed to these third parties. We do not control the maintenance, prosecution, enforcement, or strategy for many of these patents or patent application rights and as such are dependent in part on the owners of the intellectual property rights to maintain their viability. Their failure to do so could significantly impair our ability to exploit those technologies.

Furthermore, competitors may independently develop similar technologies, or duplicate our technologies, or design around the patented aspects of such technologies. In addition, our technologies, products, or services could infringe patents or other rights owned by others, or others could infringe our patents. If we become involved in a patent dispute, the costs of the dispute could be expensive, and if we were to lose or decide to settle the dispute, the amounts or effects of the settlement or award by a tribunal could be costly. For example, in 2015 we resolved a patent infringement case with Medafor related to technology we licensed from SMI. The settlement of that patent infringement case resulted in the continuation of an injunction prohibiting us from marketing, selling, or distributing PerClot in the U.S. until February 8, 2019. We incurred substantial attorneys’ fees and costs in pursuing and defending that case, and only a portion of those fees and costs are subject to recovery through indemnification. Should we be forced to sue a potential infringer, if we are unsuccessful in prohibiting infringements of our patents, should the validity of our patents be successfully challenged by others, or if we are sued by another party for alleged infringement (whether we ultimately prevail or not), our revenues, financial condition, profitability, and cash flows could be materially, adversely affected.

~~We may be subject to damages resulting from claims that we, our employees, or our independent contractors have wrongfully used or disclosed alleged trade secrets of others.~~

Some of our employees were previously employed at other medical device or tissue companies. We may also hire additional employees who are currently employed at other medical device or tissue companies, including our competitors. Additionally, consultants or other independent agents with which we may contract may be or have been in a contractual arrangement with one or more of our competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or independent contractors have used or disclosed any party’s trade secrets or other proprietary information. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to us. If we fail to defend such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to market existing or new products, which could severely harm our business.

Our business could be negatively impacted as a result of shareholder activism.

The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to our unobservable estimates and assumptions. Our assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include: estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. We may also engage external advisors to assist in determining fair value, as appropriate.

~~Although we believe that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.~~

Based on the procedures and calculations completed to date, we do not expect that the combined cumulative effect adjustments will be material to our financial statements. In addition, we have not identified other matters related to the adoption of the standard that we believe would have a material impact on our financial position, results of operations, or cash flows.


*			Filed herewith.

Furnished herewith.

†

Indicates management contract or compensatory plan or arrangement.

+∞			Indicates that the 2018 form was used in 2019, and 2020, except otherwise indicated.
+			The Registrant has ~~requested confidential treatment for certain portions of this~~redacted exhibit ~~pursuant~~provisions or terms that are both not material and would likely cause competitive harm to ~~Rule24b-2~~ of the ~~Securities Exchange Act of 1934, as amended.~~Registrant if publicly disclosed.

The Registrant has been granted confidential treatment for certain portions of this exhibit pursuant to Rule24b-2 of the Securities Exchange Act of 1934, as amended.

~~Management’s Report on Internal Control over Financial Reporting underSarbanes-Oxley~~ ~~Section 404.~~

~~The management of CryoLife, Inc. and subsidiaries (“CryoLife” or “we”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined inRules 13a-15(f)~~ ~~and15d-15(f)~~ under the Securities Exchange Act of 1934. CryoLife’s internal control system was designed to provide reasonable assurance to CryoLife’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

On December 1, 2017 we completed the acquisition of 100% of the outstanding equity of JOTEC GmbH (“JOTEC”), a privately held company. As permitted by SEC guidance, we excluded JOTEC from management’s assessment of internal control over financial reporting as of December 31, 2017. JOTEC, which is included in the 2017 consolidated financial statements of CryoLife, constituted $280.9 million and $193.8 million of total assets and net assets, respectively, as of December 31, 2017 and $4.1 million and $2.2 million of revenues and gross margin, respectively, for the year then ended. JOTEC will be included in management’s assessment of the internal control over financial reporting as of December 31, 2018.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

CryoLife management assessed the effectiveness of CryoLife’s internal control over financial reporting as of December 31, 2017. In making this assessment, we used the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, we have determined that, as of December 31, 2017, our internal control over financial reporting was effective based on those criteria.

CryoLife’s independent registered public accounting firm, Ernst & Young, LLP, has issued an audit report on the effectiveness of CryoLife’s internal control over financial reporting as of December 31, 2017.

~~CryoLife, Inc.~~

~~March 9, 2018~~

~~F-1~~

~~Report of Independent Registered Public Accounting Firm on the Financial Statements~~

~~The Board of Directors and Shareholders of CryoLife, Inc.~~

~~Opinion on the Financial Statements~~

We have audited the accompanying consolidated balance sheets of CryoLife, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 9, 2018 expressed an unqualified opinion thereon.

~~Basis for Opinion~~

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

~~Ernst & Young LLP~~

~~We have served as the Company‘s auditor since 2013~~

~~Atlanta, Georgia~~

~~March 9, 2018~~

~~F-2~~

~~Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting~~

~~To the Shareholders and the Board of Directors of CryoLife, Inc.~~

~~Opinion on Internal Control over Financial Reporting~~

We have audited CryoLife, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, CryoLife, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of JOTEC GmbH (“JOTEC”), which is included in the 2017 consolidated financial statements of the Company and constituted $280.9 million and $193.8 million of total and net assets, respectively, as of December 31, 2017 and $4.1 million and $2.2 million of revenues and gross margin, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of JOTEC.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and our report dated March 9, 2018 expressed an unqualified opinion thereon.

~~Basis for Opinion~~

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

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

~~Definition and Limitations of Internal Control Over Financial Reporting~~

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

~~F-3~~

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

~~Ernst & Young LLP~~

~~Atlanta, Georgia~~

~~March 9, 2018~~

~~F-4~~

~~CRYOLIFE, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED BALANCE SHEETS~~

~~(in thousands)~~

   December 31,
   2017    2016
ASSETS

Current assets:

Cash and cash equivalents
   $ 39,977    $ 56,642
Restricted securities
   776    699

Receivables:

Trade accounts, net
   47,525    27,769
Other
   3,916    2,327




Total receivables
   51,441    30,096

Inventories
   46,684    26,293
Deferred preservation costs
   35,671    30,688
Prepaid expenses and other
   4,731    2,815





Total current assets
   179,280    147,233





Property and equipment:

Equipment and software
   47,899    37,086
Furniture and fixtures
   4,916    4,670
Leasehold improvements
   40,280    31,981




Total property and equipment
   93,095    73,737
Less accumulated depreciation and amortization
   59,516    55,235




Net property and equipment
   33,579    18,502

Other assets:

Goodwill
   188,305    78,294
Patents, less accumulated amortization of $2,819 in 2017 and $2,702 in 2016
   793    1,008
Trademarks and other intangibles, less accumulated amortization of $15,326 in 2017 and $10,733 in 2016
   178,637    65,633
Deferred income taxes
   1,610    --
Other
   7,489    5,470





Total assets
   $         589,693    $         316,140

~~F-5~~

~~CRYOLIFE, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED BALANCE SHEETS~~

~~(in thousands, except per share data)~~

   December 31,
   2017    2016
LIABILITIES AND SHAREHOLDERS’ EQUITY


Current liabilities:

Accrued expenses
   $ 11,646    $ 5,054
Accrued compensation
   10,208    8,815
Accounts payable
   9,767    5,744
Taxes payable
   4,020    2
Accrued procurement fees
   3,577    4,806
Current portion of capital lease obligation
   578    --
Current portion of long-term debt
   718    4,562
Other
   2,426    1,119





Total current liabilities
   42,940    30,102





Long-term debt
   218,236    67,012
Deferred income taxes
   30,431    7
Capital lease obligation
   6,856    11
Deferred compensation liability
   3,390    2,600
Deferred rent obligations
   2,895    2,355
Other
   7,887    5,070





Total liabilities
   312,635    107,157





Commitments and contingencies


Shareholders’ equity:

Preferred stock $0.01 par value per share, 5,000 shares authorized, no shares issued
   --    --
Common stock $0.01 par value per share, 75,000 shares authorized, 37,618 shares issued in 2017 and 34,230 shares issued in 2016
   376    342
Additionalpaid-in capital
   249,935    187,061
Retained earnings
   37,609    34,143
Accumulated other comprehensive income (loss)
   1,857    (429)
Treasury stock at cost, 1,387 shares in 2017 and 1,356 shares in 2016
   (12,719)    (12,134)





Total shareholders’ equity
   277,058    208,983





Total liabilities and shareholders’ equity
   $         589,693    $         316,140

~~See accompanying Notes to Consolidated Financial Statements.~~

~~F-6~~

~~CRYOLIFE, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME~~

~~(in thousands, except per share data)~~

   Year Ended December 31,
   2017    2016    2015
Revenues:

Products
   $ 119,631    $ 113,992    $ 83,081
Preservation services
   70,071    66,388    62,817






Total revenues
   189,702    180,380    145,898







Cost of products and preservation services:

Products
   29,798    28,033    18,663
Preservation services
   31,262    33,448    36,516






Total cost of products and preservation services
   61,060    61,481    55,179







Gross margin
   128,642    118,899    90,719







Operating expenses:

General, administrative, and marketing
   101,211    91,548    74,929
Research and development
   19,461    13,446    10,436






Total operating expenses
   120,672    104,994    85,365






Gain from sale of business components
   --    (7,915)    --






Operating income
   7,970    21,820    5,354







Interest expense
   4,881    3,043    (62)
Interest income
   (212)    (72)    (45)
Gain on sale of Medafor investment
   --    --    (891)
Other (income) expense, net
   (260)    437    484







Income before income taxes
   3,561    18,412    5,868
Income tax (benefit) expense
   (143)    7,634    1,863







Net income
   $ 3,704    $ 10,778    $ 4,005






Income per common share:

Basic
   $ 0.11    $ 0.33    $ 0.14






Diluted
   $ 0.11    $ 0.32    $ 0.14






Dividends declared per common share
   $ --    $ --    $ 0.120
Weighted-average common shares outstanding:

Basic
   33,008    31,855    27,744
Diluted

   34,163    32,822    28,542
Net income
   $ 3,704    $ 10,778    $ 4,005
Other comprehensive income (loss)
   2,286    (353)    45






Comprehensive income
   $         5,990    $         10,425    $         4,050

~~See accompanying Notes to Consolidated Financial Statements.~~

~~F-7~~

~~CRYOLIFE, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(in thousands)~~

   Year Ended December 31,
   2017    2016    2015
Net cash flows from operating activities:

Net income
   $ 3,704    $ 10,778    $ 4,005

Adjustments to reconcile net income to net cash from operating activities:

Gain from sale of business components
   --    (7,915)    --
Gain on sale of Medafor investment
   --    --    (891)
Depreciation and amortization
   9,745    8,384    5,863
Non-cash compensation
   6,919    6,328    5,089
Write-down of inventories and deferred preservation costs
   2,110    1,364    1,341
Deferred income taxes
   (1,483)    595    3,681
Othernon-cash adjustments to income
   676    268    268

Changes in operating assets and liabilities:

Receivables
   (7,258)    4,142    (3,809)
Inventories and deferred preservation costs
   (9,369)    (9,460)    (2,262)
Prepaid expenses and other assets
   (2,968)    515    (1,187)
Accounts payable, accrued expenses, and other liabilities
   8,727    4,720    (656)






Net cash flows provided by operating activities
   10,803    19,719    11,442







Net cash flows used in investing activities:

Acquisition of JOTEC, net of cash acquired
   (164,661)    --    --
Acquisition ofOn-X, net of cash acquired
   --    (91,152)    --
Acquisition of PhotoFix technology
   (409)    (1,226)    --
Acquisition of French distribution business
   --    --    (1,349)
Capital expenditures
   (6,632)    (6,198)    (3,490)
Proceeds from sale of business components
   740 �� 19,795    --
Proceeds from sale of Medafor investment
   --    --    891
Decrease in restricted cash
   --    5,000    --
Sales and maturities of restricted securities and investments
   1,010    1,067    1,157
Purchases of restricted securities and investments
   (954)    (1,014)    (1,085)
Other
   (86)    (126)    (610)






Net cash flows used in investing activities
   (170,992)    (73,854)    (4,486)







Net cash flows from financing activities:

Proceeds from issuance of term loan
   225,000    75,000    --
Payoff of debt agreement
   (67,219)    --    --
Payment of debt issuance costs
   (10,144)    (2,289)    --
Repayment of term loan
   (4,994)    (1,406)    --
Proceeds from exercise of stock options and issuance of common stock
   3,126    2,203    1,526
Cash dividends paid
   --    --    (3,408)
Redemption and repurchase of stock to cover tax withholdings
   (1,614)    (697)    (1,386)
Other
   (910)    617    458






Net cash flows provided by (used in) financing activities
   143,245    73,428    (2,810)







Effect of exchange rate changes on cash
   279    (239)    67






(Decrease) increase in cash and cash equivalents
   (16,665)    19,054    4,213

Cash and cash equivalents, beginning of year
   56,642    37,588    33,375






Cash and cash equivalents, end of year
   $         39,977    $         56,642    $         37,588

~~See accompanying Notes to Consolidated Financial Statements.~~

~~F-8~~

~~CRYOLIFE, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY~~

~~(in thousands)~~

   Common
Stock    Additional
Paid In
Capital    Retained
Earnings    Accumulated
Other
Comprehensive
(Loss) Income    Treasury
Stock    Total
Shareholders’
Equity
   Shares    Amount             Shares    Amount
Balance at December 31, 2014
   29,229    $ 292    $ 135,227    $ 22,768    $ (121)    (1,101)    $ (9,481)    $ 148,685


Net income
   --    --    --    4,005    --    --    --    4,005
Other comprehensive income:

Foreign currency translation gain
   --    --    --    --    45    --    --    45


Comprehensive income
                        4,050


Cash dividends paid ($0.120 per share)
   --    --    --    (3,408)    --    --    --    (3,408)
Equity compensation
   271    3    5,323    --    --    --    --    5,326
Exercise of options
   248    2    1,837    --    --    (93)    (1,002)    837
Employee stock purchase plan
   78    1    688    --    --    --    --    689
Excess tax benefit
   --    --    458    --    --    --    --    458
Redemption and repurchase of stock to cover tax withholdings
   (60)    --    (645)    --    --    (71)    (741)    (1,386)


Balance at December 31, 2015
   29,766    $ 298    $ 142,888    $ 23,365    $ (76)    (1,265)    $ (11,224)    $ 155,251


Net income
   --    --    --    10,778    --    --    --    10,778
Other comprehensive income:

Foreign currency translation loss
   --    --    --    --    (353)    --    --    (353)


Comprehensive income
                        10,425


Stock Issued forOn-X transaction
   3,704    37    34,556    --    --    --    --    34,593
Equity compensation
   342    3    6,599    --    --    --    --    6,602
Exercise of options
   372    3    2,083    --    --    (69)    (712)    1,374
Employee stock purchase plan
   90    1    828    --    --    --    --    829
Excess tax benefit
   --    --    606    --    --    --    --    606
Redemption and repurchase of stock to cover tax withholdings
   (44)    --    (499)    --    --    (22)    (198)    (697)


Balance at December 31, 2016
   34,230    $ 342    $ 187,061    $ 34,143    $ (429)    (1,356)    $ (12,134)    $ 208,983


Cumulative effect of ASU2016-09 Adjustment
   --    --    379    (238)    --    --    --    141
Net income
   --    --    --    3,704    --    --    --    3,704
Other comprehensive income:

Foreign currency translation gain
   --    --    --    --    2,286    --    --    2,286


Comprehensive income
                        5,990


Stock Issued for JOTEC transaction
   2,683    27    53,092    --    --    --    --    53,119
Equity compensation
   311    3    7,310    --    --    --    --    7,313
Exercise of options
   393    4    2,476    --    --    (30)    (585)    1,895
Employee stock purchase plan
   93    1    1,230    --    --    --    --    1,231
Redemption and repurchase of stock to cover tax withholdings
   (92)    (1)    (1,613)    --    --    --            --    (1,614)


Balance at December 31, 2017
   37,618    $         376    $         249,935    $         37,609    $         1,857    (1,386)    $         (12,719)    $         277,058

~~See accompanying Notes to Consolidated Financial Statements.~~

~~F-9~~

~~CRYOLIFE, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~1. Summary of Significant Accounting Policies~~

~~Nature of Business~~

CryoLife, Inc. (“CryoLife,” the “Company,” “we,” or “us”), incorporated in 1984 in Florida, is a leader in the manufacturing, processing, and distribution of medical devices and implantable human tissues used in cardiac and vascular surgical procedures focused on aortic repair. Our medical devices and processed tissues primarily include four product families: BioGlue^® ~~Surgical Adhesive (“BioGlue”);On-X~~ ~~mechanical heart valves and surgical products; JOTEC endovascular and surgical products; and cardiac and vascular human tissues including the CryoValve~~^® ~~SG pulmonary heart valve (“CryoValve SGPV”) and the CryoPatch~~^® ~~SG pulmonary cardiac patch (“CryoPatch SG”), both of which are processed using our proprietary SynerGraft~~^® ~~technology.~~

~~Principles of Consolidation~~

The accompanying consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

~~Translation of Foreign Currencies~~

Our revenues and expenses transacted in foreign currencies are translated as they occur at exchange rates in effect at the time of each transaction. Realized gains and losses on foreign currency transactions are recorded as a component of other (income) expense, net on our Consolidated Statements of Operations and Comprehensive Income. Our assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect as of the balance sheet date and are recorded as a separate component of accumulated other comprehensive income (loss) in the shareholders’ equity section of our Consolidated Balance Sheets.

~~Use of Estimates~~

The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Estimates and assumptions are used when accounting for investments, allowance for doubtful accounts, inventory, deferred preservation costs, acquired assets or businesses,~~long-lived~~ tangible and intangible assets, deferred income taxes, commitments and contingencies (including product and tissue processing liability claims, claims incurred but not reported, and amounts recoverable from insurance companies), stock-based compensation, certain accrued liabilities (including accrued procurement fees, income taxes, and financial instruments), contingent consideration liability, and other items as appropriate.

~~Revenue Recognition~~

~~Revenues for products, including: BioGlue,On-X~~ ~~products, JOTEC products, CardioGenesis cardiac laser therapy, PerClot~~^®~~, PhotoFix~~^TM and other medical devices, are typically recognized at the time the product is shipped, at which time title passes to the customer, and there are no further performance obligations. Revenues from consignment are recognized when the medical device is implanted. We recognize revenues for preservation services when services are completed and tissue is shipped to the customer. Revenues from upfront licensing agreements are recognized ratably over the period we expect to fulfill our obligations.

Revenues from the sale of laser consoles are considered multiple element arrangements, and such revenues are allocated to the elements of the sale. We allocate revenues based primarily on the revenue these individual elements would generate if sold separately. Revenues from the sales of domestic laser consoles are typically recognized when the laser is installed at a customer site and all materials for the laser console’s use are delivered. Revenues from the sales of laser consoles to international distributors are evaluated individually based on the terms of the sale and collectability to determine when revenue has been earned and can be recognized.

~~F-10~~

~~Shipping and Handling Charges~~

Fees charged to customers for shipping and handling of products and tissues are included in product revenues and preservation services revenues, respectively. The costs for shipping and handling of products and tissues are included as a component of cost of products and cost of preservation services, respectively.

~~Advertising Costs~~

The costs to develop, produce, and communicate our advertising are expensed as incurred and are classified as general, administrative, and marketing expenses. We record the cost to print or copy certain sales materials as a prepaid expense and amortize these costs as an advertising expense over the period they are expected to be used, typically six months to one year. The total amount of advertising expense included in our Consolidated Statements of Operations and Comprehensive Income was $606,000, $384,000, and $521,000 for the years ended December 31, 2017, 2016, and 2015, respectively.

~~Stock-Based~~ ~~Compensation~~

~~We have stock option and stock incentive plans for employees andnon-employee~~ Directors that provide for grants of restricted stock awards (“RSA”s), performance stock awards (“PSA”s), restricted stock units (“RSU”s), performance stock units (“PSU”s), and options to purchase shares of our common stock at exercise prices generally equal to the fair values of such stock at the dates of grant. We also maintain a shareholder approved Employee Stock Purchase Plan (the “ESPP”) for the benefit of our employees. The ESPP allows eligible employees the right to purchase common stock on a regular basis at the lower of 85% of the market price at the beginning or end of each offering period. The RSAs, PSAs, RSUs, PSUs, and stock options granted by us typically vest over a one to three-year period. The stock options granted by us typically expire within seven years of the grant date.

We value our RSAs, PSAs, RSUs, and PSUs based on the stock price on the date of grant. We expense the related compensation cost of RSAs, PSAs, and RSUs using the straight-line method over the vesting period. We expense the related compensation cost of PSUs based on the number of shares expected to be issued, if achievement of the performance component is probable, using a straight-line method over each vesting tranche of the award. The amount of compensation costs expensed related to PSUs is adjusted as needed if we deem that achievement of the performance component is no longer probable, or if our expectation of the number of shares to be issued changes. We use a Black-Scholes model to value our stock option grants and expense the related compensation cost using the straight-line method over the vesting period. The fair value of our ESPP options is also determined using a Black-Scholes model and is expensed over the vesting period.

The fair value of stock options and ESPP options is determined on the grant date using assumptions for the expected term, volatility, dividend yield, and the risk-free interest rate. The expected term is primarily based on the contractual term of the option and our data related to historic exercise and post-vesting forfeiture patterns, which is adjusted based on our expectations of future results. Our anticipated volatility level is primarily based on the historic volatility of our common stock, adjusted to remove the effects of certain periods of unusual volatility not expected to recur, and adjusted based on our expectations of future volatility, for the life of the option or option group. Our model was updated to include a zero dividend yield assumption when our quarterly dividends were discontinued after the fourth quarter of 2015. The risk-free interest rate is based on recent U.S. Treasury note auction results with a similar life to that of the option. Our model does not include a discount for post-vesting restrictions, as we have not issued awards with such restrictions.

~~The period expense for our stock compensation is determined based on the valuations discussed above and forfeitures are accounted for in the period awards are forfeited.~~

~~Change in Accounting for Employee Share-Based Payments~~

~~As of January 1, 2017 we made an entity-wide accounting policy election in accordance with ASU2016-09,~~~~Improvements to Employee Share-Based Payment Accounting,~~ ~~(“ASU2016-09”)~~ to change our accounting policy to account for stock compensation forfeitures in the period awards are forfeited rather than estimating the effect of forfeitures. We elected to make this accounting policy change to simplify the accounting for share-based compensation and believe this method provides a more accurate reflection of periodic share-based compensation cost from the grant date forward. We used the modified retrospective transition method to record a net $238,000 cumulative-effect adjustment decrease to retained earnings for the accounting policy change, which included a $379,000 increase to additional~~paid-in~~ ~~capital and a $141,000 increase in deferred tax assets.~~

~~F-11~~

~~Additionally, as of January 1, 2017 and in accordance with the guidance in ASU2016-09,~~ we made a change to account for excess tax benefits and deficiencies resulting from the settlement or vesting of share-based awards in income tax expense on our Consolidated Statement of Operations and Comprehensive Income instead of accounting for these effects through additional paid~~in-capital~~ ~~on our Consolidated Balance Sheets. We applied this amendment prospectively and prior periods have not been adjusted.~~

~~Income Per Common Share~~

~~Income per common share is computed using the two class method, which requires us to include unvested RSAs and PSAs that containnon-forfeitable~~ ~~rights to dividends (whether paid or unpaid) as participating securities in the income per common share calculation.~~

Under the two class method, net income is allocated to the weighted-average number of common shares outstanding during the period and the weighted-average participating securities outstanding during the period. The portion of net income that is allocated to the participating securities is excluded from basic and dilutive net income per common share. Diluted net income per share is computed using the weighted-average number of common shares outstanding plus the dilutive effects of outstanding stock options and awards and other dilutive instruments as appropriate.

~~Dividends~~

Cash dividends approved by our Board of Directors were paid every three months in the amount of $0.03 per share in 2015. In December 2015 the Board of Directors undertook a review of our dividend policy and determined that it would be in the best interest of the shareholders to discontinue dividend payments for the foreseeable future. We did not pay quarterly dividends in 2016 or 2017 and do not currently anticipate paying out further quarterly dividends.

~~Financial Instruments~~

Our financial instruments include cash equivalents, marketable securities, restricted securities, accounts receivable, notes receivable, accounts payable, debt obligations, contingent consideration, and derivatives. We typically value financial assets and liabilities such as receivables, accounts payable, and debt obligations at their carrying values, which approximate fair value due to their generally short-term duration. Other financial instruments are recorded as discussed in the sections below.

~~Fair Value Measurements~~

We record certain financial instruments at fair value, including: cash equivalents, certain marketable securities, certain restricted securities, contingent consideration, and derivative instruments. We may make an irrevocable election to measure other financial instruments at fair value on an~~instrument-by-instrument~~ ~~basis, although as of December 31, 2017 we have not chosen to make any such elections. Fair value financial instruments are recorded in accordance with the fair value measurement framework.~~

~~We also measure certainnon-financial~~ ~~assets at fair value on anon-recurring~~ ~~basis. Thesenon-recurring~~ ~~valuations include evaluating assets such as cost method investments,long-lived~~ ~~assets, andnon-amortizing~~ intangible assets for impairment; allocating value to assets in an acquired asset group; applying accounting for business combinations; and allocating goodwill to divested components of a business. We use the fair value measurement framework to value these assets and report these fair values in the periods in which they are recorded or written down.

The fair value measurement framework includes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair values in their broad levels. These levels from highest to lowest priority are as follows:

●

~~Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities;~~

●

~~Level 2: Quoted prices in active markets for similar assets or liabilities or observable prices that are based on inputs not quoted on active markets, but corroborated by market data; and~~

●

~~Level 3: Unobservable inputs or valuation techniques that are used when little or no market data is available.~~

~~F-12~~

use of various cost, market, or income valuation methodologies applied to our unobservable estimates and assumptions. Our assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include: estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. We may also engage external advisors to assist in determining fair value, as appropriate.

~~Although we believe that the recorded fair values of our financial instruments are appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.~~

~~Cash and Cash Equivalents~~

Cash equivalents consist primarily of highly liquid investments with maturity dates of three months or less at the time of acquisition. The carrying value of cash equivalents approximates fair value. We maintain depository accounts with certain financial institutions. Although these depository accounts may exceed government insured depository limits, we have evaluated the credit worthiness of these applicable financial institutions, and determined the risk of material financial loss due to the exposure of such credit risk to be minimal.

~~Cash Flow Supplemental Disclosures~~

~~Supplemental disclosures of cash flow information for the years ended December 31 (in thousands):~~

         2017                2016                2015
Cash paid during the year for:

Interest
   $ 2,561    $ 2,446    $ 1
Income taxes
   3,358    2,501    145
Non-cash investing and financing activities:

Issuance of common stock for acquisition of JOTEC intangible assets
   $ 53,119    $ --    $ --
Issuance of common stock for acquisition ofOn-X intangible assets
   --    34,593    --

~~Marketable Securities and Other Investments~~

~~We typically invest our excess cash for short-term periods in large,well-capitalized~~ ~~financial institutions, and our policy excludes investment in any securities rated less than“investment-grade”~~ by national rating services, unless specifically approved by the Board of Directors. We sometimes make longer term strategic investments in medical device companies, and these investments must be approved by the Board of Directors.

~~We determine the classification of our investments as trading,available-for-sale,~~ or~~held-to-maturity~~ at the time of purchase and reevaluate such designations quarterly. Trading securities are securities that are acquired principally for the purpose of generating a profit from short-term fluctuations in price. Debt securities are classified as~~held-to-maturity~~ ~~when we have the intent and ability to hold the securities to maturity. Any securities not designated as trading orheld-to-maturity~~ ~~are consideredavailable-for-sale.~~ ~~We typically state our investments at their fair values; however, forheld-to-maturity~~ ~~securities or when current fair value information is not readily available, investments are recorded using the cost method. The cost of securities sold is based on the specific identification method.~~

Under the fair value method, we adjust each investment to its market price and record the unrealized gains or losses in other (income) expense, net for trading securities, or accumulated other comprehensive income (loss), for~~available-for-sale~~ securities. Interest, dividends, realized gains and losses, and declines in value judged to be other than temporary are included in other (income) expense, net. Under the cost method, investments are recorded at cost, with subsequent dividends received recognized as income. Cost method investments are reviewed for impairment if factors indicate that a decrease in the value of the investment has occurred.

We review our contracts to determine if they require any restrictions to cash or investments. If there is a contractual agreement restricting the availability of our cash or investments, we will classify these amounts as current or long-term restricted cash or investments.

~~F-13~~

~~Accounts and Notes Receivable and Allowance for Doubtful Accounts~~

Our accounts receivable are primarily from hospitals and distributors that either use or distribute our products and tissues. We assess the likelihood of collection based on a number of factors, including past transaction history and the credit worthiness of the customer, as well as the increased risks related to international customers and large distributors. We determine the allowance for doubtful accounts based upon specific reserves for known collection issues, as well as a~~non-specific~~ reserve based upon aging buckets. We charge off uncollectable amounts against the reserve in the period in which we determine they are uncollectible. Our accounts receivable balances are reported net of allowance for doubtful accounts of $697,000 and $503,000 as of December 31, 2017 and 2016, respectively.

~~We may lend money fromtime-to-time~~ through a note receivable, which may be made in conjunction with a longer term strategic investment in a medical device company, as approved by the Board of Directors. We assess the likelihood of collection of our notes receivable based on a number of factors, including past transaction history, credit worthiness, and the liquidity position of the recipient as well as the expected value of any collateral. Our notes receivable balance was zero as of December 31, 2017 and 2016, respectively.

~~Inventories~~

~~Inventories are comprised of finished goods for our major product lines including: BioGlue;On-X~~ ~~products; JOTEC products; CardioGenesis cardiac laser therapy laser consoles, handpieces, and accessories; PerClot; PhotoFix; other medical devices;work-in-process;~~ ~~and raw materials. Inventories for finished goods are valued at the lower of cost or market on afirst-in,first-out~~ basis and raw materials are valued on a moving average cost basis. Typically, upon shipment, or upon implant of a medical device on consignment, revenue is recognized and the related inventory costs are expensed as cost of products. Cost of products also includes, as applicable, lower of cost or market write-downs and impairments for products not deemed to be recoverable and, as incurred, idle facility expense, excessive spoilage, extra freight, and rehandling costs.

Inventory costs for manufactured products consist primarily of direct labor and materials (including salary and fringe benefits, raw materials, and supplies) and indirect costs (including allocations of costs from departments that support manufacturing activities and facility allocations). The allocation of fixed production overhead costs is based on actual production levels, to the extent that they are within the range of the facility’s normal capacity. Inventory costs for products purchased for resale or manufactured under contract consist primarily of the purchase cost,~~freight-in~~ ~~charges, and indirect costs as appropriate.~~

We regularly evaluate our inventory to determine if the costs are appropriately recorded at the lower of cost or market value. We also evaluate our inventory for costs not deemed to be recoverable, including inventory not expected to ship prior to its expiration. Lower of cost or market value write-downs are recorded if the book value exceeds the estimated net realizable value of the inventory, based on recent sales prices at the time of the evaluation. Impairment write-downs are recorded based on the book value of inventory deemed to be impaired. Actual results may differ from these estimates. Write-downs of inventory are expensed as cost of products, and these write-downs are permanent impairments that create a new cost basis, which cannot be restored to its previous levels if our estimates change.

We recorded write-downs to our inventory totaling $1.2 million, $467,000, and $858,000 for the years ended December 31, 2017, 2016, and 2015, respectively. The 2017 write-down is primarily related to the write-down of our~~On-X~~ ~~ascending aortic prosthesis (“AAP”) as a result of inventory not expected to ship prior to the expiration date of the packaging and continued delay in obtaining Europeanre-certification.~~ The 2016 write-down is primarily related to the write-down of PerClot inventory as a result of inventory not expected to ship prior to the expiration date. The 2015 write-down is primarily related to the write-down of PerClot Topical inventory following our cessation of marketing, sales, and distribution of PerClot Topical in the U.S. See Note 8 for further discussion of PerClot Topical.

~~Deferred Preservation Costs~~

Deferred preservation costs includes costs of cardiac and vascular tissues available for shipment, tissues currently in active processing, and tissues held in quarantine pending release to implantable status. By federal law, human tissues cannot be bought or sold; therefore, the tissues we preserve are not held as inventory. The costs we incur to procure and process cardiac and vascular tissues are instead accumulated and deferred. Deferred preservation costs are stated at the lower of cost or market value on a~~first-in,first-out~~ basis and are deferred until revenue is recognized. Upon shipment of tissue to an implanting facility, revenue is recognized and the related deferred preservation costs are expensed as cost of preservation services. Cost of preservation services also includes, as applicable, lower of cost or market write-downs and impairments for

~~F-14~~

~~tissues not deemed to be recoverable, and includes, as incurred, idle facility expense, excessive spoilage, extra freight, and rehandling costs.~~

The calculation of deferred preservation costs involves judgment and complexity and uses the same principles as inventory costing. Donated human tissue is procured from deceased human donors by organ and tissue procurement organizations (“OTPOs”), which consign the tissue to us for processing, preservation, and distribution. Deferred preservation costs consist primarily of the procurement fees charged by the OTPOs, direct labor and materials (including salary and fringe benefits, laboratory supplies and expenses, and~~freight-in~~ charges), and indirect costs (including allocations of costs from support departments and facility allocations). Fixed production overhead costs are allocated based on actual tissue processing levels, to the extent that they are within the range of the facility’s normal capacity.

These costs are then allocated among the tissues processed during the period based on cost drivers, such as the number of donors or number of tissues processed. We apply a yield estimate to all tissues in process and in quarantine to estimate the portion of tissues that will ultimately become implantable. We estimate quarantine yields based on our experience and reevaluate these estimates periodically. Actual yields could differ significantly from our estimates, which could result in a change in tissues available for shipment, and could increase or decrease the balance of deferred preservation costs. These changes could result in additional cost of preservation services expense or could increase per tissue preservation costs, which would impact gross margins on tissue preservation services in future periods.

We regularly evaluate our deferred preservation costs to determine if the costs are appropriately recorded at the lower of cost or market value. We also evaluate our deferred preservation costs for costs not deemed to be recoverable, including tissues not expected to ship prior to the expiration date of their packaging. Lower of cost or market value write-downs are recorded if the tissue processing costs incurred exceed the estimated market value of the tissue services, based on recent average service fees at the time of the evaluation. Impairment write-downs are recorded based on the book value of tissues deemed to be impaired. Actual results may differ from these estimates. Write-downs of deferred preservation costs are expensed as cost of preservation services, and these write-downs are permanent impairments that create a new cost basis, which cannot be restored to its previous levels if our estimates change.

We recorded write-downs to our deferred preservation costs totaling $922,000, $897,000, and $483,000 for the years ended December 31, 2017, 2016, and 2015, respectively, due primarily to tissues not expected to ship prior to the expiration date of the packaging.

~~Property and Equipment~~

~~Property and equipment is stated at cost. Depreciation is provided over the estimated useful lives of the assets, generally three to ten years, on astraight-line~~ ~~basis. Leasehold improvements are amortized on astraight-line~~ ~~basis over the remaining lease term at the time the assets are capitalized or the estimated useful lives of the assets, whichever is shorter.~~

~~Depreciation expense for the years ended December 31 is as follows (in thousands):~~

2017 2016 2015
Depreciation expense
$ 4,648 $ 3,958 $ 3,728

~~Goodwill and Other Intangible Assets~~

Our intangible assets consist of goodwill, patents, trademarks, and other intangible assets, as discussed in Note 11. Our goodwill is attributable to a segment or segments of our business, as appropriate, as the related acquired business that generated the goodwill is integrated into our operations. Upon divestiture of a component of our business, the goodwill related to the operating segment is allocated to the divested business using the relative fair value allocation method.

We amortize our definite lived intangible assets over their expected useful lives using the straight-line method, which we believe approximates the period of economic benefits of the related assets. Our indefinite lived intangible assets do not amortize, but are instead subject to periodic impairment testing as discussed in “Impairments of Long-Lived Assets and~~Non-Amortizing~~ ~~Intangible Assets” below.~~

~~F-15~~

~~Impairments ofLong-Lived~~ ~~Assets andNon-Amortizing~~ ~~Intangible Assets~~

We assess the potential impairment of our long-lived assets to be held and used whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that could trigger an impairment review include, but are not limited to, the following:

●

~~Significant underperformance relative to expected historical or projected future operating results;~~

●

~~Significant negative industry or economic trends;~~

●

~~Significant decline in our stock price for a sustained period; or~~

●

~~Significant decline in our market capitalization relative to net book value.~~

If we determine that an impairment review is necessary, we will evaluate the assets or asset groups by comparing their carrying values to the sum of the undiscounted future cash flows expected to result from their use and eventual disposition. If the carrying values exceed the future cash flows, then the asset or asset group is considered impaired, and we will write down the value of the asset or asset group. For the years ended December 31, 2017, 2016, and 2015 we did not experience any factors that indicated that an impairment review of our long-lived assets was warranted.

~~We evaluate our goodwill and othernon-amortizing~~ ~~intangible assets for impairment on an annual basis as of October 31 and, if necessary, during interim periods if factors indicate that an impairment review is warranted. As of October 31, 2017 ournon-amortizing~~ ~~intangible assets consisted of goodwill, acquired procurement contracts and agreements, trademarks, and other acquired technology. We performed an analysis of ournon-amortizing~~ intangible assets as of October 31, 2017 and 2016, and determined that the fair value of the assets and the fair value of the reporting unit exceeded their associated carrying values and were, therefore, not impaired. We will continue to evaluate the recoverability of these~~non-amortizing~~ ~~intangible assets.~~

~~Accrued Procurement Fees~~

Donated tissue is procured from deceased human donors by OTPOs, which consign the tissue to us for processing, preservation, and distribution. We reimburse the OTPOs for their costs to recover the tissue and include these costs as part of deferred preservation costs, as discussed above. We accrue estimated procurement fees due to the OTPOs at the time tissues are received based on contractual agreements between us and the OTPOs.

~~Leases~~

We have operating and capital lease obligations resulting from the lease of land and buildings that comprise our corporate headquarters and various manufacturing facilities; leases related to additional manufacturing, office, and warehouse space; leases on Company vehicles; and leases on a variety of office and other equipment, as discussed in Note 14. Certain of our leases contain escalation clauses, rent concessions, and renewal options for additional periods. Rent expense is computed on the~~straight-line~~ ~~method over the lease term and the related liability is recorded as deferred rent obligations on our Consolidated Balance Sheets.~~

~~Debt Issuance Costs~~

Debt issuance costs related to our term loan and line of credit are capitalized and reported net of the current and long-term debt or as a prepaid asset when there are no outstanding borrowings. If there is unamortized debt issuance costs related to our line of credit but only borrowings on the term loan, these debt issuance costs will be combined with the debt issuance costs related to the term loan and reported net of the current and long-term debt for the term loan. We amortize debt issuance costs to interest expense on our term loan using the effective interest method over the life of the debt agreement. We amortize debt issuance costs to interest expense on our line of credit on a straight-line basis over the life of the debt agreement.

~~Liability Claims~~

In the normal course of business, we are made aware of adverse events involving our products and tissues. Future adverse events could ultimately give rise to a lawsuit against us, and liability claims may be asserted against us in the future based on past events we are not aware of at the present time. We maintain~~claims-made~~ ~~insurance policies to mitigate our financial exposure to product and tissue processing liability claims.Claims-made~~ ~~insurance policies generally cover only~~

~~F-16~~

~~those asserted claims and incidents that are reported to the insurance carrier while the policy is in effect. Thus, aclaims-made~~ policy does not generally represent a transfer of risk for claims and incidents that have been incurred but not reported to the insurance carrier during the policy period. Any punitive damage components of claims are uninsured.

~~We engage external advisors to assist us in estimating our liability and any related amount recoverable under our insurance policies as of each balance sheet date. We use afrequency-severity~~ approach to estimate our unreported product and tissue processing liability claims, whereby projected losses are calculated by multiplying the estimated number of claims by the estimated average cost per claim. The estimated claims are determined based on the reported claim development method and the~~Bornhuetter-Ferguson~~ method using a blend of our historical claim experience and industry data. The estimated cost per claim is calculated using a lognormal claims model blending our historical average cost per claim with industry claims data. We use a number of assumptions in order to estimate the unreported loss liability including: the future claim reporting time lag, the frequency of reported claims, the average cost per claim, and the maximum liability per claim. We believe that the assumptions we use provide a reasonable basis for our calculation. However, the accuracy of the estimates is limited by various factors, including, but not limited to, our specific conditions, uncertainties surrounding the assumptions used, and the scarcity of industry data directly relevant to our business activities. Due to these factors, actual results may differ significantly from our assumptions and from the amounts accrued.

~~We accrue our estimate of unreported product and tissue processing liability claims as a component of otherlong-term~~ ~~liabilities and record the related recoverable insurance amounts as a component of otherlong-term~~ assets. The amounts recorded represent our estimate of the probable losses and anticipated recoveries for unreported claims related to products sold and services performed prior to the balance sheet date.

~~Legal Contingencies~~

We accrue losses from a legal contingency when the loss is both probable and reasonably estimable. The accuracy of our estimates of losses for legal contingencies is limited by uncertainties surrounding litigation. Therefore, actual results may differ significantly from the amounts accrued, if any. We accrue for legal contingencies as a component of accrued expenses and/or other~~long-term~~ ~~liabilities. Gains from legal contingencies are recorded when the contingency is resolved.~~

~~Legal Fees~~

We expense the costs of legal services, including legal services related to product and tissue processing liability claims and legal contingencies, as they are incurred. Reimbursement of legal fees by an insurance company or other third party is recorded as a reduction to legal expense.

~~Uncertain Tax Positions~~

~~We periodically assess our uncertain tax positions and recognize tax benefits if they are“more-likely-than-not”~~ to be upheld upon review by the appropriate taxing authority. We measure the tax benefit by determining the maximum amount that has a “greater than 50 percent likelihood” of ultimately being realized. We reverse previously accrued liabilities for uncertain tax positions when audits are concluded, statutes expire, administrative practices dictate that a liability is no longer warranted, or in other circumstances as deemed necessary. These assessments can be complex and we often obtain assistance from external advisors to make these assessments. We recognize interest and penalties related to uncertain tax positions in other (income) expense, net on our Consolidated Statements of Operations and Comprehensive Income. See Note 12 for further discussion of our liabilities for uncertain tax positions.

~~Deferred Income Taxes~~

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax return purposes. We periodically assess the recoverability of our deferred tax assets, as necessary, when we experience changes that could materially affect our determination of the recoverability of our deferred tax assets. We provide a valuation allowance against our deferred tax assets when, as a result of this analysis, we believe it is more likely than not that some portion or all of our deferred tax assets will not be realized.

~~F-17~~

Assessing the recoverability of deferred tax assets involves judgment and complexity in conjunction with prudent and feasible tax planning. Estimates and judgments used in the determination of the need for a valuation allowance and in calculating the amount of a needed valuation allowance include, but are not limited to, the following:

●

~~Projected future operating results;~~

●

~~Anticipated future state tax apportionment;~~

●

~~Timing and amounts of anticipated future taxable income;~~

●

~~Timing of the anticipated reversal of book/tax temporary differences;~~

●

~~Evaluation of statutory limits regarding usage of certain tax assets; and~~

●

~~Evaluation of the statutory periods over which certain tax assets can be utilized.~~

Significant changes in the factors above, or other factors, could affect our ability to use our deferred tax assets. Such changes could have a material, adverse impact on our profitability, financial position, and cash flows. We will continue to assess the recoverability of our deferred tax assets, as necessary, when we experience changes that could materially affect our prior determination of the recoverability of our deferred tax assets.

We believe that the realizability of our acquired net operating loss carryforwards will be limited in future periods due to a change in control of our former subsidiaries Hemosphere, Inc. (“Hemosphere”) and Cardiogenesis Corporation (“Cardiogenesis”), as mandated by Section 382 of the Internal Revenue Code of 1986, as amended. We believe that our acquisitions of these companies each constituted a change in control as defined in Section 382 and that, prior to our acquisition, Hemosphere had experienced other equity ownership changes that should be considered such a change in control. We acquired net operating loss carryforwards in the acquisition of~~On-X,~~ ~~the majority of which have been realized. We also acquired net operating loss carryforwards in certain foreign jurisdictions in our recent acquisition of JOTEC. While our analysis is stillon-going,~~ we believe these loss carryforwards will be fully realizable. The deferred tax assets recorded on our Consolidated Balance Sheets exclude amounts that we expect will not be realizable due to changes in control. A portion of the acquired net operating loss carryforwards is related to state income taxes for which we believe it is more likely than not, that some will not be realized. Therefore, we recorded a valuation allowance against these state net operating loss carryforwards.

~~Valuation of Acquired Assets or Businesses~~

As part of our corporate strategy, we are seeking to identify and capitalize upon acquisition opportunities of complementary product lines and companies. We evaluate and account for acquired patents, licenses, distribution rights, and other tangible or intangible assets as the purchase of an asset or asset group, or as a business combination, as appropriate. The determination of whether the purchase of a group of assets should be accounted for as an asset group or as a business combination requires judgment based on the weight of available evidence.

~~For the purchase of an asset group, we allocate the cost of the asset group, including transaction costs, to the individual assets purchased based on their relative estimated fair values.In-process~~ research and development acquired as part of an asset group is expensed upon acquisition. We account for business combinations using the acquisition method. Under this method, the allocation of the purchase price is based on the fair value of the tangible and identifiable intangible assets acquired and the liabilities assumed as of the date of the acquisition. The excess of the purchase price over the estimated fair value of the tangible net assets and identifiable intangible assets is recorded as goodwill. Transaction costs related to business combinations are expensed as incurred.~~In-process~~ research and development acquired as part of a business combination is accounted for as an indefinite-lived intangible asset until the related research and development project gains regulatory approval or is discontinued.

We typically engage external advisors to assist us in determining the fair value of acquired asset groups or business combinations, using valuation methodologies such as: the excess earnings, the discounted cash flow, or the relief from royalty methods. The determination of fair value in accordance with the fair value measurement framework requires significant judgments and estimates, including, but not limited to: timing of product life cycles, estimates of future revenues, estimates of profitability for new or acquired products, cost estimates for new or changed manufacturing processes, estimates of the cost or timing of obtaining regulatory approvals, estimates of the success of competitive products, and discount rates and represent level 3 measurements. We, in consultation with our advisors, make these estimates based on our prior experiences and industry knowledge. We believe that our estimates are reasonable, but actual results could differ significantly from our estimates. A significant change in our estimates used to value acquired asset groups or business combinations could result in future write-downs of tangible or intangible assets acquired by us and, therefore, could

~~F-18~~

materially impact our financial position and profitability. If the value of the liabilities assumed by us, including contingent liabilities, is determined to be significantly different from the amounts previously recorded in purchase accounting, we may need to record additional expenses or write-downs in future periods, which could materially impact our financial position and profitability.

~~Derivative Instruments~~

We determine the fair value of our stand-alone and embedded derivative instruments at issuance and record any resulting asset or liability on our Consolidated Balance Sheets. Changes in the fair value of the derivative instruments are recognized in other (income) expense on our Consolidated Statements of Operations and Comprehensive Income.

~~New Accounting Pronouncements~~

~~In February 2016, the Financial Accounting Standards Board (“FASB”) amended its Accounting Standards Codification and created a new Topic 842,~~~~Leases~~~~. The final guidance requires lessees to recognize aright-of-use~~ ~~asset and a lease liability for all leases (with the exception of short-term leases) at the commencement date and recognize expenses on their income statements similar to the current Topic 840,~~~~Leases~~. It is effective for fiscal years and interim periods beginning after December 15, 2018, and early adoption is permitted. We are evaluating the impact the adoption of this standard will have on our financial position, results of operations, and cash flows.

~~In May 2014 the FASB issued ASUNo. 2014-09,~~~~Revenue from Contracts with Customers.~~ ~~Since ASU2014-09~~ was issued, several additional ASUs have been issued to clarify various elements of the guidance. These standards provide guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. As required, we have adopted the new standard effective January 1, 2018. We are using the modified retrospective method and under this method we will have a cumulative catch up adjustment and will be providing additional disclosures in future filings including a comparison of results under the new standard to the previous standard. We have completed an initial evaluation of the potential impact from adopting the new standard, including a detailed review of performance obligations for all material revenue streams. We currently believe the most significant impacts may include the following items:

●

Certain distributor agreements included inventory buyback provisions under defined change of business conditions which, under the new standard, would not qualify as a completed revenue transaction because these provisions could prevent us from transferring control to the distributor and would, therefore, result in a reversal of revenue and recording of deferred revenue until the proper criteria are met. We have modified most of our agreements to remove the buyback provisions effective on or before January 1, 2018. As of January 1, 2018, there were certain remaining agreements with buyback provisions that had not been modified. We expect to record a cumulative effect adjustment upon adoption of the new standard to record the deferred revenue associated with these agreements. The deferred revenue will be recognized over future periods as the medical devices are implanted during the remaining term of the agreement.

●

Certain JOTEC products are manufactured to order, have no alternative use, and contain an enforceable right to payment for the performance completed. The revenue impact of these agreements is not material, but it is anticipated the sale of these products will increase over time. We expect to record a cumulative effect adjustment upon adoption of the new standard to record the deferred revenue associated with these agreements.

~~F-19~~

~~2. Financial Instruments~~

~~A summary of financial instruments measured at fair value is as follows (in thousands):~~

December 31, 2017
           Level 1                 Level 2                 Level 3                 Total
Cash equivalents:

Money market funds
   $ 372 -- -- $ 372
Restricted securities:

Money market funds
   776 -- -- 776


Total assets
   $         1,148 $         -- $
        --

$         1,148

December 31, 2016
           Level 1                 Level 2                 Level 3                 Total
Cash equivalents:

Money market funds
   $ 3,466 $ -- $ -- $ 3,466
Restricted securities:

Money market funds
   699 -- -- 699


Total assets
   $         4,165 $         -- $         -- $         4,165

~~We used prices quoted from our investment management companies to determine the Level 1 valuation of our investments in money market funds.~~

~~During the years ended December 31, 2017 and 2016, the Company initially recoded certainnon-financial~~ ~~assets at fair value related to the acquisition JOTEC andOn-X.~~ ~~Disclosures of these initial fair value determinations are included in Note 4 and Note 5 below.~~

~~3. Cash Equivalents and Restricted Cash and Securities~~

~~The following is a summary of cash equivalents and marketable securities (in thousands):~~

December 31, 2017
         Cost Basis          Unrealized
Holding
  Gains (Losses)          Estimated
Market
Value
Cash equivalents:

Money market funds
   $         372    --    $         372
Restricted securities:

Money market funds
   776    --    776

December 31, 2016
         Cost Basis          Unrealized
Holding
  Gains (Losses)          Estimated
Market
Value
Cash equivalents:

Money market funds
   $     3,466    $         --    $     3,466
Restricted securities:

Money market funds
   699    --    699

As of December 31, 2017 and 2016 $776,000 and $699,000, respectively, of our money market funds were designated as short-term restricted securities due to a contractual commitment to hold the securities as pledged collateral relating primarily to international tax obligations.

~~F-20~~

There were no gross realized gains or losses on cash equivalents or restricted securities for the years ended December 31, 2017, 2016, and 2015. As of December 31, 2017 $537,000 of our restricted securities had a maturity date within three months and $239,000 had a maturity date between three months and one year. As of December 31, 2016 $490,000 of our restricted securities had a maturity date within three months and $209,000 of our restricted securities had a maturity date between three months and one year.

~~4. Acquisition of JOTEC~~

~~Overview~~

On October 10, 2017 we announced that we entered into a definitive agreement to acquire JOTEC AG (“JOTEC”), a Swiss entity (the “Acquisition”), which we converted to JOTEC GmbH, for approximately $225.0 million, subject to certain adjustments. The transaction closed on December 1, 2017 and JOTEC is being operated as a wholly owned subsidiary of CryoLife. In connection with the closing of the JOTEC acquisition, CryoLife entered into a Credit and Guaranty Agreement (“Credit Agreement”) with certain financial institutions as lenders, and Deutsche Bank AG New York Branch, as administrative and collateral agent, for a senior secured credit facility in an aggregate principal amount of $255.0 million, which includes a $225.0 million term loan and a $30.0 million revolving credit facility. See Note 13 for further discussion of the Credit Agreement.

JOTEC is a German-based, privately held developer of technologically differentiated endovascular stent grafts, and cardiac and vascular surgical grafts, focused on aortic repair. We believe our the acquisition of JOTEC will create a company with a broad and highly competitive product portfolio focused on aortic surgery, and will position us to compete strongly in the important and growing endovascular surgical markets.

~~Accounting for the Transaction~~

Based on our preliminary analysis, the purchase price of the transaction totaled approximately $221.9 million, including debt and cash acquired as determined on the date of closing, consisting of $168.8 million in cash and 2,682,754 shares of CryoLife common stock, with an estimated value of $53.1 million as determined on the date of the closing. Upon closing of the Acquisition, $22.5 million was paid into an escrow account for any amounts payable for indemnification claims or other payment obligations. Our preliminary allocation of the $221.9 million purchase consideration was allocated to JOTEC’s tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated fair values as of December 1, 2017. Goodwill was preliminarily recorded based on the amount by which the purchase price exceeded the fair value of the net assets acquired and is not deductible for tax purposes. Goodwill from this transaction has been allocated to our Medical Devices segment. The estimated allocation of assets acquired and liabilities assumed is based on the information available to us. If new information regarding these values is received that would result in a material adjustment to the values recorded, we will recognize the adjustment, which may include the recognition of additional expenses, impairments, or other allocation adjustments, in the period this determination is made.

~~The preliminary purchase consideration acquired as of December 1, 2017, is as follows (in thousands):~~


	~~Opening~~ ~~Balance Sheet~~
~~Cash and cash equivalents~~	$	~~4,089~~
~~Receivables~~		~~13,204~~
~~Inventories~~		~~17,341~~
~~Intangible assets~~		~~115,820~~
~~Property and equipment~~		~~12,921~~
~~Goodwill~~		~~110,100~~
~~Other assets~~		~~3,893~~
~~Debt acquired~~		~~(3,770)~~
~~Liabilities assumed~~		~~(51,729)~~

~~Total purchase consideration~~	$	~~221,869~~

We incurred transaction and integration costs of $8.9 million for the year ended December 31, 2017 primarily related to the acquisition, which included, among other costs, expenses related to the termination of international and domestic

~~F-21~~

distribution agreements, severance costs, and legal, professional, and consulting costs. These costs were expensed as incurred and were primarily recorded as general, administrative, and marketing expenses on our Consolidated Statements of Operations and Comprehensive Income.

~~Pro Forma Results - Unaudited~~

JOTEC revenues were $4.1 million and the net loss was $1.5 million from the date of acquisition through December 31, 2017. Our unaudited pro forma results of operations for the years ended December 31, 2017 and 2016, assuming the JOTEC acquisition had occurred as of January 1, 2016, are presented for comparative purposes below. These amounts are based on available information from the results of operations of JOTEC prior to the acquisition date and are not necessarily indicative of what the results of operations would have been had the acquisition been completed on January 1, 2016. Differences between the preliminary and final purchase price allocation could have an impact on the pro forma financial information presented below and that impact could be material. This unaudited pro forma information does not project operating results post acquisition.

~~This unaudited pro forma information is as follows (in thousands, except per share amounts):~~

Twelve Months Ended
December 31,



   2017    2016


Total revenues
   $               236,209    $                 224,896
Net loss
   (736)    (1,966)
Pro forma loss per common share - basic
   $ (0.02)    $ (0.06)
Pro forma loss per common share - diluted
   $ (0.02)    $ (0.06)

~~Pro forma net loss was calculated using a normalized tax rate of approximately 38%.~~

~~The pro forma amortization of intangible assets acquired, as reported in our8-K/A~~ filed on February 16, 2018, was incorrect due to a clerical error. The corrected pro forma amortization is included in the determination of pro forma loss per common share for the twelve months ended December 31, 2016 presented above. The result of this correction increased the pro forma amortization adjustment by $4.3 million to a total of $5.5 million for the twelve month ended December 31, 2016. This adjustment reduced the results per common share for the twelve months ended December 31, 2016 by $0.08 per common share from $0.02 per common share originally reported in the~~8-K/A,~~ ~~resulting in an adjusted pro forma net loss per common share of ($0.06) on a fully diluted basis.~~

~~The results for the twelve months ended December 31, 2017 presented above include pro forma amortization of intangible assets acquired of $4.9 million.~~

~~The result of this correction on pro forma results of operations, as reported in the8-K/A~~ referenced for the nine months ended September 30, 2017, also increased the pro forma amortization adjustment by $3.2 million for the nine months ended September to a total of $3.8 million. This adjustment reduced the pro forma net income per common share by $0.06 from $0.13 per common share to an adjusted pro forma net income per common share of $0.07 on a fully diluted basis for the nine months ended September 30, 2017.

~~5. Acquisition ofOn-X~~ ~~Life Technologies~~

~~Overview~~

~~On December 22, 2015 we entered into an Agreement and Plan of Merger(“On-X~~ ~~Agreement”) to acquireOn-X~~ ~~Life Technologies Holdings, Inc.(“On-X”),~~ ~~an Austin, Texas-based, privately held mechanical heart valve company, for approximately $130.0 million, subject to certain adjustments. The transaction closed on January 20, 2016, andOn-X~~ ~~is being operated as a wholly owned subsidiary of CryoLife.~~

~~TheOn-X~~ ~~catalogue of products includes theOn-X~~ ~~prosthetic aortic and mitral heart valves and theOn-X~~ ~~ascending aortic prosthesis.On-X~~ ~~also distributes CarbonAid CO~~₂ ~~diffusion catheters and manufacturesChord-X~~ ~~ePTFE sutures for mitral chordal replacement.On-X~~ ~~also generates revenue from pyrolytic carbon coating products produced for other medical~~

~~F-22~~

~~device manufacturers. We believe that theOn-X~~ ~~products fit well into our product portfolio of medical devices for cardiac surgery and that we are capitalizing on the significant opportunity for our sales team to expand utilization of theOn-X~~ ~~valves in the U.S. and internationally.~~

~~Accounting for the Transaction~~

~~The purchase price of theOn-X~~ transaction totaled approximately $128.2 million, consisting of $93.6 million in cash and 3,703,699 shares of CryoLife common stock, with a value of $34.6 million as determined on the date of the closing. We recorded an allocation of the $128.2 million purchase price to~~On-X’s~~ tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated fair values as of January 20, 2016. Goodwill was recorded based on the amount by which the purchase price exceeded the fair value of the net assets acquired and is not deductible for tax purposes. Goodwill from this transaction has been allocated to our Medical Devices segment.

~~The purchase price allocation was as follows (in thousands):~~


	~~Opening~~ ~~Balance Sheet~~
~~Cash and cash equivalents~~	$	~~2,472~~
~~Receivables~~		~~6,826~~
~~Inventories~~		~~12,889~~
~~Intangible assets~~		~~53,950~~
~~Goodwill~~		~~68,229~~
~~Other assets~~		~~6,891~~
~~Liabilities assumed~~		~~(23,040)~~

~~Total purchase price~~	$	~~128,217~~

We incurred transaction and integration costs of $7.4 million for the year ended December 31, 2016 related to the acquisition, which included, among other costs, expenses related to the termination of international and domestic distribution agreements. These costs were expensed as incurred and were primarily recorded as general, administrative, and marketing expenses on our Consolidated Statements of Operations and Comprehensive Income.

~~We paid approximately $10.0 million of the purchase price into an escrow account upon closing of theOn-X~~ ~~transaction. We are currently in litigation with the shareholder representative ofOn-X~~ concerning the resolution of these escrow funds. We believe that we are entitled to recover the escrow funds, but the outcome of litigation is inherently uncertain, and we may not recover any of the escrow funds.

~~Pro Forma Results - Unaudited~~

~~Our pro forma results of operations for the years ended December 31, 2016 and 2015, assuming theOn-X~~ ~~acquisition had occurred as of January 1, 2015, are presented for comparative purposes below. These amounts are based on available information of the results of operations ofOn-X~~ prior to the acquisition date and are not necessarily indicative of what the results of operations would have been had the acquisition been completed on January 1, 2015. This unaudited pro forma information does not project operating results post acquisition.

~~This unaudited pro forma information is as follows (in thousands, except per share amounts):~~

   Twelve Months Ended
December 31,


   2016        2015


Total revenues
   $             182,007      $             179,266
Net income (loss)
   17,692      (4,787)
Pro forma income (loss) per common share - basic
   $ 0.54      $ (0.15)
Pro forma income (loss) per common share - diluted
   $ 0.53      $ (0.15)

~~Pro forma net income (loss) was calculated using a normalized tax rate of approximately 38%.~~

~~F-23~~

~~6. Sale of Business Components~~

~~Divestiture of the HeRO Graft Product Line~~

~~On February 3, 2016 we sold our Hemodialysis Reliable Outflow Graft (“HeRO~~^® Graft”) product line to Merit Medical Systems, Inc. (“Merit”) for $18.5 million in cash (“HeRO Sale”), of which $17.8 million was received on the transaction date and the remaining $740,000 was received in the first quarter of 2017. Under terms of the agreement, Merit acquired the HeRO Graft product line, including worldwide marketing rights, customer relationships, intellectual property, inventory, and certain property and equipment. We continued to manufacture the HeRO Graft under a transition supply agreement until the manufacturing transfer to Merit was completed in the second quarter of 2016. Sales prices under the transition supply agreement were at lower average prices than our previous sales to hospitals at~~end-user~~ ~~prices. The HeRO Graft product line was included as part of our Medical Devices segment. We recorded apre-tax~~ ~~gain of approximately $8.8 million on the HeRO Sale.~~

~~ProCol Distribution Agreement and Divestiture of the ProCol Product Line~~

~~In 2014 we acquired the exclusive worldwide distribution rights to ProCol~~^® Vascular Bioprosthesis (“ProCol”) from Hancock Jaffe Laboratories, Inc. (“Hancock Jaffe”). In accordance with the terms of the agreement, we made payments to Hancock Jaffe totaling $3.4 million for which we obtained the right to receive a designated amount of ProCol inventory for resale. As of March 18, 2016 we had received $1.7 million in inventory. The remaining $1.7 million in prepayments for inventory not yet delivered to us were settled as part of the ProCol Sale, described below.

On March 18, 2016 we sold our ProCol distribution rights and purchase option to LeMaitre Vascular, Inc. (“LeMaitre”) for $2.0 million in cash (“ProCol Sale”), all of which was received by March 31, 2016. Under the terms of the agreement, LeMaitre acquired the ProCol related assets, including inventory, customer lists, related marketing assets, and our purchase option to acquire ProCol. LeMaitre exercised the option to acquire ProCol from Hancock Jaffe. The ProCol product was included as part of our Medical Devices segment. We recorded a~~pre-tax~~ ~~loss of approximately $845,000 on the ProCol Sale.~~

~~Disclosure of the HeRO Sale and the ProCol Sale~~

~~Financial Accounting Standards Board ASU2014-08,~~~~Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,~~ ~~(“ASU2014-08”)~~ defines the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations. The standard requires that an entity report a disposal as a discontinued operation only if the disposal represents a strategic shift in operations that has a major effect on our operations and financial results.

In the first quarter of 2016 we completed and recorded the HeRO Sale and the ProCol Sale and received cash for these transactions. Therefore, as of March 31, 2016 both transactions met the disposed of by sale criteria under ASU~~2014-08.~~

We evaluated the impact of the HeRO Sale and the ProCol Sale on our business to determine whether these disposals represent a strategic shift that has, or will have, a major effect on our financial position, results of operations, or cash flows. As the HeRO Graft and ProCol product lines combined represented less than 10% of both our total revenues for the year ended December 31, 2015 and our total assets as of December 31, 2015, we believe that these transactions did not have a major effect on our operations and financial condition, either individually or in the aggregate, and therefore, we did not disclose these transactions as discontinued operations. The combined net gain from the HeRO Sale and ProCol Sale was, therefore, reported as gain from sale of business components on our Consolidated Statements of Operations and Comprehensive Income.

~~7. PhotoFix Distribution Agreement and Acquisition~~

~~Overview~~

~~In 2014 CryoLife entered into an exclusive supply and distribution agreement with Genesee Biomedical, Inc. (“GBI”) to acquire the distribution rights to PhotoFix, a bovine pericardial patch stabilized using adye-mediated~~ photo-fixation process that requires no glutaraldehyde. PhotoFix has received U.S. Food and Drug Administration (“FDA”) 510(k) clearance and is indicated for use in intracardiac repair, including ventricular repair and atrial repair, great vessel repair and suture line

~~F-24~~

buttressing, and pericardial closure. We believe that PhotoFix fits well into our product portfolio of medical devices for cardiac surgery. In January 2015 we received our initial shipments and launched our distribution of PhotoFix.

~~The agreement between CryoLife and GBI (the “GBI Agreement”) had an initial five-year term and was renewable for twoone-year~~ periods at CryoLife’s option. Under the terms of the GBI Agreement, we began purchasing PhotoFix inventory for resale at an agreed upon transfer price and had the option, which became effective in March 2015, to acquire the PhotoFix product line from GBI.

~~Accounting for the Transaction~~

On April 13, 2016 we exercised our right to acquire the PhotoFix technology from GBI for approximately $2.3 million, of which $1.2 million was paid in cash at closing, approximately $600,000 was previously provided to GBI as an advance under the distribution agreement, and approximately $400,000 was paid to GBI in October 2017. Our allocation of the purchase price to the tangible and identifiable intangible assets acquired, based on their estimated fair values, resulted in the allocation of the majority of the purchase price to amortizable intangible assets. We began limited manufacturing of PhotoFix in the fourth quarter of 2017. GBI will continue to manufacture PhotoFix until we are able to fully establish manufacturing operations, which is expected to occur in 2018.

~~8. Medafor Matters~~

~~Investment in Medafor Common Stock~~

In 2009 and 2010 we purchased shares of common stock in Medafor, a developer and supplier of plant based hemostatic agents. We initially recorded our investment using the cost method as a long-term asset, investment in equity securities, on our Consolidated Balance Sheets.

On October 1, 2013 Bard (“Bard”), previously C. R. Bard, Inc. and its subsidiaries, now a wholly owned subsidiary of Becton, Dickinson and Company (“BD”) and a developer, manufacturer, and marketer of medical technologies in the fields of vascular, urology, oncology, and surgical specialty products completed its acquisition of all outstanding shares of Medafor common stock. We received an initial payment of approximately $15.4 million in 2013, $530,000 in 2014, and $891,000 in 2015 for our 2.4 million shares of Medafor common stock.

~~Legal Action~~

In April 2014 we filed a declaratory judgment lawsuit against Bard, and its subsidiaries Davol, Inc. (“Davol”), and Medafor (collectively, “Defendants”), in the District Court for the District of Delaware (the “Court”). We requested that the Court declare that our manufacture, use, offer for sale, and sale of PerClot in the U.S. does not, and would not, infringe BD’s U.S. Patent No. 6,060,461 (the “‘461 Patent”). In addition, we requested that the Court declare that the claims of the ‘461 Patent are invalid. We also requested injunctive relief and an award of attorneys’ fees.

In August 2014 Medafor filed a counterclaim against us for infringement of the ‘461 Patent. In September 2014 Medafor filed a motion for a preliminary injunction, asking the Court to enjoin our marketing and sale of PerClot in the U.S. In March 2015 the Court ruled that our declaratory judgment lawsuit against Medafor may proceed but dismissed Bard from the lawsuit. The Court also granted Medafor’s motion for a preliminary injunction, which prohibited us from marketing, selling, and distributing PerClot in the U.S. while the litigation proceeded. In March 2015 we ceased all marketing, sales, and distribution of PerClot in the U.S., including PerClot Topical, in accordance with the Court’s order. In April 2015 we appealed the Court’s ruling on the preliminary injunction motion to the U.S. Court of Appeals for the Federal Circuit. We dismissed this appeal in June 2015. On November 18, 2015, the lawsuit was resolved by entry by the Court of the Parties’ Joint Stipulation for Dismissal, which resulted in the dismissal with prejudice of all parties’ claims and counterclaims in the lawsuit, the continuation of the preliminary injunction prohibiting us from marketing, selling and distributing PerClot in the U.S. until expiration of the ‘461 Patent on February 8, 2019, each party bearing its own attorneys’ fees and costs associated with the lawsuit, and the continuation of the Court’s jurisdiction over the parties to enforce the resolution.

~~F-25~~

~~9. Direct Sales in France~~

In June 2015 we signed a Business Transfer Agreement with our French distribution partner to facilitate an orderly transition to a direct sales model in France. In October 2015 we completed the acquisition of a portion of the business of our French distribution partner. We acquired in the transaction certain intangible assets, including commercial and business information, assignment of contracts, and a~~non-compete~~ agreement with our former French distribution partner for a purchase price of €1.2 million or $1.3 million. During the third quarter of 2015 we established a wholly owned subsidiary in France, CryoLife France SAS, and certain members of the distributor’s sales team who were responsible for selling our products in France became employees of the our newly created subsidiary.

~~10. Inventories and Deferred Preservation Costs~~

~~Inventories at December 31, 2017 and 2016 are comprised of the following (in thousands):~~

   2017    2016
Raw materials and supplies
   $ 16,328    $ 9,321
Work-in-process
   5,504    3,321
Finished goods
           24,852            13,651




Total inventories
   $ 46,684    $ 26,293

~~Deferred preservation costs at December 31, 2017 and 2016 are comprised of the following (in thousands):~~

   2017    2016
Cardiac tissues
   $ 16,988    $ 15,768
Vascular tissues
           18,683            14,920




Total deferred preservation costs
   $ 35,671    $ 30,688

~~We maintain consignment inventory of ourOn-X~~ ~~heart valves at domestic hospital locations andOn-X~~ heart valves and JOTEC products at international hospital locations to facilitate usage. We retain title to this consignment inventory until the device is implanted, at which time we invoice the hospital. As of December 31, 2017 we had $9.3 million in consignment inventory, with approximately 58% in domestic locations and 42% in foreign locations. As of December 31, 2016 we had $4.9 million in consignment inventory, with approximately 80% in domestic locations and 20% in foreign locations.

~~11. Goodwill and Other Intangible Assets~~

~~Indefinite Lived Intangible Assets~~

~~As of December 31, 2017 and 2016 the carrying values of our indefinite lived intangible assets are as follows (in thousands):~~

   2017      2016
Goodwill
   $         188,305      $         78,294
In-process R&D
   13,954      --
Procurement contracts and agreements
   2,013      2,013
Trademarks
   841      841

Based on our experience with similar agreements, we believe that our acquired procurement contracts and agreements have indefinite useful lives, as we expect to continue to renew these contracts for the foreseeable future. We believe that our trademarks have indefinite useful lives as we currently anticipate that these trademarks will contribute to our cash flows indefinitely.

~~F-26~~

~~As of December 31, 2017 and 2016 the value of our goodwill, all of which is related to our Medical Devices segment, is as follows (in thousands):~~

   2017      2016
Balance as of January 1,
   $ 78,294      $ 11,365
Goodwill from JOTEC acquisition
           110,100      --
Goodwill fromOn-X acquisition
   --              68,229
Goodwill allocated to sale of HeRO Graft product line
   --      (1,200)
Goodwill allocated to sale of ProCol distribution rights and purchase option
   --      (100)
Revaluation of goodwill denominated in foreign currency
   (89)      --




Balance as of December 31,
   $ 188,305      $ 78,294

~~Definite Lived Intangible Assets~~

~~As of December 31, 2017 and 2016 gross carrying values, accumulated amortization, and approximate amortization periods of our definite lived intangible assets are as follows (dollars in thousands):~~

December 31, 2017
   Gross Carrying
Value      Accumulated
Amortization        Amortization
Period
Acquired technology
   $ 139,045      8,685      11 – 22 Years
Patents
   3,612      2,819      17 Years
Distribution and manufacturing rights andknow-how
   4,059      1,820      11 – 15 Years
Customer lists and relationships
   32,419      3,552      13 – 23 Years
Other
   1,439      1,076      3 Years
December 31, 2016
   Gross Carrying
Value      Accumulated
Amortization        Amortization
Period
Acquired technology
   $ 38,478      5,956      11 – 22 Years
Patents
   3,710      2,702      17 Years
Distribution and manufacturing rights andknow-how
   4,059      1,532      11 – 15 Years
Customer lists and relationships
   29,140      2,141      13 – 22 Years
Non-compete agreement
   381      381      10 Years
Other
   1,262      531      3 Years

The increase in gross carrying value of our intangible assets as of December 31, 2017 when compared to December 31, 2016 is primarily due to our acquisition JOTEC. See Note 4 for further discussion of the acquisition of JOTEC.

~~Amortization Expense~~

Amortization expense recorded in general, administrative, and marketing expenses on our Consolidated Statements of Operations and Comprehensive Income for the years ended December 31 is as follows (in thousands):

2017 2016 2015
Amortization expense
$ 5,085 $ 4,426 $ 2,135

~~As of December 31, 2017 scheduled amortization of intangible assets for the next five years is as follows (in thousands):~~

2018 2019 2020 2021 2022 Total
Amortization expense
$ 10,810 $ 10,468 $ 10,304 $ 10,283 $ 9,755 $ 51,620

~~F-27~~

~~12. Income Taxes~~

~~Tax Cuts and Jobs Act of 2017~~

On December 22, 2017, the United States enacted tax reform legislation known as the H.R. 1, commonly referred to as the “Tax Cuts and Jobs Act” (the “Tax Act”), resulting in significant modifications to existing law. We have elected to follow the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), which provides additional clarification regarding the application of ASC Topic 740 in situations where we do not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act for the reporting period in which the Tax Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Tax Act’s enactment date and ending when we have obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstances should the measurement period extend beyond one year from the enactment date.

We have estimated the accounting for the effects of the Tax Act to be included in our 2017 Consolidated Balance Sheets and Statements of Operations and Comprehensive Income, and, as a result, our financial statements for the year ended December 31, 2017 reflect these effects of the Tax Act as provisional based on a reasonable estimate of the income tax effects. We have recorded a~~one-time~~ estimated deemed repatriation transition tax resulting in a nominal tax impact to us, based on the interplay of the transition tax and the foreign tax credit. The provisional amount is based on information currently available, including information from our recent acquisition of JOTEC. We continue to gather and analyze information, including historical adjustments to earnings and profits of foreign subsidiaries, in order to complete the accounting for the effects of the estimated transition tax.

As a result of the Tax Act, we have also recorded a nominal tax benefit related to the remeasurement of domestic deferred tax assets and liabilities from 35% to 21%. We continue to analyze other impacts of the Tax Act, but the effects based on current information do not have a material impact on the financial statements for the year ended December 31, 2017. We intend to complete the necessary analysis within the measurement period. We expect the impact of the Tax Act may have a material impact on our effective income tax rate in future periods.

~~We have provisionally elected to account for the global intangiblelow-taxed~~ income (“GILTI”) tax in the period in which it is incurred, and therefore, have not provided any provisional deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2017.

~~Income Tax Expense~~

~~Income before income taxes consists of the following (in thousands):~~

   2017      2016      2015
Domestic
   $         5,086      $         17,874      $         5,701
Foreign
   (1,525)      538      167






Income before income taxes
   $ 3,561      $ 18,412      $ 5,868






Income tax expense consists of the following (in thousands):

   2017      2016      2015
Current:

Federal
   $ 521      $ 3,948      $ 231
State
   110      626      142
Foreign
   460      353      160






           1,091              4,927      533






Deferred:

Federal
   (714 )      2,836              1,011
State
   70      (9 )      319
Foreign
   (590 )      (120 )      --






   (1,234 )      2,707      1,330






Income tax (benefit) expense
   $ (143 )      $ 7,634      $ 1,863

~~F-28~~

~~Our income tax (benefit) expense in 2017, 2016, and 2015 included our federal, state, and foreign tax obligations. Our effective income tax rate was approximately-4%,~~ 41%, and 32% for the years ended December 31, 2017, 2016, and 2015, respectively. Our income tax rate for the twelve months ended December 31, 2017 was favorably affected by excess tax benefits on stock compensation and the research and development tax credit, offset by nondeductible transaction costs related to the JOTEC acquisition and nondeductible meals and entertainment expenses. The Company’s income tax rate for the twelve months ended December 31, 2016 was unfavorably impacted by the tax treatment of certain expenses related to the~~On-X~~ acquisition, which had a larger impact on the tax rate in the first quarter of 2016, and by book/tax basis differences related to the HeRO Sale. Our income tax rate for the twelve months ended December 31, 2015 was favorably affected by the reversal of $869,000 in uncertain tax positions, primarily related to research and development tax credits for which the statute of limitations has expired, partially offset by the expiration of certain state net operating losses and other permanent differences.

The income tax expense amounts differ from the amounts computed by applying the U.S. federal statutory income tax rate of 34% for the year ended December 31, 2017, 35% for the year ended December 31, 2016, and 34% for the year ended December 31, 2015 to pretax income as a result of the following (in thousands):

   2017    2016    2015
Tax expense at statutory rate
   $ 1,211    $ 6,444    $ 1,995
Increase (reduction) in income taxes resulting from:

Nondeductible transaction costs
   1,676    908    --
State income taxes, net of federal benefit
   212    531    499
Nondeductible loss on unit disposals
   --    455    --
Nondeductible entertainment expenses
   258    221    184
Foreign income taxes
   364    130    118
Limitation of future deductibility of stock awards
   145    --    --
Provision to return adjustments
   96    29    122
State valuation allowance adjustment
   54    (84)    (19)
Impact of Tax Cuts and Jobs Act
   (255)    --    --
Equity compensation
   (2,664)    135    144
Net change in uncertain tax positions
   (67)    (153)    (869)
Federal tax rate differential
   (100)    --    --
Foreign tax credit
   (133)    (178)    (92)
Unrealized income on investments
   (163)    (111)    63
Domestic production activities deduction
   (174)    (456)    (87)
Research and development credit
   (525)    (296)    (281)
Other
   (78)    59    86






Total income tax (benefit) expense
   $         (143)    $         7,634    $         1,863

~~Deferred Taxes~~

We generate deferred tax assets primarily as a result of write-downs of inventory and deferred preservation costs; accruals for product and tissue processing liability claims; asset impairments; stock compensation, and net operating losses. We acquired significant deferred tax assets, primarily net operating losses, from our acquisitions of JOTEC in 2017,~~On-X~~ ~~in 2016, Hemosphere in 2012, and Cardiogenesis in 2011. We recorded significant deferred tax liabilities in 2017 and 2016 related to the intangible assets acquired in the JOTEC andOn-X~~ ~~acquisitions, respectively.~~

~~F-29~~

~~The tax effects of temporary differences which give rise to deferred tax assets and liabilities at December 31 are as follows (in thousands):~~

   2017    2016
Deferred tax assets:

Allowance for bad debts
   $             101    $             208
Inventory and deferred preservation costs write-downs
   570    708
Investment in equity securities
   36    58
Property
   --    1,780
Intangible assets
   1,306    2,034
Accrued expenses
   4,719    4,215
Loss carryforwards
   8,369    8,760
Credit carryforwards
   771    1,001
Stock compensation
   2,213    3,678
Transaction costs
   --    122
Deferred compensation
   1,010    973
UNICAP
   390    371
Tax benefit of tax reserves
   229    333
Other
   402    409
Less valuation allowance
   (2,469 )    (2,157 )




Total deferred tax assets
   17,647              22,493




   2017      2016
Deferred tax liabilities:

Prepaid items
   (285 )    (436 )
Intangible assets
   (43,647 )    (21,665 )
Property
   (1,632 )    --
Other
   (904 )    (399 )




Total deferred tax liabilities
   (46,468 )    (22,500 )





Total net deferred tax liabilities
   $          (28,821 )    $         (7 )

As of December 31, 2017 we maintained a total of $2.5 million in valuation allowances against deferred tax assets, related primarily to state net operating loss carryforwards, and a net deferred tax liability of $28.8 million. As of December 31, 2016 we maintained a total of $2.2 million in valuation allowances against deferred tax assets, related to state net operating loss carryforwards, and a net deferred tax liability of $7,000.

~~As of December 31, 2017 we had approximately $3.4 milliontax-effected~~ ~~federal net operating loss carryforwards related to the acquisitions of Cardiogenesis and Hemosphere that will begin to expire in 2018, $2.8 million oftax-effected~~ state net operating loss carryforwards, that will begin to expire in 2022, $2.2 million of foreign net operating loss carryforwards related to the acquisition of JOTEC that do not expire, $490,000 in research and development tax credit carryforwards that begin to expire in 2022, and $164,000 in credits from the state of Texas that will fully expire by 2027.

~~Uncertain Tax Positions~~

~~A reconciliation of the beginning and ending balances of our uncertain tax position liability, excluding interest and penalties, is as follows (in thousands):~~

   2017    2016    2015
Beginning balance
   $ 3,390    $ 969    $ 1,437
Increases related to current year tax positions
   143    86    103
Increases related to prior year tax positions
   1,155    2,668    403
Decreases related to prior year tax positions
   (106)    (40)    (70)
Decreases related to settlements
   --    (66)    --
Decreases due to the lapsing of statutes of limitations
   (254)    (227)    (904)






Ending balance
   $         4,328    $         3,390    $         969

~~F-30~~

~~A reconciliation of the beginning and ending balances of our liability for interest and penalties on uncertain tax positions is as follows (in thousands):~~

   2017    2016    2015
Beginning balance
   $          208    $          210    $          366
Accrual of interest and penalties
   169    92    50
Decreases related to prior year tax positions
   (62)    (94)    (206)






Ending balance
   $          315    $          208    $          210

~~As of December 31, 2017 our uncertain tax liability, including interest and penalties, of $4.6 million, was recorded as a reduction to deferred tax assets of $146,000, and anon-current~~ liability of $4.5 million on our Consolidated Balance Sheets. The uncertain tax position increase related to prior year tax positions is primarily due to our preliminary analysis of positions taken by JOTEC on tax returns in prior years. As of December 31, 2016 our total uncertain tax liability, including interest and penalties of $3.6 million, was recorded as a reduction to deferred tax assets of $234,000, and a~~non-current~~ ~~liability of $3.4 million on our Consolidated Balance Sheets, all of which, except for the portion related to interest and penalties, is expected to impact our tax rate when recognized.~~

We believe it is reasonably possible that approximately $817,000 of our uncertain tax liability will be recognized in 2018 due to settlement with various taxing authorities and the lapsing of various federal and state statutes of limitations, of this amount approximately $433,000 would affect the tax rate.

~~Other~~

Our tax years 2014 through 2016 generally remain open to examination by the major taxing jurisdictions to which we are subject. However, certain returns from years prior to 2014, in which net operating losses and tax credits have arisen, are still open for examination by the tax authorities.

~~13. Debt~~

~~Credit Agreement~~

On December 1, 2017, we entered into a credit and guaranty agreement for a new $255.0 million senior secured credit facility, consisting of a $225.0 million secured term loan facility (the “Term Loan Facility”) and a $30.0 million secured revolving credit facility (“the Revolving Credit Facility” and, together with the Term Loan Facility, the “Credit Agreement”). We and each of our existing domestic subsidiaries (subject to certain exceptions and exclusions) guarantee the obligations under the Credit Agreement (the “Guarantors”). The Credit Agreement is secured by a security interest in substantially all existing and after-acquired real and personal property (subject to certain exceptions and exclusions) of us and the Guarantors.

On December 1, 2017, we borrowed the entire $225.0 million Term Loan Facility. The proceeds of the Term Loan Facility were used along with cash on hand and shares of CryoLife common stock to (i) fund the previously announced acquisition of JOTEC and its subsidiaries (the “Acquisition”), (ii) pay certain fees and expenses related to the Acquisition and the Credit Agreement and (iii) pay the outstanding balance of our existing credit facility under the Amended Debt Agreement. The Revolving Credit Facility is undrawn following the Acquisition and may be used for working capital, capital expenditures, acquisitions permitted under the Credit Agreement, and other general corporate purposes pursuant to the terms of the Credit Agreement.

Loans under the Term Loan Facility are repayable on a quarterly basis according to the amortization provisions set forth in the Credit Agreement. We have the right to prepay loans under the Credit Agreement in whole or in part at any time. Amounts repaid in respect of loans under the Term Loan Facility may not be reborrowed. Amounts repaid in respect of loans under the Revolving Credit Facility may be reborrowed. All outstanding principal and interest in respect of (i) the Term Loan Facility must be repaid on or before December 1, 2024 and (ii) the Revolving Credit Facility must be repaid on or before December 1, 2022.

The loans under the Term Loan Facility bear interest, at our option, at a floating annual rate equal to either, the base rate plus a margin of 3.00%, or LIBOR plus a margin of 4.00%. The loans under the Revolving Credit Facility bear interest, at our option, at a floating annual rate equal to either the base rate plus a margin of between 3.00% and 3.25%, depending

~~F-31~~

on our consolidated leverage ratio, or LIBOR plus a margin of between 4.00% and 4.25%, depending on our consolidated leverage ratio. While a payment or bankruptcy event of default exists, we are obligated to pay a per annum default rate of interest of 2.00% in excess of the interest rate otherwise payable with respect to the overdue principal amount of any loans outstanding and overdue interest payments and other overdue fees and amounts. As of December 31, 2017 the aggregate interest rate was 5.36%. We were obligated to pay an unused commitment fee equal to 0.50% of the~~un-utilized~~ ~~portion of the revolving loans. In addition, we are also obligated to pay other customary fees for a credit facility of this size and type.~~

The Credit Agreement contains certain customary affirmative and negative covenants, including covenants that limit our ability, and the ability of our subsidiaries to, among other things, grant liens, incur debt, dispose of assets, make loans and investments, make acquisitions, make certain restricted payments, merge or consolidate, change their business or accounting or reporting practices, in each case subject to customary exceptions for a credit facility of this size and type. In addition, with respect to the Revolving Credit Facility, when the principal amount of loans outstanding thereunder is in excess of 25% of the Revolving Credit Facility, the Credit Agreement requires us to comply with a specified maximum first lien net leverage ratio. The Credit Agreement prohibits the payment of certain restricted payments, including cash dividends.

~~The Credit Agreement includes certain customary events of default that include, among other things,non-payment~~ of principal, interest or fees, inaccuracy of representations and warranties, breach of covenants, cross-default to certain material indebtedness, bankruptcy and insolvency and change of control. Upon the occurrence and during the continuance of an event of default, the lenders may declare all outstanding principal and accrued but unpaid interest under the Credit Agreement immediately due and payable and may exercise the other rights and remedies provided under the Credit Agreement and related loan documents.

~~Government Supported Bank Debt~~

In June 2015, JOTEC GmbH obtained two loans of Sparkasse Zollernalb, which are government sponsored by the Kreditanstalt für Wiederaufbau Bank (KFW). Both KFW loans have a term of 9 years and the interest rates are 2.45% and 1.4%.

~~Amended Debt Agreement~~

~~In connection with the closing of theOn-X~~ acquisition on January 20, 2016 we and certain of our subsidiaries entered into the Third Amended and Restated Credit Agreement (“Amended Debt Agreement”) with Capital One, National Association, who acquired GE Capital’s Healthcare Financial Services lending business in late 2015. The designated credit parties were Healthcare Financial Solutions, LLC; Fifth Third Bank; and Citizens Bank, National Association, collectively the (“Lending Parties”). The Amended Debt Agreement amended and restated the prior GE Credit Agreement and provided us with a senior secured credit facility in an aggregate principal amount of $95 million, which included a $75 million term loan and a $20 million revolving credit facility (including a $4 million letter of credit~~sub-facility~~ ~~and a $3 million swing-linesub-facility).~~ ~~The $75 million term loan was used to finance, in part, the acquisition ofOn-X~~ ~~and was set to mature on January 20, 2021.~~

We and our domestic subsidiaries, subject to certain exceptions and exclusions, had guaranteed the obligations of the Amended Debt Agreement. Borrowings under the Amended Debt Agreement were secured by substantially all of our real and personal property. As of December 31, 2016 the aggregate interest rate was 3.50%. We were obligated to pay an unused commitment fee equal to 0.50% of the~~un-utilized~~ ~~portion of the revolving loans. In addition, we are also obligated to pay other customary fees for a credit facility of this size and type.~~

The Amended Debt Agreement prohibited us from exceeding a maximum consolidated leverage ratio during the term of the Amended Debt Agreement and requires us to maintain a minimum interest coverage ratio. In addition, the Amended Debt Agreement contained certain customary affirmative and negative covenants, including covenants that limit our ability, and the ability of our subsidiaries that are parties to the loan agreement to, among other things, grant liens; incur debt; dispose of assets; make loans and investments; make acquisitions; make certain restricted payments; merge or consolidate; and change their business and accounting or reporting practices, in each case subject to customary exceptions for a credit facility of this size and type. As of December 31, 2017 and 2016 the balance of the term loan under the amended debt agreement was zero and $67.0 million.

~~F-32~~

~~The short-term and long-term balances of our term loans are as follows (in thousands):~~

   As of December 31,


   2017        2016


Term loan balance
   $             225,000    $             73,594
2.45% Sparkasse Zollernalb (KFW Loan 1)
   2,312    --
1.4% Sparkasse Zollernalb (KFW Loan 2)
   1,657    --




Total loan Balance
   228,969    73,594
Less unamortized loan origination costs
   (10,015)    (2,020)




Total borrowed
   218,954    71,574
Less short-term loan balance
   (718)    (4,562)




Long-term loan balance
   $ 218,236    $ 67,012

~~At December 31, 2017 the aggregate maturities of long-term debt for the next five years is as follows (in thousands):~~

2018 2019 2020 2021 2022 Thereafter Total
Maturities
$ 2,814 $ 2,813 $ 2,813 $ 2,814 $ 2,813 $ 214,902 $ 228,969

~~Our aggregate maturity schedule is subject to change due to a provision within the Credit Agreement that requires us to make annual prepayments based on an excess cash flow calculation.~~

~~Interest~~

Total interest expense was $4.9 million and $3.0 million in 2017 and 2016, respectively, and a favorable $62,000 in 2015. Interest expense was favorable in 2015 due to the reversal of accrued interest on uncertain tax positions as discussed in Note 12 above. Interest expense includes interest on debt and uncertain tax positions in all periods.

~~14. Commitments and Contingencies~~

~~Leases~~

Our operating and capital lease obligations result from the lease of land and buildings that comprise our corporate headquarters and various manufacturing facilities, leases related to additional manufacturing, office, and warehouse space, leases on Company vehicles, and leases on a variety of office and other equipment.

We had deferred rent obligations of $2.9 million and $2.4 million as of December 31, 2017 and 2016, respectively, primarily related to the lease on our corporate headquarters, which expires in 2022. Total rental expense for operating leases was $4.9 million in 2017, $4.3 million in 2016, and $3.4 million in 2015. The increase in rent expense in 2017 is due to the acquisition and our lease of equipment and manufacturing, warehouse, and office space in Hechingen, Germany. The increase in rent expense in 2016 is due to the acquisition of~~On-X~~ and our lease for manufacturing, warehouse, and office space in Austin, Texas. We began subleasing some of our additional office space late in December 2016 and earned $564,000 of sublease income in 2017 and nominal sublease income in 2016.

~~F-33~~

~~Future minimum lease payments and sublease rental income are as follows (in thousands):~~

   Capital
Leases    Operating
Leases    Sublease
Income




2018
   $ 1,034    $ 5,927    $ 512
2019
   1,061    6,231    525
2020
   874    5,098    538
2021
   838    4,249    552
2022
   781    2,038    --
Thereafter
   6,243    5,301    --






Total minimum lease payments
   $         10,831    $         28,844    $         2,127






Less amount representing interest
   3,415



Present value of net minimum lease payments
   7,416
Less current maturities
   580



Capital lease obligations, less current maturities
   $ 6,836



Assets acquired under capital leases are as follows (in thousands):

     Gross
  Carrying
  Value      Accumulated
Amortization    NBV


Equipment
   $ 1,306    $ 594    $ 712
Leasehold improvements
   6,908    256    6,652






Total
   $ 8,214    $ 850    $ 7,364

~~Liability Claims~~

At December 31, 2017 and 2016 our unreported loss liability was $1.8 million and $1.5 million, respectively. As of December 31, 2017 and 2016, the related insurance recoverable amounts were $692,000 and $626,000, respectively. We accrue our estimate of unreported product and tissue processing liability claims as other~~long-term~~ ~~liabilities and record the related recoverable insurance amounts as otherlong-term~~ assets. Further analysis indicated that the liability as of December 31, 2017 could be estimated to be as high as $2.9 million, after including a reasonable margin for statistical fluctuations calculated based on actuarial simulation techniques.

~~Employment Agreements~~

In July 2014 our Board of Directors appointed Mr. James P. Mackin as President and Chief Executive Officer (“CEO”), and we and Mr. Mackin entered into an employment agreement, which became effective September 2, 2014. The employment agreement has an initial three-year term. Beginning on the second anniversary of the effective date, and subject to earlier termination pursuant to the agreement, the employment term will, on a daily basis, automatically extend by one day. The agreement provides for a severance payment, which would become payable upon the occurrence of certain employment termination events, including termination by us without cause.

The employment agreement of our former President, CEO, and Executive Chairman, Mr. Steven G. Anderson, conferred certain benefits on Mr. Anderson upon his retirement or termination of employment in conjunction with certain change in control events. On April 9, 2015 Mr. Anderson retired from service as our employee and Chair of our Board of Directors, and entered into a separation agreement with us. We recorded expenses of approximately $1.4 million related to Mr. Anderson’s separation agreement in the second quarter of 2015. We had remaining obligations due under Mr. Anderson’s separation agreement of $77,000 and $83,000 as of December 31, 2017 and December 31, 2016, respectively.

~~PerClot Technology~~

On September 28, 2010 we entered into a worldwide distribution agreement (the “Distribution Agreement”) and a license and manufacturing agreement (the “License Agreement”) with Starch Medical, Inc. (“SMI”), for PerClot, a polysaccharide hemostatic agent used in surgery. The Distribution Agreement has a term of 15 years, but we can terminate it

~~F-34~~

for any reason before the expiration date by providing 180 days’ notice. The Distribution Agreement also contains minimum purchase requirements that expire upon the termination of the Distribution Agreement or following U.S. regulatory approval for PerClot. Separate and apart from the terms of the Distribution Agreement, pursuant to the License Agreement, as amended by a September 2, 2011 technology transfer agreement, we can manufacture and sell PerClot, assuming appropriate regulatory approvals, in the U.S. and certain other jurisdictions and may be required to pay royalties to SMI at certain rates on net revenues of products.

We paid $500,000 to SMI in January 2015 related to the achievement of a contingent milestone. We may make additional contingent payments to SMI of up to $1.0 million if certain U.S. regulatory and certain commercial milestones are achieved.

We are conducting our pivotal clinical trial to gain approval to commercialize PerClot for surgical indications in the U.S. We resumed enrollment into the PerClot U.S. clinical trial in the fourth quarter of 2016, and assuming enrollment proceeds as anticipated, we could receive Premarket Approval (“PMA”) from the U.S. Food and Drug Administration (“FDA”) in the second half of 2019.

As of December 31, 2017 we had $1.5 million in prepaid royalties, $2.6 million in net intangible assets, and $1.4 million in property and equipment, net on our Consolidated Balance Sheets related to the PerClot product line. If we do not ultimately pursue or receive FDA approval to commercialize PerClot in the U.S., these assets could be materially impaired in future periods.

~~15. Cash Dividends~~

We initiated a cash dividend in the third quarter of 2012 and paid the dividend quarterly until our Board of Directors discontinued dividend payments for the foreseeable future in December 2015. We paid dividend payments of $3.4 million from cash on hand for the year ended December 31, 2015. The dividend payments were recorded as a reduction to retained earnings on our Consolidated Balance Sheet.

~~16. Employee Benefit Plans~~

~~401(k) Plan~~

We have a 401(k) savings plan (“401(k) Plan”) providing retirement benefits to all employees who have completed at least three months of service. We made matching contributions of 100% of each participant’s contribution for up to 3% of each participant’s salary in 2017. We made matching contributions of 40% of each participant’s contribution for up to 5% of each participant’s salary in 2016 and 2015. Our contributions approximated $1.4 million, $750,000, and $573,000 for the years ended 2017, 2016, and 2015, respectively. The increase in expenses in 2017 was primarily due to the increase in our matching contribution. The increase in expenses in 2016 was due, in part, to the addition of participants related to the acquisition of~~On-X.~~ ~~Additionally, we may make discretionary contributions to the 401(k) Plan; however, no discretionary contributions were made in any of the past three years.~~

~~Deferred Compensation Plan~~

On January 1, 2011 we initiated a nonqualified Deferred Compensation Plan (“Deferred Plan”). The Deferred Plan allows certain or our employees to defer receipt of a portion of their salary and cash bonus. The Deferred Plan provides for~~tax-deferred~~ growth of deferred compensation. Pursuant to the terms of the Deferred Plan, we agree to return the deferred amounts plus gains and losses, based on investment fund options chosen by each respective participant, to the plan participants upon distribution. All deferred amounts and deemed earnings thereon are vested at all times. We have no current plans to match any contributions. Amounts owed to plan participants are unsecured obligations of the Company. We have established a rabbi trust in which it will make contributions to fund our obligations under the Deferred Plan. Pursuant to the terms of the trust, we will be required to make contributions each year to fully match our obligations under the Deferred Plan. The trust’s funds are primarily invested in Company Owned Life Insurance (“COLI”), and we plan to hold the policies until the deaths of the insured.

Our deferred compensation liabilities are recorded as a component of other current liabilities or long-term deferred compensation liabilities, as appropriate, based on anticipated distribution dates. The cash surrender value of COLI is

~~F-35~~

recorded in other long-term assets. Changes in the value of participant accounts and changes in the cash surrender value of COLI are recorded as part of our operating expenses and are subject to our normal allocation of expenses to inventory and deferred preservation costs.

~~17. Stock Compensation~~

~~Overview~~

~~We are currently authorized to grant and have available for grant the following number of shares under our stock plans as of December 31, 2017 and 2016:~~

   Authorized    Available for Grant
Plan
   Shares    2017    2016
1996 Discounted Employee Stock Purchase Plan, as amended
   1,900,000    377,000    469,000
2009 Equity and Cash Incentive Plan
   7,100,000        1,422,000    2,194,000






Total
         9,000,000          1,799,000          2,663,000

~~Upon the exercise of stock options or grants of RSAs, PSAs, RSUs, or PSUs, we may issue the required shares out of authorized but unissued common stock or out of treasury stock, at our discretion.~~

~~Stock Awards~~

~~In 2017 the Compensation Committee of our Board of Directors (the “Committee”) authorized awards from approved stock incentive plans of RSAs tonon-employee~~ directors, RSUs to certain employees, and RSAs and PSUs to certain Company officers, which, counting PSUs at target levels, together totaled 426,000 shares and had an aggregate grant date market value of $7.1 million. The PSUs granted in 2017 represented the right to receive from 60% to 150% of the target number of shares of common stock. The performance component of PSU awards granted in 2016 was based on attaining specified levels of adjusted EBITDA, adjusted inventory levels, and adjusted trade accounts receivable days’ sales outstanding, each as defined in the PSU grant documents, for the 2016 calendar year. The PSUs granted in 2017 earned 92% of the target number of shares.

~~In 2016 the Committee authorized awards from approved stock incentive plans of RSAs tonon-employee~~ Directors, RSUs to certain employees, and RSAs and PSUs to certain Company officers, which, counting PSUs at target levels, together totaled 490,000 shares of common stock and had an aggregate grant date market value of $5.5 million. The PSUs granted in 2016 earned approximately 142% of the target number of shares.

~~In 2015 the Committee authorized awards from approved stock incentive plans of RSAs tonon-employee~~ Directors, RSUs to certain employees, and RSAs, PSAs, and PSUs to certain Company officers, which, counting PSUs at target levels, together totaled 405,000 shares of common stock and had an aggregate market value of $4.3 million. The PSUs granted in 2015 earned approximately 127% of the target number of shares.

~~F-36~~

~~A summary of stock grant activity for the years ended December 31, 2017, 2016, and 2015 for RSAs, PSAs, RSUs, and PSUs, based on the target number of shares, is as follows:~~

RSAs
           Shares            Weighted Average
Grant Date
            Fair Value
Unvested at December 31, 2014
   495,000    $ 7.65



Granted
   207,000    10.33
Vested
   (278,000)    8.10
Forfeited
   (110,000)    8.49



Unvested at December 31, 2015
   314,000    9.31



Granted
   216,000    10.84
Vested
   (138,000)    7.92
Forfeited
   --    --



Unvested at December 31, 2016
   392,000    10.64



Granted
   138,000    17.00
Vested
   (129,000)    10.84
Forfeited
   (18,000)    11.78



Unvested at December 31, 2017
           383,000    12.81



PSAs
   Shares    Weighted Average
Grant Date Fair Value
Unvested at December 31, 2014
   250,000    $ 10.18



Granted
   --    --
Vested
   --    --
Forfeited
   --    --
Unvested at December 31, 2015
   250,000    10.18



Granted
   --    --
Vested
   --    --
Forfeited
   --    --
Unvested at December 31, 2016
   250,000    10.18



Granted
   --    --
Vested
   (250,000)    10.18
Forfeited
   --    --



Unvested at December 31, 2017
   --    --

~~F-37~~

RSUs
       Shares        Weighted
Average
Remaining
Contractual
    Term in years            Aggregate
Intrinsic
Value
Unvested at December 31, 2014
   61,000    1.21    $ 687,000



Granted
   88,000
Vested
   (36,000)
Forfeited
   (10,000)



Unvested at December 31, 2015
   103,000    1.17    1,110,000



Granted
   146,000
Vested
   (44,000)
Forfeited
   (27,000)



Unvested at December 31, 2016
   178,000    1.24    3,405,000



Granted
   196,000
Vested
   (64,000)
Forfeited
   (24,000)



Unvested at December 31, 2017
   286,000    1.26    5,477,000




Vested and expected to vest
   286,000    1.26    $     5,477,000
PSUs
       Shares        Weighted
Average
Remaining
Contractual
    Term in years            Aggregate
Intrinsic
Value
Unvested at December 31, 2014
   257,000    0.73    $ 2,907,000



Granted
   125,000
Vested
   (139,000)
Forfeited
   (108,000)



Unvested at December 31, 2015
   135,000    0.74    1,455,000



Granted
   144,000
Vested
   (83,000)
Forfeited
   (8,000)



Unvested at December 31, 2016
   188,000    0.77    3,603,000



Granted
   126,000
Vested
   (128,000)
Forfeited
   (17,000)



Unvested at December 31, 2017
           169,000    0.71    3,236,000




Vested and expected to vest
   169,000    0.71    $     3,236,000

~~During the years ended December 31, 2017, 2016, and 2015, the total fair value of $11.1 million, $2.9 million, and $4.8 million, respectively, in combined RSAs, PSAs, RSUs, and PSUs vested.~~

~~Stock Options~~

The Compensation Committee of our Board of Directors authorized grants of stock options from approved stock incentive plans to certain Company officers and employees totaling 260,000, 387,000, and 328,000 shares in 2017, 2016, and 2015, respectively, with exercise prices equal to the stock prices on the respective grant dates.

~~F-38~~

~~A summary of our stock option activity for the years ended December 31, 2017, 2016, and 2015 is as follows:~~

       Shares        Weighted
Average
  Exercise Price      Weighted
Average
Remaining
Contractual
  Term in years          Aggregate
Intrinsic
Value
Outstanding at December 31, 2014
   2,021,000    $ 7.43    3.54    $ 8,021,000



Granted
   328,000    10.83
Exercised
   (248,000)    7.42
Forfeited
   (112,000)    9.93
Expired
   (93,000)    12.08



Outstanding at December 31, 2015
   1,896,000    7.65    3.31    5,992,000



Granted
   387,000    10.34
Exercised
   (372,000)    5.60
Forfeited
   --    --
Expired
   --    --



Outstanding at December 31, 2016
   1,911,000    8.59    3.55    20,179,000



Granted
   260,000    16.30
Exercised
   (394,000)    6.30
Forfeited
   (31,000)    12.47
Expired
   (5,000)    7.01



Outstanding at December 31, 2017
       1,741,000    10.19    3.64    15,598,000




Vested and expected to vest
   1,741,000    $ 10.19    3.64    $ 15,598,000
Exercisable at December 31, 2017
   1,167,000    $ 8.81    2.76    $     12,057,000

~~Other information concerning stock options for the years ended December 31 is as follows:~~

   2017    2016    2015
Weighted-average fair value of options granted
   $ 5.97    $ 3.68    $ 3.82
Intrinsic value of options exercised
       4,748,000        2,422,000        761,000

~~Employees purchased common stock totaling 93,000, 90,000, and 78,000 shares in 2017, 2016, and 2015, respectively, through our ESPP.~~

~~Stock Compensation Expense~~

~~The followingweighted-average~~ ~~assumptions were used to determine the fair value of options:~~

   2017    2016    2015
   Stock
  Options      ESPP
  Options      Stock
  Options      ESPP
  Options      Stock
  Options      ESPP
  Options
Expected life of options
   4.75 Years    0.5 Years    4.75 Years    0.5 Years    4.5 Years    0.5 Years
Expected stock price volatility
   0.40    0.39    0.40    0.30    0.44    0.32
Dividend yield
   --%    --%    --%    --%    1.12%    1.06%
Risk-free interest rate
   1.87%    0.85%    1.20%    0.43%    1.41%    0.12%

~~The following table summarizes stock compensation expense (in thousands):~~

   2017    2016    2015
RSA, PSA, RSU, and PSU expense
   $ 5,335    $ 4,966    $ 3,955
Stock option and ESPP option expense
   1,978    1,636    1,371






Total stock compensation expense
   $ 7,313    $ 6,602    $ 5,326

~~F-39~~

Included in the total stock compensation expense, as applicable in each period, were expenses related to RSAs, PSAs, RSUs, PSUs, and stock options issued in each respective year, as well as those issued in prior periods that continue to vest during the period, and compensation related to our ESPP. These amounts were recorded as stock compensation expense and were subject to or normal allocation of expenses to inventory costs and deferred preservation costs. We capitalized $394,000, $274,000 and $237,000 in the years ended December 31, 2017, 2016, and 2015, respectively, of the stock compensation expense into our inventory costs and deferred preservation costs.

As of December 31, 2017 we had total unrecognized compensation costs of $6.1 million related to RSAs, PSAs, RSUs, and PSUs and $1.6 million related to unvested stock options. As of December 31, 2017 this expense is expected to be recognized over a weighted-average period of 1.9 years for RSUs, 1.5 years for stock options, 1.1 years for RSAs, and 0.7 years for PSUs.

~~18. Income Per Common Share~~

~~The following table sets forth the computation of basic and diluted income per common share (in thousands, except per share data):~~

Basic income per common share
   2017    2016    2015
Net income
   $ 3,704    $ 10,778    $ 4,005
Net income allocated to participating securities
   (63)    (208)    (87)






Net income allocated to common shareholders
   $ 3,641    $ 10,570    $ 3,918






Basic weighted-average common shares outstanding
   33,008    31,855    27,744






Basic income per common share
   $ 0.11    $ 0.33    $ 0.14






Diluted income per common share
   2017    2016    2015
Net income
   $ 3,704    $ 10,778    $ 4,005
Net income allocated to participating securities
   (61)    (202)    (87)






Net income allocated to common shareholders
   $ 3,643    $ 10,576    $ 3,918






Basic weighted-average common shares outstanding
   33,008    31,855    27,744
Effect of dilutive options and awards^a
   1,155    967    798






Diluted weighted-average common shares outstanding
   34,163    32,822    28,542






Diluted income per common share
   $ 0.11    $ 0.32    $ 0.14

^a We excluded stock options from the calculation of diluted weighted-average common shares outstanding if the per share value, including the sum of (i) the exercise price of the options and (ii) the amount of the compensation cost attributed to future services and not yet recognized, was greater than the average market price of the shares, because the inclusion of these stock options would be antidilutive to income per common share. Accordingly, stock options to purchase 227,000, 1,000, and 710,000 shares for the years ended December 31, 2017, 2016, and 2015, respectively, were excluded from the calculation of diluted weighted-average common shares outstanding.

~~19. Transactions with Related Parties~~

~~A member of our Board of Directors and a shareholder of the Company is an employee of an investment banking services company. On January 20, 2016 we acquiredOn-X.~~ ~~The investment banking company representedOn-X,~~ not us, in that acquisition, for which that investment banking services company earned $3.0 million in fees upon the close of the acquisition. We paid these fees directly to the investment banking company on behalf of~~On-X~~ ~~from the acquisition sales proceeds otherwise dueOn-X~~ ~~shareholders.~~

A member of our Board of Directors and a shareholder of the Company was the former Chief of Thoracic Surgery of a university hospital that generated product and preservation services revenues of $133,000, $316,000, and $329,000 for us in 2017, 2016, and 2015, respectively. Additionally, the son of this member of our Board of Directors receives a retainer for performing heart and lung transplants from a medical center that generated product and preservation services revenues of $793,000, $479,000, and $617,000 for us in 2017, 2016, and 2015, respectively.

~~F-40~~

We expensed $34,000, $39,000, and $35,000 in 2017, 2016, and 2015, respectively, relating to supplies for clinical trials purchased from a company whose former Chief Financial Officer is a member of the Company’s Board of Directors and a shareholder of the Company.

We expensed $53,000, $44,000, and $43,000 in 2017, 2016, and 2015, respectively, relating to membership fees to a medical device trade association where our President and CEO is a current member of the Board of Directors.

~~20. Segment and Geographic Information~~

We have two reportable segments organized according to our products and services: Medical Devices and Preservation Services. The Medical Devices segment includes external revenues from product sales of BioGlue, BioFoam,~~On-X~~ products, JOTEC products, CardioGenesis cardiac laser therapy, PerClot, PhotoFix, HeRO Graft through the second quarter of 2016, and ProCol through the date of the sale of the ProCol product line in the first quarter of 2016. The Preservation Services segment includes external services revenues from the preservation of cardiac and vascular tissues. There are no intersegment revenues.

The primary measure of segment performance, as viewed by our management, is segment gross margin, or net external revenues less cost of products and preservation services. We do not segregate assets by segment; therefore, asset information is excluded from the segment disclosures below.

~~The following table summarizes revenues, cost of products and preservation services, and gross margins for our operating segments (in thousands):~~

   2017       2016       2015
Revenues:

Medical devices
   $ 119,631       $ 113,992       $ 83,081
Preservation services
   70,071       66,388       62,817






Total revenues
   189,702       180,380       145,898






Cost of products and preservation services:

Medical devices
   29,798       28,033       18,663
Preservation services
   31,262       33,448       36,516






Total cost of products and preservation services
   61,060       61,481       55,179






Gross margin:

Medical devices
   89,833       85,959       64,418
Preservation services
   38,809       32,940       26,301






Total gross margin
   $     128,642       $     118,899       $     90,719

~~F-41~~

~~Net revenues by product for the years ended December 31, 2017, 2016, and 2015 were as follows (in thousands):~~

         2017                2016                2015
Products:

BioGlue and BioFoam
   $ 65,939    $ 63,461    $ 59,332
On-X
   37,041    34,232    --
JOTEC
   4,136    --    --
CardioGenesis cardiac laser therapy
   6,866    7,864    9,419
PerClot
   3,533    4,021    4,083
PhotoFix
   2,116    1,871    1,396
HeRO Graft
   --    2,325    7,546
ProCol
   --    218    1,305






Total products
   119,631    113,992    83,081
Preservation services:

Cardiac tissue
   32,510    29,697    28,059
Vascular tissue
   37,561    36,691    34,758






Total preservation services
   70,071    66,388    62,817







Total revenues
   $ 189,702    $ 180,380    $ 145,898

~~Net revenues by geographic location attributed to countries based on the location of the customer for the years ended December 31, 2017, 2016, and 2015 were as follows (in thousands):~~

         2017                2016                2015
U.S.
   $ 135,102    $ 131,727    $ 114,978
International
   54,600    48,653    30,920






Total revenues
   $ 189,702    $ 180,380    $ 145,898

~~At December 31, 2017 and 2016 60% and 99%, respectively, of ourlong-lived~~ assets were held in the U.S., where the corporate headquarters and a portion of our manufacturing facilities are located. At December 31, 2017 $13.3 million of our long-lived assets were located internationally, of which 99% were located in Hechingen, Germany. At December 31, 2017 and 2016 $188.3 million and $78.3 million, respectively, of our goodwill was allocated entirely to our Medical Devices segment.

~~F-42~~

~~SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)~~

~~(in thousands, except per share data)~~

First Second Third Fourth
Quarter Quarter Quarter Quarter
REVENUE:

2017
$ 45,059 $ 47,818 $ 43,999 $ 52,826 ^*
2016
43,016 ^** 47,083 ^** 45,252 ^** 45,029 ^**
2015
33,831 35,526 36,703 39,838
GROSS MARGIN:

2017
$ 29,512 $ 32,905 $ 29,862 $ 36,363 ^*
2016
27,621 ^** 30,301 ^** 29,782 ^** 31,195 ^**
2015
19,667 21,554 22,982 26,516
NET INCOME (LOSS):

2017
$ 2,223 $ 3,163 $ 1,325 $ (3,007) ^*
2016
2,541 ^** 2,347 ^** 2,993 ^** 2,897 ^**
2015
(274) (502) 2,145 2,636
INCOME (LOSS) PER COMMON SHARE—DILUTED:

2017
$ 0.06 $ 0.09 $ 0.04 $ (0.09) ^*
2016
0.08 ^** 0.07 ^** 0.09 ^** 0.09 ^**
2015
(0.01) (0.02) 0.07 0.09

^*	~~In December 2017 we completed our acquisition of JOTEC, which is also being operated as a wholly owned subsidiary of CryoLife.~~

^**	~~In January 2016 we completed our acquisition ofOn-X~~ Life Technologies Holdings, Inc., which is being operated as a wholly owned subsidiary of CryoLife. In 2016 we also sold our HeRO Graft product line and our ProCol product line, and ceased sales of these products during 2016.

~~F-43~~


(Mark One)
~~(Mark One)~~
☒ x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, ~~2017~~2023
				OR
☐o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	~~For the transition period from to~~


2017	High		Low
First quarter	$	19.60	$	15.20
Second quarter		20.30		14.03
Third quarter		23.35		17.60
Fourth quarter		24.00		18.25

2016	High		Low
First quarter	$	11.33	$	8.94
Second quarter		13.00		10.64
Third quarter		18.64		11.69
Fourth quarter		20.15		16.40


2023	High		Low
First quarter	$	15.18	$	11.44
Second quarter	17.69		12.57
Third quarter	17.97		14.58
Fourth quarter	19.00		12.16


2022	High		Low
First quarter	$	22.04	$	16.56
Second quarter	23.07		15.44
Third quarter	23.43		12.90
Fourth quarter	14.30		9.64


					Total Number
					of Common Shares		Dollar Value
					Purchased as		of Common Shares
	Total Number of		Average Price		Part of Publicly		That May Yet Be
	Common Shares		Paid per		Announced		Purchased Under the
Period	Purchased		Common Share		Plans or Programs		Plans or Programs
10/01/17 - 10/31/17		--		--		--		--
11/01/17 - 11/30/17		731	$	19.55		--		--
12/01/17 - 12/31/17		--		--		--		--

Total		731	$	19.55		--		--


	December 31,
	2017¹		2016²		2015		2014		2013
Operations
Revenues	$	189,702	$	180,380	$	145,898	$	144,641	$	140,763
Operating income		7,970		21,820		5,354		8,838		13,820
Net income³		3,704		10,778		4,005		7,322		16,172
Net income applicable to common shareholders diluted³		3,643		10,576		3,918		7,164		15,813
Research and development expense as a percentage of revenues		10%		7%		7%		6%		6%

Income Per Common Share³
Basic	$	0.11	$	0.33	$	0.14	$	0.26	$	0.59
Diluted	$	0.11	$	0.32	$	0.14	$	0.25	$	0.57

Dividend Declared Per Common Share	$	--	$	--	$	0.120	$	0.118	$	0.108

Year-End Financial Position
Total assets	$	589,693	$	316,140	$	181,179	$	176,157	$	174,683
Working capital		136,340		117,131		90,058		85,401		85,605
Long-term liabilities		269,695		77,055		6,323		6,845		9,214
Shareholders’ equity		277,058		208,983		155,251		148,685		144,747
Current ratio⁴		4:1		5:1		6:1		5:1		5:1


	Twelve Months Ended
	December 31,
	2017		2016
Total revenues	$	236,209	$	224,896
Net loss		(736)		(1,966)

Pro forma loss per common share - basic	$	(0.02)	$	(0.06)
Pro forma loss per common share - diluted	$	(0.02)	$	(0.06)


					Revenues as a Percentage of
	Revenues for the				Total Revenues for the
	Three Months Ended				Three Months Ended
	December 31,				December 31,
	2017		2016		2017		2016
Products:
BioGlue and BioFoam	$	17,845	$	15,982		34%		36%
On-X		9,993		9,073		19%		20%
JOTEC		4,136		--		8%		--%
CardioGenesis cardiac laser therapy		1,736		2,367		3%		5%
PerClot		892		1,038		2%		2%
PhotoFix		510		465		1%		1%

Total products		35,112		28,925		67%		64%

Preservation services:
Cardiac tissue		8,599		7,442		16%		17%
Vascular tissue		9,115		8,662		17%		19%

Total preservation services		17,714		16,104		33%		36%


Total	$	52,826	$	45,029		100%		100%


	Revenues for the Twelve Months Ended December 31,					Revenues as a Percentage of Total Revenues for the Twelve Months Ended December 31,
	2023		2022		Percent Change	2023	2022
Products:
Aortic stent grafts	$	107,469	$	92,752	16%	31%	29%
On-X	74,528		63,904		17%	21%	20%
Surgical sealants	68,016		65,379		4%	19%	21%
Other	11,172		8,318		34%	3%	3%
Total products	261,185		230,353		13%	74%	73%

Preservation services	92,819		83,436		11%	26%	27%
Total	$	354,004	$	313,789	13%	100%	100%


	Revenues for the Twelve Months Ended December 31,								Percent Change From Prior Year
	2023		2022
	US GAAP		US GAAP		Exchange Rate Effect		Constant Currency		Constant Currency
Products:
Aortic stent grafts	$	107,469	$	92,752	$	1,587	$	94,339	14%
On-X	74,528		63,904		61		63,965		17%
Surgical sealants	68,016		65,379		236		65,615		4%
Other	11,172		8,318		4		8,322		34%
Total products	261,185		230,353		1,888		232,241		12%

Preservation services	92,819		83,436		(88)		83,348		11%
Total	$	354,004	$	313,789	$	1,800	$	315,589	12%


	Twelve Months Ended December 31,
	2023		2022
Cost of products	$	84,595	$	72,166


	Three Months Ended December 31,				Twelve Months Ended December 31,
	2017		2016		2017		2016
Cost of preservation services	$	7,862	$	7,100	$	31,262	$	33,448


	Revenues for the Three Months Ended December 31,				Revenues as a Percentage of Total Revenues for the Three Months Ended December 31,
	2016		2015		2016		2015
Products:
BioGlue and BioFoam	$	15,982	$	16,488		36%		41%
On-X		9,073		--		20%		--%
CardioGenesis cardiac laser therapy		2,367		3,487		5%		9%
PerClot		1,038		1,096		2%		3%
PhotoFix		465		437		1%		1%
HeRO Graft		--		2,008		--%		5%
ProCol		--		397		--%		1%

Total products		28,925		23,913		64%		60%

Preservation services:
Cardiac tissue		7,442		6,970		17%		18%
Vascular tissue		8,662		8,955		19%		22%

Total preservation services		16,104		15,925		36%		40%


Total	$	45,029	$	39,838		100%		100%


	Revenues for the Twelve Months Ended December 31,				Revenues as a Percentage of Total Revenues for the Twelve Months Ended December 31,
	2016		2015		2016		2015
Products:
BioGlue and BioFoam	$	63,461	$	59,332		35%		41%
On-X		34,232		--		19%		--%
CardioGenesis cardiac laser therapy		7,864		9,419		5%		6%
PerClot		4,021		4,083		2%		3%
PhotoFix		1,871		1,396		1%		1%
HeRO Graft		2,325		7,546		1%		5%
ProCol		218		1,305		--%		1%

Total products		113,992		83,081		63%		57%

Cardiac tissue		29,697		28,059		17%		19%
Vascular tissue		36,691		34,758		20%		24%

Total preservation services		66,388		62,817		37%		43%


Total	$	180,380	$	145,898		100%		100%


	Three Months Ended December 31,				Twelve Months Ended December 31,
	2016		2015		2016		2015
Gross margin	$	31,195	$	26,516	$	118,899	$	90,719
Gross margin as a percentage of total revenues		69%		67%		66%		62%


	Year Ended December 31,
	2023		2022
Cash flows provided by (used in):
Operating activities	$	18,825	$	(5,153)
Investing activities	(502)		(10,715)
Financing activities	865		(1,639)
Effect of exchange rate changes on cash and cash equivalents	401		1,848
Increase (decrease) in cash and cash equivalents	$	19,589	$	(15,659)


	Total		2018		2019		2020		2021		2022		Thereafter
Long-term debt obligations	$	228,969	$	2,814	$	2,813	$	2,813	$	2,814	$	2,813	$	214,902
Interest payments		81,910		13,147		11,944		11,813		11,682		11,550		21,774
Operating leases		28,844		5,927		6,231		5,098		4,249		2,038		5,301
Research obligations		5,060		4,216		328		222		159		135		—
Purchase commitments		4,669		2,930		1,739		—		—		—		—
Contingent payments		1,000		—		—		1,000		—		—		—
Other long-term liabilities		137		137		—		—		—		—		—

Total contractual obligations	$	350,589	$	29,171	$	23,055	$	20,946	$	18,904	$	16,536	$	241,977


REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS– (PCAOB ID:42)			57
CONSOLIDATED BALANCE SHEETS			60
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS			62
CONSOLIDATED STATEMENTS OF CASH FLOWS			63
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY			64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS			65


Description of the Matter						At December 31, 2023, the Company’s deferred preservation costs, net, balance was $49.8 million. As discussed in Note 1 to the consolidated financial statements, the calculation of deferred preservation costs involves judgment and complexity and uses the same principles as inventory costing. Donated human tissue is procured from deceased human donors by organ and tissue procurement organizations (“OPOs”) and tissue banks, that provide the tissue to the Company for processing, preservation, and distribution. Deferred preservation costs consist primarily of the procurement fees charged by the OPOs and tissue banks, direct labor and materials (including salary and fringe benefits, laboratory supplies and expenses, and freight-in charges), and indirect costs (including allocations of costs from support departments and facility allocations). Fixed production overhead costs are allocated based on actual tissue processing levels, to the extent that they are within the range of the facility’s normal capacity. These costs are then allocated among the tissues processed during the period based on cost drivers, such as the number of donors or number of tissues processed. The Company applies a yield estimate to all tissues in process and in quarantine to estimate the portion of tissues that will ultimately become implantable. Estimated yields are based on the Company’s historical yield experience with similar tissues and these estimates are evaluated periodically to determine whether the appropriate historical volume and time periods are being used to calculate the yields applied to in-process tissues to determine the equivalent units on hand at each period end. Auditing management’s deferred preservation costs was complex and required judgment due to the detailed calculations within the Company’s costing model to determine the amount of preservation costs deferred, including the estimation of the number of in-process tissue equivalent units based on historical volumes and yields by tissue type that is utilized to determine the number of tissues in process that will ultimately become implantable to which the deferred costs will be applied.

How We Addressed the Matter in Our Audit						We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the process used by management to calculate the Company’s deferred preservation costs, including controls over management’s review of the completeness and accuracy of the deferred preservation cost model and key inputs such as the historical yield information used to estimate the in-process tissue equivalent units as a component of the deferred preservation costs, as discussed above. To test the appropriateness of the amounts recorded as deferred preservation costs, we performed audit procedures that included, among others, testing the nature of costs being deferred and the accuracy of the calculation of deferred preservation costs by agreeing the amounts to and testing the underlying reports and analyses supporting the calculation of costs to be deferred. We tested the yield estimates applied to determine the equivalent units of in-process tissues by understanding and testing the historical information utilized and comparing the yields utilized in the period end model to those historical results. We also compared the reconciliation of the ending balance of deferred preservation costs as calculated in the Company’s deferred preservation cost calculation model to amounts recorded in the general ledger.


	Common Stock			Additional Paid In Capital		Retained Earnings (Deficit)		Accumulated Other Comprehensive Income (Loss)		Treasury Stock			Total Shareholders' Equity
	Shares	Amount								Shares	Amount
Balance at December 31, 2020	40,394	$	404	$	316,192	$	20,022	$	6,743	(1,487)	$	(14,648)	$	328,713
Net loss	—	—		—		(14,834)		—		—	—		(14,834)
Other comprehensive loss, net of tax	—	—		—		—		(16,630)		—	—		(16,630)
Stock issued for contingent consideration	553	6		9,994		—		—		—	—		10,000
Adoption of ASU 2020-06	—	—		(16,426)		(3,213)		—		—	—		(19,639)
Equity compensation	260	3		11,274		—		—		—	—		11,277
Exercise of options	179	1		2,145		—		—		—	—		2,146
Employee stock purchase plan	87	1		1,608		—		—		—	—		1,609
Redemption and repurchase of stock to cover tax withholdings	(76)	(1)		(1,913)		—		—		—	—		(1,914)
Balance at December 31, 2021	41,397	$	414	$	322,874	$	1,975	$	(9,887)	(1,487)	$	(14,648)	$	300,728
Net loss	—	—		—		(19,192)		—		—	—		(19,192)
Other comprehensive loss, net of tax	—	—		—		—		(11,722)		—	—		(11,722)


Equity compensation	282	3		12,939		—		—		—	—		12,942
Exercise of options	151	1		1,788		—		—		—	—		1,789
Employee stock purchase plan	95	1		1,578		—		—		—	—		1,579
Redemption and repurchase of stock to cover tax withholdings	(95)	(1)		(1,794)		—		—		—	—		(1,795)
Balance at December 31, 2022	41,830	$	418	$	337,385	$	(17,217)	$	(21,609)	(1,487)	$	(14,648)	$	284,329
Net loss	—	—		—		(30,690)		—		—	—		(30,690)
Other comprehensive income, net of tax	—	—		—		—		9,599		—	—		9,599
Equity compensation	412	4		15,142		—		—		—	—		15,146
Exercise of options	226	3		2,499		—		—		—	—		2,502
Employee stock purchase plan	141	2		1,451		—		—		—	—		1,453
Redemption and repurchase of stock to cover tax withholdings	(40)	(1)		(558)		—		—		—	—		(559)
Balance at December 31, 2023	42,569	$	426	$	355,919	$	(47,907)	$	(12,010)	(1,487)	$	(14,648)	$	281,780


	2023		2022
Equipment and software	$	66,618	$	72,480
Leasehold improvements	49,107		47,384
Furniture and fixtures	7,555		7,148
Total property and equipment	123,280		127,012
Less accumulated depreciation and amortization	(84,922)		(88,338)
Property and equipment, net	$	38,358	$	38,674


December 31, 2023	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	22,802	$	—	$	—	$	22,802
Certificates of deposit	3,968		—		—		3,968
Total assets	$	26,770	$	—	$	—	$	26,770

Long-term liabilities:
Contingent consideration	—		—		(63,890)		(63,890)
Total liabilities	$	—	$	—	$	(63,890)	$	(63,890)


December 31, 2022	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	10,098	$	—	$	—	$	10,098
Total assets	$	10,098	$	—	$	—	$	10,098

Long-term liabilities:
Contingent consideration	—		—		(40,400)		(40,400)
Total liabilities	$	—	$	—	$	(40,400)	$	(40,400)


	Contingent Consideration
Balance as of December 31, 2022	$	(40,400)
Change in valuation	(23,490)
Balance as of December 31, 2023	$	(63,890)


	2023		2022
Raw materials and supplies	$	36,907	$	36,715
Work-in-process	12,687		10,476
Finished goods	32,382		27,287
Total inventories, net	$	81,976	$	74,478


	2023		2022
Cardiac tissues	$	24,823	$	21,799
Vascular tissues	24,981		24,572
Total deferred preservation costs, net	$	49,804	$	46,371


	2023		2022
Goodwill	$	247,337	$	243,631
In-process R&D	2,154		2,080
Procurement contracts and agreements	2,013		2,013


	Medical Devices Segment
	2023		2022
Balance as of January 1,	$	243,631	$	250,000
Foreign currency translation	3,706		(6,369)
Balance as of December 31,	$	247,337	$	243,631


December 31, 2023	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Weighted Average Useful Life (Years)
Acquired technology	$	201,897	$	59,304	$	142,593	18.2
Other intangibles:
Customer lists and relationships	28,729		10,334		18,395		21.6
Distribution and manufacturing rights and know-how	9,608		7,807		1,801		5.0
Patents	4,365		3,225		1,140		17.0
Other	7,815		3,680		4,135		5.0
Total other intangibles	$	50,517	$	25,046	$	25,471	10.0


	2024		2025		2026		2027		2028		Total
Amortization expense	$	15,121	$	13,200	$	12,972	$	12,866	$	12,644	$	66,803


	2023		2022
Deferred tax assets:
Finance and operating leases	$	13,254	$	12,581
Excess interest carryforward	6,438		5,559
Unrealized gains and losses	5,424		—
Loan revaluation	3,859		2,633
Loss carryforwards	3,205		9,660
Stock compensation	2,761		2,463
Accrued expenses	2,567		1,734
Deferred compensation	1,790		1,317
Property	1,786		1,310
Credit carryforwards	336		503
Inventory and deferred preservation costs write-downs	302		764
Other	1,422		1,650
Less valuation allowance	(32,860)		(17,942)
Total deferred tax assets, net	10,284		22,232

	2023		2022
Deferred tax liabilities:

Unrealized gains and losses	—		(6,624)
Prepaid items	(370)		(323)
Debt costs	(626)		(818)
Finance and operating leases	(12,777)		(12,217)
Intangible assets	(16,106)		(24,601)
Other	(1,169)		(834)
Total deferred tax liabilities	(31,048)		(45,417)

Total deferred tax liabilities, net	$	(20,764)	$	(23,185)


Operating leases:	December 31, 2023		December 31, 2022


Operating lease right-of-use assets, net	$	43,822	$	41,859

Current maturities of operating leases	$	3,395	$	3,308
Non-current maturities of operating leases	43,977		41,257
Total operating lease liabilities	$	47,372	$	44,565

Finance leases:
Property and equipment, at cost	$	6,862	$	6,408
Accumulated amortization	(3,136)		(2,498)
Property and equipment, net	$	3,726	$	3,910

Current maturities of finance leases	$	582	$	513
Non-current maturities of finance leases	3,405		3,644
Total finance lease liabilities	$	3,987	$	4,157

Weighted average remaining lease term (in years):
Operating leases	10.4		11.9
Finance leases	6.8		7.8

Weighted average discount rate:
Operating leases	6.3%		5.9%
Finance leases	2.2%		2.1%


	December 31, 2023		December 31, 2022
Amortization of property and equipment	$	542	$	518
Interest expense on finance leases	84		89
Total finance lease expense	626		607
Operating lease expensea	7,354		7,432
Sublease income	(278)		(306)
Total lease expense	$	7,702	$	7,733


Cash paid for amounts included in the measurement of lease liabilities:	2023		2022
Operating cash flows for operating leases	$	7,263	$	6,927
Financing cash flows for finance leases	539		507
Operating cash flows for finance leases	84		90

~~Florida~~
(State or other jurisdiction of incorporation or organization)

~~59-2417093~~
(I.R.S. Employer Identification No.)

~~1655 Roberts Boulevard N.W., Kennesaw, GA 30144~~
~~(Address of principal executive offices) (zip code)~~